2021 (9) TMI 1177 - AT - Income Tax

Accrual of Income in India - Royalty - right to use the software - overriding effect to the DTAA - License fee for use of HR software treated as royalty under the Act / Article 12 of the India-Netherlands tax treaty - HELD THAT - Issue is squarely covered in favour of the assessee by the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT is acceptable. Hon ble Supreme Court has elaborately examined the issue and has decided the issue in favour of the assessee. The Hon ble Supreme Court has set aside the decision of Hon ble Karnataka High Court in the case of Samsung Electronics Company Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT , which has been relied upon by the AO. - Decided in favour of assessee.

Summary

Issues Involved:
1. License fee for use of HR software treated as royalty under the Act / Article 12 of the India-Netherlands tax treaty.
2. Payments towards ongoing support services treated as royalty under the Act / Article 12 of the India-Netherlands tax treaty.
3. Levy of interest under section 201(1A) of the Act.

Issue-Wise Detailed Analysis:

1. License Fee for Use of HR Software Treated as Royalty:
The main contention was whether the license fee paid by the assessee to Shell International BV (SIBV) for the use of HR software constitutes 'royalty' under section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Netherlands tax treaty. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the payments were indeed 'royalty' as there was a transfer of copyright rights. The AO relied on the Karnataka High Court's decision in CIT Vs Samsung Electronics Ltd. and the retrospective amendments made by the Finance Act, 2012, which clarified that payments for the use of software amounted to royalty. However, the assessee argued that the payments were for the use of a copyrighted article, not the copyright itself, and thus should not be considered royalty. The Income Tax Appellate Tribunal (ITAT) accepted the assessee's plea, citing the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited v. CIT, which clarified that such payments do not constitute royalty under the DTAA.

2. Payments Towards Ongoing Support Services Treated as Royalty:
Similar to the license fee issue, the AO and CIT(A) treated the payments for ongoing support services related to the HR software as 'royalty' under section 9(1)(vi) and Article 12 of the tax treaty. The AO argued that these services were in connection with the provision of HR software and thus fell under the definition of royalty. The assessee contended that these payments were for routine support services and did not involve any transfer of copyright or use of a copyrighted article. The ITAT, following the Supreme Court's decision in the aforementioned case, ruled in favor of the assessee, stating that such payments do not amount to royalty under the DTAA.

3. Levy of Interest Under Section 201(1A) of the Act:
The AO levied interest under section 201(1A) for the assessee's failure to deduct tax at source on the payments made to SIBV, treating them as royalty. The CIT(A) upheld this decision, but the assessee argued that the interest was wrongly computed and that the issue of royalty itself was under dispute. The ITAT, in light of its findings on the royalty issues, set aside the interest levied under section 201(1A), as the payments were not considered royalty.

Conclusion:
The ITAT ruled in favor of the assessee on all issues, setting aside the orders of the AO and CIT(A). The tribunal relied heavily on the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited v. CIT, which clarified that payments for the use of software and related support services do not constitute royalty under the India-Netherlands tax treaty. Consequently, the assessee was not liable to deduct tax at source on these payments, and the interest levied under section 201(1A) was also annulled.