2021 (10) TMI 655 - AT - Income Tax

Income accrued in India - Validity of assessing the sale proceeds of software sold to Indian customers as royalty income - assessee is a company incorporated and operating in Netherlands - DTAA entered between India and Netherlands - HELD THAT - As assessee is granting license to the integrators and also authorizing the integrator to grant license only for the purpose of using the software. An identical issue of granting license to use software was examined in the context of its taxability as royalty by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence 2021 (3) TMI 138 - SUPREME COURT . Thus sale proceeds received by the assessee on sale of software licenses cannot be categorized as Royalty within the meaning of provisions of DTAA. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete the addition made as royalty income.- Decided in favour of assessee.

Issues Involved: Validity of assessing the sale proceeds of software sold to Indian customers as royalty income.

Issue-wise Detailed Analysis:

Validity of Assessing Sale Proceeds as Royalty Income:

1. Background and Appeal:
The assessee, a company incorporated and operating in the Netherlands, challenged the final assessment order dated 15.4.2019 for the assessment year 2016-17. The primary issue was whether the sale proceeds of software sold to Indian customers should be assessed as royalty income under section 9(1)(vi) of the Income Tax Act and the DTAA between India and the Netherlands. The A.O. had assessed ?1132.10 crores as royalty income, a decision affirmed by the Ld. DRP based on previous judgments, including the Karnataka High Court's decision in Samsung Electronics Ltd. (345 ITR 494).

2. Assessee's Argument:
The Ld. A.R. argued that similar assessments for the years 2014-15 and 2015-16 were challenged and subsequently deleted by ITAT following the Supreme Court's decision in Engineering Analysis Centre for Excellence Pvt. Ltd. Vs. CIT (2021) 125 taxmann.com 432. The assessee contended that the facts and agreements for the current year were identical to those of the previous years.

3. Revenue's Argument:
The Ld. D.R. contended that the assessee did not provide sufficient documentation to the A.O., who had to rely on agreements from the 2014-15 assessment. The D.R. argued that the Supreme Court's decision in Engineering Analysis Centre of Excellence should not be applied blindly and that the agreements should be examined afresh to determine if there was a transfer of copyright.

4. Tribunal's Analysis:
The Tribunal noted that the assessee had entered into two types of agreements with customers: "Systems integrated agreement" and "Software license agreement." The relevant clauses from these agreements were extracted in the assessment order. The Tribunal observed that the agreements did not transfer any copyright but only granted a user license.

5. Supreme Court's Precedent:
The Tribunal referred to the Supreme Court's analysis in Engineering Analysis Centre of Excellence, which categorized similar agreements into four types and concluded that such agreements did not constitute a transfer of copyright. The Supreme Court had determined that payments for the use of software through EULAs/distribution agreements did not amount to royalty and were not taxable in India.

6. Conclusion:
The Tribunal concluded that the facts and agreements for the current year were identical to those in the previous years. Therefore, following the Supreme Court's decision, the sale proceeds from software licenses could not be categorized as royalty income under the DTAA. The Tribunal set aside the order passed by the Ld. CIT(A) and directed the A.O. to delete the addition made as royalty income.

Final Judgment:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 30th Sept, 2021.

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