2022 (1) TMI 281 - AT - Income Tax

Accrual of income in India - Royalty / FTS - tax receipt towards software license fees as 'Royalty' within the meaning of Article 12 of the India- Netherlands Double Taxation Avoidance Agreement - distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles - Right to use a copyrighted article or product with the owner retaining his copyright - HELD THAT - The appellant company granted the software license fee on non-exclusive non-transferable basis during the license term. The subject software is standard software not customised software. The title, the ownership and all rights in patents, copyrights and trade secrets and other software contained does not get transferred to the customer. The Courts as well as OECD commentary on Article 12 of the DTAA recognized the distinction between copyrighted article and copyright right in the programme and software which incorporates a copy of the copyrighted programme. Any payment made for acquisition of copy of the software is held not to be Royalty. Thus as relying on ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT we hold that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of consideration for grant of software license held not to be Royalty under the provisions of Income Tax Act, 1961, the question of considering under the provisions as per DTAA between India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed. Bring to tax software maintenance fee and consulting service fee and training fees as Fees for Technical services within the meaning of Article 12(5)(a) of the India and Netherland treaty - DRP held that the receipts of assessee from the software maintenance, consulting services and training fees are chargeable to tax as Fees for Technical services as per Article 12 (5)(a) of India and Netherland treaty - HELD THAT - Clause 5 of Article 12 defines fees for technical services to mean the payment of any kind to any person in consideration of rendering any technical or consultancy services that are ancillary and subsidiary to application of enjoyment of the right, any copyright information described in clause 4 which deals with the payment made towards Royalties. DRP gave a finding that the software maintenance, consultation charges and training fees are in connection with the receipt of consultation towards software license fee. This finding of the DRP is not under challenge before us. Therefore, the software maintenance fees, consulting charges and training fees which are incidental to software license fee, assumes same character as that of software license fee. Even the software maintenance, consulting charges and training fees which are incidental to software maintenance fee cannot come within the purview of FTS within clause 5 of Article 12 of the treaty. Our view is fortified by the judgment of Hon ble Delhi High Court in the case of Datamine International Ltd . 2016 (3) TMI 540 - ITAT DELHI . We, therefore, we hold that software maintenance fees, consultancy services fees and training services fees cannot be held to be Fees for Technical services . Thus, grounds of appeal no. 2 to 4 stands allowed Short credit of deduction of tax at source - HELD THAT - This ground of appeal is restored to the file of AO with a direction to allow tax as per the information contained in Form No.26AS. Thus, grounds of appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Taxation of software license fees as 'Royalty' under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
2. Taxation of software maintenance fees as Fees for Technical Services (FTS) under Article 12(5)(a) of the India-Netherlands DTAA.
3. Taxation of consulting service fees as Fees for Technical Services under Article 12(5)(a) of the India-Netherlands DTAA.
4. Taxation of training fees as Fees for Technical Services under Article 12(5)(a) of the India-Netherlands DTAA.
5. Short credit of Tax Deducted at Source (TDS).
6. Levy of education cess while computing tax liability under Article 12 of the India-Netherlands DTAA.
7. Initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

1. Taxation of Software License Fees as 'Royalty':
The appellant contended that the software license fees of ?22,81,56,726 should not be taxed as 'Royalty' under Article 12 of the India-Netherlands DTAA. The lower authorities, including the Dispute Resolution Panel (DRP), had upheld the Assessing Officer's (AO) decision to tax these fees as 'Royalty'. The appellant relied on the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC), which disapproved the reasoning of the Karnataka High Court in Samsung Electronics Co. Ltd. and held that payments for a copyrighted article do not constitute 'Royalty'. The Tribunal agreed with the appellant, stating that the software license fee cannot be taxed as 'Royalty' under the provisions of the Income Tax Act, 1961, or the DTAA. Consequently, Ground No.1 was allowed.

2. Taxation of Software Maintenance Fees as Fees for Technical Services:
The DRP had directed the AO to tax the software maintenance fees of ?5,99,03,443 as Fees for Technical Services (FTS) under Article 12(5)(a) of the India-Netherlands DTAA. The appellant argued that these fees should not be considered FTS since the software license fees were not 'Royalty'. The Tribunal noted that the DRP's finding that the software maintenance fees were ancillary to the software license fees was not challenged. Since the software license fees were not 'Royalty', the software maintenance fees could not be considered FTS. Ground No.2 was allowed.

3. Taxation of Consulting Service Fees as Fees for Technical Services:
Similarly, the DRP had directed the AO to tax the consulting service fees of ?5,36,19,958 as FTS under Article 12(5)(a) of the India-Netherlands DTAA. The appellant's argument and the Tribunal's reasoning were the same as for the software maintenance fees. Since the software license fees were not 'Royalty', the consulting service fees could not be considered FTS. Ground No.3 was allowed.

4. Taxation of Training Fees as Fees for Technical Services:
The DRP had directed the AO to tax the training fees of ?1,44,10,721 as FTS under Article 12(5)(a) of the India-Netherlands DTAA. The appellant's argument and the Tribunal's reasoning were consistent with the previous grounds. Since the software license fees were not 'Royalty', the training fees could not be considered FTS. Ground No.4 was allowed.

5. Short Credit of Tax Deducted at Source (TDS):
The appellant claimed that there was a short credit of TDS amounting to ?43,54,684. The Tribunal restored this ground to the file of the AO with a direction to allow the tax credit as per the information contained in Form No.26AS. Ground No.5 was allowed for statistical purposes.

6. Levy of Education Cess:
The appellant challenged the levy of education cess while computing the tax liability. Since the Tribunal held that the software license fees, consulting charges, and training fees were not taxable in India, this ground became academic and was dismissed. Ground No.6 was dismissed.

7. Initiation of Penalty Proceedings:
The appellant contested the initiation of penalty proceedings under section 271(1)(c). The Tribunal noted that this ground was consequential in nature and dismissed it. Ground No.7 was dismissed.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal ruled in favor of the appellant on the primary issues concerning the taxation of software license fees, software maintenance fees, consulting service fees, and training fees. The short credit of TDS was remanded to the AO for verification, while the issues regarding education cess and penalty proceedings were dismissed.