2022 (4) TMI 669 - AT - Income Tax

Income deemed to accrue or arise in India - payment received from the Indian distributors/resellers towards sale of software license as Royalty - AO held that the revenue received by the assessee from sale of softwar is to be treated as income from Royalty to be taxed @ 15% as per Article 12 of India-USA DTAA - HELD THAT - As decided in own case 2022 (2) TMI 820 - ITAT DELHI consideration received by the assessee cannot be brought to tax as per India-USA DTAA. Since, the facts of the instant case are identical to the facts of the case decided by the Tribunal in assessee's own case for the immediately preceding assessment year, therefore, respectfully we hold that the payment received by the assessee on sale of software to India resellers/distributors is not in the nature of Royalty chargeable to tax u/s. 9(1)(vi) of the I.T. Act and under Article 12 of the India-USA DTAA. The ground of the assessee are accordingly allowed.

Summary

Issues Involved:
1. Taxability of payments received on sale of software as "Royalty".
2. Classification of revenue from Maintenance and Technical Support Services (MTSS) as Fees for Technical Services (FTS).
3. Levy of interest under Section 234B.
4. Initiation of penalty proceedings under Section 271(1)(c).

Issue-Wise Detailed Analysis:

1. Taxability of Payments Received on Sale of Software as "Royalty":
The primary issue was whether the payments received by the assessee from Indian resellers/distributors for the sale of software should be treated as "Royalty" under Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the India-USA DTAA. The assessee, a company incorporated in the USA, argued that its income from the sale of software is not taxable in India as per the provisions of the India-USA DTAA. The AO, however, classified the revenue as "Royalty" and taxed it at 15%. The Dispute Resolution Panel (DRP) upheld this classification, following its order for the previous assessment year. The Tribunal, referencing its earlier decision in the assessee’s own case for the preceding assessment year (A.Y. 2014-15), concluded that the payments received did not constitute "Royalty" as no rights in the copyright were transferred. The Tribunal cited the Supreme Court's ruling in Engineering Analysis Center of Excellence Pvt. Ltd., which clarified that payments for the resale/use of software do not amount to royalty and are not taxable in India. Consequently, the Tribunal directed the deletion of the addition made by the AO.

2. Classification of Revenue from Maintenance and Technical Support Services (MTSS) as Fees for Technical Services (FTS):
The assessee also contested the classification of revenue from MTSS as FTS under Article 12 of the DTAA. The DRP, following its earlier order, classified the revenue from MTSS as FTS, which the AO included in the final assessment order. The Tribunal, however, did not provide a separate detailed analysis for this issue in the provided text but allowed the appeal based on the precedent set in the previous assessment year, implying that the classification as FTS was not upheld.

3. Levy of Interest under Section 234B:
The assessee challenged the levy of interest under Section 234B, which pertains to interest for default in payment of advance tax. The Tribunal dismissed this ground, stating that the levy of interest is mandatory and consequential in nature.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee also contested the initiation of penalty proceedings under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars of income. The Tribunal dismissed this ground as premature, indicating that the penalty proceedings were not yet ripe for adjudication.

Conclusion:
The Tribunal allowed the appeal partly, holding that the payments received by the assessee on the sale of software to Indian resellers/distributors are not to be treated as "Royalty" and directed the deletion of the related addition. The grounds related to the levy of interest and initiation of penalty proceedings were dismissed. The Tribunal's decision was consistent with its earlier ruling in the assessee’s own case and the Supreme Court's judgment in Engineering Analysis Center of Excellence Pvt. Ltd.