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2022 (5) TMI 673 - AT - Income TaxTaxability of sale of software products - receipts as royalty and Fees for Technical Services (FTS) - sale of copyrighted article v/s copyright - income earned by the Appellant from sale of software products and software related support services as taxable in India as royalty under Section 9(1 )(vi) of the Act and under Article 12 of the India- Singapore Tax Treaty - assessee submitted, the amount received on sale of software and provision of software related maintenance services cannot be treated as royalty under Article 12(3) of the India Singapore Tax Treaty, as, what the assessee has sold is a copyrighted article and not copyright. - HELD THAT - Undisputedly, during the year under consideration, the assessee had sold certain software products to customers in India and has also provided software related maintenance services. The first issue which arises for consideration is, whether the amount received by the assessee towards sale of software products and software related maintenance services can be treated as royalty under Article 12(3) of India Singapore Tax Treaty. In case, it does not come within the ambit of royalty as defined under the Treaty, there is no need to go into the provisions of the Act. On a perusal of the assessment order it is noticed that the Assessing Officer has not factually examined the nature of transaction between the assessee and the Indian Customers. The Assessing Officer relying upon certain judicial precedents has straightway assumed that the assessee has sold a copyright. However, neither the sample agreement nor any other material available on record demonstrate that the assessee has transferred/sold the use or right to use a copyright and not copyrighted article. What the assessee has sold is copyrighted article and not the copyright. It is also observed, while treating the payment received by the assessee as royalty, the departmental authorities have been greatly influenced by the decision of Samsung Electronics Pvt. Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT . However, the issue is no more res integra in view of the decision of Hon ble Supreme court in case of Engineering Analysis Centre of Excellence (P.) Ltd. 2021 (3) TMI 138 - SUPREME COURT - Since, the factual matrix clearly reveals that the assessee has sold a copyrighted article and not the copyright, the ratio laid down by the Hon ble Apex Court in the decision referred to above would squarely apply. Accordingly, we hold that the amount received by the assessee from sale of software and provision of software related services cannot be treated as royalty under Article 12(3) of the India Singapore DTAA. Insofar as the issue of treating the amount received towards provisions of software related services as FTS, we have noticed that the Assessing Officer has not brought any cogent material on record to demonstrate that while providing the software related maintenance service, the assessee has made available any technical knowledge, knowhow, skill etc. so as to enable the recipient of such service to use it independently in exclusion of the assessee. Therefore, in our considered opinion, the conditions of Article 12(4)(b) of the Treaty are not satisfied. That being the factual position emerged on record, the amount received cannot be treated as FTS. Therefore, the addition made is deleted. Levy of education cess on the ground that as per the definition of tax under Article 2, being in the nature of surcharge, would be included in the tax rates prescribed in the Treaty - HELD THAT - We are of the view that the issue has become, more or less, academic, since, we have deleted the additions made by the Assessing Officer. However, the Assessing Officer is directed to compute the tax liability strictly in terms with the Treaty provision
Issues Involved:
1. Taxability of income from the sale of software products as 'royalty'. 2. Taxability of income from the provision of software-related support services as 'Fees for Technical Services' (FTS) and 'royalty'. 3. Levy of education cess. 4. Charging of interest under Section 234B of the Income-tax Act. 5. Initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act. Detailed Analysis: 1. Taxability of Income from Sale of Software Products as 'Royalty': The primary issue was whether the income earned by the assessee from the sale of software products should be considered 'royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-Singapore Tax Treaty. The assessee, a non-resident company incorporated in Singapore, argued that the income from the sale of software products was not 'royalty' but rather business income, as it involved selling a copyrighted article rather than a copyright. The Assessing Officer and Commissioner (Appeals) had previously treated the income as 'royalty'. However, the Tribunal referred to the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd. Vs. CIT, which clarified that the sale of copyrighted articles does not constitute 'royalty'. Therefore, the Tribunal concluded that the income from the sale of software products could not be treated as 'royalty' under Article 12(3) of the India-Singapore DTAA. 2. Taxability of Income from Provision of Software-Related Support Services as 'Fees for Technical Services' (FTS) and 'Royalty': The Tribunal examined whether the income from software-related support services should be treated as FTS under Section 9(1)(vii) of the Act and Article 12 of the India-Singapore Tax Treaty. The assessee contended that the services did not make available any technical knowledge, skill, know-how, or experience that would enable the recipient to use it independently. The Tribunal agreed, noting that the Assessing Officer failed to demonstrate that the services provided met the 'make available' criterion under Article 12(4)(b) of the Treaty. Consequently, the income from software-related support services could not be classified as FTS or 'royalty'. 3. Levy of Education Cess: The assessee challenged the levy of education cess, arguing that it should be included in the tax rates prescribed by the Treaty. The Tribunal noted that since the primary additions were deleted, the issue became largely academic. However, the Tribunal directed the Assessing Officer to compute the tax liability per the Treaty provisions and relevant judicial decisions. 4. Charging of Interest Under Section 234B: The assessee contested the interest charged under Section 234B of the Income-tax Act. Given the deletion of the primary additions, this issue was rendered inconsequential by the Tribunal and did not require specific adjudication. 5. Initiation of Penalty Proceedings Under Section 271(1)(c): The initiation of penalty proceedings under Section 271(1)(c) was also contested by the assessee. Similar to the issue of interest under Section 234B, this matter was deemed inconsequential following the deletion of the primary additions and did not require further adjudication. Conclusion: The Tribunal allowed the appeal, ruling in favor of the assessee on all contested issues. The income from the sale of software products and provision of software-related support services was not taxable as 'royalty' or FTS under the India-Singapore Tax Treaty. The levy of education cess was to be reconsidered by the Assessing Officer per Treaty provisions. The issues of interest under Section 234B and penalty proceedings under Section 271(1)(c) were rendered moot.
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