2022 (5) TMI 1070 - HC - Income Tax

Income deemed to accrue or arise in India - licensing of software products of Microsoft in the Territory of India by the Respondent was not taxable in India as Royalty under Section 9(1)(vi) read with Article 12 of the Indo US DTAA - whether Tribunal has failed to appreciate that the distribution model in the case of the respondent-assessee involved making of multiple copies of the software clearly indicating transfer of copyright? - HELD THAT - The issue raised in the present appeals is no longer res integra as the Supreme Court in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax and Anr. 2021 (3) TMI 138 - SUPREME COURT held that the payment received by EYGSL (UK) for providing access to computer software to its member firms of EY Network located in India, that is, EYGBS (India), does not amount to royalty liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA.- Decided in favour of assessee.

Summary

Issues:
- Challenge to ITAT judgment on taxation of software licensing as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the Indo US DTAA.

Analysis:
1. The appellant challenged the ITAT judgment regarding the taxation of software licensing as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the Indo US DTAA for the Assessment Years 1997-98 and 1999-2000.

2. The appellant contended that the ITAT erred in ruling that the licensing of software products by the respondent was not taxable in India as royalty. The appellant argued that the distribution model involved in the case indicated a transfer of copyright, which should be considered taxable.

3. The Court referred to the Supreme Court judgment in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax, categorizing cases involving software transactions into four categories. The Court emphasized that the mere grant of a license does not necessarily entail a transfer of copyright.

4. The Court highlighted that the AAR's ruling, which considered a license as transferring copyright, was incorrect. It emphasized that the end-user under a license only receives the right to use the software and not the copyright itself. The Court also noted that any interpretation of the Income Tax Act must align with the DTAA provisions.

5. Referring to a similar case, the Court reiterated that for a payment to be taxed as royalty, there must be a transfer of copyright in the software. In the case at hand, where the end-user was authorized to use the software without exclusive rights, it did not constitute a transfer of copyright.

6. The Court dismissed the appeals, stating that the issue had been conclusively decided by the Supreme Court in favor of the assessee. It noted that the appellant had acknowledged the previous Tribunal decision in favor of the assessee. Consequently, no substantial question of law arose for consideration in the present appeals.