2022 (6) TMI 344 - AT - Income Tax

Income taxable in India - Royalty - income liable for taxation in India within the meaning of Article 12(3) of the India-USA Double Taxation Avoidance Agreement ( DTAA ) - whether resale of the computer software through End User License Agreement (EULA)/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India? - HELD THAT - Respectfully following the precedent Engineering Analysis Centre of Excellence Private Ltd. 2021 (3) TMI 138 - SUPREME COURT expounded that consideration for the resale of the computer software through End User License Agreement (EULA)/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India - thus duly taking note that Revenue has not disputed that the facts in this care are not identical, we set aside the order of the Revenue authorities and decide the issue in favour of the assessee.

Summary

Issues:
Characterization of receipts from sale of perpetual license as 'royalty' income under India-USA DTAA, Adoption of amended definition of 'royalty' under Income-tax Act, Consideration of OECD Commentary on taxation of royalty, Non-following of jurisdictional High Court decisions, Application of principle favoring the assessee, Penalty proceedings under section 271(1)(c) of the Act.

Characterization of Receipts as 'Royalty' Income:
The appeal challenged the characterization of receipts from the sale of a perpetual license as 'royalty' income under the India-USA DTAA. The assessee argued that the payment received was not for the use of copyright in the software, citing a Supreme Court decision and a previous ITAT ruling in their favor. The Revenue did not dispute the similarity in facts with the cited cases. Consequently, the Tribunal set aside the Revenue's order and ruled in favor of the assessee.

Adoption of Amended Definition of 'Royalty':
The AO held that the assessee's receipt from the supply of software was taxable as royalty income under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-USA DTAA. The tax rate was determined at 15% under the DTAA, which was more beneficial than the rate under the Income Tax Act. The DRP rejected the assessee's objections. However, the Tribunal, following the Supreme Court precedent and noting the lack of dispute on factual similarity, allowed the assessee's appeal.

Consideration of OECD Commentary:
The assessee contended that the Revenue erred in not considering the OECD Commentary on the issue of taxation of royalty, citing reservations expressed by the Government of India. However, the Tribunal did not delve into this aspect as the decision was made in favor of the assessee based on other grounds.

Non-Following of Jurisdictional High Court Decisions:
The appeal argued that the Revenue erred by not following binding decisions of the jurisdictional High Court merely because they were challenged by the department. However, the Tribunal did not address this issue explicitly as the decision was made in favor of the assessee based on other legal interpretations.

Application of Principle Favoring the Assessee:
The assessee contended that the Revenue erred by not adopting the principle that if two views are possible, the view favorable to the assessee should be considered. While this argument was presented, the Tribunal did not specifically address it in the final decision as the case was resolved in favor of the assessee based on other legal grounds.

Penalty Proceedings under Section 271(1)(c) of the Act:
The AO had initiated penalty proceedings under section 271(1)(c) of the Act. However, this issue was not discussed in detail in the judgment as the Tribunal ruled in favor of the assessee on the primary issue related to the characterization of receipts as 'royalty' income. Therefore, the penalty proceedings became inconsequential in the final decision.

In conclusion, the Tribunal allowed the assessee's appeal, setting aside the Revenue's order regarding the characterization of receipts from the sale of a perpetual license as 'royalty' income under the India-USA DTAA. The decision was primarily based on the Supreme Court precedent and the factual similarity with previous cases where similar issues were resolved in favor of the assessee.