2023 (1) TMI 464 - AT - Income Tax

Royalty receipt - amount received by the Appellant on account of sale of software/license charges - India- Israel DTAA - non-exclusive, non-transferable and terminable license has been granted by Appellant to Wipro - as argued sale of such off shelf software by the Appellant is merely a sale of copyrighted article and has not resulted in transfer of any right in relation to a 'copyright' embedded in the said software and therefore, payments received by the Appellant do not constitute 'royalty' - as per assessee same has been treated as business income, but not liable to tax in absence of Permanent Establishment ( PE ) in India invoking Article 12 read with Article 7 of the India-Israel - HELD THAT - We hold that this issue is covered in favour of the assessee by the decision of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT and also by the decision of Intrasoft Ltd 2013 (11) TMI 1382 - DELHI HIGH COURT Accordingly, ground nos.1 to 5 are allowed.

Summary

Issues involved:
Interpretation of royalty under India-Israel Double Taxation Avoidance Agreement (DTAA), applicability of section 9(1)(vi) of the Income Tax Act, consideration of software sale as royalty, tax credit calculation, charging of interest under sections 234A, 234B, and 234C of the Act.

Analysis:

Interpretation of Royalty under DTAA and Income Tax Act:
The appeal concerned the treatment of an amount received by the assessee from a company for the sale of software/license charges. The Assessing Officer (AO) considered it taxable as royalty under Article 12(3) of the India-Israel DTAA and section 9(1)(vi) of the Income Tax Act. The Dispute Resolution Panel (DRP) upheld this treatment, citing the definition of royalty in the DTAA and the amended definition in the Income Tax Act. The panel noted that the transaction fell within the scope of royalty as per the Act and DTAA, proposing taxation at 10% under the DTAA. The AO's decision was based on the nature of software programs as processes embedded within the software itself, making the payment for the license a consideration for the use of such process. The panel rejected the assessee's objections, citing precedents and the pending appeal before the Supreme Court against a Delhi High Court judgment. The ITAT Delhi, however, ruled in favor of the assessee, citing relevant Supreme Court and Delhi High Court decisions, allowing grounds 1 to 5 of the appeal.

Tax Credit Calculation and Interest Charges:
The ITAT Delhi directed the AO to reexamine and grant appropriate tax credit as per the law, addressing the discrepancy in the tax credit granted. Grounds 8 and 9, related to charging interest under sections 234A, 234B, and 234C of the Act, were considered consequential and not adjudicated separately. Ground 6 was dismissed as not pressed, and the appeal was partly allowed for statistical purposes.

This detailed analysis covers the interpretation of royalty under the DTAA and the Income Tax Act, the tax credit calculation issue, and the consequential nature of the grounds related to interest charges. The ITAT Delhi's decision in favor of the assessee was based on relevant legal precedents, highlighting the importance of legal interpretations and precedents in tax matters.