2023 (1) TMI 494 - HC - Income Tax

Issuance of a certificate u/s 197 at nil rate - petitioner claims that it is a tax resident of the United States of America (USA) - petitioner also states, that it has no business connection or a permanent establishment in India - HELD THAT - Petitioner entered into a Software License Agreement with Reliance Jio Infocomm Limited RJIL . The petitioner s case is, that in terms of the aforementioned Software Licensing Agreement, it granted a non-exclusive and non-transferable license to RJIL, to use and operate the software concerning Transmission Control Protocol and Video Optimisation Solution in the territory of India. As consideration, the petitioner receives licensing fees from RJIL. Inter-alia, the petitioner s claim is, that RJIL has only been allowed to use the licence software and that the rights qua the same have not been transferred. It is, thus, the petitioner s submission, that it is not liable to tax qua the license fee received from RJIL. Petitioner, has also placed reliance on the judgment of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT . Respondents/revenue cannot but accept, that the concerned officer who passed the impugned order would have to take into account, the observations made by DRP in its order dated 17.05.2022, as also consider the impact of the judgment rendered by the Supreme Court in Engineering Analysis. In our view, the aforementioned aspects will require consideration. Accordingly, the impugned order is set aside, with the direction that the application filed by the petitioner will be decided afresh.The concerned authority will hear the Authorized Representative (AR) of the petitioner. Petitioner will appear before the concerned authority on 16.01.2023, at 11 00 AM.

Summary

Issues:
1. Grant of certificate under Section 197 of the Income Tax Act, 1961 at nil rate.
2. Tax liability of a non-resident petitioner for license fee received from an Indian entity.
3. Interpretation of Software License Agreement and tax implications.
4. Consideration of observations by the Dispute Resolution Panel and a Supreme Court judgment in determining tax liability.
5. Setting aside the impugned order and directions for a fresh decision.

Analysis:
1. The petitioner sought a certificate under Section 197 of the Income Tax Act, 1961 at a nil rate, claiming non-resident status and no business connection in India. The petitioner entered into a Software License Agreement with an Indian entity, receiving licensing fees. The petitioner contended that it is not liable to tax on the license fee received.

2. The Software License Agreement was examined, revealing two distinct transactions: supply and license of software, and providing AMC services. The petitioner argued that the rights were not transferred, thus not liable to tax. The petitioner relied on the Dispute Resolution Panel's observations and a Supreme Court judgment to support its stance.

3. The Dispute Resolution Panel's order highlighted the terms of the Software License Agreement, emphasizing the non-transferable nature of the license and the proprietary trade secrets involved. The Panel directed the exclusion of receipts related to the sale of software licenses from taxation, considering the absence of a permanent establishment in India.

4. The petitioner also cited a Supreme Court judgment in Engineering Analysis, reinforcing its position on tax liability. The respondents acknowledged the need to consider the observations by the Dispute Resolution Panel and the Supreme Court judgment in determining the tax implications.

5. The High Court set aside the impugned order and directed a fresh decision by the concerned authority. The authority was instructed to consider the DRP's order and the Supreme Court judgment, ensuring an expeditious decision. The petitioner was granted the prevailing rate of tax on remittances and the option to seek further legal recourse if the decision is adverse.

This judgment emphasizes the importance of considering specific contractual terms and legal precedents in determining tax liability for non-resident entities engaging in transactions with Indian counterparts.