2023 (1) TMI 891 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipt - Taxability of an amount received from sale of licence to various Indian customers as royalty under Article 12(3) of Indian USA Double Taxation Avoidance Agreement (DTAA) - HELD THAT - It is evident, the assessee had entered into End User Licence Agreement (EULA) with customers in India in terms of which the assessee has granted licence to use certain standardized software to the customer. The licences provided to the end users are non-exclusive and non-transferable. The end users of the licnese do not have any access to the source code, nor there was any transfer of right in process or use of any process. The limited right granted to the customers under EULA is to use the software for their own internal purposes. There is no dispute that factually the issue stands on the same footing as assessment year 2014-15 2022 (6) TMI 344 - ITAT DELHI . Therefore, respectfully following the decision of the Coordinate Bench in assessee s own case, as referred to above, we hold that the receipt in dispute is not in the nature of royalty, hence, not taxable in India. The Assessing Officer is directed to delete the addition. These grounds are allowed. Fee for Included Services (FIS) under Article 12(4)(a) of Indian USA DTAA - AO held that the amount received by the assessee towards granting licence under EULA is in the nature of royalty, hence, taxable in India - HELD THAT - Annual maintenance charges are ancillary and subsidiary to the grant of licence for right to use software, which is treated as royalty, the Assessing Officer concluded that receipt from annual maintenance charges is in the nature of FIS under Article 12(4)(a) of India USA DTAA as well as under section 9(1)(vii) of the Act. However, while deciding the issue of taxability of receipts from granting of licence, we have held that they are not in the nature of royalty under the treaty provisions. That being the case, the receipt from annual maintenance charges being not ancillary or subsidiary to any royalty income cannot be brought to tax under Article 12(4)(a) of the tax treaty. Therefore whether it can come within the purview of Article 12(4)(b) of the tax treaty. As could be seen, to be considered as FIS under Article 12(4)(b) under the tax treaty, the make available condition has to be satisfied. In the facts of the present appeal, the Departmental Authorities have failed to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skills, knowhow etc. to the recipient of such services. That being the case, the amount received cannot be treated as FIS under Article 12(4)(b) of the tax treaty. The entire case of the revenue is, the amount received falls under Article 12(4)(a) of the treaty. In view of the aforesaid, we hold that the amount received is not taxable in India as it cannot be treated as FIS under Article 12(4) of the tax treaty. Accordingly, we direct the Assessing Officer to delete the addition. Erroneous application of tax at the rate of 40% instead of 10% under section 115(1)(b)(B) of the Act, with regard to the income offered to tax in the return of income - It is an agreed position before us that the Assessing Officer has not, at all, considered the issue. Therefore, it was submitted before us to restore this issue to the Assessing Officer.

Summary

Issues:
1. Taxability of amount received from sale of license as royalty under India-USA DTAA.
2. Taxability of receipts from annual software maintenance charges as Fee for Included Services (FIS) under India-USA DTAA.
3. Erroneous application of tax rate under section 115(1)(b)(B) of the Act.

Analysis:

Issue 1: Taxability of amount received from sale of license as royalty under India-USA DTAA
The assessee challenged the taxability of an amount received from the sale of a license as royalty under Article 12(3) of the India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer considered the amount as royalty under both the Act and the DTAA. However, the assessee argued that the receipts did not fall under the definition of royalty as per the DTAA. The Dispute Resolution Panel upheld the Assessing Officer's decision. The Tribunal referred to a previous decision in the assessee's case for the assessment year 2014-15, where a similar issue was decided in favor of the assessee based on the Supreme Court's ruling. The Tribunal held that the receipt in question was not royalty and directed the Assessing Officer to delete the addition.

Issue 2: Taxability of receipts from annual software maintenance charges as Fee for Included Services (FIS) under India-USA DTAA
The Assessing Officer treated the receipts from annual software maintenance charges as Fee for Included Services (FIS) under Article 12(4)(a) of the India-USA DTAA. This treatment was based on the assumption that these charges were ancillary to the royalty income. However, since the Tribunal had already ruled that the receipts from granting licenses were not royalty, the maintenance charges could not be considered FIS under the DTAA. The Departmental Authorities failed to demonstrate that the services provided made technical knowledge available to the recipient, a condition for classification as FIS under Article 12(4)(b). Consequently, the Tribunal held that the amount received was not taxable in India under the DTAA and directed the Assessing Officer to delete the addition.

Issue 3: Erroneous application of tax rate under section 115(1)(b)(B) of the Act
The issue of the erroneous application of tax at a rate of 40% instead of 10% under section 115(1)(b)(B) of the Act with regard to the income offered to tax in the return of income was not considered by the Assessing Officer. The Tribunal decided to restore this issue to the Assessing Officer for verification and proper adjudication in accordance with the law.

In conclusion, the appeal for the assessment year 2015-16 was allowed, and the appeal for the assessment year 2017-18 was partly allowed, with specific directions given to the Assessing Officer for further actions as per the Tribunal's findings.