2023 (3) TMI 910 - AT - Income Tax

Income deemed to accrue or arise in India - amount received by the assessee towards sale of software - royalty receipts under Article 12 of the India USA Double Taxation Avoidance Agreement (DTAA) - HELD THAT - Materials on record clearly demonstrate that the assessee has sold copyrighted articles and has not transferred use or right to use of any copyright. Though, creation of software might have involved certain formula or process, but what the customers in India have purchased is the software and not the process. Thus, in sum and substance, the assessee has sold copyrighted articles and not the copyright in the software. The ratio laid down by the Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT would squarely apply to assessee s case. The amount received by the assessee from sale of software is not in the nature of royalty under Article 12(3) of India USA DTAA. Accordingly, we direct the Assessing Officer to delete the addition. Grounds are allowed.

Summary

Issues:
Whether the amount received by the assessee towards the sale of software is in the nature of royalty under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).

Analysis:
The appeal pertains to an assessment year where the assessee, a non-resident corporate entity from the USA, sold software to Indian companies and received a license fee. The Assessing Officer initially treated the amount received as royalty under Article 12(3) of the DTAA. The assessee contended that the amount was for the sale of copyrighted software, not for the use of any copyright material. The Assessing Officer relied on certain High Court decisions to treat the amount as royalty. The Commissioner (Appeals) upheld the addition.

Upon review, it was found that the software sold by the assessee was copyrighted material and not the transfer of any copyright. The Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT clarified that consideration for the sale of a copyrighted article cannot be treated as royalty. This decision overruled the Karnataka High Court's judgment. The Tribunal noted that the Assessing Officer should have followed the Delhi High Court's decision, being within its jurisdiction, and not the non-jurisdictional High Court's decision. Therefore, the Tribunal held that the amount received from the sale of software is not royalty under the DTAA, directing the deletion of the addition.

In conclusion, the Tribunal allowed the appeal, following the Supreme Court and Jurisdictional High Court's decisions, and directed the Assessing Officer to delete the addition.