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2023 (6) TMI 1029 - AT - Income TaxIncome chargeable to tax in India - consideration received by the assessee from supply / distribution of its copy righted software products - Whether income from royalty as defined in Article 12 of the agreement for avoidance of double taxation between the India and Ireland? - HELD THAT - This quarrel has now been settled by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd 2021 (3) TMI 138 - SUPREME COURT amounts paid by resident Indian end- users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/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, as a result of which the persons referred to In section 195 of the Income Tax Act were not liable to deduct any TDS u/s 195. Decided in favour of assessee.
Issues:
The issues involved in the judgment are: 1. Adequate opportunity of being heard violation by AO and DRP. 2. Taxability of consideration from supply/distribution of copyrighted software products as royalty. 3. Interpretation of royalty under India-Ireland DTAA. 4. Application of principles laid down by the Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 5. Failure to follow judicial precedents by lower authorities. 6. Observation regarding the role of distributors appointed by the assessee. 7. Lack of independent assessment by AO for the year under consideration. Issue 1: Adequate Opportunity of Being Heard Violation The appellant contended that the orders passed by the Assistant Commissioner of Income Tax and the Dispute Resolution Panel were bad in law and void ab-initio due to the lack of providing an adequate opportunity of being heard, violating principles of natural justice. Issue 2: Taxability of Consideration as Royalty The AO and DRP held that the consideration received by the appellant from supply/distribution of copyrighted software products is chargeable to tax in India as income from 'Royalty' as defined in Article 12 of the Agreement for Avoidance of Double Taxation between India and Ireland. Issue 3: Interpretation of Royalty under India-Ireland DTAA The dispute revolved around whether the consideration received for supply/distribution of copyrighted software products qualifies as royalty under the India-Ireland Double Taxation Avoidance Agreement. The definition of royalty under the DTAA covers payments for the right to use any copyright embedded in the software supplied by the assessee. Issue 4: Application of Supreme Court Principles The AO was criticized for not following the principles laid down by the Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified the taxability of payments made for software, especially in cases involving distributors and end-users. Issue 5: Failure to Follow Judicial Precedents Lower authorities were faulted for not adhering to judicial precedents cited by the appellant, including decisions from the Jurisdictional High Court and the Supreme Court, which could have influenced the taxability of the consideration received by the appellant. Issue 6: Role of Distributors The DRP's observation regarding the role of distributors appointed by the appellant, specifically in transmitting software to end customers, was questioned in the appeal. Issue 7: Lack of Independent Assessment The AO was criticized for not applying an independent mind for the year under consideration and merely reproducing observations from a previous assessment, leading to a lack of factual analysis in the assessment order. In conclusion, the judgment favored the appellant, directing the AO to delete the impugned addition based on the principles established by the Supreme Court. The decision highlighted the importance of correctly interpreting royalty provisions under DTAA and following established judicial precedents in tax assessments.
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