2023 (9) TMI 1173 - HC - Income Tax

Income accrued in India - royalty receipts - payments received by the assessee for supply of software - India - USA DTAA - HELD THAT - As decided by Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT a non-exclusive, non-transferable license, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. Thus decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for royalty for the use of copyright in the computer software considering the definition of royalty under the DTAAs. In the present case what is sold is the copyrighted software which is shrink-wrapped.To our minds, the consideration received on the sale of off-the-shelf, shrink-wrapped software to Indian distributors and resellers would not constitute royalty in terms of the India-UK Double Taxation Avoidance Agreement. Thus, in our opinion, no substantial question of law arises for our consideration.

Summary

Issues Involved:
- Condonation of delay in re-filing the appeal
- Assessment of tax liability on software supply contracts

Condonation of Delay:
An application was filed seeking condonation of a 160-day delay in re-filing the appeal by the appellant/revenue. The respondent/assessee's counsel had no objection to condoning the delay. The delay was ultimately condoned based on the reasons provided in the application and the respondent's counsel's stance.

Assessment of Tax Liability on Software Supply Contracts:
The appeal pertained to the Assessment Year 2003-04 and aimed to challenge the order passed by the Income Tax Appellate Tribunal. The Tribunal allowed the appeal of the respondent/assessee based on the judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT. The Tribunal's findings highlighted the nature of the agreements between the appellant and its customers, emphasizing the distinction between the rights to reproduce and use computer software. It was concluded that the consideration received for the sale of shrink-wrapped software did not constitute royalty under the India-UK Double Taxation Avoidance Agreement. Consequently, no substantial question of law was found to arise, leading to the closure of the appeal.