2023 (10) TMI 28 - AT - Income Tax

Income accrued in India - royalty and Fees for Technical Services - assessee is a company incorporated in the Netherlands is in the business of selling networking equipments and providing maintenance service (AMS) and networking equipments are sold through the third party distributors or value added resellers (collectively referred to as channel partners - assessee is a licensed resale distributor for Juniper Networks equipments in 130 countries in Europe, the Middle East, African Region, Asia Pacific and Japan Region - taxability under India Netherlands DTAA - According to AO software program is a literary work or alternatively software is a property similar to', 'patent', 'invention', design', 'process', 'trademark', 'secret formula'. While holding so the Assessing Officer stated that there is no material difference between the Act and DTAA when it comes to the definition of the term Royalty and accordingly the service fees received by the assessee is taxable in India as Royalty. HELD THAT - Assessee retains exclusive ownership of all right, title, and interest of all intellectual property and all other legal rights in the software and that nothing in EULA constitutes a sale or other transfer or conveyance of any right, title, or interest in the software. Therefore we see merit in the contention that except the right to use the Software embedded on the hardware, there is no other rights being transferred to the SSS. Whether the payment for troubleshooting software would be royalty ? - As to be taxable as royalty income covered by article 12 of the DTAA the income of the assessee should have been generated by the use of or the right to use of any copyright . Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. In assessee's case from the perusal of the terms of EULA, it is clear that SSS is given the mere access to use the troubleshooting / licensed software without the right to own or reproduce and the right to do so continued to be retained by the assessee. The grant of license to use the software cannot be construed as granting a right to utilize the copyright embedded in the software. Therefore we are of the considered view that the payments received by the assessee are towards the use of copy righted software and not towards acquisition of copy right or right to use the copy right. Software is a 'literary work' and thus the same is taxable as per Article 12(4) of India-Netherlands DTAA - India while entering into DTAA with certain countries such as Morocco, Kazakhstan etc. has specifically included for 'software/computer software program' to be classified as Royalty. Therefore there is force in the argument that, where the intention of both the States was to include payment for 'software/ computer software within the ambit of the definition of 'Royalty' under the DTAA the same would have been specifically negotiated between the parties and stated within the definition of 'Royalty' in the DTAA, as the same has not been specifically mentioned under the India-Netherlands DTAA, it was never the intention of both the States to include it with the definition of 'Royalty'. Considering the above elaborated facts of the assessee's case and the ratio laid down by the Hon'ble High Court Infrasoft Ltd 2013 (11) TMI 1382 - DELHI HIGH COURT we hold that the payments received by the assessee towards Juniper Services are not in the nature of royalty under the DTAA between India and Netherlands and not liable to tax accordingly. AO holding the payments received by the assessee are in the nature of Royalty also held that the same would otherwise should be treated as Fees for Technical Services (FTS) and taxed in India accordingly - Online support (i.e. through the CSC) through which issues are resolved the software gets updated once the problem is resolved thereby the knowledge regarding that problem gets imparted to SSS - Online support provides access to product specifications, FAQs, status of service requests raised oh JTAC, operating manuals, software updates, blogs, discussion forums, troubleshoot tools for resolving general error messages, etc., but does not in anyway enable SSS to independently apply any knowledge without assessee's support or resolve or diagnose the issues / errors / bugs / problems on their own in future. The SSS engineers continue to approach JTAC in case of critical / priority / time sensitive issues which are eventually resolved by Juniper engineers on the phone or through release of software updates. From these facts it is clear that the Juniper Services provided by the assessee does not result in any enduring benefit to the SSS as the SSSA between the SSS and the assessee is renewed upon the expiry of its tenure similar to any maintenance contract. In view of this discussion in our considered view the services rendered by the assessee to SSS does not make available any technical knowledge that would enable to SSS to resolve the technical issues independently in future and therefore does not fall within the definition to FTS under the India Netherlands DTAA. Accordingly the payment received by the assessee towards rendering Juniper Services is not taxable in India. This appeal of the revenue is dismissed.

Summary

Issues Involved:

1. Deletion of addition made by the Assessing Officer towards income received by the assessee as royalty and Fees for Technical Services (FTS).
2. Nature of services rendered by the assessee and whether they qualify as royalty or FTS under the India-Netherlands DTAA.
3. Reopening of assessment for AY 2013-14 and its validity.

Summary:

Issue 1: Deletion of Addition Made by the Assessing Officer
The common issue in all appeals was the deletion of addition made by the Assessing Officer towards income received by the assessee, which was contended to be in the nature of royalty and FTS. The CIT(A) held that the payments received by the assessee would fall within the definition of FTS and Royalty under the Act but not under the India-Netherlands DTAA. The Tribunal upheld the CIT(A)'s decision, stating that the payments received by the assessee from SSS are neither Royalty nor FTS as per the DTAA provisions between India and Netherlands.

Issue 2: Nature of Services Rendered by the Assessee
The assessee, a company incorporated in the Netherlands, provides Juniper Services related to Juniper Network equipment. The Assessing Officer treated the income as FTS and royalty, arguing that the services rendered are in the nature of consultancy services and that knowledge is made available to SSS. However, the CIT(A) and Tribunal found that the services rendered do not make available any technical knowledge to SSS, and thus, the income is not taxable in India as FTS or royalty under the DTAA. The Tribunal emphasized that the right to use the software embedded in the hardware does not constitute a transfer of copyright or right to use the copyright.

Issue 3: Reopening of Assessment for AY 2013-14
For AY 2013-14, the assessment was reopened based on the scrutiny proceedings for AY 2015-16, where payments received by the assessee were treated as taxable as Royalty/FTS. The CIT(A) deleted the addition, and the Tribunal upheld this decision, stating that the facts for AY 2013-14 were identical to those for AY 2015-16. Consequently, the Tribunal dismissed the appeal of the revenue for AY 2013-14.

Conclusion:
The Tribunal dismissed the revenue's appeals for AY 2013-14, 2015-16, and 2016-17, upholding the CIT(A)'s decisions that the payments received by the assessee towards Juniper Services are not taxable in India as Royalty or FTS under the India-Netherlands DTAA.