2023 (10) TMI 836 - AT - Income Tax

Income taxable in India - taxability of amounts received from Indian customers towards sale of hardware along with software packages as royalty income - HELD THAT - It is a fact on record that the assessee procures the hardware and software packages from non-resident vendors and re-sells them to Indian customers without any value addition, along with, warranty packages. The facts on record clearly reveal that what the assessee has sold to Indian customers is copyrighted articles and not use or right to use of any copyright. This is so because, the assessee procures hardware and software packages from other vendors and sells them to third party customers. Therefore, the ownership over copyright lies with the manufacturer and original supplier of software packages and not with the assessee. Therefore, the ratio laid down in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT will squarely apply to assessee s case.Therefore, we uphold the deletion of additions made on account of royalty income. Receipts from Technical services/service charges received - whether taxable as Fees for Technical Services u/s 9(1)(vii) and Article 12(4) of India- Singpore DTAA ? - assessee is a non-resident corporate entity and a tax resident of Singapore - Undisputedly, though, the AO has not expressed in so many words, however, his observations clearly reveal that he has treated the receipts as FTS by applying Article 12(4)(a) of India-Singapore DTAA, which treats fee received for services which are ancillary and subsidiary to the royalty income as FTS. Once, it is held that the receipts from sale of hardware and software packages are not in the nature of royalty either under the provisions of the Act or under Treaty provisions, the case of the Assessing Officer in treating the service charges as FTS under Article 12(4)(a) of the treaty is bound to fail. Therefore, we uphold the decision of learned first appellate authority in deleting the additions made on account of FTS. Though, learned first appellate authority has recorded his conclusive findings on applicability of Article 12(4)(b) and 12(4)(c) of India-Singapore DTAA to the service charges received by the assessee, however, since the AO has not examined these aspects in the respective assessment orders, we desist from dealing with these issues. However, the issues relating to applicability of Articles 12(4)(b) and 12(4)(c) of India- Singapore DTAA to the service charges are kept open for deliberation if they arise in future in appeals relating to any other assessment years. Revenue appeal dismissed.

Summary

Issues involved:
The judgment pertains to appeals by the Revenue regarding the taxability of amounts received by the assessee company as fees for technical services and the tax treatment of receipts from the sale of software as royalty income for assessment years 2013-14, 2014-15, 2015-16, and 2017-18.

Taxability of Receipts from Sale of Hardware and Software as Royalty Income:
The assessee, a non-resident corporate entity, procures hardware and software packages from vendors and resells them to customers without adding value, including Indian customers. The ownership of copyright lies with the original suppliers, not the assessee. The Tribunal previously directed the Assessing Officer to verify for any royalty component, and in earlier assessment years, it was concluded that the receipts from the sale of hardware and software were not in the nature of royalty. The learned first appellate authority applied the decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. and deleted the additions, which was upheld by the ITAT. The Revenue should have accepted the decision instead of further litigation.

Taxability of Service Charges as Fees for Technical Services (FTS):
The Assessing Officer treated the service charges as FTS under Article 12(4)(a) of the India-Singapore DTAA, considering them ancillary to royalty income. However, since the receipts from the sale of hardware and software were not considered royalty, the treatment as FTS under the treaty provision failed. The ITAT upheld the deletion of additions made on account of FTS.

Conclusion:
The ITAT dismissed all appeals by the Revenue, upholding the decisions of the learned first appellate authority regarding the taxability of receipts from the sale of hardware and software as royalty income and the treatment of service charges as FTS. The issues relating to other provisions of the India-Singapore DTAA were kept open for future consideration if they arise in subsequent appeals.