2023 (12) TMI 974 - AT - Income Tax

Royalty receipts - amount received from Indian entity - characterizing payment received by the assessee during the relevant previous year as royalty and taxing at 10% of gross receipts - submissions of the assessee is that amount is received by the assessee towards providing facilities to Volvo Indian entities and by such arrangement they (Indian entities) do not use or obtain a right to use the copy right in any of the software/business software/ application owned and executed by the assessee - HELD THAT - The Hon ble Delhi High Court in the case of EY Global Services Ltd. 2021 (12) TMI 571 - DELHI HIGH COURT following the judgment of Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT held that payment received for providing access to computer software to its member firms located in India, does not amount to royalty liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA . Thus the authorities below committed an error in taxing the impugned receipts as royalty . Grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Characterization of payments received by the assessee as "royalty" and their taxability under Section 9(1)(vi) of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA).

Summary:

Issue 1: Characterization of Payments as "Royalty" (A.Y. 2014-15)
The assessee contested the assessment of INR 77,72,01,480 as royalty income, arguing it was for providing standard facilities and not for the right to use any copyright. The authorities, however, treated it as royalty under Section 9(1)(vi) of the Income Tax Act and DTAA, taxing it at 10%. The Tribunal found that the authorities erred in their characterization, citing precedents like the Supreme Court's ruling in Engineering Analysis Centre for Excellence (P) Ltd. vs. CIT and the Delhi High Court's decision in DIT vs. Infrasoft Ltd. The Tribunal concluded that the payments were not for the use of copyright and thus could not be taxed as royalty.

Issue 2: Characterization of Payments as "Royalty" (A.Y. 2015-16)
The facts for A.Y. 2015-16 were identical to those of A.Y. 2014-15. The assessee again argued that the payments received were not for the use of copyright but for providing standard facilities. The Tribunal reiterated its earlier decision, holding that the receipts of INR 119,88,54,215 could not be taxed as royalty. The Tribunal set aside the orders of the lower authorities, allowing the assessee's appeal.

Conclusion:
The Tribunal allowed the appeals for both A.Y. 2014-15 and A.Y. 2015-16, concluding that the payments received by the assessee could not be characterized as royalty and thus were not taxable under the provisions of Section 9(1)(vi) of the Income Tax Act, 1961, or the DTAA.