2024 (2) TMI 692 - AT - Income Tax

Taxability of income in India - income from the sale of Software licenses subscription - India - Japan DTAA - CIT(A) held that the consideration received by the assessee from Indian end customers for sale of software products does not constitute royalty income and is not taxable under Article 12 of the India - Japan DTAA and is not business profits under Article 7 of the India Japan DTAA - HELD THAT - DR was unable to point any distinction of fact or any proposition of law, to show that ld. CIT(A) has fallen in error in making the deletion. After the judgement of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT wherein held the receipts as non-taxable in for AY 2018-19 and 2019-20, as concluded that the impugned receipts were not in the nature of royalty within the meaning of Article 12 of India-Japan DTAA the issue with regard to taxability of the income from the sale of Software licenses subscription, stands settled and same is followed by ld. CIT(A), so there is no infirmity in the impugned orders, requiring interference. Decided against revenue.

Summary

Issues involved:
The issues involved in this case are:
1. Whether the consideration received by the assessee from Indian end customers for the sale of software products constitutes royalty income and is taxable under the India-Japan Double Taxation Avoidance Agreement (DTAA) and as business profits under the India-Japan DTAA.
2. Whether the consideration received by the assessee for the sale of software products constitutes royalty income, despite a pending review petition against a judgment of the Supreme Court.
3. Whether the appeals by the Revenue have merit for alteration or amendment of the grounds of appeal.

Issue 1:
The assessee, a non-resident company incorporated in Japan, engaged in distributing software products and related services in the Asia Pacific region. The income streams included fees for technical services taxed at 10% under the India-Japan DTAA and sales of software licenses subscription not offered to tax.

Issue 2:
The Assessing Officer (AO) treated the sale of software license subscription as royalty income, but the Commissioner of Income Tax (Appeals) (CIT(A)) set aside this addition based on precedents. The CIT(A) referred to favorable decisions by the ITAT and the Authority for Advance Rulings (AAR) which held that such receipts were not in the nature of royalty. The CIT(A) also noted that the AO had accepted the non-taxability of similar receipts in previous assessment years following a Supreme Court decision.

Issue 3:
The Deputy Commissioner was unable to demonstrate any factual distinction or legal error in the CIT(A)'s decision. The CIT(A) correctly applied the Supreme Court decision in a similar case, indicating that the issue of taxability of income from software sales was settled. Consequently, the appeals by the Revenue were dismissed, as the grounds lacked substance.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee and dismissing the appeals by the Revenue. The judgment highlighted the importance of legal precedents and the application of tax treaties in determining the taxability of income from software sales.