2024 (2) TMI 1233 - AT - Income Tax

Accrual of income in India - royalty income - taxability of income in India or not? - AO treated the supply of software as royalty for use of Industrial, commercial, scientific experience - assessee is a tax resident of China and does not have a PE in India - whether the impugned receipts in the hands of the assessee are in the nature of royalty and hence subject to tax in India or business income not taxable in India in the absence of a PE of the assessee in India? HELD THAT - MG India merely purchases the licensed software (Software) which are embedded in the head unit and fitted into cars for end use by the buyer of the car. In such cases, EULA is signed with the end user to restrict access to rights in the license. The end user signs EULA for use of the licensed software and has no right to copy (except as permitted by the licensed and the Usages Rules), reverse engineer, disassembled, attempt to derive the source code of, modify or create derivative works of the licensed software, any updates or any part thereof (as accepted and permitted by EULA). From the relevant clause of EULA extracted above, it is amply clear that the end user has limited right to use the application quite akin to use of licensed software. MG India merely purchases the Software and acts as a reseller and it is for this reason that it is not a party to EULA. This would not in our view characterize the impugned receipts from supply of Software as royalty income. The payments received by the assessee is for the supply of Software which is a standardized / off the shelf software and not for the use of the copyright or imparting information concerning industrial, commercial or scientific experience and thus would not fall within the scope of Article 12(3) of the India-China DTAA to be taxed as royalty income. The impugned receipts would thus partake the character of business income in the hands of the assessee which is not taxable in India in the absence of PE of the assessee in India. Accordingly, ground decided in favour of the assessee. Levy of Interest u/s 234A is levied only in cases where the assessee does not furnish its return of income or furnishes it after the due date prescribed under section 139 of the Act. The facts on record reveal that the assessee filed its return of income within the prescribed (extended) due date applicable to the relevant AY under consideration. Hence we deem it fit and proper to restore this issue to the file of the Ld. AO for verification as to the filing of date of return viz-a-viz the due date of filing of return for the AY 2020-21 in the light of the CBDT circular ( No. 93/2020/F. No. 370142/35/2020-TPL) and decide it afresh in accordance with law. Levy of Interest u/s 234B - as submitted proviso inserted in section 209(1)(d) of the Act by the Finance Act, 2012 w.e.f. 01.04.2012 would apply only in a scenario where person responsible for deducting tax has paid or credited such income without deduction of tax - HELD THAT - As relying on Amadeus case 2023 (10) TMI 1138 - ITAT DELHI levy of interest under section 234B of the Act is not called for. Accordingly, interest levied under section 234B of the Act is hereby deleted.

Summary

Issues Involved:
1. Validity of assessment proceedings/order.
2. Taxability of software sale payments as royalty.
3. Applicable tax rate.
4. Levy of interest under sections 234A and 234B.
5. Initiation of penalty proceedings under section 270A.

Summary:

Validity of assessment proceedings/order:
The assessee contended that the assessment order dated 22.06.2023 was illegal and barred by limitation. Additionally, the directions issued by the Dispute Resolution Panel (DRP) lacked a Document Identification Number (DIN), rendering the final assessment order invalid. However, these grounds were not adjudicated as the assessee requested to keep them open.

Taxability of software sale payments as royalty:
The main issue was whether the payment received by the assessee from the sale of software to MG Motor India Private Limited (MG India) was taxable as royalty under Article 12(3) of the India-China Double Taxation Avoidance Agreement (DTAA). The assessee argued that the payment was not for the transfer of copyright but for a non-exclusive, non-transferable software license. The Tribunal found that the software supplied was a standard/off-the-shelf product, and the end-user license agreement (EULA) restricted the rights of the end-user. The Tribunal concluded that the payment was not for the use of copyright but for the supply of a copyrighted article, thus not taxable as royalty but as business income, which is not taxable in India in the absence of a Permanent Establishment (PE).

Applicable tax rate:
This issue became academic following the Tribunal's decision that the payment was not taxable as royalty.

Levy of interest under sections 234A and 234B:
The Tribunal restored the issue of interest under section 234A to the Assessing Officer (AO) for verification, as the assessee had filed its return within the extended due date. Regarding interest under section 234B, the Tribunal held that since the income was received after tax deduction at source, the proviso to section 209(1)(d) was not applicable, and thus, interest under section 234B was not warranted.

Initiation of penalty proceedings under section 270A:
The Tribunal deemed the issue of penalty proceedings initiation as premature and did not adjudicate it.

Conclusion:
The appeal was allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the primary issue of royalty taxability and directing further verification on the interest under section 234A.