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2022 (5) TMI 1660 - AT - Income TaxIncome deemed to accrue or arise in India - Taxability of receipts towards sale of software products - income from sale of shrink-wrapped software is taxable in India, being in the nature of royalty under the provisions of section 9(1)(vi) as well as Article 12(3) of the DTAA between India and USA - assessee is a non resident company incorporated in USA, which is into the business of developing and marketing of 3D mechanical design solutions - HELD THAT - As decided by tribunal in order 2020 (7) TMI 97 - ITAT MUMBAI for A.Y. 2016-17 held that income derived by the assessee from the sale of shrink wrapped software being a copy righted article would not be construed as royalty. So following the earlier year precedence on the identical issue by the co-ordinate Bench of the Tribunal, we are of the considered view that income derived by the assessee from the sale of shrink wrapped software being a copy righted article would not be construed as royalty under the provisions of section 9(1)(vi) of the Act as well as Article 12(13) of the DTAA between India and the USA. Co-ordinate Bench of the Tribunal also held that assessee being a non resident company incorporated in the USA would not be liable to tax in India in respect of the receipt from the sale of software by treating the same in the nature of royalty and as such ordered to be deleted. Merely because of the fact that the Revenue has gone in appeal in the earlier years the findings returned by the co-ordinate Bench of the Tribunal cannot be brushed aside. Assessee appeal allowed.
Issues Involved:
1. Jurisdiction and validity of the Assessing Officer's order. 2. Taxability of receipts from the sale of software products as royalty under Indian tax laws and the Double Taxation Avoidance Agreement (DTAA) between India and the USA. 3. Application of retrospective amendments to the definition of "royalty." 4. Levy of interest under sections 234A and 234B of the Income Tax Act. Detailed Analysis: 1. Jurisdiction and Validity of the Assessing Officer's Order: The assessee challenged the jurisdiction and validity of the order passed by the Assessing Officer (AO), arguing that it was contrary to the principles of equity, natural justice, and mandatory provisions of the Income Tax Act, 1961. The assessee contended that the order lacked jurisdiction and should be struck down. However, the Tribunal did not specifically address this issue in its judgment, focusing instead on the substantive taxability issues. 2. Taxability of Receipts from the Sale of Software Products: The primary issue was whether the income from the sale of shrink-wrapped software should be taxed as royalty in India. The assessee argued that the income was not royalty, as the payments were for the sale of a copyrighted article and not for the transfer of any copyright rights. The AO and the Dispute Resolution Panel (DRP) held that the income was taxable as royalty under section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India and the USA. The Tribunal noted that this issue had been consistently decided in favor of the assessee in previous years (2003-04 to 2016-17) by the Income Tax Appellate Tribunal (ITAT), where it was held that such income is not royalty. The Tribunal reiterated its earlier stance, emphasizing that the sale of shrink-wrapped software constitutes the sale of a copyrighted article, not a royalty payment. The Tribunal also referenced the Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Private Limited, which supported the assessee's position. 3. Application of Retrospective Amendments: The AO applied the retrospective amendment to section 9(1)(vi) of the Income Tax Act, introduced by the Finance Act 2012, to define "royalty" under Article 12 of the DTAA. The Tribunal found this application incorrect, as the amendment could not alter the definition of "royalty" under the DTAA. The Tribunal upheld the assessee's contention that the retrospective amendment did not apply to the DTAA, thereby supporting the non-taxability of the income as royalty. 4. Levy of Interest under Sections 234A and 234B: The assessee also contested the levy of interest under sections 234A and 234B of the Income Tax Act. The Tribunal did not specifically address this issue in detail, as the primary focus was on the taxability of the software receipts. However, given the Tribunal's decision to treat the software receipts as non-taxable, the interest levied under these sections would likely be impacted, favoring the assessee. In conclusion, the Tribunal allowed the appeal filed by the assessee, holding that the receipts from the sale of shrink-wrapped software were not taxable as royalty in India. The Tribunal's decision was consistent with its previous rulings on the same issue in earlier years, affirming the non-taxability of such receipts under both Indian tax law and the DTAA between India and the USA.
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