2024 (5) TMI 486 - AT - Income Tax

Income deemed to accrue or arise in India - Revenue earned from supply of software - royalty u/A 13 of DTAA between India and United Kingdom - software is Shrink wrap software or customized software? - assessee was incorporated under the laws of United Kingdom (UK) with the primary objective of carrying on the business of specialist, engineers and dealers in computer system - HELD THAT - As decided in assessee own case 2022 (8) TMI 1497 - ITAT DELHI the software catered to by the assessee is a customized software and not a shrink wrap one as it is exclusively developed for the organization to suit its business requirement and that it is very expensive which is a logical corollary to the customized software. The issue of royalty or not on software has been examined by the Hon ble High Court in case of Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT Where in it was held that supply of software is not royalty despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as royalty , the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG 2008 (11) TMI 74 - BOMBAY HIGH COURT it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as royalty despite the retrospective amendments to the Act. The right to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the context of nonexclusive EULAs, not being so. At this juncture, we have examined the written submission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user right only. The buyer has no right to re-sale the product and it still remained a copyrighted article which the buyer cannot alter modified, reproduced i.e. own will unless authorized. And such authorization has been given to re-supply to BSNL for their use, at the same time, keeping the all other rights with the assessee. Holding thus, the Hon ble Supreme Court 2021 (3) TMI 138 - SUPREME COURT decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for royalty for the use of copyright in the computer software considering the definition of royalty under the DTAAs. Hence, keeping in view the judgment of Hon ble Apex Court, we hereby allow the appeal of the assessee on merits. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Taxation of revenue from software supply as 'royalty' under Article 13 of DTAA between India and UK.
2. Taxation of revenue from software supply as 'royalty' u/s 9(1)(vi) of the Income-tax Act, 1961.
3. Taxation of revenue from 'maintenance services' as 'royalty/fee for technical services' under Article 13 of DTAA between India and UK.
4. Taxation of revenue from 'maintenance services' as 'royalty/fee for technical services' u/s 9(1)(vi)/(vii) of the Income-tax Act, 1961.
5. Levy of interest u/s 234B and 234D of the Income-tax Act, 1961.

Summary:

1. Taxation of revenue from software supply as 'royalty' under Article 13 of DTAA between India and UK:

The Tribunal examined whether the revenue from the supply of software qualifies as 'royalty' under Article 13 of the DTAA between India and the UK. The Tribunal relied on its previous decision for AY 2003-04, which followed the Hon'ble Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT. It was held that the payments received for the supply of software do not constitute 'royalty' and are not taxable under Article 13 of the DTAA.

2. Taxation of revenue from software supply as 'royalty' u/s 9(1)(vi) of the Income-tax Act, 1961:

The Tribunal noted that the Assessing Officer had followed the findings from the AY 2003-04, treating the payments for software licensing as 'royalty' u/s 9(1)(vi) of the Act. However, the Tribunal, following its earlier decision and the Supreme Court's ruling, held that the payments for software supply are not taxable as 'royalty' under the Act.

3. Taxation of revenue from 'maintenance services' as 'royalty/fee for technical services' under Article 13 of DTAA between India and UK:

The Tribunal observed that the revenue from maintenance services was also treated as 'royalty/fee for technical services' under Article 13 of the DTAA by the lower authorities. However, based on the same reasoning applied to the software supply issue, the Tribunal concluded that the revenue from maintenance services does not qualify as 'royalty/fee for technical services' under the DTAA.

4. Taxation of revenue from 'maintenance services' as 'royalty/fee for technical services' u/s 9(1)(vi)/(vii) of the Income-tax Act, 1961:

The Tribunal found that the Assessing Officer had also treated the revenue from maintenance services as 'royalty/fee for technical services' u/s 9(1)(vi)/(vii) of the Act. However, consistent with its findings on the software supply issue, the Tribunal held that the revenue from maintenance services is not taxable as 'royalty/fee for technical services' under the Act.

5. Levy of interest u/s 234B and 234D of the Income-tax Act, 1961:

The Tribunal noted that the levy of interest u/s 234B and 234D was challenged by the assessee. The Tribunal observed that the assessee was not liable to pay advance tax u/s 208 and 209(1)(d) since tax was deductible u/s 195 on the payments made to the assessee. Consequently, no interest u/s 234B was leviable. Similarly, as no refund was granted to the assessee for the subject assessment year, no interest u/s 234D was leviable.

Conclusion:

The Tribunal allowed the appeal of the assessee on all grounds, holding that the revenue from the supply of software and maintenance services is not taxable as 'royalty' under the DTAA and the Income-tax Act. Additionally, the levy of interest u/s 234B and 234D was found to be unjustified. The appeal of the assessee was allowed in its entirety.