2024 (6) TMI 1340 - AT - Income Tax

Taxability of software license receipts as royalty under India-US Tax Treaty - case involved a foreign company selling software licenses to its distributor in India, who then sells to end-users -HELD THAT - In light of categoric finding by the CIT (A) that end-users in the instant case have been only granted a non-exclusive / non-transferrable and a non-sub licensable licence, payment received by the assessee from Math Work India Pvt. Ltd., on sale of software to the end-users cannot be termed as royalty under the relevant DTA. Taxability of amount received by the assessee towards maintenance services - CIT (A) had held the same is inextricably linked to the supply of software licence and when the software licence itself is not taxable as royalty , the provisions of Article 12(4)(a) of the India-US DTAA would not apply. CIT (A) had relied on various ITAT Orders to hold that when receipts are on account of maintenance which is inextricably linked to the supply of software licence and when the supply of the software itself is not taxable as royalty , the receipts cannot be termed as fees for included services . In view of aforesaid reasoning we see no reason to interfere with the order of the CIT (A) and we uphold the same. Appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Taxability of software license receipts as royalty under India-US Tax Treaty.
2. Taxability of maintenance service receipts in relation to software license under India-US Tax Treaty.

Analysis:
1. The case involved a foreign company selling software licenses to its distributor in India, who then sells to end-users. The Assessing Officer (AO) treated the receipts as royalty under the India-US Tax Treaty and taxed the entire amount. However, the First Appellate Authority (CIT(A)) disagreed, citing a Supreme Court judgment that the end-users only purchased copyrighted articles, not rights in the nature of copyright. The CIT(A) held the receipts were not royalty and deleted the addition made by the AO.

2. Regarding the amount received for maintenance services linked to software licenses, the AO taxed it as fees for included services under the Treaty. The CIT(A) held that since the software license itself was not taxable as royalty, the maintenance service receipts could not be taxed as fees for included services. The CIT(A) relied on ITAT decisions and held that the receipts were not taxable. The Tribunal upheld the CIT(A)'s decision, stating that when maintenance services are linked to software supply, and software supply is not royalty, the receipts cannot be considered fees for included services.

3. The Tribunal considered the agreements, Supreme Court judgment, and relevant provisions of the Tax Treaty. It concluded that the receipts from software license sales and maintenance services were not taxable as royalty or fees for included services. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order and providing relief to the assessee based on the legal interpretations and precedents cited in the judgment.