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2024 (11) TMI 497 - AT - Income Tax


Issues Involved:

1. Jurisdiction and validity of the Assessing Officer's order.
2. Taxability of receipts from the sale of software products as royalty.
3. Application of retrospective amendments to the definition of "royalty" under the Income Tax Act and Double Taxation Avoidance Agreement (DTAA).
4. Levy of interest under section 234B of the Income Tax Act.

Detailed Analysis:

1. Jurisdiction and Validity of the Assessing Officer's Order:

The appellant contended that the order of the Assessing Officer (AO) was contrary to the principles of equity and natural justice, and not based on the facts and circumstances of the case. The appellant argued that the order lacked jurisdiction and was liable to be struck down. However, the tribunal did not specifically address this issue, focusing instead on the substantive tax issues.

2. Taxability of Receipts from the Sale of Software Products as Royalty:

The primary issue was whether receipts from the sale of shrink-wrapped software products should be taxed as royalty income under section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India and the USA. The appellant argued that the payments received were for the sale of a copyrighted article, not a transfer of copyright rights, as the end users in India only obtained a right to use the software products. The appellant cited the Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Private Limited, which held that payments made by resident Indian end users to non-resident software manufacturers are not royalties. The tribunal agreed with the appellant, noting that this issue had been consistently decided in favor of the appellant in previous assessment years and was settled by the Supreme Court's ruling.

3. Application of Retrospective Amendments to the Definition of "Royalty":

The appellant challenged the AO's reliance on the retrospective amendment to section 9(1)(vi) of the Income Tax Act, introduced by the Finance Act 2012, which aimed to expand the definition of "royalty." The AO had applied this expanded definition to the DTAA, but the tribunal found that no bilateral amendments were made to the DTAA to incorporate this change. The tribunal emphasized that the OECD Commentary on the definition of royalties continued to have persuasive value, and the retrospective amendment could not override the DTAA provisions unless bilaterally amended.

4. Levy of Interest under Section 234B:

The appellant objected to the levy of interest under section 234B of the Income Tax Act. However, the tribunal did not specifically address this issue in detail, as the primary focus was on the taxability of the software receipts.

Conclusion:

The tribunal, following the decisions of the High Court of Bombay and the Supreme Court, directed the AO to delete the impugned addition related to the taxability of software receipts as royalty. The appeal was allowed in favor of the appellant, affirming that the receipts from the sale of shrink-wrapped software were not taxable as royalty under the DTAA and the Income Tax Act. The tribunal's decision was pronounced on 8th November 2024 in Mumbai.

 

 

 

 

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