2013 (11) TMI 118 - AT - Income Tax

Income from royalty - Fees for technical services Accounting method - Whether income from royalty and fee for technical services are to be taxed on receipt basis or accrual basis - the assessee has been consistently following the accrual basis method and the Tribunal has upheld the contentions of the assessee in various orders from the assessment years 1990-91 to 2003-04. Supply of software Royalty - Held that - Following Director of Income-tax v. Ericsson A. B. 2011 (12) TMI 91 - Delhi High Court - the consideration received by the assessee for software was not royalty. The receipts would constitute business receipts in the hands of the assesse the assessee who is a non-resident does not have a permanent establishment and therefore business income of the assessee cannot be taxed in India in the absence of a permanent establishment - the amount received by the assessee towards supply of software cannot be segregated from the supply of equipment and hence that portion cannot be considered as royalty Decided against Revenue.

Summary

Issues:
1. Taxation of income from royalty and technical services on receipt basis vs. accrual basis.
2. Treatment of software value as royalty in the hands of the assessee.

Issue 1: Taxation of income from royalty and technical services

The appeal raised the question of whether income from royalty and fees for technical services should be taxed on a receipt basis or an accrual basis. The Tribunal noted that a similar issue had been decided in favor of the assessee in a previous case. The assessee had consistently followed this method, which had been upheld by the Tribunal in various orders from previous assessment years. In line with these precedents, the Tribunal upheld the findings of the first appellate authority and dismissed the appeal raised by the Revenue.

Issue 2: Treatment of software value as royalty

The second issue revolved around whether the value of software supplied by the assessee could be treated as royalty. The assessee argued that since the software was embedded in hardware sold outside India, and the purchaser had no right to reproduce or modify the software, it did not constitute royalty under the Income-tax Act or the Double Taxation Avoidance Agreement between India and Germany. The assessee relied on previous decisions in its favor, including a Special Bench ruling. The Departmental representative opposed these contentions, citing other decisions and proposed amendments to the Income-tax Act. However, the Tribunal found that the facts of the case aligned with previous rulings favoring the assessee, where it was held that the consideration for software embedded in equipment did not amount to royalty. The Tribunal also referenced decisions by the Delhi High Court and the Authority for Advance Ruling to support its conclusion. Consequently, the Tribunal upheld the order of the first appellate authority and dismissed the appeal raised by the Revenue.

In conclusion, the Tribunal's judgment addressed the issues of taxation of income from royalty and technical services, as well as the treatment of software value as royalty. The decision was based on established precedents, legal interpretations, and factual considerations, ultimately ruling in favor of the assessee and dismissing the appeals raised by the Revenue.