2014 (4) TMI 369 - AT - Income Tax

Sale of software and maintenance services Payments to be taxable as Royalty u/s 9(1)(vi) of the Act Article 12 of DTAA between India and US - The decision in DIT v. Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT followed - For a payment to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright - It is to be established that the licensee, by making such payment, obtains all or any of the copyright rights - Distinction has to be made between the acquisition of a copyright right and a copyrighted article - Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose - The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee - The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA - The right to make a backup copy purely as a temporary protection against loss, destruction or damage does not amount to acquiring a copyright in the software - What has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income - The consideration received on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America the addition made for sale of software and provisions of maintenance/other support services to the customers in India is not taxable - Decided in favour of Assessee.

Summary

Issues Involved:
1. Taxability of payments received from the sale of software and provision of maintenance/support services as "Royalty" under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-US DTAA.
2. Application of a 15% tax rate on receipts as opposed to a 10% rate.
3. Taxability of payments as business profits under Article 7 (read with Article 5) of the DTAA in the absence of a permanent establishment in India.
4. Charging of interest under section 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Payments as "Royalty":
The assessee, a US-based company, supplied pre-packaged software and provided maintenance/support services to Indian customers. The Assessing Officer (AO) held that the payments received for these services were taxable as "Royalty" under section 9(1)(vi) of the Income-tax Act and Article 12 of the India-US DTAA. The AO relied on the Tribunal's decision in the Gracemac case, asserting that the payments were for the use of or the right to use a copyright. The assessee contended that the payments were for the sale of a copyrighted article, not the transfer of any rights in the copyright itself, citing various case laws and the definition of "Royalty" under the Act and the DTAA.

2. Application of Tax Rate:
The AO applied a 15% tax rate on the receipts, arguing that the relevant agreements were not verifiable to confirm if they were entered into on or after June 1, 2005. The assessee challenged this, asserting that the applicable tax rate should be 10% under the Act, which is more favorable than the DTAA rate.

3. Taxability as Business Profits:
The assessee argued that the payments should be considered business profits under Article 7 of the DTAA and not taxable in India due to the absence of a permanent establishment (PE) in India. The AO, however, maintained that the payments were royalties and thus taxable in India.

4. Charging of Interest under Section 234B:
The AO charged interest under section 234B of the Act. The assessee contested this, arguing that since the payments were not taxable as royalties or business profits in India, the interest should not be applicable.

Tribunal's Findings:

On the Taxability of Payments as "Royalty":
The Tribunal considered the submissions and case laws presented by both parties. It noted that the software was supplied under a non-exclusive and non-transferable license, with the copyright remaining with the assessee. The Tribunal referred to the Delhi High Court's decision in the Infrasoft Ltd. case, which held that payments for the use of software under similar circumstances did not constitute "Royalty" under the Act or the DTAA. The Tribunal concluded that the payments received by the assessee were not taxable as royalties.

On the Application of Tax Rate:
Given the conclusion that the payments were not royalties, the Tribunal did not need to address the issue of the applicable tax rate.

On the Taxability as Business Profits:
The Tribunal agreed with the assessee's argument that the payments were business profits and not taxable in India in the absence of a PE. It reiterated that the assessee did not have any business presence in India, and all services were rendered outside India.

On Charging of Interest under Section 234B:
Since the Tribunal found that the payments were not taxable in India, it held that the interest charged under section 234B was not applicable and directed its deletion.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the addition made by the AO for the sale of software and provision of maintenance/support services. Consequently, the interest charged under section 234B was also directed to be deleted. The decision was pronounced in the open court on February 14, 2014.