2022 (7) TMI 1452 - HC - Income Tax

Income deemed to accrue or arise in India - payment received by Microsoft Regional Sales Corporation from the sale of MS Retail Software Products to its distributors - Whether the income earned by the Appellant was royalty for the purpose of Section 9(1)(vi) ? - DTAA between India and USA - HELD THAT -In the opinion of this Court, the issue of taxability of software receipts in the present cases is no longer res integra as the Supreme Court in Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195. Chargeability of interest u/s 234B - HELD THAT - Ground is allowed following decision of the M/s Mitsubishi Corporation 2021 (9) TMI 875 - SUPREME COURT

Summary

Issues involved:
1. Taxability of software receipts in the present cases.
2. Whether the income earned by the Appellant was royalty.
3. Taxability under Double Taxation Avoidance Agreement.
4. Perversity in the Tribunal's order.
5. Chargeability of interest under Section 234B.

Analysis:
1. The High Court addressed the taxability of software receipts, citing the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT. The Court categorized cases involving software transactions into four types, clarifying the tax implications for each scenario. It was concluded that payments made by Indian end-users/distributors to non-resident software manufacturers/suppliers were not royalty for copyright use, thus not taxable in India. This decision overruled previous rulings and set aside judgments from the High Courts of Karnataka and Delhi.

2. Regarding the nature of income earned by the Appellant, the Court allowed substantial questions of law (ii) and (iii) based on the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. case. The Court ruled that the income received by the Appellant was not considered royalty for tax purposes, aligning with the decision in the aforementioned case.

3. The Court also examined the tax implications under the Double Taxation Avoidance Agreement. It was determined that the income earned by the Appellant did not fall under the category of royalty as per the agreement between India and the United States of America. Consequently, the Court dismissed the appeals from the High Court of Delhi while allowing those from the High Court of Karnataka.

4. The issue of perversity in the Tribunal's order was raised, questioning the correctness of the factual findings. However, this concern became academic in light of the Court's decisions on taxability and royalty status. As a result, the Court did not delve further into this issue.

5. Lastly, the Court considered the chargeability of interest under Section 234B. Following the precedent set in the case of Director of Income Tax, New Delhi vs. M/s Mitsubishi Corporation, the Court allowed substantial question of law (v) and upheld the chargeability of interest under the mentioned section. The batch of appeals was ultimately disposed of, with directions for expeditious hearing of connected appeals on related disputes.