2016 (3) TMI 540 - AT - Income Tax

Treating Business receipts towards sale of software as Royalty - Held that - Para 6 of Article 13, to the extent applicable, states that the provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein. In simple terms, this means that the amount falling under para 3 of Article 13 cannot be taxed as Royalties under paras 1 and 2, if the beneficial owner of the royalties, being a resident of a Contracting State (UK), carries on business in the other Contracting State (India) in which the royalties arises through a permanent establishment situated therein (India). Once these conditions are satisfied, then the later part of para 6 comes into play, as per which the provision of Article 7 (Business profits) of this Convention shall apply. On the fulfillment of the conditions in the first part of para 6, the amount shall not be considered as royalties under paras 1 and 2 of Article 13, but shall fall for consideration under Article 7 of the DTAA, being, Business profits . There is no dispute on the fact that the assessee is a UK company having its branch office in India (which is its permanent establishment) and the transactions in question are sale of computer software made by such permanent establishment to certain parties in India. This shows that all the requisite conditions for the applicability of first part of para 6 of Article 13 are fully satisfied. On such fulfillment, the amount of royalties is liable to be considered under Article 7 (Business profits). As the assessee has declared such receipts under Article 7, the view taken by the authorities in this regard, shifting such amount from Article 7 (business profits) to Article 13 (royalties), being contrary to the mandate of the DTAA, is liable to be and is hereby set aside. Thus we approve the assessee s stand on the sale of computer software as business profits, by jettisoning the Revenue s viewpoint of royalty. - Decided in favour of assessee. Receipt towards Annual maintenance contract - Held that - AO finally treated receipts from annual maintenance contract as part of Royalty covered under section 9(1)(vi) of Article 13(3), as having the same character as that of the original software. While discussing receipts from sale of software amounting to ₹ 1.04 crore, we have held that the same is in the nature of business receipts covered under Article 7 and not Article 13 of the DTAA. Going by the AO s own version of receipts from annual maintenance contract having the same character as that of software sales, we consequently hold such receipts also falling under Article 7 of Business profits . Before parting with this issue, we want to clarify that we have not independently examined the character of receipt from annual maintenance contract as Royalties or Fees for technical services . It is so because of the AO himself finally holding it to be of the same character as the sale of software, and thus royalty covered under Article 13(3) read with section 9(1)(vi) and not Fees for technical services covered under Article 13(4) read with section 9(1)(vii).- Decided in favour of assessee. Receipts from training fees as Fees for technical services covered under Article 13(4) of the DTAA - Held that - Article 13(4) defines the term fees for technical services to mean payments, inter alia, for rendering of any technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of the right, property or information described in paragraph 3(a) of this Article, para 5 provides that fees for technical services in paragraph 4 shall not include amounts paid, inter alia, for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article. This shows that in so far as consideration for services that are ancillary, subsidiary, and inextricably linked to the sale of property described in paragraph 3(a) of the Article 13 is concerned, the provisions of para 4 apply. If however, consideration is for services that are ancillary, subsidiary, and inextricably linked to the sale of property other than that described in paragraph 3(a) of the Article 13, then it falls in para 5 and thus cease to be fee for technical services as per para 4 of Article 13. While discussing the nature of receipts from sale of software above, we have held in principle that such consideration does not fall within the definition of royalties given in para 3(a) of Article 13. Since the training of personnel of end users for which this consideration has been received is ancillary and subsidiary to the sale of software, the same, being covered under para 5, cannot be treated as Fees for technical services as per para 4 of Article 13 of the DTAA. Ex consequenti, we allow this ground by approving the assessee s stand of including such receipts under Article 7 of the DTAA.- Decided in favour of assessee. Estimation of income from business at the rate of 18% on Consultancy receipts and Miscellaneous income - Held that - We find that the AO has estimated income at the rate of 18% on Consultancy receipts and Miscellaneous income without pointing out any mistake in or rejecting books of account maintained by the assessee. It is trite law that unless the books are rejected after pointing out certain deficiencies, the declared profit of the assessee cannot be disturbed. In the absence of an iota of evidence justifying rejection of books of account, we overturn the impugned order on this issue and order for the deletion of addition. It is accordingly held these two amounts be included in the income of the assessee as originally declared. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of 'Business receipts' from the sale of software as 'Royalty'.
2. Treatment of receipts from Annual Maintenance Contracts as 'Royalty'.
3. Treatment of receipts from training fees as 'Fees for technical services'.
4. Estimation of income from business at 18% on Consultancy receipts and Miscellaneous income.

Detailed Analysis:

1. Treatment of 'Business receipts' from the sale of software as 'Royalty':
The primary issue was whether the receipts from the sale of software amounting to Rs. 1,04,18,783/- should be treated as 'Business receipts' or 'Royalty'. The assessee, a UK-based company with a branch in India, declared these receipts as business income. The AO, however, treated them as 'Royalty' under section 9(1)(vi) of the Income-tax Act and Article 13(3)(a) of the Indo-UK DTAA. The AO's conclusion was based on the nature of the software, which was specialized for mining activities and considered to be making available a 'process' to the customers. However, the Tribunal held that the software sold was a copyrighted product and not the copyright itself. The intellectual property rights remained with Datamine Corporate, and the end-users only had the right to use the software. The Tribunal concluded that the receipts from the sale of software should be treated as 'Business receipts' under Article 7 (Business profits) of the DTAA, not 'Royalty'.

2. Treatment of receipts from Annual Maintenance Contracts as 'Royalty':
The AO treated the receipts of Rs. 36,69,021/- from Annual Maintenance Contracts as 'Royalty', considering them an extension of the original software process. However, the Tribunal, referencing its earlier decision on software sales, held that these receipts should also be treated as 'Business receipts' under Article 7 of the DTAA. The AO's own version that these receipts had the same character as software sales supported this conclusion.

3. Treatment of receipts from training fees as 'Fees for technical services':
The AO treated the receipts of Rs. 9,62,372/- from training fees as 'Fees for technical services' under Article 13(4) of the DTAA. The Tribunal examined whether these receipts fell under Article 13(4) or were excluded by Article 13(5). It concluded that the training provided was ancillary and subsidiary to the sale of software, which did not fall under Article 13(3)(a). Therefore, the receipts from training fees were not 'Fees for technical services' but 'Business receipts' under Article 7 of the DTAA.

4. Estimation of income from business at 18% on Consultancy receipts and Miscellaneous income:
The AO estimated the income from Consultancy receipts of Rs. 25,000/- and Miscellaneous income of Rs. 61,584/- at an 18% profit rate, without rejecting the assessee's books of account. The Tribunal held that unless the books of account were rejected after pointing out deficiencies, the declared profit could not be disturbed. Consequently, the Tribunal overturned the AO's estimation and ordered the inclusion of these amounts in the income as originally declared by the assessee.

Conclusion:
The Tribunal allowed the appeal, treating the software sales, Annual Maintenance Contracts, and training fees as 'Business receipts' under Article 7 of the DTAA. The estimation of income from Consultancy receipts and Miscellaneous income was also overturned, and the declared amounts were accepted. The judgment emphasized the distinction between the sale of copyrighted products and the use of copyrights, aligning the tax treatment with the provisions of the DTAA over the domestic law where beneficial to the assessee.