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2016 (12) TMI 1353 - AT - Income TaxRe-characterisation of income received from licensing of software as Royalty - DTAA between India and Netherlands - disregarding the claim of the assessee that the aforesaid income was in the nature of business income - existence of PE in India - Held that - No corresponding amendment has been made in the provisions of the DTAA. Under these circumstances, the assessee would be entitled to the provisions, which are more beneficial to the assessee out of the provisions of Indian Income-tax Act and DTAA between India and the Netherlands, in view of provisions contained in section 90(2) of the Act. We have already held that as per the provisions of India Netherlands DTAA, the amount received by the assessee on account of sale of software would not fall within the definition of Royalty as provided in Article 12(4) of the DTAA. Under these circumstances, it will not be legally permissible for us to refer to the provisions of the Act to decide the taxability of this amount in the hands of the assessee in India. Thus, in our considered view, based upon the facts and circumstances of the case and legal position as discussed above, the impugned amount received by the assessee is in the nature of business profits assessable under Article 7 of India Netherlands DTAA and would not be taxable as Royalty under Article 12 of the DTAA. Thus, this ground is decided in favour of the assessee.
Issues Involved:
1. Validity of assessment under Section 147. 2. Re-characterization of income from licensing of software as 'Royalty'. 3. Treatment of the Appellant as not being the beneficial owner of the income from licensing of software. 4. Taxation of income from maintenance of software. Issue-wise Detailed Analysis: 1. Validity of Assessment under Section 147: - Ground 1: The appellant contested the issuance of notice under Section 148 and the subsequent order under Section 143(3) read with Section 147, claiming it was bad in law. - Resolution: Ground 1 was not pressed during the hearing and was dismissed. 2. Re-characterization of Income from Licensing of Software as 'Royalty': - Ground 2: The appellant challenged the re-characterization of income received from licensing of software as 'Royalty' under the DTAA between India and Netherlands, asserting it was business income and not taxable in India due to the absence of a Permanent Establishment (PE). - Facts and Arguments: The assessee, a non-resident, filed returns declaring taxable income from maintenance service charges. The AO reopened the case under Section 147, treating the income from the sale of software licenses as royalty. The appellant argued that the transaction did not transfer copyright rights and thus should not be classified as royalty. Reliance was placed on judgments from the Bombay High Court and ITAT Mumbai. - Revenue's Argument: The Revenue contended the assessee had rights to make adaptations and copies, including access to the source code, and thus the income should be treated as royalty. - Tribunal's Analysis: The Tribunal examined the Master Agreement and relevant clauses, determining that the rights granted were limited and did not constitute a transfer of copyright. The Tribunal referenced the Copyright Act, 1957, and noted that the DTAA with the Netherlands did not include software in the definition of 'Royalty'. The Tribunal concluded that the payments were for the use of software, not for the use of copyright, and thus did not qualify as royalty under the DTAA. - Decision: The Tribunal held that the income from the sale of software was business profits under Article 7 of the DTAA and not taxable as royalty under Article 12. Ground 2 was decided in favor of the assessee. 3. Treatment of the Appellant as not being the Beneficial Owner of the Income from Licensing of Software: - Ground 3: The appellant contested the finding that it was not the beneficial owner of the income, arguing for a lower tax rate applicable to beneficial owners under the DTAA. - Resolution: Since Ground 2 was decided in favor of the assessee, Grounds 3 and 4 were dismissed as infructuous. 4. Taxation of Income from Maintenance of Software: - Ground 4: The appellant contested the higher tax rate applied on income from maintenance services, arguing it was the beneficial owner and entitled to the lower tax rate under the DTAA. - Resolution: Similar to Ground 3, this ground was dismissed as infructuous following the decision on Ground 2. Appeal for AY 1999-2000: - Ground 1: Relating to the reopening of assessment, dismissed as it was not pressed. - Ground 2: Similar to Ground 2 of AY 1998-99, decided in favor of the assessee. - Grounds 3 & 4: Dismissed as infructuous following the decision on Ground 2. Conclusion: Both appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the key issue of re-characterization of income from software licensing, determining it as business income rather than royalty.
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