2020 (7) TMI 99 - AT - Income Tax

Taxability of receipt from sale of 'off-the shelf' software as 'Royalty' - India-Finland Tax Treaty - whether the payments received by the assessee from its distributor for sale of specialized software and maintenance and support services (including upgrades) could be held as royalty as per Article 12 of the India-Finland tax treaty, and also as per the Explanation 2 to Sec. 9(1)(vi)? - HELD THAT - As decided in own case 2019 (12) TMI 1315 - ITAT MUMBAI amount received by the assessee from its distributor for sale of specialized software and maintenance and support services (including upgrades) cannot be held as being in the nature of royalty as per Article 12 of the India-Finland tax treaty. Levy of interest u/ss. 234A and 234B - HELD THAT - As the calculation of the interest liabilities would be consequential to the determining of the tax liability of the assessee, therefore, the same is being restored to the file of the A.O.

Issues Involved:
1. Determination of taxable income.
2. Taxability of receipt from the sale of 'off-the-shelf' software as 'Royalty'.
3. Taxability of receipt from maintenance and support services (including upgrades) as 'Royalty'.
4. Taxability of receipt of management fees as "Fees for Technical Services".
5. Levy of interest under Section 234A and 234B of the Income Tax Act.
6. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Determination of Taxable Income:
The assessee, a foreign company incorporated in Finland, filed returns declaring total income at Nil. The Assessing Officer (AO) determined the total taxable income at ?29,95,51,758/- for AY 2013-14 and ?20,19,24,489/- for AY 2014-15, including amounts received for sale of software, maintenance and support services, and management fees.

2. Taxability of Receipt from Sale of 'Off-the-Shelf' Software as 'Royalty':
The AO held that payments received by the assessee towards the sale of 'off-the-shelf' software were in the nature of 'Royalty' under Section 9(1)(vi) of the Income Tax Act and the India-Finland Tax Treaty. The assessee contended that these payments were sales revenue and not 'Royalty' as the distributors were granted the right to distribute copyrighted articles (software products) and not the copyright itself. The Tribunal, referencing its previous decisions in the assessee's own case for AY 2010-11 and AY 2011-12, concluded that the amounts received for the sale of specialized software could not be held as 'Royalty' under Article 12 of the India-Finland Tax Treaty.

3. Taxability of Receipt from Maintenance and Support Services (Including Upgrades) as 'Royalty':
The AO treated payments received for maintenance and support services (including upgrades) as 'Royalty'. The assessee argued that these payments were not for any right to use the copyright and hence should not be classified as 'Royalty'. The Tribunal, following its earlier decisions, held that payments for maintenance and support services (including upgrades) were not 'Royalty' under Article 12 of the India-Finland Tax Treaty.

4. Taxability of Receipt of Management Fees as "Fees for Technical Services":
The AO classified management fees received by the assessee as "Fees for Technical Services" (FTS) under Section 9(1)(vi) of the Act and Article 12 of the India-Finland Tax Treaty. The assessee did not press grounds related to the taxability of management fees, and thus, these grounds were dismissed as not pressed.

5. Levy of Interest under Section 234A and 234B of the Income Tax Act:
The AO levied interest under Sections 234A and 234B. The Tribunal held that the calculation of interest liabilities would be consequential to the determination of the tax liability and restored the matter to the AO for recalculation.

6. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
The AO initiated penalty proceedings under Section 271(1)(c). The Tribunal dismissed the assessee's appeal on this ground as premature.

Conclusion:
The Tribunal concluded that the amounts received by the assessee from its distributor for the sale of specialized software and maintenance and support services (including upgrades) could not be held as 'Royalty' under Article 12 of the India-Finland Tax Treaty. The appeal for AY 2013-14 and AY 2014-15 was partly allowed, with the issues related to the taxability of management fees dismissed as not pressed, and the levy of interest and initiation of penalty proceedings remanded for further consideration.

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