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2020 (9) TMI 64 - AT - Income TaxIncome received from sale of software licenses - Royalty under Article 12 of India Singapore Agreement - whether the receipts on sale of licensed software to the end user customers in India, which was an application software, can be covered under the term Royalty income arising on sale of such software as provided in Section 9(1)(vi) of the Act and/ or under Article 12(3) of the India Singapore Treaty? - Whether provision of DTAA over-ride the provision of Income Tax Act, 1961? - HELD THAT - Hon ble High Court of Delhi in DIT vs Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT had held that Explanation 4 was added to section 9(1)(vi) of the Act by the Finance Act, 2012 with retrospective effect from 01.06.1976 to provide that all consideration for use of software shall be assessable as Royalty . However, the definition in the DTAA has been left unchanged It is an admitted fact that though Explanation 5 has been inserted in section 9(1)(vi) of the Act but no amendment has been made to the definition under the DTAA and since the provisions of the DTAA are beneficial to the assessee, then the said provisions would be applied. Thus, we hold that the amended definition of Royalty under the domestic law even if amended with retrospective effect cannot be extended to the definition of Royalty under the DTAA since the term Royalty under the DTAA has not been amended. As the provision of DTAA over-ride the provision of Income Tax Act, 1961 and being more beneficial shall apply and since the definition of Royalty has not been amended in the DTAA, receipts by the assessee on sale of copyright Article was not taxable in the hands of the assessee. Before parting, we may also point out that there is no merit in the plea of the Ld. DR for the Revenue that whether the copyrighted Article was processed or not. We reiterate that as per the provisions of DTAA has not been amended and the same being more beneficial, the same are to be applied and the consideration received by the assessee on sale of copyrighted license is not taxable in the hands of the assessee. Ground of appeal No.1 raised by the assessee is thus allowed.
Issues Involved:
1. Taxability of consideration received from the sale of software licenses as 'Royalty' under the Income Tax Act and the India-Singapore DTAA. 2. Levy of surcharge and cess on the tax rate under the India-Singapore DTAA. 3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Taxability of Consideration from Sale of Software Licenses as 'Royalty': The primary issue was whether the consideration received from the sale of software licenses should be taxed as 'Royalty' under both the Income Tax Act and Article 12 of the India-Singapore DTAA. The assessee argued that the software licenses sold were goods and not services, and thus should not be classified as 'Royalty'. They contended that the licenses granted did not transfer any rights in the copyright of the software but were merely for the use of a copyrighted article. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) had treated the income from the sale of software licenses as 'Royalty', relying on the decision in Gracemac Corporation vs ADIT. However, the assessee placed reliance on the Delhi High Court's decision in DIT vs Infrasoft Ltd., which held that the sale of software licenses did not constitute 'Royalty' as it was a sale of a copyrighted article and not a transfer of copyright. The Tribunal noted that the definition of 'Royalty' under the DTAA had not been amended, unlike the Income Tax Act, and thus, the more beneficial provisions of the DTAA should apply. The Tribunal held that the consideration received from the sale of software licenses did not fall under the definition of 'Royalty' as per the DTAA, and thus, was not taxable in the hands of the assessee. 2. Levy of Surcharge and Cess on the Tax Rate under DTAA: The second issue was regarding the erroneous levy of surcharge and cess on the tax rate applicable as per the India-Singapore DTAA. The Tribunal noted that this ground was an alternate plea and would not survive if the first issue was decided in favor of the assessee. Since the Tribunal decided that the consideration from the sale of software licenses was not taxable as 'Royalty', this ground became irrelevant. 3. Initiation of Penalty Proceedings under Section 271(1)(c): The third issue was the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. The Tribunal found this ground to be premature and thus dismissed it. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the consideration received from the sale of software licenses was not taxable as 'Royalty' under the provisions of the DTAA. Consequently, the alternate plea regarding the levy of surcharge and cess did not survive, and the ground related to the initiation of penalty proceedings was dismissed as premature. The appeal was decided in favor of the assessee.
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