2020 (10) TMI 936 - AT - Income Tax

Income accrued in India - taxability of receipts from the sale of software as royalty - receipts of royalty income being in nature of payment for use of copyright in a process and transfer of information of commercial or industrial nature - Copyright vs Copyrighted Article - India-Sweden DTAA - HELD THAT -Since the facts of the instant assessment year are identical to the facts of the two preceding assessment years decided by the Tribunal in assessee s own case relying on INFRASOFT LTD. 2013 (11) TMI 1382 - DELHI HIGH COURT and NOKIA NETWORKS OY 2012 (9) TMI 409 - DELHI HIGH COURT we set aside the order of the Ld. CIT(A) and hold that consideration received by the assessee for sale of software cannot be treated as royalty under the provision of section 9(1)(vi) of the Act as well as Article 12 of the India-Sweden DTAA and that the sale of software products by the assessee to its Indian distributors for further sale to end users is not in the nature of transfer of copyright and therefore not taxable in the hands of the assessee as royalty under the provision of section 9 (1)(vi) of the Act as well as Article 12 of the India-Sweden DTAA. - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of consideration as payment for use of copyright in a process and for transfer of information of commercial or industrial nature.
2. Copyright vs Copyrighted Article.
3. Applicability of amendments to Section 9(1)(vi) of the Act in light of the India-Sweden DTAA.

Detailed Analysis:

1. Treatment of Consideration as Payment for Use of Copyright in a Process and for Transfer of Information of Commercial or Industrial Nature:
The assessee, a Sweden-based company, engaged in the sale of software products and IT services, declared NIL income for the assessment year 2014-15. The Assessing Officer (AO) categorized the entire receipts from software sales as royalty under Article 12 of the India-Sweden Double Taxation Avoidance Agreement (DTAA) and Section 9(1)(vi) of the Income Tax Act. The assessee appealed, arguing that the receipts were not for the use of copyright but for the sale of copyrighted articles. The CIT(A) upheld the AO's decision, stating that the receipts were for the use of copyright in a process and transfer of commercial or industrial information. However, the Tribunal in the assessee's case for previous years had ruled that the right transferred was to use copyrighted material, not the copyright itself, thus not constituting royalty income.

2. Copyright vs Copyrighted Article:
The assessee contended that the sale of software to Indian distributors for resale to end-users was a transfer of copyrighted articles, not the copyright itself, and thus should not be taxed as royalty. The Tribunal referenced the Delhi High Court's decision in the case of DCIT vs. Infrasoft Ltd., which distinguished between the transfer of copyright rights and the sale of copyrighted articles. The court held that payments for the use of copyrighted articles are not considered royalties under the DTAA. The Tribunal reaffirmed that the assessee's transactions involved the sale of copyrighted articles, not the transfer of copyright, and thus did not constitute royalty income.

3. Applicability of Amendments to Section 9(1)(vi) of the Act in Light of the India-Sweden DTAA:
The Tribunal addressed the applicability of the amendments to Section 9(1)(vi) of the Income Tax Act, brought by the Finance Act, 2012. It held that these amendments could not unilaterally alter the provisions of the DTAA. The Tribunal cited the Delhi High Court's decision in DIT vs. New Skies Satellite BV, which stated that changes to domestic law do not automatically amend international treaties unless incorporated into the agreement. Consequently, the Tribunal concluded that the amendments to Section 9(1)(vi) were not applicable to the DTAA, and the assessee's receipts from software sales could not be taxed as royalty under the amended provisions.

Conclusion:
The Tribunal set aside the CIT(A)'s order, ruling that the consideration received by the assessee for software sales could not be treated as royalty under Section 9(1)(vi) of the Income Tax Act or Article 12 of the India-Sweden DTAA. The sale of software products by the assessee to Indian distributors for resale to end-users was not considered a transfer of copyright and, therefore, not taxable as royalty. The appeal filed by the assessee was partly allowed.

Order Pronounced on 20th October 2020.