2021 (4) TMI 916 - AT - Income Tax

Income accrued in India - payments received by the assessee from its Indian customers in respect of licenses granted for use of copy righted computer software as royalty u/s 9(1)(vi) - India Singapore DTAA - HELD THAT - As payments received on sale of software licenses are not in the nature of royalty, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright under 12AA of India Singapore DTAA. A.R submitted that the DTAA entered by India with Australia also contains similar provisions. Accordingly, following the decision rendered by Hon ble Supreme Court in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VERSUS THE COMMISSIONER OF INCOME TAX ANR. 2021 (3) TMI 138 - SUPREME COURT we hold that the payments received by the assessee on sale of software licenses in India are not in the nature of Royalty as per the provisions of DTAA. As observed by Hon ble Supreme Court in the above cited case, there is no requirement to apply provisions of sec. 9(1)(vi) of the Act - We set aside the orders passed by Ld. CIT(A) on this issue in both the years and direct the A.O. to delete the income assessed as royalty in respect of sale of software licenses in both the years under consideration. Appeals of the assessee are allowed.

Summary

Issues:
1. Taxability of payments received by the assessee from Indian customers for software licenses as royalty under section 9(1)(vi) of the Income-tax Act, 1961.

Analysis:
The Appellate Tribunal, ITAT Bangalore, heard appeals against a common order related to the assessment years 2008-09 & 2009-10. The issue at hand was the taxability of payments received by a foreign company from its Indian customers for software licenses. The company contended that the consideration received should not be taxable in India as it did not have a Permanent Establishment in the country.

The Authority for Advanced Ruling (AAR) and the Assessing Officer (AO) held that the payments constituted royalty under section 9(1)(vi) of the Act and the Double Taxation Avoidance Agreement (DTAA) between India and Australia. The AO assessed the amounts received as income in the respective assessment years. The assessee challenged these decisions before the Tribunal.

The assessee argued that different judicial opinions existed on the issue, citing cases from the Karnataka High Court, Delhi High Court, and AAR. The matter was eventually taken to the Hon'ble Supreme Court, which rendered a decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. The Supreme Court concluded that payments for software licenses did not constitute royalty as they did not create any interest or right in the distributors/end-users regarding copyright use. Therefore, the payments were not taxable in India.

Based on the Supreme Court's decision, the Tribunal set aside the orders of the CIT(A) and directed the AO to delete the income assessed as royalty for the sale of software licenses in both years under consideration. The Tribunal allowed both appeals of the assessee, ruling in their favor.

In conclusion, the Tribunal's decision aligned with the Supreme Court's interpretation that payments for software licenses were not royalty under the DTAA provisions, and there was no need to apply section 9(1)(vi) of the Act. The Tribunal's judgment provided relief to the assessee by overturning the taxability of the payments received for software licenses in India.