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2021 (11) TMI 806 - AT - Income TaxTaxability of supply of software as royalty - business connection/PE in India - AO held that the assessee had an Agency PE in India - AO directed attribution of profits of 15% from the sale of equipment - AO held that the amount received by the assessee on account of software licensing as loyalty u/s 9(1)(vi) (vii) of the Income Tax Act, 1961 and under the Article 12 of the treaty between India and USA - HELD THAT - As decided in own case 2017 (4) TMI 1504 - DELHI HIGH COURT consideration received by the Assessee for supply of product along with license of software to End user is not royalty under Article 12 of the Tax Treaty. Even where the software is separately licensed without supply of hardware to the end users (i.e. eight out of 63 customers), we are of the view that the terms of license agreement is similar to the facts of Infrasoft Ltd' 2013 (11) TMI 1382 - DELHI HIGH COURT . Accordingly, we- hold' that there was no transfer of any right in respect of copyright by the Assessee and it was a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article. Hence, the payment for the same is not in the nature of royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/PE in India as per adjudication on Ground - Decided in favour of assessee.
Issues Involved:
1. Legality of the assessment order. 2. Taxation of revenue from software supply as 'Royalty.' 3. Applicable tax rate on software revenue. 4. Applicable tax rate on revenue from professional, educational, and training services. 5. Application of Transfer Pricing (TP) provisions. 6. Levy of interest under section 234C. 7. Initiation of penalty proceedings. Detailed Analysis: 1. Legality of the Assessment Order: The assessee contended that the assessment order passed by the AO was "bad in law" as it failed to appreciate the facts and the law, and did not follow the decisions of the Hon’ble Delhi High Court and ITAT in the appellant's own case for earlier years. The AO computed the total income of the appellant at ?12,48,05,161 as against ?65,51,514 returned by the appellant, which the assessee argued was incorrect and should be annulled. 2. Taxation of Revenue from Software Supply as 'Royalty': The AO/DRP taxed the revenue earned by the appellant from the supply of software to customers in India as 'royalty' under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The assessee argued that this was incorrect, citing previous decisions where it was held that the consideration for the supply of software is for a copyrighted article and not in the nature of royalty. The DRP confirmed the AO's observation that the software 'made available' a 'process' to customers. The assessee contended that the agreements' substance was the sale of software, not a license, and the decision of Gracemac Corporation relied upon by the AO was not a good law. The DRP and AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright,' and thus, the revenue should be treated as business income not taxable under Article 7 of the India-US tax treaty in the absence of a PE in India. 3. Applicable Tax Rate on Software Revenue: The AO taxed the revenue from the supply of software at 15% as per the India-US tax treaty, whereas the assessee argued that the beneficial rate of 10% under Section 115A of the Act should apply. 4. Applicable Tax Rate on Revenue from Professional, Educational, and Training Services: The AO taxed the revenue from rendering professional, educational, and training services at 15% as per the India-US tax treaty, instead of the beneficial rate of 10% claimed by the appellant as per Section 115A of the Act. 5. Application of Transfer Pricing (TP) Provisions: The assessee argued that the DRP's directions were laconic regarding how TP provisions apply to the appellant. The AO/DRP erred in holding that TP provisions are applicable, as the transactions did not qualify as 'international transactions' between 'associated enterprises.' Consequently, the initiation of penalty proceedings under Section 271BA for not furnishing the Accountant’s Report in Form 3CEB was also contested. 6. Levy of Interest under Section 234C: The assessee contended that the AO erred in charging interest under Section 234C of the Act. 7. Initiation of Penalty Proceedings: The assessee argued that the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act, alleging that the appellant furnished inaccurate particulars of income. Judgment: The ITAT followed the decisions of the Hon’ble Delhi High Court in the assessee’s own case and other relevant cases, ruling in favor of the assessee. The court reiterated that the payment for the supply of customized software is not 'royalty' under Article 12 of the Indo-US DTAA and Section 9(1)(vi) of the Income Tax Act. Consequently, the appeal of the assessee was allowed, and the assessment order was annulled. The court also addressed the issue of the applicable tax rate, transfer pricing provisions, interest under Section 234C, and penalty proceedings, ruling in favor of the assessee on these points as well. The order was pronounced in the open court on 24/09/2021.
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