2021 (11) TMI 880 - AT - Income Tax

Income accrued in India - treating the receipts of assessee's on account of sale of software to the Indian customers, as royalty - DTAA between India and Netherlands - HELD THAT - As relying on ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VERSUS THE COMMISSIONER OF INCOME TAX ANR. 2021 (3) TMI 138 - SUPREME COURT we are of the view that Ld. CIT(A) erred in treating the receipts from sale of software with the support services as royalty.

Summary

Issues:
Treatment of receipts from the sale of software to Indian customers as royalty.

Analysis:
The appeal was filed against the final assessment order for the assessment year 2017-18, focusing on the classification of the receipts from the sale of software to Indian customers as royalty. The appellant contended that they were also engaged in selling tangible hardware and providing support services, emphasizing that they were granting a license for the use of software, not transferring copyright. The Assessing Officer (AO) treated the receipts as royalty under section 9(1)(vi) of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and Netherlands, requiring TDS under section 195 of the Act. The AO relied on legal precedents to support this classification.

The issue was found to be covered by a decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre for Excellent Pvt. Ltd vs CIT. The appellant's counsel highlighted that the Karnataka High Court had ruled in favor of the appellant in a previous case, and argued that the terms of the agreement had not changed in the relevant year. They also pointed out that previous decisions by the Supreme Court and a coordinate bench had supported their position.

The Tribunal examined the submissions and referred to the Supreme Court's analysis in the Engineering Analysis Centre case. The Supreme Court clarified the link between Section 195 and the charging provisions of the Income Tax Act, emphasizing that the licenses granted did not transfer copyright interest. The Court concluded that the payments made by Indian end-users to non-resident software suppliers did not constitute royalty, as they did not involve the use of copyright in the software. Consequently, the Tribunal ruled in favor of the appellant, stating that the receipts from software sales should not be treated as royalty.

A similar view had been taken by a coordinate bench in a previous case, further supporting the appellant's position. The Tribunal held that the CIT(A) had erred in treating the receipts as royalty and allowed the appellant's grounds. The additional grounds raised by the assessee were not pressed and were not considered. Ultimately, the appeal was partly allowed in favor of the assessee.

In conclusion, the Tribunal's decision, based on the Supreme Court's judgment and supporting legal analysis, determined that the receipts from the sale of software with support services should not be classified as royalty, leading to the partial allowance of the appeal.