2022 (4) TMI 615 - AT - Income Tax

Income taxable in India - taxing of the sale of software and subscribers as royalty income - AO had held the receipt to be royalty and taxed it @10% on the gross basis as per Article 12 in India-Netherland treaty - As submitted by assessee that payment received by the assessee did not constitute royalty and was therefore not taxable in India for the reason that the payment was for the use of a copyrighted article and not use of copyrights, the Distributors do not have the right to copy, distributors/customers do not own any of the IPR in and to the software and the software is embedded in the storage equipment and sold as a consolidated product and cannot be used separately - HELD THAT - As decide in own case 2021 (9) TMI 1372 - ITAT DELHI no addition is required to be made. Thus the grounds of assessee are allowed. Tax payable on interest income - contention of the assessee that the AO has considered it to be an interest income as referred in Section 115A(1)(a)(iiaa) of the Act and taxed it @ 40% as against the rate of 5% as envisaged under the provisions of Section 115A(1)(a)(iiaa) - HELD THAT - In view of the agreement of Learned AR and Learned DR for restoring the matter back to the file of AO for necessary verification, we restore the issue to the file of AO for carrying out necessary verification and thereafter to bring it to tax in accordance with law. Needless to state that the AO shall grant adequate opportunity of hearing to the Assessee. Assessee is also directed to promptly furnish all the required details called for by the authorities. Thus the ground of the assessee is allowed for statistical purposes.

Issues Involved:
1. Taxability of income from the sale of software as royalty under Article 12(3) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
2. Taxability of income from the sale of subscriptions as royalty under Article 12(3) of the DTAA.
3. Taxability of income from the provision of services as royalty and fees for technical services (FTS) under Article 12(4) of the DTAA.
4. Calculation of tax payable on income from the sale of subscriptions at the rate of 40% instead of 10% as per Article 12 of the DTAA.
5. Calculation of tax payable on income from the sale of software at the rate of 40% instead of 10% as per Article 12 of the DTAA.
6. Calculation of tax payable on interest income at the rate of 40% instead of 5% as per Section 115A(1)(a)(iiaa) of the Income Tax Act.
7. Levying of interest under Section 234A of the Income Tax Act.
8. Levying of interest under Section 234B of the Income Tax Act.
9. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Income from Sale of Software as Royalty:
The Assessing Officer (AO) classified the income from the sale of software as royalty under Article 12(3) of the India-Netherlands DTAA and taxed it at 10% on a gross basis. The assessee argued that the payment received did not constitute royalty as it was for the use of a copyrighted article and not for the use of copyrights. The Dispute Resolution Panel (DRP) upheld the AO's view. However, the Tribunal noted that similar issues in earlier assessment years (2008-09, 2010-11, and 2013-14) were decided in favor of the assessee. The Tribunal directed the AO to follow the earlier decisions and the Supreme Court's ruling in the case of Engineering Analysis Centre of Excellence P. Ltd. vs. CIT.

2. Taxability of Income from Sale of Subscriptions as Royalty:
Similar to the income from the sale of software, the AO treated the income from the sale of subscriptions as royalty under Article 12(3) of the DTAA and taxed it at 10% on a gross basis. The DRP upheld this view. The Tribunal, following its earlier decision and the Supreme Court's ruling, directed the AO to treat the subscription income in line with the established precedent, which favored the assessee.

3. Taxability of Income from Provision of Services as Royalty and FTS:
The AO classified the income from the provision of services as royalty and fees for technical services (FTS) under Article 12(4) of the DTAA. The Tribunal did not provide a separate detailed analysis for this issue, as it was interconnected with the issues of software and subscription income. The Tribunal's direction to follow the earlier decisions implicitly covered this aspect as well.

4. Calculation of Tax on Subscription Income at 40% Instead of 10%:
The assessee contended that the AO erroneously calculated the tax on subscription income at 40% instead of the 10% rate specified in Article 12 of the DTAA. The Tribunal, in line with its decision on the classification of subscription income, directed the AO to apply the correct tax rate of 10%.

5. Calculation of Tax on Software Income at 40% Instead of 10%:
Similar to the subscription income, the AO calculated the tax on software income at 40%. The Tribunal directed the AO to apply the correct rate of 10% as per Article 12 of the DTAA, consistent with its earlier rulings.

6. Calculation of Tax on Interest Income at 40% Instead of 5%:
The AO taxed the interest income at 40%, considering it under Section 115A(1)(a)(iiaa) of the Income Tax Act. The assessee argued that the applicable rate should be 5%. The Tribunal remitted the matter back to the AO for verification and directed the AO to apply the correct rate of 5% after necessary verification.

7. Levying of Interest under Section 234A:
The AO levied interest under Section 234A, amounting to INR 32,07,834, despite the assessee filing the return within the time allowed under Section 139. The Tribunal did not provide a separate detailed analysis for this issue, but the favorable decision on the primary issues implies reconsideration of related interest levies.

8. Levying of Interest under Section 234B:
The AO levied interest under Section 234B, amounting to INR 8,50,07,601. The assessee argued that the entire income was subject to withholding taxes, and thus, advance tax was not required. The Tribunal's favorable decision on the primary issues implies reconsideration of related interest levies.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c), asserting that the assessee was liable to tax in India. The Tribunal's favorable decision on the primary issues implies that the penalty proceedings may not be warranted.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the AO to follow the earlier decisions and the Supreme Court's ruling, which favored the assessee on the classification and taxability of software and subscription income. The AO was also directed to verify and apply the correct tax rate on interest income and reconsider the levying of interest under Sections 234A and 234B. The initiation of penalty proceedings under Section 271(1)(c) was implicitly questioned based on the favorable outcome for the assessee.

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