2022 (4) TMI 1061 - AT - Income Tax

Income deemed to accrue or arise in India - Receipt towards software license fees as Royalty within the meaning of Article 12 of the India-Netherlands Double Taxation Avoidance Agreement - HELD THAT - While dealing with the identical issue in the case of the assessee for the A.Y. 2013-14 has observed that the appellant company granted the software license fee on non-exclusive non-transferable basis during the license term. While deciding the issue in favour of the assessee the Tribunal found that the subject software is standard software not customized software. The title, the ownership and all rights in patents, copyrights and trade secrets and other software contained does not get transferred to the customer. The Courts as well as OECD commentary on Article 12 of the DTAA recognized the distinction between copyrighted article and copyright right in the programme and software which incorporates a copy of the copyrighted programme. Any payment made for acquisition of copy of the software is held not to be Royalty. In the light of the judgment of Hon ble Supreme Court 2021 (3) TMI 138 - SUPREME COURT and respectfully following the decision of the Tribunal 2022 (1) TMI 281 - ITAT PUNE for the immediately preceding assessment year, we hold that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of consideration for grant of software license is not Royalty under the provisions of Income Tax Act, 1961, the question of considering under the provisions as per DTAA between India and Netherland does not arise. Thus, ground of appeal No.1 filed by the assessee stands allowed. Direction of the DRP directing the A.O to bring to tax software maintenance, consulting service fees, Training fees, other services within the meaning of Article 12(5)(a) of the India and Netherland Treaty - D.R.P held that the receipts of the assessee from software maintenance fees, consulting services, training fees and other services are chargeable to tax as fee for Technical Services as per Article 12(5)(a) of India and Netherland treaty - Assessee submitted that the question of treating the above consideration as fees for technical services does not arise as the consideration received towards software licence fees cannot be considered as Royalty as per para4 of Article 12 of DTAA. - HELD THAT - In the absence of any distinguishing facts and respectfully following the precedent, we hold that software maintenance fees, consulting service fees, and other services cannot be held to be Fees for technical services . Short credit of deduction of tax at source - HELD THAT - This ground of appeal is restored to the file of the A.O with a direction to allow tax as per information contained in form No. 26AS. Thus, this ground of appeal is allowed for statistical purposes.

Issues Involved:
1. Taxation of software license fees as "Royalty."
2. Taxation of software maintenance fees as Fees for Technical Services (FTS).
3. Taxation of consulting service fees as FTS.
4. Taxation of training fees as FTS.
5. Taxation of other service fees as FTS.
6. Short credit of Tax Deducted at Source (TDS).
7. Initiation of penalty proceedings under Section 274 r.w.s 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Taxation of Software License Fees as "Royalty"
The primary contention was whether the software license fees amounting to ?9,45,38,285 should be taxed as "Royalty" under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA). The appellant argued that the software license fees should not be considered as royalty, relying on the OECD Commentary and various judicial precedents, including the decision of the Supreme Court in Engineering Analysis Center of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). The Tribunal noted that the software license was non-exclusive, non-transferable, and did not transfer any copyright to the customer. Following the Supreme Court's ruling, the Tribunal held that the software license fees should not be taxed as royalty. Thus, Ground No. 1 was allowed in favor of the appellant.

Issue 2: Taxation of Software Maintenance Fees as FTS
The appellant challenged the taxation of software maintenance fees amounting to ?8,74,84,583 as Fees for Technical Services (FTS) under Article 12(5)(a) of the India-Netherlands DTAA. The Tribunal referred to its earlier decision for the assessment year 2013-14, where it was held that software maintenance fees, being incidental to software license fees, should not be considered as FTS. The Tribunal relied on the judgment of the Delhi High Court in Datamine International Ltd. Vs. ADIT (2016) 68 taxmann.com 97 and concluded that software maintenance fees do not qualify as FTS. Thus, Ground No. 2 was allowed.

Issue 3: Taxation of Consulting Service Fees as FTS
The appellant contested the taxation of consulting service fees amounting to ?1,27,56,877 as FTS. The Tribunal reiterated its stance from the previous assessment year, stating that consulting service fees, being ancillary to software license fees, should not be treated as FTS. The Tribunal's decision was consistent with the interpretation of Article 12(5)(a) of the DTAA, and Ground No. 3 was allowed.

Issue 4: Taxation of Training Fees as FTS
The appellant also disputed the taxation of training fees amounting to ?1,48,45,943 as FTS. The Tribunal maintained that training fees, being incidental to software license fees, do not fall under the definition of FTS as per Article 12(5)(a) of the DTAA. The Tribunal's decision aligned with its earlier rulings and judicial precedents, allowing Ground No. 4.

Issue 5: Taxation of Other Service Fees as FTS
The appellant challenged the taxation of other service fees amounting to ?1,72,800 as FTS. The Tribunal followed the same reasoning applied to software maintenance, consulting, and training fees, concluding that other service fees should not be classified as FTS. Ground No. 5 was thus allowed.

Issue 6: Short Credit of TDS
The appellant claimed that there was a short credit of TDS amounting to ?2,47,660. The Tribunal directed the Assessing Officer (A.O) to allow the tax credit as per the information contained in Form No. 26AS. This ground was allowed for statistical purposes.

Issue 7: Initiation of Penalty Proceedings
The appellant contested the initiation of penalty proceedings under Section 274 r.w.s 271(1)(c) of the Income-tax Act, 1961. The Tribunal noted that this issue was consequential in nature and dismissed the ground.

Conclusion
The appeal was partly allowed for statistical purposes, with the Tribunal ruling in favor of the appellant on most grounds, particularly regarding the non-taxability of software license fees, software maintenance fees, consulting service fees, training fees, and other service fees under the provisions of the India-Netherlands DTAA. The issue of short credit of TDS was remanded to the A.O for verification, and the initiation of penalty proceedings was dismissed.

← Previous Next →