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2022 (5) TMI 855 - AT - Income TaxIncome deemed to accrue or arise in India - consideration received towards use of the software as taxable as Royalty u/s.9(1)(vi) of the Act as well as under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Netherland - appellant company granted the software license fee on non-exclusive non-transferable basis during the license term - contentions of the appellant that such payment cannot be characterized as Royalty as the payment is made for purchase of standard software not for use of copyright itself - HELD THAT - 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. Even the Hon ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT held to the same effect. Whereas the Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT and CIT Vs. Synopsis International Old Ltd. 2013 (2) TMI 448 - KARNATAKA HIGH COURT held to the contrary. The reasoning given by the Hon ble Karnataka High Court has been disapproved by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT Thus 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 held not to be Royalty under the provisions of Income Tax Act 1961 the question of consideration of the issue 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. Software maintenance fees consultancy services fees and training services fees held to be Fees for Technical services - HELD THAT - Software maintenance fees consulting charges and training fees which are incidental to software license fee assumes same character as that of software license fee. In relation to ground of appeal No.1 in the preceding paragraphs we have held that the consideration received towards software license fee cannot be termed as Royalty . Hence what follows from this is that even the software maintenance consulting charges and training fees which are incidental to software maintenance fee cannot come within the purview of FTS within clause 5 of Article 12 of the treaty. Our view is fortified by the judgment of Hon ble Delhi High Court in the case of Datamine International Ltd. Vs. ADIT 2016 (3) TMI 540 - ITAT DELHI BHARATI AXA GENERAL INSURANCE CO. LTD 2010 (8) TMI 8 - AUTHORITY FOR ADVANCE RULINGS AND CITRIX SYSTEMS ASIA PACIFIC PTY. LIMITED 2012 (2) TMI 258 - AUTHORITY FOR ADVANCE RULINGS - We therefore hold that software maintenance fees consultancy services fees and training services fees cannot be held to be Fees for Technical services . Thus grounds of appeal no. 2 to 5 stands allowed. Short credit of deduction of tax at source - HELD THAT - This ground of appeal no.6 is restored to the file of AO with a direction to allow tax as per the information contained in Form No.26AS and in accordance with provisions of section 199 of the Income Tax Act 1961. Thus ground of appeal no.6 is allowed for statistical purposes. Bringing to tax the difference between the receipts as per Form No.26AS and receipts credited to Profit Loss Account rejecting the explanation of the appellant that the difference had arisen due to difference in rate applied for conversion - HELD THAT - We find from reading of the orders of the lower authorities that the explanation rendered by the appellant is not supported by any material on record. In order to meet the ends of justice we remand the matter to the file of the Assessing Officer with direction to produce the necessary evidence in support of the explanation offered by the appellant company reconciling the difference between the amount shown in Form No.26AS and the amount shown in the Profit Loss Account. Thus the ground of appeal no.6 stands partly allowed.
Issues Involved:
1. Taxation of software license fees as 'Royalty' under the Income Tax Act, 1961 and the India-Netherlands DTAA. 2. Taxation of software maintenance fees, consulting service fees, and training fees as 'Fees for Technical Services' under Article 12(5)(a) of the India-Netherlands DTAA. 3. Short credit for Tax Deducted at Source (TDS). 4. Levy of interest under section 234B of the Income-tax Act, 1961. 5. Initiation of penalty proceedings under sections 274 r.w.s. 271F and 274 r.w.s. 271(1)(c) of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Taxation of Software License Fees as 'Royalty': The appellant challenged the taxation of INR 26,02,184 towards software license fees as 'Royalty'. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) treated the software license fees as 'Royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Netherlands DTAA, relying on various judicial precedents. However, the appellant argued that the fee for software licenses should not be treated as 'Royalty', citing the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, which clarified that payments for the use of copyrighted software do not constitute 'Royalty'. The Tribunal agreed with the appellant, holding that the software license fees cannot be taxed as 'Royalty' in India, thus allowing Ground No.1. 2. Taxation of Software Maintenance Fees, Consulting Service Fees, and Training Fees as 'Fees for Technical Services': The appellant contested the DRP's direction to tax software maintenance fees (INR 29,05,513), consulting service fees (INR 3,78,346), and training fees (INR 34,23,769) as 'Fees for Technical Services' under Article 12(5)(a) of the India-Netherlands DTAA. The DRP had held that these fees were ancillary and subsidiary to the software license fees and thus taxable as 'Fees for Technical Services'. The appellant argued that since the software license fees were not 'Royalty', the related fees should not be considered 'Fees for Technical Services'. The Tribunal agreed, referencing the judgment of Hon’ble Delhi High Court in Datamine International Ltd. vs. ADIT and other cases, and ruled that these fees cannot be taxed as 'Fees for Technical Services'. Thus, Grounds No.2 to 5 were allowed. 3. Short Credit for TDS: The appellant raised an issue regarding the short credit of TDS amounting to INR 9,59,092. The Tribunal directed the AO to allow credit for TDS as per the information contained in Form No.26AS and in accordance with Section 199 of the Income Tax Act. This ground was allowed for statistical purposes. 4. Levy of Interest under Section 234B: The appellant contested the levy of interest under Section 234B, which was consequential to the short grant of TDS credit. Since the Tribunal directed the AO to rectify the TDS credit issue, the levy of interest would become inapplicable. This ground was dismissed as it was consequential. 5. Initiation of Penalty Proceedings: The appellant challenged the initiation of penalty proceedings under Sections 274 r.w.s. 271F and 274 r.w.s. 271(1)(c) of the Income-tax Act. The Tribunal noted that these grounds were consequential and dismissed them. Separate Judgments for Different Assessment Years: For A.Y. 2011-12 (ITA No.1348/PUN/2019), the appeal was partly allowed for statistical purposes. For A.Y. 2015-16 (ITA No.1554/PUN/2018), the Tribunal applied the same reasoning and decisions as for A.Y. 2011-12, allowing the grounds related to software license fees and related services, and remanding the issue of TDS credit difference to the AO. The appeal for A.Y. 2015-16 was also partly allowed for statistical purposes. Conclusion: Both appeals were partly allowed for statistical purposes, with significant relief granted to the appellant on the issues of software license fees and related service fees not being taxable as 'Royalty' or 'Fees for Technical Services'.
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