2022 (7) TMI 675 - AT - Income Tax

Penalty u/s 271(1)(c) - Software Maintenance service charges treated as Royalty in the draft order - HELD THAT - Access is automatically obtained to the underlined technology of the Facility when it is used. But, strictly speaking, the user of an equipment implies its use simpliciter de hors access to its underlined technology facilitating the operation. As section 9(1) of the Act is a deeming provision and it unequivocally provides, inter alia, for treating consideration for the use of equipment as royalty, we cannot countenance the contention of the ld. AR for reading the words 'use of equipment as equivalent of getting access to the underlined technology . In our view, the proposition suggesting to read the mandate of copyright royalty cases in the context of industrial royalty cases is grossly misconceived. That appears precisely to be the reason for the assessee appreciating the correct position as per law and thus accepting the assessment order and not challenging the taxability of the amount as royalty in quantum proceedings. The mere fact that an assessee has not challenged the addition does not per se lead to imposition or confirmation of penalty u/s.271(1)(c) of the Act thereon. The relevant facts and circumstances of the case need to be viewed independently for the purpose of penalty, which is distinct proceeding. Amongst others, it is a well settled proposition that penalty cannot be imposed on a debatable issue. If a favourable view initially canvassed by the assessee is judicially substantiated, it cannot lead to imposition of penalty simply because there exists a contrary view which the assessee has finally chosen by not filing an appeal. Reverting to the prevailing factual panorama, we find that as against the unfavorable view of the Pune Tribunal in the cases there is another decision in Ovid Technologies Inc. 2022 (3) TMI 1019 - ITAT DELHI holding that consideration received for granting license to access online database does not fall within the definition of Royalty. In view of the prevalence of divergent views on the point, we hold that the penalty is not sustainable. The conclusion drawn in the impugned order is, ergo, accorded imprimatur on this legal score. Appeal of assessee allowed.

Summary

Issues:
1. Penalty under section 271(1)(c) of the Income-tax Act, 1961 for non-inclusion of income.
2. Taxability of Software Maintenance charges as Royalty.
3. Interpretation of the Engineering Analysis Centre of Excellence Pvt. Ltd. judgment.
4. Distinction between Copyright Royalty and Industrial Royalty.
5. Applicability of penalty in case of divergent judicial views.

Analysis:

1. The case involved the imposition of a penalty under section 271(1)(c) of the Income-tax Act, 1961 for the non-inclusion of income amounting to Rs.8.56 crore by the Assessing Officer (AO) in the assessment year 2013-14. The penalty was imposed by the AO, which was later deleted by the CIT(A), leading to an appeal by the Revenue before the Tribunal.

2. The core issue revolved around the taxability of Software Maintenance charges as Royalty. The AO treated the charges as Royalty in the draft order, while the assessee contended that the consideration received was for licensing software and not for Royalty purposes. The dispute arose regarding the nature of the transaction and whether it constituted Royalty income under the Income-tax Act.

3. The Tribunal analyzed the Engineering Analysis Centre of Excellence Pvt. Ltd. judgment, which differentiated between ownership of copyright and the rights to use licensed software. The judgment clarified that consideration for licensing software without granting exclusive rights does not amount to Royalty. The Tribunal applied this interpretation to determine the taxability of the amount received by the assessee for software licensing.

4. A significant aspect of the case was the distinction drawn between Copyright Royalty and Industrial Royalty. The Tribunal referred to previous decisions and highlighted that while software-related transactions may constitute Copyright Royalty, payments for the use of IT infrastructure facilities fall under Industrial Royalty. The nature of the transaction, whether involving software or equipment, influenced the tax treatment as Royalty income.

5. Regarding the imposition of the penalty, the Tribunal considered the presence of divergent judicial views on the taxability of similar transactions. Citing a decision by the Delhi Tribunal, the Tribunal emphasized that if there are conflicting interpretations of the law, the imposition of a penalty on the assessee becomes unsustainable. The Tribunal dismissed the appeal, upholding the deletion of the penalty based on the prevailing legal uncertainties and divergent views in the judicial landscape.

In conclusion, the Tribunal's judgment delved into the nuances of taxability concerning Software Maintenance charges, the interpretation of relevant legal precedents, and the application of penalties in cases of legal ambiguity. The decision provided clarity on the distinction between Copyright Royalty and Industrial Royalty, ultimately leading to the dismissal of the appeal and the affirmation of the deletion of the penalty.