2023 (3) TMI 518 - AT - Income Tax

Income taxable in India - Royalty receipt - receipt from sale of software - transfer of copyright - Article 12(3) of the India-Ireland DTAA - HELD THAT - As decided in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers as consideration for the resale/use of the computer software through EULAs/distribution agreements is not the payment of royalty for the use of copyright in the computer software and that the same does not give rise to any income taxable in India as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. - Decided against revenue. Disputed standard automated services in the nature of technical services - Whether these technical services were without human intervention - AR submitted that the question of human intervention is a question of facts and need to be examined by the Tax Authorities below but the same was not examined - HELD THAT - The bench is of considered opinion that although reference has been made by the Tax Authorities below to have taken into consideration the aspect of questioning technical services on the basis of human intervention however there seems to have been lack of examination of the issue by taking into account the relevant evidence and opinion of expert. Conclusion are more on basis of general perception of the nature of service. Thus the bench is of considered opinion that this issue requires restoration to the files of the ld AO to decide the issue afresh after taking into consideration the judgment of the Hon ble Supreme Court in CIT Vs. Bharti Cellular 2010 (8) TMI 332 - SUPREME COURT In the light of the aforesaid the grounds in appeal of the assessee are allowed for statistical purposes.

Issues Involved:
1. Taxability of income from the sale of software.
2. Taxability of income from rendering standard automated services as Fees for Technical Services (FTS).
3. Initiation of penalty proceedings under sections 271(1)(c), 271BA, and 271F of the Income Tax Act, 1961.
4. Levy of interest under sections 234A and 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Income from Sale of Software:
The Ld. AO treated the software sales as royalty and taxed them accordingly. However, the Ld. CIT(A) deleted this addition, concluding that the payment made by customers could not be characterized as royalty under the Income Tax Act or the DTAA. The Ld. CIT(A) observed:
- The customer has not been given any of the seven rights under Section 14(a)(i) to (vii) of the Copyright Act, 1957, and therefore what is transferred is not a copyright but a copyrighted article.
- The customer cannot commercially exploit the software and therefore a copyright is not transferred.
- The software provided under the contract is goods and therefore no royalty can be said to be paid.

The Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT and Another (2022) 3 SCC 321 clarified that amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers for the resale/use of the computer software do not constitute royalty and are not taxable in India. Consequently, the ITAT concluded that the issue is covered in favor of the assessee, and the revenue's grounds of appeal on this matter have no substance.

2. Taxability of Income from Rendering Standard Automated Services as Fees for Technical Services (FTS):
The Ld. AO characterized the receipts from rendering standard automated services as FTS and taxed them accordingly. The assessee argued that these services did not involve human intervention and thus should not qualify as FTS under Article 12 of the India-Ireland DTAA. The Ld. CIT(A) sustained the addition, but the ITAT noted that the question of human intervention is a factual one that needs to be examined by the Tax Authorities. The ITAT referred to the Supreme Court judgment in CIT Vs. Bharti Cellular, which emphasized the need for expert examination to determine human intervention. Consequently, the ITAT restored this issue to the files of the Ld. AO for fresh examination.

3. Initiation of Penalty Proceedings:
The assessee contested the initiation of penalty proceedings under sections 271(1)(c), 271BA, and 271F of the Income Tax Act. The Ld. CIT(A) dismissed the grounds of appeal against the initiation of penalty proceedings. The ITAT did not provide a separate detailed analysis of this issue in the judgment, implying that it upheld the Ld. CIT(A)'s decision.

4. Levy of Interest under Sections 234A and 234B:
The revenue's grounds of appeal included objections to the levy of interest under sections 234A and 234B. The ITAT did not provide a separate detailed analysis of this issue, implying that these grounds were also dismissed.

Conclusion:
The ITAT dismissed the revenue's appeal, confirming that the income from the sale of software is not taxable as royalty. The ITAT allowed the assessee's appeal for statistical purposes, remanding the issue of taxability of standard automated services as FTS to the Ld. AO for fresh examination. The penalty proceedings and interest levies were not separately addressed, indicating the ITAT upheld the Ld. CIT(A)'s decisions on these matters.

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