2024 (11) TMI 858 - AT - Income Tax

Income taxable in India or not - income from licensing of software - Royalty receipts u/s 9(1)(vi) of the Act and Article 12 of India- Singapore DTAA - HELD THAT - Assessee is a non-resident company incorporated under the laws of Singapore and did not have PE in India. During the assessment year the assessee has received an order for supply, installation, testing, commission and AMC of Video Management Software and Video Analytics Software for Vizag Smart city project from M/s. L T Ltd. Warranty/AMC should also be provided by the supplier up to December, 2022 by the assessee to M/s. L T Ltd. On perusal of EULA entered between the assessee and M/s.L T Ltd, it clearly mentions that no title or ownership of the software or its documentation is transferred to the buyer (M/s. L T Ltd) and also the ownership of the software and its modification rights shall remain at all times with the assessee only. Considering the present facts and circumstances, supply of software sale made by the assessee to M/s.L T Ltd, of India cannot be treated as royalty u/s. 9(1)(vi) of the Act and hence, the action of the Assessing Officer cannot be accepted. Further, the assessee s claim of software is only a sale of software but not the copyright of the software and treated as royalty by relying on decision in the case of Engineering Analysis and Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT Further, the decision of Hon ble Supreme Court is considered in the case of CIT vs. Microsoft Corporation 2022 (5) TMI 1070 - DELHI HIGH COURT and also in EY Global Services Ltd. 2021 (12) TMI 571 - DELHI HIGH COURT and held that mere supply of software without a sale of copyright cannot be treated as royalty to bring it to tax u/s. 9(1)(vi) of the Act. The same analogy has been following with reference to India-Singapore DTAA in the following cases and decided in favour of the assessee by excluding the supply of software without any copyright as non-taxable under Income-tax Act, 1961. Thus, the supply of software by the assessee cannot be brought to tax either u/s. 9(1)(vi) of the Act or under the India-Singapore DTAA and hence, we set aside the order of the Assessing Officer/DRP by allowing the ground raised by the assessee.

Issues Involved:

1. Validity of the reassessment proceedings under sections 147 and 148 of the Income Tax Act, 1961.
2. Jurisdictional challenge due to the transfer of the assessee's jurisdiction from New Delhi to Chennai.
3. Issuance of notice under section 148 bearing incorrect Document Identification Number (DIN).
4. Non-issuance of notice under section 143(2) of the Act.
5. Validity of reassessment proceedings under section 144 of the Act.
6. Taxability of income from licensing of software as royalty under section 9(1)(vi) of the Act and Article 12 of the India-Singapore DTAA.
7. Application of surcharge and cess over the prescribed tax rate under the DTAA.
8. Initiation of penalty proceedings under section 274 read with section 270A of the Act.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee challenged the reassessment proceedings initiated under sections 147 and 148, asserting that they were initiated without proper jurisdiction and were thus invalid. The Tribunal acknowledged the assessee's claim that the proceedings were initiated without adequate "reasons to believe," relying solely on suspicion and conjecture, rendering the proceedings non-est and void ab initio.

2. Jurisdictional Challenge:
The assessee contended that the jurisdiction was transferred from New Delhi to Chennai arbitrarily, without following the mandatory procedures or providing any intimation. The Tribunal noted the procedural lapses and the lack of adherence to the principles of natural justice, which further invalidated the jurisdictional assumption by the Assessing Officer.

3. Issuance of Notice with Incorrect DIN:
The Tribunal recognized the procedural irregularity concerning the issuance of notice under section 148 with an incorrect DIN. The attempt to regularize this error after a significant delay was found to be in blatant disregard of applicable laws and circulars, further undermining the validity of the proceedings.

4. Non-Issuance of Notice under Section 143(2):
The Tribunal highlighted the failure to issue a notice under section 143(2), which is a mandatory requirement for reassessment proceedings. This omission rendered the order non-est, invalid, and void ab initio, as per established judicial precedents.

5. Validity of Reassessment under Section 144:
The Tribunal examined the reassessment under section 144, noting the self-contradictory observations by the Assessing Officer regarding the submission of manual returns by the assessee. The Tribunal found that the conditions under section 144 were not satisfied, further invalidating the reassessment.

6. Taxability of Software Licensing as Royalty:
The core issue was whether the income from software licensing constituted royalty under section 9(1)(vi) of the Act and Article 12 of the India-Singapore DTAA. The Tribunal, relying on the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt Ltd v. CIT, concluded that the payments for software licensing did not amount to royalty since there was no transfer of copyright. The End User License Agreement (EULA) clearly stipulated that no copyright was transferred, and the license was non-exclusive and non-transferable, aligning with the Supreme Court's interpretation that such transactions do not constitute royalty.

7. Application of Surcharge and Cess:
The Tribunal noted the assessee's contention regarding the erroneous application of surcharge and cess over the prescribed tax rate under the DTAA. However, since the primary issue of royalty was decided in favor of the assessee, this contention became academic.

8. Initiation of Penalty Proceedings:
Given the Tribunal's decision in favor of the assessee on the substantive issues, the initiation of penalty proceedings under section 274 read with section 270A was not addressed, as the primary grounds for such penalties were rendered moot.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, setting aside the order of the Assessing Officer/Dispute Resolution Panel. The Tribunal held that the supply of software by the assessee did not constitute royalty under the Act or the India-Singapore DTAA, thereby exempting it from tax in India. Consequently, the legal grounds raised by the assessee were not adjudicated as they became academic following the decision on the merits.

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