Software sales not royalty income under IT Act: ITAT Bangalore. Permanent Establishment crucial.

Velankani Mauritius Ltd. Versus Deputy Director of Income-tax (International Taxation), Circle-II (1), Bangalore

Velankani Mauritius Ltd. Versus Deputy Director of Income-tax (International Taxation), Circle-II (1), Bangalore - [2010] 40 SOT 33 (BANG.) (URO), [2011] ... Issues:
1. Reopening of assessment under section 147 read with section 143(3) of the IT Act, 1961.
2. Treatment of software sale as income from royalty chargeable under the IT Act/DTAA.

Analysis:

1. Reopening of Assessment:
The assessees contended that the Commissioner of Income-tax(A) erred in confirming the action of the Assessing Officer in reopening the assessment under section 147. The assessees argued that the reopening of assessments under section 147 was legally flawed. The Tribunal noted the assessees' objection and considered the issue of reopening the assessments. However, since the appeals were decided on the merits of the main issue, the Tribunal did not delve into the legal ground of reopening the assessments, deeming it as an academic exercise.

2. Treatment of Software Sale as Royalty Income:
The main issue revolved around whether the sale of software by the assessees constituted income from royalty chargeable under the IT Act or the Double Taxation Avoidance Agreement (DTAA). The Assessing Officer had treated the software sale as generating royalties, leading to tax liability for the assessees. The assessees argued that the remittances did not fall under the definition of 'Royalty' as per section 9(1)(vi) of the IT Act or relevant DTAA provisions. The Tribunal analyzed various precedents and legal principles to determine the nature of the transactions. The Tribunal referred to the case of Motorola Inc. where it was established that payments for copyrighted articles did not constitute royalty income. Additionally, the Tribunal cited the Authority for Advance Rulings' decision in the case of Airports Authority of India, which emphasized that without a Permanent Establishment in India, royalty income did not arise. The Tribunal also highlighted the decision in the case of Sonata Software Ltd., where it was held that software sales without a PE in India did not result in income accruing in India. Relying on these precedents and the Supreme Court's ruling in Tata Consultancy Services v. State of Andhra Pradesh, the Tribunal concluded that the sale of software by the assessees did not amount to income from royalty under the IT Act or DTAA. Consequently, the additions made by the Assessing Officer were deleted, and the appeals filed by the assessees were allowed.

In conclusion, the Appellate Tribunal, ITAT Bangalore, after thorough analysis of the issues raised in the appeals, ruled in favor of the assessees, holding that the sale of software by the companies did not constitute income from royalty under the IT Act or DTAA. The Tribunal emphasized the absence of Permanent Establishment in India as a crucial factor in determining the tax liability. The decision provided clarity on the taxation treatment of software sales and set a precedent based on established legal principles and precedents.