2019 (7) TMI 1592 - AT - Income Tax

Appeal allowed: Payments for off-the-shelf software user rights not royalty under Income Tax Act

Cummins Inc C/o Cummins India Limited Versus Dy. Director of Income Tax, International Taxation – 1, Pune

Cummins Inc C/o Cummins India Limited Versus Dy. Director of Income Tax, International Taxation – 1, Pune - TMI Issues Involved:1. Initiation of re-assessment proceedings under section 147.2. Taxability of consideration for facilitating grant of user rights in off-the-shelf software and provision of related support services.Issue-wise Detailed Analysis:1. Initiation of Re-assessment Proceedings under Section 147:The assessee challenged the initiation of re-assessment proceedings, arguing that the reason provided by the Assessing Officer (AO) was a mere change of opinion on an already assessed transaction, which cannot form the basis for initiating re-assessment proceedings. However, no specific submissions were made by the assessee’s representative to contest the reopening of the assessment. Consequently, this ground of appeal was dismissed.2. Taxability of Consideration for Facilitating Grant of User Rights in Off-the-shelf Software and Provision of Related Support Services:The primary issue was whether the payments received by the assessee for providing user rights in off-the-shelf software and related support services to its Indian associates should be treated as 'royalty' under section 9(1)(vi) of the Income Tax Act and Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.The assessee contended that the consideration received was for the user rights in copyrighted articles (software) and not for the use of the copyright itself. The software provided to the Indian affiliates was off-the-shelf and not customized, with no rights to modify or sublicense the software granted to the assessee. The assessee relied on several judicial precedents, including the cases of John Deere India Pvt. Ltd., Symantec Corporation, and others, which held that payments for user rights in copyrighted articles do not constitute royalty.The Department, on the other hand, argued that such payments fall within the definition of royalty as per the Hon’ble Karnataka High Court’s judgment in the case of Commissioner of Income Tax & Ors. Vs. Samsung Electronics Co. Ltd. & Anr.The Tribunal observed that the software supplied was indeed off-the-shelf, and no copyright in the software was granted to the Indian companies. The Tribunal referred to the distinction between 'copyright' and 'copyrighted article' as elaborated in the John Deere India Pvt. Ltd. case and concluded that the payments for user rights in copyrighted articles do not amount to royalty under section 9(1)(vi) of the Act. Moreover, the Tribunal noted that the definition of royalty under the DTAA between India and the USA is more restrictive and beneficial to the assessee. Therefore, such payments do not fall within the purview of royalty under the DTAA.The Tribunal also held that the amended definition of royalty under domestic law cannot be extended to the DTAA, where the original definition remains unamended. Consequently, the receipts in the hands of the assessee were not in the nature of royalty and hence not taxable in India.Based on these findings, the Tribunal allowed the appeal for the assessment year 2004-05 concerning the taxability of the consideration received for software and related services. The appeal for the assessment year 2006-07 was also allowed, as the facts and issues were identical to those of the assessment year 2004-05.Conclusion:The appeals were partly allowed for the assessment year 2004-05 and fully allowed for the assessment year 2006-07. The Tribunal concluded that the receipts from providing user rights in off-the-shelf software and related support services do not constitute royalty and are not taxable in India under the provisions of the Income Tax Act and the DTAA between India and the USA.