2016 (5) TMI 169 - AT - Income Tax

Payments for software classified as business income, not royalties, for non-resident assessee under DTAA

Solid Works Corporation Versus Additional Director of Income Tax (Int’l Taxation) Range 2, Mumbai

The Tribunal held that payments received for software are classified as business income, not royalties, as the appellant lacks a Permanent Establishment ... Payment received from resellers in India for acquisition of computer software - whether are royalty in nature and hence chargeable to tax in India @ 15% as per Double Taxation Avoidance Agreement between India and USA ? - Held that:- Having noted that there is no material difference in the facts of the case for this year vis-à-vis the facts of the immediately preceding assessment year discussed above, respectfully following the views of the coordinate benches, we uphold the grievance of the assessee. It is, therefore, held that the receipts on account of receipts for software are not exigible to tax in India. The consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the Assessee. Admittedly the Assessee who is a non resident does not have a permanent establishment and therefore business income of the Assessee cannot be taxed in India in the absence of a permanent establishment. The Assessing Officer is, therefore, directed to delete the impugned addition - Decided in favour of assessee Issues Involved:1. Taxability of payments received by the company from resellers in India for the acquisition of computer software as royalty.2. Levy of interest under section 234B of the Income Tax Act on a non-resident assessee.Detailed Analysis:Issue 1: Taxability of Payments as RoyaltyThe primary issue concerns whether the payments received by the appellant from resellers in India for the acquisition of computer software should be classified as royalty and thus subject to tax in India at 15% under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.Background:The appellant is a company incorporated in the USA and a tax resident of the USA, entitled to the benefits of the DTAA. The appellant develops and markets 3D mechanical design solutions, with the software being sold in a shrink-wrap form to customers in India. The software is provided under an End User License Agreement (EULA) which restricts users from modifying, reverse engineering, or redistributing the software.Tribunal's Findings:The Tribunal noted that the issue is covered in favor of the appellant by several orders of the coordinate benches for earlier assessment years, where it was consistently held that the sums received for the supply of software are not in the nature of royalty under Article 12(3) of the DTAA. Instead, these sums are considered business income, and since the appellant does not have a Permanent Establishment (PE) in India, such receipts are not taxable in India.Legal Precedents:The Tribunal referenced several cases, including:- Tata Consultancy Services Pvt. Ltd. Vs. State of Andhra Pradesh (2004) 271 ITR 401: It was held that software, once put on media and marketed, becomes goods susceptible to sales tax and does not constitute a transfer of intellectual property rights.- Lucent Technologies Hindustan Ltd. Vs. ITO, 92 ITD 366 (Bang): It was held that there is no acquisition of any right in software.- DIT Vs. Ericsson A.B. (Delhi High Court): It was held that payment made for the use of software embedded in hardware does not constitute royalty.- Dassault Systems KK (AAR): It was ruled that payments for software products sold through resellers are business profits and not royalties.Conclusion:The Tribunal upheld the view that the payments received for software are not royalties but business income. As the appellant does not have a PE in India, the business income is not taxable in India. The Tribunal directed the Assessing Officer to delete the addition of Rs. 10,63,10,960 on account of receipts for software.Issue 2: Levy of Interest under Section 234BThe second issue pertains to the levy of interest under section 234B of the Income Tax Act, despite the appellant being a non-resident assessee.Tribunal's Findings:The Tribunal noted that the appellant is a non-resident and, therefore, not liable to pay advance tax under section 234B. The Tribunal referenced Article 24(1) of the DTAA, which provides for non-discrimination, stating that nationals of a contracting state shall not be subjected to any taxation or requirements more burdensome than those applicable to nationals of the other state in similar circumstances.Conclusion:The Tribunal concluded that the levy of interest under section 234B on a non-resident assessee is not justified and directed the Assessing Officer to delete the interest levied under section 234B.Final Judgment:The appeal was allowed, and the Tribunal directed the Assessing Officer to delete the impugned addition of Rs. 10,63,10,960 and the interest levied under section 234B. The judgment was pronounced in the open court on 31st March 2016.