2016 (12) TMI 48 - AT - Income Tax

ITAT Rules Software Sale Consideration as Business Income under India-Finland DTAA

The ITAT ruled that the consideration received by the assessee from the sale of software should be treated as business income under the India-Finland ... Characterisation of software receipts as royalty - sale of standard software as business income - application of DTAA Article 7 (business profits) vis-a -vis Article 12 (royalties) - precedential effect of coordinate bench decision - TDS credit adjustment and verification by assessing officer - grossing up of receipts for computation of incomeCharacterisation of software receipts as royalty - sale of standard software as business income - application of DTAA Article 7 (business profits) vis-a -vis Article 12 (royalties) - precedential effect of coordinate bench decision - Whether receipts from sale of standard software for AY 2011-12 and AY 2012-13 constitute royalty or business income under the India-Finland DTAA and the Income-tax Act - HELD THAT: - The Tribunal noted that the assessing officer recorded there was no change in the factual matrix or business model for AYs 2011-12 and 2012-13 compared to earlier years. The assessee relied on a coordinate-bench ITAT decision in its own case for earlier assessment years, which had held that sale of standard software is chargeable as business income under Article 7 of the DTAA and not as royalty under Article 12. Applying and respectfully following that coordinate-bench decision, and finding the facts and business model unchanged, the Tribunal held that the receipts in the years under appeal are from sale of standard software and are taxable as business income under Article 7 of the DTAA and not as royalty under Article 12. The Tribunal allowed the related grounds in both appeals and rejected the revenue's contrary contention that the receipts were royalty. [Paras 5]Sale of software for AY 2011-12 and AY 2012-13 is business income chargeable under Article 7 of the DTAA and not royalty under Article 12; related grounds allowed.TDS credit adjustment and verification by assessing officer - grossing up of receipts for computation of income - Whether TDS credit should be allowed and whether receipts should be grossed up for computing income (as raised in respective grounds for the two years) - HELD THAT: - The Tribunal set aside the matters relating to TDS credit (AY 2011-12) and the grossing up of receipts (AY 2012-13) to the file of the assessing officer for verification and action in accordance with law. The Tribunal directed the AO to grant TDS credit if found permissible under law and to recompute gross receipts for taxation as appropriate, treating these issues as remitted for fresh consideration rather than finally adjudicated on the merits in the present order. These aspects were allowed for statistical purposes and remitted. [Paras 5]TDS credit claim and grossing up of receipts remitted to the assessing officer for verification and recomputation in accordance with law.Final Conclusion: Both appeals partly allowed: the Tribunal held that receipts from sale of standard software for AY 2011-12 and AY 2012-13 are business income under Article 7 of the India-Finland DTAA and not royalty; issues of TDS credit and grossing up were remitted to the assessing officer for verification and recomputation; remaining grounds dismissed as consequential. Issues:1. Whether the consideration received by the assessee falls under the category of royalty under the Income Tax Act and the India-Finland Double Taxation Avoidance Agreement (DTAA) for AY 2011-12 and AY 2012-13.Analysis:For AY 2011-12, the core issue was whether the consideration received by the assessee constituted royalty income under the Act and the DTAA. The AO had previously held that the assessee's receipts were taxable as royalty income. However, the assessee contended that the sale of software should be treated as business income under Article 7 of the DTAA, not as royalty. The ITAT, following its earlier decision in the assessee's case, held that the sale of software was business income, not royalty, for both AYs 11-12 and 12-13.In the detailed grounds of appeal, the assessee challenged various aspects of the AO's orders, including the classification of receipts as royalty, application of retrospective amendments, TDS credit disallowance, and tax rate computation. The ITAT allowed the appeals on the grounds related to the classification of software sale as business income, directing the AO to grant TDS credit and re-compute gross receipts for taxation purposes.The ITAT noted that there was no change in the factual matrix or business model from earlier years, and the issue had been settled in favor of the assessee in previous ITAT decisions. Therefore, the ITAT held that the sale of software by the assessee should be treated as business income under the DTAA, not as royalty income. The AO's reliance on earlier years' assessments was deemed appropriate, and the appeals were partly allowed, with certain issues remanded to the AO for reconsideration.In conclusion, the ITAT ruled that the sale of software by the assessee was business income under the DTAA, not royalty income. The appeals were partly allowed, with directions to grant TDS credit and re-compute gross receipts for taxation purposes. Other grounds of appeal were dismissed as consequential.