2017 (3) TMI 331 - AT - Income Tax

ITAT rules in favor of assessee, quashes AO's order adding Rs. 26,87,30,378. Sale of shrink-wrap software not taxable.

The ITAT ruled in favor of the assessee, setting aside the AO's order and directing the deletion of the addition of Rs. 26,87,30,378/-. The tribunal ... Royalty receipt - receipt from the sale of software products to clients in India through its distributor / reseller - P.E. in India - taxability in India - Held that:- The present case has been decided in view of the latest law settled by the Hon’ble Delhi High Court in case of Ericsson AV (2011 (12) TMI 91 - Delhi High Court). As decided in assessee's own case in previous year receipt on account of sale of Shrink-wrap software is not in the nature of royalty hence is not liable in India in view of the provision of section 9(1)(iv) of the Act as well as Article 12(3) of the Double Taxation Avoidance Agreement between India and U.S.A. In view of the said circumstances, we are of the view that the case of the assessee is fully covered by the above mentioned decisions and the finding of the Assessing Officer is based upon the DRP direction is wrong against law and facts and is hereby ordered to be set aside on this issue. It is therefore held that receipt on account of the receipt for sale of shrink-wrap software is not liable to tax in India. Therefore, the Assessing Officer is hereby directed to delete the full addition. Accordingly, these issues are decided in favour of the assessee against the revenue. Issues Involved:1. Computation of total income by the Assessing Officer (AO).2. Taxability of income from the sale of shrink-wrap software as royalty under Indian law and the India-USA Double Taxation Avoidance Agreement (DTAA).3. Classification of payments received from the sale of shrink-wrap software as 'sale of copyrighted article' versus 'transfer of copyright right'.4. Definition of software as a process or property similar to patent, invention, etc., under Explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961.5. Applicability of the retrospective amendment to section 9(1)(vi) of the Act to the definition of 'Royalty' under Article 12 of the DTAA.6. Rejection of appellant’s objections by the Dispute Resolution Panel (DRP) based on previous decisions.7. Computation of tax on royalty income at the rate of 15% instead of 10% as prescribed under section 115A of the Act.8. Levying of interest under section 234B of the Act.Detailed Analysis:Issue 1 to 7: Taxability of Software Sales as RoyaltyThe primary issue revolves around the classification of income from the sale of shrink-wrap software. The assessee contested that the income should not be treated as royalty. The AO and DRP, however, classified it as royalty under section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India and the USA.The assessee argued that the case was covered by previous decisions of the Income Tax Appellate Tribunal (ITAT) in its favor for various assessment years (2002-03, 2005-06, 2006-07, 2007-08, and 2009-10). The ITAT had consistently held that receipts from the sale of shrink-wrap software were not royalty. The assessee cited these decisions to support its claim that the software sales constituted the sale of copyrighted articles, not the transfer of copyright rights.The department countered by referencing decisions from the Karnataka High Court, which had ruled in favor of the revenue, treating similar receipts as royalty. Cases cited included CIT Vs. Synopsis International Old Ltd., CIT Vs. Samsung Electronics Co. Ltd., CIT Vs. Wipro Ltd., and CIT Vs. CGI Information Systems and Management Consultants (P) Ltd.The ITAT noted that the jurisdictional tribunal had previously followed the Karnataka High Court's decisions in other cases. However, it emphasized that in situations where there are conflicting views from non-jurisdictional High Courts, the principle laid down by the Supreme Court in CIT Vs. Vegetable Products Ltd. should be followed. This principle states that if two reasonable constructions of a taxing provision are possible, the one favoring the assessee should be adopted.The ITAT also referenced the Delhi High Court's decisions in DIT Vs. Infrasoft Ltd. and DIT Vs. Nokia Network, which supported the assessee's position. The tribunal reiterated that the receipts from the sale of shrink-wrap software were not royalty and should not be taxed in India.Issue 8: Levying of Interest under Section 234BThe assessee also challenged the levy of interest under section 234B of the Act. However, the tribunal's decision on the primary issue of taxability rendered this point moot, as the deletion of the addition would nullify the interest computation.Conclusion:The ITAT ruled in favor of the assessee, setting aside the AO's order and directing the deletion of the addition of Rs. 26,87,30,378/-. The tribunal concluded that the receipts from the sale of shrink-wrap software were not liable to tax in India as royalty. Consequently, the appeal filed by the assessee was allowed.