Israeli Company Wins Tax Dispute on Software Supply Classification

The Tribunal ruled in favor of the appellant, an Israeli company, in a tax dispute regarding the treatment of consideration received for software supply as royalty. The Tribunal held that the consideration was not royalty but business income, based on previous judgments and contractual clauses indicating no transfer of intellectual property rights. Additionally, the Indian subsidiary was not deemed a permanent establishment of the appellant, as it operated independently. The Tribunal directed the Assessing Officer to verify and grant credit for tax deducted at source.

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Issues Involved:
1. Treatment of consideration received for software supply as royalty.
2. Consideration of Indian subsidiaries as a permanent establishment (PE) of the assessee.
3. Credit for tax deducted at source (TDS).

Issue-wise Detailed Analysis:

1. Treatment of Consideration Received for Software Supply as Royalty:

The assessee, an Israeli company, supplied software to Indus Towers Ltd. and provided IT support services through its Indian subsidiary. The Assessing Officer (AO) treated the consideration received for the software supply as royalty, taxable under Article 12 of the India-Israel Double Taxation Avoidance Agreement (DTAA). The Dispute Resolution Panel (DRP) upheld this view.

The Tribunal examined the facts and previous judgments in the assessee’s own case for the assessment years (A.Y.) 2008-09, 2009-10, 2010-11, and 2012-13, where it was held that such amounts did not constitute royalty. The Tribunal reiterated that the software supply did not transfer any copyright or intellectual property rights to the buyer, but only allowed the use of the software in machine-readable form. The Tribunal noted that the software license granted was non-exclusive, royalty-free, and did not permit reverse engineering or modification of the software.

The Tribunal also referenced the agreement clauses, which confirmed that the intellectual property rights remained with the assessee, and the software was restricted to designated sites. The Tribunal emphasized that the source code was not transferred to Reliance under an escrow agreement, making the AO's concerns about source code transfer irrelevant.

The Tribunal concluded that the consideration received for software supply was not royalty under Article 12 of the India-Israel DTAA but should be treated as business income, following the precedent set in previous years.

2. Consideration of Indian Subsidiaries as a Permanent Establishment (PE) of the Assessee:

The AO considered the Indian subsidiary (TTI Team Telecom Software Private Limited) as a dependent agent PE of the assessee in India. The Tribunal reviewed previous judgments, particularly for A.Y. 2006-07, where it was held that the assessee did not have a PE in India. The Tribunal found no new facts or changes in circumstances that would warrant a different conclusion.

The Tribunal noted that the transactions had been consistently accepted by the Revenue in previous years and that the Indian subsidiary operated independently. Therefore, the Tribunal held that the Indian subsidiary could not be treated as a dependent agent PE of the assessee, and the amount received was not taxable in India on this basis.

3. Credit for Tax Deducted at Source (TDS):

The assessee claimed that the AO did not give credit for the tax deducted at source amounting to Rs. 68,78,174/-. The Tribunal directed the AO to verify the factual figures and allow the necessary credit for the TDS after verification.

Conclusion:

The Tribunal allowed the appeal in part, holding that the consideration received for software supply was not royalty but business income, and that the Indian subsidiary was not a dependent agent PE of the assessee. The Tribunal also directed the AO to verify and allow the credit for TDS. The order was pronounced in the open court on 13/11/2018.

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