2018 (12) TMI 112 - AT - Income Tax

Software Sale Not Royalty: Tax Appeal Partially Allowed

The Tribunal concluded that the receipts from the 'Sale of Software' were not considered 'Royalty' under the India-Ireland Double Taxation Avoidance ... Receipts on account of “Sale of Software” - chargeability to tax as income from Royalty u/s 9(1)(vi) and Article 12 of the DTAA - India-Ireland DTAA - Held that:- Respectfully following decision of Infrasoft Ltd. [2013 (11) TMI 1382 - DELHI HIGH COURT] we hold that receipts derived by the assessee from “Sale of Software” is not in nature of “Royalty” as defined under Article 12 of India-Ireland DTAA. Since treaty provisions are more beneficial, an adjudication on nature of receipts vis a vis provisions of Section 9(1)(vi) is not required. Levy of interest u/s 234 - Held that:- Since the receipt itself is not liable to tax in India interest u/s 234B will be consequential. Issues Involved:1. Taxability of the amount received from 'Sale of Software' as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA).2. Consideration for the supply/distribution of copyrighted software qualifying as 'Royalty.'3. Non-adherence to judicial precedents by the DRP/AO.4. Levy of education cess on the tax rate prescribed under India-Ireland DTAA.5. Levy of interest under Section 234B of the Act.6. Initiation of penalty proceedings under Section 271(1)(c) of the Act.Detailed Analysis:1. Taxability of the amount received from 'Sale of Software' as 'Royalty':The Assessee, a company incorporated in Ireland, received payments for the 'Sale of Software' from its Indian distributors. The AO held that these receipts were chargeable to tax as income from Royalty under Section 9(1)(vi) of the Act and Article 12 of the DTAA. The AO's stance was based on the assertion that the payments for software fall within the definition of 'Royalty' as per the DTAA and Section 9(1)(vi) of the Act. The AO relied on judicial precedents, including the Karnataka High Court's decision in Samsung Electronics Co. Ltd., to support this view.2. Consideration for the supply/distribution of copyrighted software qualifying as 'Royalty':The Assessee contended that the payments received were not for the use of copyright but for the purchase of copyrighted articles. The Assessee argued that the distributors and end-users did not acquire any rights to the copyright and relied on several judicial pronouncements, including the Delhi High Court's decisions in Infrasoft Ltd. and Dynamic Vertical Software India (P) Ltd., which supported their position. The DRP, however, upheld the AO's view, citing ongoing appeals in the Supreme Court against these judgments.3. Non-adherence to judicial precedents by the DRP/AO:The Assessee argued that the DRP/AO failed to follow binding judicial precedents set by the jurisdictional Delhi High Court, which had consistently held that payments for the sale of software do not constitute 'Royalty.' The Tribunal agreed with the Assessee, noting that the issue was squarely covered in favor of the Assessee by the Delhi High Court's decisions in Ericsson A.B., Infrasoft Ltd., and Nokia Networks Oy. The Tribunal emphasized the distinction between the transfer of a copyrighted article and the transfer of copyright rights.4. Levy of education cess on the tax rate prescribed under India-Ireland DTAA:The Tribunal did not specifically address this issue in detail, but it was implied that since the primary issue regarding the nature of receipts was resolved in favor of the Assessee, the levy of education cess would not be applicable.5. Levy of interest under Section 234B of the Act:Since the Tribunal held that the receipts from the 'Sale of Software' were not liable to tax in India, the levy of interest under Section 234B would be consequential and not applicable.6. Initiation of penalty proceedings under Section 271(1)(c) of the Act:The Tribunal deemed this ground as premature and dismissed it accordingly.Conclusion:The Tribunal concluded that the receipts derived by the Assessee from the 'Sale of Software' were not in the nature of 'Royalty' as defined under Article 12 of the India-Ireland DTAA. Consequently, the appeal was partly allowed, with grounds related to the nature of receipts and interest under Section 234B being resolved in favor of the Assessee, while the ground regarding penalty proceedings was dismissed as premature. The decision was pronounced in the open court on 26th November 2018.