2019 (12) TMI 1029 - AT - Income Tax

Tax Tribunal: Software License Payments, Business Income, Delayed Appeals, TDS Credit Verification

Digite Inc. Versus ADIT Circle- 1 (1), (2) (2) International Taxation New Delhi

Digite Inc. Versus ADIT Circle- 1 (1), (2) (2) International Taxation New Delhi - TMI Issues Involved:1. Characterization of Payments as Royalty or Business Income2. Condonation of Delay in Filing Appeals3. Grant of TDS CreditDetailed Analysis:1. Characterization of Payments as Royalty or Business Income:The primary issue in these appeals was whether the amounts received by the assessee from its customers for the sale of software licenses should be characterized as 'royalty' under Section 9(1)(vi) of the IT Act, 1961, and Article 12(3) of the Indo-US DTAA, or as business income.The assessee argued that the payments received were for the sale of copyrighted software products (licenses) and not for the use of or right to use any copyright, thus should be treated as business income. The assessee retained ownership of intellectual property rights and only permitted customers to use the software for their business needs, with restrictions on copying or duplicating the software.The Tribunal referred to multiple judicial precedents, including the landmark decision of the Delhi High Court in the case of Infrasoft Ltd., which distinguished between the transfer of a copyright and the sale of a copyrighted article. The Tribunal concluded that the payments received by the assessee were not for the use of or the right to use any copyright but were for the sale of copyrighted products, thus constituting business income and not royalty.The Tribunal also considered the various clauses in the agreements between the assessee and its customers, which indicated that the transactions were for the sale of copyrighted products and not for the transfer of any copyright rights. The Tribunal held that the payments received by the assessee did not fall under the definition of 'royalty' as per the IT Act and the DTAA and should be treated as business income not taxable in India in the absence of a Permanent Establishment (PE).2. Condonation of Delay in Filing Appeals:There was a delay in filing the appeals for the assessment years 2007-08 and 2009-10. The assessee explained that the delay was due to the confusion caused by retrospective amendments proposed in the Finance Bill 2012 and the logistical challenges of obtaining signatures from the USA.The Tribunal, after considering the explanations provided by the assessee and relying on various judicial precedents, including the Supreme Court's decisions in Collector, Land Acquisition vs. MST Katiji and Vedabai Alias Vaijayanta Bai Baburao Patil vs. Shantaram Baburao Patil, condoned the delay. The Tribunal emphasized the principle of advancing substantial justice and held that the delay was not deliberate or due to culpable negligence.3. Grant of TDS Credit:In ITA No. 382/Del/2016 for A.Y. 2012-13, the assessee challenged the AO's order for not granting TDS credit of Rs. 5,88,007/-. The Tribunal directed the AO to verify the records and grant appropriate TDS credit to the assessee, ensuring due opportunity of being heard.Conclusion:The Tribunal allowed the appeals, holding that the payments received by the assessee for the sale of software licenses were not in the nature of royalty but constituted business income. The delay in filing the appeals was condoned, and the issue of TDS credit was remanded to the AO for verification and appropriate action.