2020 (7) TMI 640 - AT - Income Tax

Appeal allowed on 'Royalty' classification for hardware and software sales

Nagravision S.A., C/o-Ernst & Young LLP Versus The ACIT (International Taxation), Circle-2 (2) (2), New Delhi.

The tribunal allowed the appeal, determining that revenue from the sale of hardware equipment and supply of CAS and Middleware products did not qualify as ... Royalty receipt - revenue earned by the Appellant from sale of hardware equipment - addition as per section 9(1)( vi) of the Act and Article 12(3) of the India-Switzerland Double Taxation Avoidance Agreement (India-Swiss tax treaty') - Whether revenue earned by the Appellant from sale of hardware equipment represents business income, which is not taxable in India in the absence of any Permanent Establishment (‘PE') of the Appellant in India? - HELD THAT:- It is an admitted fact that though Explanation 5 has been inserted in section 9(1)(vi) of the Act but no amendment has been made to the definition of ‘Royalty’ under DTAA and since the provisions of DTAA are beneficial to the assessee, then the said provisions would be applied. What has been transferred is limited right to use copyrighted material, then the receipts on sale of licensing of software is not Royalty in view of the beneficial provisions of the DTAA between India and Sweden - Amended definition of ‘Royalty’ under the domestic law cannot be extended to the definition of ‘Royalty’ under DTAA, where the term ‘Royalty’ originally defined has not been amended. As per definition of ‘Royalty’ under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of ‘Royalty’. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of ‘Royalty’ having not undergone any amendment in Tax Treaty, the assessee was not liable to be taxed on aforesaid receipts of Licensing software and also on sale of Hardware. - Decided in favour of assessee. Issues Involved:1. Violation of principles of natural justice.2. Classification of revenue from sale of hardware equipment as 'Royalty'.3. Classification of revenue from supply of Conditional Access Systems (CAS) and Middleware products as 'Royalties'.4. Addition to income due to differences between Form 15CA filings and revenue as per Form 26AS.5. Levy of interest under sections 234A and 234B.6. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Violation of Principles of Natural Justice:The appellant contended that the order passed by the Assistant Commissioner of Income Tax (ACIT) was in violation of the principles of natural justice and was arbitrary. However, the tribunal did not find it necessary to adjudicate on this issue separately as it was general in nature.2. Classification of Revenue from Sale of Hardware Equipment as 'Royalty':The appellant argued that the revenue earned from the sale of hardware equipment should be classified as business income and not as 'Royalty' under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-Switzerland Double Taxation Avoidance Agreement (DTAA). The tribunal held that the revenue from the sale of hardware equipment, which was integral to the CAS, should not be treated as 'Royalty'. The tribunal relied on the decision of the Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. and other related judgments, which distinguished between the acquisition of a copyrighted article and a copyright right. It concluded that the sale of hardware equipment did not constitute 'Royalty' under the DTAA.3. Classification of Revenue from Supply of CAS and Middleware Products as 'Royalties':The appellant contended that the revenue from the supply of CAS and Middleware products should be treated as business income and not as 'Royalties'. The tribunal observed that the software supplied by the appellant did not transfer any copyright rights to the customers but only provided a limited, non-exclusive, non-transferable license to use the software. The tribunal held that the consideration received for the supply of CAS and Middleware products did not fall within the definition of 'Royalties' under the DTAA, as the definition of 'Royalty' in the DTAA is narrower compared to the Income-tax Act. The tribunal relied on the judgments of the Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. and other related cases to support its conclusion.4. Addition to Income Due to Differences Between Form 15CA Filings and Revenue as per Form 26AS:The appellant challenged the addition made by the ACIT on account of alleged differences between the data as per Form 15CA filings and revenue as per Form 26AS. The tribunal did not find it necessary to adjudicate on this issue separately as it became academic in view of the decision on the classification of revenue from the sale of hardware equipment and supply of CAS and Middleware products.5. Levy of Interest under Sections 234A and 234B:The appellant contested the levy of interest under sections 234A and 234B of the Income-tax Act. The tribunal held that the issue of charging interest was consequential and did not require separate adjudication.6. Initiation of Penalty Proceedings under Section 271(1)(c):The appellant argued against the initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act. The tribunal held that the issue was premature and did not require separate adjudication.Conclusion:The tribunal allowed the appeal of the appellant, holding that the revenue from the sale of hardware equipment and supply of CAS and Middleware products did not constitute 'Royalty' under the DTAA. The tribunal dismissed the grounds related to the addition to income due to differences between Form 15CA filings and revenue as per Form 26AS, levy of interest, and initiation of penalty proceedings as they were either academic, consequential, or premature. The tribunal's decision was pronounced in the open court on 06th July, 2020.