Software License Sales: Business Income, Not Royalty. No Tax Liability Without Permanent Establishment.

The Tribunal held that income from the sale of software licenses, whether directly or through distributors/resellers, constituted business income and not Royalty. As the assessee lacked a Permanent Establishment in India, the income was not taxable. The Assessing Officer's assessment order was set aside, and the assessee's appeals for both assessment years were allowed.

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Issues Involved:
1. Whether the consideration received for the sale of software products should be treated as Royalty and taxable in India.

Issue-wise Detailed Analysis:

1. Consideration for Sale of Software Products as Royalty:

Background and Facts:
The assessee, a non-resident company incorporated in the USA, earned income from the sale of software licenses to third-party customers in India during the assessment years 2012-13 and 2017-18. The assessee filed returns declaring Nil income, invoking the beneficial provisions of the India-USA tax treaty. The Assessing Officer (AO) issued a notice under section 148 of the Income Tax Act, questioning the taxability of receipts from the sale of software licenses as Royalty.

Assessee's Argument:
The assessee contended that the software licenses sold were for internal business purposes of the users and did not involve any transfer of copyright. The End User License Agreements (EULA) restricted users from modifying, copying, sublicensing, or reverse engineering the software. The assessee argued that the income should not be treated as Royalty but as business income, which is not taxable in India due to the absence of a Permanent Establishment (PE).

Tribunal's Findings:
The Tribunal referred to its previous decisions in the assessee's own cases for earlier years (A.Y. 2013-14 and A.Y. 2014-15), where it was held that the sale of software licenses did not constitute Royalty but business income. The Tribunal reiterated that the software sold was a copyrighted article and not a transfer of copyright. The relevant clauses of the India-USA DTAA were examined, emphasizing that Royalty involves granting the right to copy for commercial exploitation, which was not the case here.

Distributor and Reseller Agreements:
The Tribunal also analyzed the agreements with distributors and resellers, concluding that these parties did not receive any rights to the intellectual property in the software. The distributors and resellers merely facilitated the sale of the software without acquiring any rights to copy or commercially exploit it.

Conclusion:
The Tribunal held that the income from the sale of software licenses, whether directly to customers or through distributors/resellers, constituted business income and not Royalty. Since the assessee did not have a PE in India, such income was not taxable in India. Consequently, the AO's final assessment order was set aside, and the ground raised by the assessee was allowed.

Ground No. 1(b):
Given the decision on ground No. 1(a), ground No. 1(b) was rendered infructuous and dismissed.

Appeal for A.Y. 2017-18:
The issues and facts in the appeal for A.Y. 2017-18 were identical to those for A.Y. 2012-13. Therefore, the Tribunal's findings and conclusions for A.Y. 2012-13 were applied mutatis mutandis to A.Y. 2017-18, and the appeal was allowed accordingly.

Final Order:
Both appeals by the assessee were allowed, with the order pronounced in the open court on 05th February 2021.

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