ITAT rules software supply payments not royalty under tax laws

The ITAT upheld the decision of the Ld. CIT(A) regarding the taxation of revenue received from software supply, ruling in favor of the assessee. The ITAT determined that the payments for software rights and licenses were not classified as royalty under the Income-Tax Act and the India-Sweden DTAA. The ITAT concluded that the software supply should be treated as a sale, not royalty taxable in India, based on the exclusive ownership of software rights by the assessee and previous court decisions.

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Issues:
1. Whether the revenue received by the assessee from the supply of software is taxable in India as Royalty under the Income-Tax Act and the Double Tax Avoidance Agreement (DTAA) between India and Sweden.
2. Whether the payment received by the assessee for the transfer of rights and license to use the software falls under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the DTAA.
3. Whether the supply of software by the assessee should be treated as royalty taxable in India or as a sale Simpliciter, especially in the absence of a Permanent Establishment in India.

Analysis:
1. The Assessing Officer considered the revenue received by the assessee from the supply of software as royalty under the Income-Tax Act and the India-Sweden DTAA. However, the Ld. CIT(A) deleted the addition, stating that the customer had only a nonexclusive right and could not sublicense the software beyond internal business purposes. The Ld. CIT(A) relied on the principle of consistency and previous court decisions to rule in favor of the assessee, emphasizing the exclusive ownership of the software rights by the assessee.

2. The assessee argued that the payment received for the transfer of rights and license to use the software should not be considered as royalty under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the DTAA. The Ld. CIT(A) upheld the assessee's position, citing the decision of the Hon’ble Supreme Court in a similar case. The Ld. CIT(A) concluded that the supply of software was not in the nature of royalty taxable in India under the DTAA.

3. The issue of whether the supply of software by the assessee should be treated as royalty taxable in India or as a sale Simpliciter was analyzed. The Assessing Officer treated the sale of software as royalty taxable in India. However, the ITAT referred to the decision of the Hon’ble Supreme Court, which held that payments for the use of computer software do not constitute royalty for the use of copyright. The ITAT found that the software license agreement was for the use of the software, not for the payment of royalty, and therefore upheld the Ld. CIT(A)'s decision.

In conclusion, the ITAT dismissed the revenue's appeal, affirming the decision of the Ld. CIT(A) based on the principles established by previous court decisions and the interpretation of the DTAA between India and Sweden.

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