2021 (11) TMI 1000 - AT - Income Tax

Assessee wins tax case: software charges not royalty, management fees not technical, DTAA principles apply.

The Tribunal ruled in favor of the assessee on all grounds. It held that software usage charges were not taxable as royalty, software did not qualify as a ... Addition of software usage charges received treated as royalty - use the copyrighted software - proof of parting with copyright as envisaged within the meaning of Section 14 of the Copyright Act - HELD THAT:- The assessee has merely transferred the right to use copyrighted software ANTIFOG and that it had not transferred the copyright itself to Trigo India. TRIGO India was authorized to have access to and make use of the copyrighted software ANTIFOG. In the Software License Agreement entered into, it is evident that the assessee i.e. Trigo SAS is ‘Licensor’ and TRIGO Quality Production Services Pvt. Ltd. which is Indian Company as a ‘Licensee’. That the various clauses of this Software License Agreement verified the fact that copyright of the software ANTIFOG is very much with Trigo SAS (Licensor) and that the Trigo India (Licensee) has been authorized to use the software ANTIFOG as per various terms and conditions specified in this Software License Agreement. There is no difference in facts of the present case as compared to the facts of the judgment in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT] which was referred by the Tribunal in Ansys Inc. [2021 (6) TMI 513 - ITAT PUNE] There has been no parting with copyright as envisaged within the meaning of Section 14 of the Copyright Act by the Licensor (assessee) to Licensee who is given access to only use the copyrighted software against which assessee’s receipts cannot be taxed as royalty. Therefore, respectfully following the judicial precedents mentioned aforesaid on this issue - Grounds No.1 & 2 raised in appeal by the assessee are allowed. Addition of management service fees received by the assessee treating it as ‘fees for technical services’ - HELD THAT:- Whatever services were provided by the assessee to Trigo India, no technical knowledge was made available by the assessee to the Indian Entity. Rather, it is a case of providing a service involving technical knowledge, which got consumed with its provision itself. Since such services simply involve use of technical knowledge and do not result into handing over some technical know-how to the recipient of the services. DR could not bring on record any materials/evidences to suggest that the facts and circumstances in the case of the present assessee was different from the case of the M/s. Faurecia Automotive Holding [2019 (7) TMI 402 - ITAT PUNE] Moreover, on going through the services agreement, it is absolutely clear that whatever services were rendered by the assessee to the Trigo India was services of such nature which got immediately consumed on delivery. There is no part of technical know-how made available by which the Indian Entity could have used services later on its own - Also as relying on the case of CIT Vs. De Beers India Minerals Pvt.Ltd [2012 (5) TMI 191 - KARNATAKA HIGH COURT] we allow Grounds No. 3 & 4 of the assessee. Levy of education cess on the tax liability computed under the provisions of the India France DTAA - HELD THAT:- . Having heard the parties herein and considering the decision of the Mumbai Bench of the Tribunal in the case of Sunil V Motiani [2013 (12) TMI 1105 - ITAT MUMBAI] to hold that tax payable @ 12.5% under Article 11(2) of FTAA is inclusive of surcharge and education cess. - on the same parity of reasoning, we provide relief to the assessee. Thus, Ground No.5 raised in the appeal by the assessee is allowed. Issues Involved:1. Addition of software usage charges as royalty.2. Classification of software as a 'process'.3. Addition of management service fees as fees for technical services.4. Classification of services as 'consultancy' and 'technical' under DTAA.5. Levy of education cess on tax liability under DTAA.Detailed Analysis:1. Addition of Software Usage Charges as Royalty:The assessee objected to the addition of Rs. 13,51,464/- as royalty for software usage charges. The assessee had entered into a Software License Agreement with Trigo India for the use of the software 'ANTIFOG'. The agreement restricted the licensee from modifying, copying, or sublicensing the software without prior consent. The assessee argued that the payment was for the use of a copyrighted article, not a copyright itself, and thus should not be taxed as royalty. The CIT(A) upheld the addition, stating that the right to use software is taxable as royalty under the Income Tax Act due to retrospective amendments. However, the Tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, which distinguished between the use of copyrighted software and the transfer of copyright. The Tribunal concluded that the assessee had not transferred the copyright itself but only the right to use the software, and thus, the receipts could not be taxed as royalty. Accordingly, Grounds No. 1 & 2 were allowed in favor of the assessee.2. Classification of Software as a 'Process':The CIT(A) had held that the software developed by the assessee falls under the category of 'process' as defined in Article 13(3) of the Indo-France DTAA. The Tribunal, however, found that the software usage did not involve the transfer of any process or technical know-how to the licensee. The Tribunal relied on the Supreme Court's judgment, which clarified that the use of software does not equate to the transfer of a process. Consequently, the Tribunal ruled in favor of the assessee, overturning the CIT(A)'s decision.3. Addition of Management Service Fees as Fees for Technical Services:The assessee received Rs. 88,21,345/- as management service fees from Trigo India. The Assessing Officer classified these services as managerial, technical, or consultancy and taxed them as fees for technical services (FTS) under Section 9(1)(vii) of the Income Tax Act. The assessee argued that the services were managerial and should be governed by the more beneficial Indo-UK DTAA, which does not include managerial services in the definition of FTS. The CIT(A) held that the services rendered were consultancy in nature and taxable under both the domestic law and the DTAA. The Tribunal, however, referred to its decision in M/s. Faurecia Automotive Holding vs. DCIT, where similar services were not considered FTS as they did not make available any technical know-how to the Indian entity. The Tribunal concluded that the services provided by the assessee were consumed upon delivery and did not result in any enduring benefit to the Indian entity. Therefore, Grounds No. 3 & 4 were allowed in favor of the assessee.4. Classification of Services as 'Consultancy' and 'Technical' Under DTAA:The CIT(A) had classified the services rendered by the assessee as consultancy and technical services, making them taxable under the Indo-France DTAA. The Tribunal, however, found that the services did not make available any technical knowledge to the Indian entity, as required by the DTAA. The Tribunal relied on the decision in M/s. Faurecia Automotive Holding vs. DCIT and the Karnataka High Court's ruling in CIT vs. De Beers India Minerals Pvt. Ltd., which clarified that the term 'make available' implies that the recipient should be able to utilize the acquired knowledge independently. Since the services provided by the assessee did not meet this criterion, the Tribunal ruled in favor of the assessee.5. Levy of Education Cess on Tax Liability Under DTAA:The CIT(A) upheld the levy of education cess of Rs. 57,528/- on the tax liability computed under the provisions of the India-France DTAA, relying on the Mumbai Tribunal's decision in Everrest Industries Ltd. The assessee argued that education cess should not be levied when tax is charged as per DTAA, which is inclusive of surcharge and education cess. The Tribunal referred to the decision in Sunil V. Motwani vs. ITO, where it was held that tax payable under DTAA includes surcharge and education cess. The Tribunal provided relief to the assessee, allowing Ground No. 5.Conclusion:The Tribunal allowed the appeal of the assessee, ruling in favor of the assessee on all grounds. The significant judgments and legal principles applied include the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT and the Tribunal's own decisions in Ansys Inc. vs. ACIT and M/s. Faurecia Automotive Holding vs. DCIT. The Tribunal concluded that the software usage charges were not taxable as royalty, the management service fees were not fees for technical services, and the education cess should not be levied separately under the DTAA.