2022 (5) TMI 855 - AT - Income Tax

Tribunal rules software license fees not taxable as 'Royalty' or 'Fees for Technical Services'

TIBCO Software B.V., C/o. TIBCO Software India Pvt. Ltd. Versus ACIT (IT), Circle-2, Pune

TIBCO Software B.V., C/o. TIBCO Software India Pvt. Ltd. Versus ACIT (IT), Circle-2, Pune - TMI Issues Involved:1. Taxation of software license fees as 'Royalty' under the Income Tax Act, 1961 and the India-Netherlands DTAA.2. Taxation of software maintenance fees, consulting service fees, and training fees as 'Fees for Technical Services' under Article 12(5)(a) of the India-Netherlands DTAA.3. Short credit for Tax Deducted at Source (TDS).4. Levy of interest under section 234B of the Income-tax Act, 1961.5. Initiation of penalty proceedings under sections 274 r.w.s. 271F and 274 r.w.s. 271(1)(c) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Taxation of Software License Fees as 'Royalty':The appellant challenged the taxation of INR 26,02,184 towards software license fees as 'Royalty'. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) treated the software license fees as 'Royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Netherlands DTAA, relying on various judicial precedents. However, the appellant argued that the fee for software licenses should not be treated as 'Royalty', citing the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, which clarified that payments for the use of copyrighted software do not constitute 'Royalty'. The Tribunal agreed with the appellant, holding that the software license fees cannot be taxed as 'Royalty' in India, thus allowing Ground No.1.2. Taxation of Software Maintenance Fees, Consulting Service Fees, and Training Fees as 'Fees for Technical Services':The appellant contested the DRP's direction to tax software maintenance fees (INR 29,05,513), consulting service fees (INR 3,78,346), and training fees (INR 34,23,769) as 'Fees for Technical Services' under Article 12(5)(a) of the India-Netherlands DTAA. The DRP had held that these fees were ancillary and subsidiary to the software license fees and thus taxable as 'Fees for Technical Services'. The appellant argued that since the software license fees were not 'Royalty', the related fees should not be considered 'Fees for Technical Services'. The Tribunal agreed, referencing the judgment of Hon’ble Delhi High Court in Datamine International Ltd. vs. ADIT and other cases, and ruled that these fees cannot be taxed as 'Fees for Technical Services'. Thus, Grounds No.2 to 5 were allowed.3. Short Credit for TDS:The appellant raised an issue regarding the short credit of TDS amounting to INR 9,59,092. The Tribunal directed the AO to allow credit for TDS as per the information contained in Form No.26AS and in accordance with Section 199 of the Income Tax Act. This ground was allowed for statistical purposes.4. Levy of Interest under Section 234B:The appellant contested the levy of interest under Section 234B, which was consequential to the short grant of TDS credit. Since the Tribunal directed the AO to rectify the TDS credit issue, the levy of interest would become inapplicable. This ground was dismissed as it was consequential.5. Initiation of Penalty Proceedings:The appellant challenged the initiation of penalty proceedings under Sections 274 r.w.s. 271F and 274 r.w.s. 271(1)(c) of the Income-tax Act. The Tribunal noted that these grounds were consequential and dismissed them.Separate Judgments for Different Assessment Years:For A.Y. 2011-12 (ITA No.1348/PUN/2019), the appeal was partly allowed for statistical purposes. For A.Y. 2015-16 (ITA No.1554/PUN/2018), the Tribunal applied the same reasoning and decisions as for A.Y. 2011-12, allowing the grounds related to software license fees and related services, and remanding the issue of TDS credit difference to the AO. The appeal for A.Y. 2015-16 was also partly allowed for statistical purposes.Conclusion:Both appeals were partly allowed for statistical purposes, with significant relief granted to the appellant on the issues of software license fees and related service fees not being taxable as 'Royalty' or 'Fees for Technical Services'.