2023 (9) TMI 145 - AT - Income Tax

Software sales revenue not taxable in India as business income, not royalty. Tribunal sides with distributor, denies Revenue appeal.

DCIT Circle 3 (1) (2) Int. Taxation, New Delhi. Versus Software One Pte Ltd.

DCIT Circle 3 (1) (2) Int. Taxation, New Delhi. Versus Software One Pte Ltd. - [2023] 105 ITR (Trib) 605 (ITAT [Del]) Issues:1. Interpretation of whether the amount received from the sale/distribution of software is royalty under India-Singapore DTAA.2. Determination of whether the revenue earned from the sale of software is in the nature of business income and not taxable in India due to the absence of Permanent Establishment.Analysis:Issue 1:The primary issue in this case revolves around whether the amount received by the assessee from the sale/distribution of software constitutes royalty under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The Assessing Officer contended that the revenue earned was from the transfer of the right to use copyright, hence, should be treated as royalty under both the provisions of the Act and the DTAA. However, the learned Commissioner (Appeals) accepted the assessee's claim that the revenue was from the sale of a copyrighted article and not the transfer of copyright. This decision was supported by the Supreme Court's ruling in a relevant case, emphasizing that the consideration for the resale/use of computer software through end-user license agreements is not royalty. The Tribunal concurred with this interpretation, highlighting that the assessee, as a distributor, did not have ownership over the software and therefore could not have transferred the right to use the copyright.Issue 2:Another crucial aspect of the case was whether the revenue earned from the sale of software should be considered as business income and not taxable in India due to the absence of a Permanent Establishment (PE). The Tribunal analyzed the nature of the transactions conducted by the assessee, noting that it acted as a distributor purchasing software from non-resident manufacturers and selling them in India. As the assessee did not create the software and merely traded in copyrighted articles, it was deemed that there was no transfer of the right to use copyright. This, coupled with the absence of ownership over the software, led to the conclusion that the revenue was in the nature of business income and not subject to taxation in India. The Tribunal dismissed the grounds raised by the Revenue, emphasizing the applicability of the Supreme Court's decision and the reversal of a similar Tribunal decision by the High Court.In conclusion, the Tribunal upheld the decision of the learned Commissioner (Appeals) and dismissed the appeal, emphasizing that the revenue earned from the sale of software was not royalty but business income, and therefore not taxable in India.