UK company can challenge software sale receipts taxed as royalty despite initially declaring them taxable in return

ITAT Delhi held that a UK-incorporated non-resident assessee could challenge the taxation of software sale receipts as royalty income despite initially offering it as taxable in their return. The tribunal ruled that tax authorities cannot collect tax based on assessee's erroneous self-assessment when the income is not legally taxable under the Act. Mere admission in original return does not bar disputing additions if otherwise permissible under law. The matter was remanded to AO to verify the factual nature of receipts and determine if they constitute taxable royalty or non-taxable software sales.

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Issues Involved:
1. Validity of DRP directions.
2. Taxability of receipts from the sale of software as 'Royalty Income'.
3. Levying of interest without reference to the section.
4. Restriction of TDS credits.
5. Consideration of refund amount not issued.

Summary:

Validity of DRP Directions:
The assessee challenged the DRP directions and the final assessment order, asserting that the order is contrary to the law laid down by the Hon'ble Supreme Court of India. The DRP directions were deemed perfunctory and failed to give clear directions to the AO, unlawfully retaining amounts collected as tax on transactions not chargeable under the Act.

Taxability of Receipts from Sale of Software:
The core issue was whether the receipts from the sale of software to various customers, including Bharti Airtel, should be taxed as 'Royalty Income'. The assessee, a non-resident entity incorporated in the UK, argued that these receipts should not be taxed as 'Royalty Income' based on the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT. The AO and DRP, however, retained the amounts as 'Royalty Income' due to the assessee's initial declaration in the ITR and lack of sufficient evidence to prove otherwise.

The Tribunal observed that the authorities are under an obligation to act according to the law and cannot enforce untenable actions against the assessee. The Tribunal found merit in the assessee's argument that the AO committed an error in denying the relief claimed and that the assessee should not be prevented from correcting the mistake in the ITR. Consequently, the issue was remitted back to the AO for fresh determination, allowing the assessee to demonstrate that the receipts were wrongly reported as 'Royalty Income' and are not chargeable to tax in India.

Levying of Interest Without Reference to Section:
The Tribunal did not provide specific details on this issue but implied that it would be addressed in the fresh assessment by the AO.

Restriction of TDS Credits:
The assessee contended that the AO erred in restricting the TDS credits. This issue is also to be reconsidered by the AO in the fresh assessment.

Consideration of Refund Amount Not Issued:
The assessee claimed that no refund had been issued despite the AO considering an amount as refunded. This matter will be addressed in the fresh assessment by the AO.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the taxability of the receipts from the sale of software and other related issues in accordance with the law, providing the assessee an opportunity to present relevant evidence.

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