2022 (11) TMI 1529 - AT - Income Tax

Non-resident US company's software sales receipts not taxable as royalty under section 9(1)(vi) and India-USA DTAA Article 12(13)

Dassault Systems Solid Works Corporation, C/o Deloitte Haskins and Sells LLP Versus ACIT (International Taxation), Range-2 (1) (2), Mumbai

ITAT Mumbai ruled in favor of a non-resident US company regarding taxability of receipts from sale of shrink-wrapped 3D modeling software. The tribunal ... Taxability of receipts towards sale of software products - royalty receipts -shrink wrap application software developed and sold by the assessee is used for 3D modelling - Income deemed to accrue or arise in India - sale of copyrighted article OR transfer of copyright right - HELD THAT:- As decided in own case [2020 (7) TMI 97 - ITAT MUMBAI] for A.Y. 2016-17 held that income derived by the assessee from the sale of “shrink wrapped software” being a copy righted article would not be construed as royalty We are of the considered view that income derived by the assessee from the sale of “shrink wrapped software” being a copy righted article would not be construed as royalty under the provisions of section 9(1)(vi) of the Act as well as Article 12(13) of the DTAA between India and the USA. Co-ordinate Bench of the Tribunal also held that assessee being a non resident company incorporated in the USA would not be liable to tax in India in respect of the receipt from the sale of software by treating the same in the nature of royalty and as such ordered to be deleted. Merely because of the fact that the Revenue has gone in appeal in the earlier years the findings returned by the coordinate Bench of the Tribunal cannot be brushed aside and AO is directed to delete the addition under the head Royalty. Decided in favour of assessee. Issues Involved:1. Jurisdiction and validity of the Assessing Officer's order.2. Taxability of receipts from the sale of software products as royalty.3. Applicability of retrospective amendments to the definition of 'Royalty' under the Income Tax Act and DTAA.4. Levy of interest under sections 234A and 234B of the Income Tax Act.Detailed Analysis:1. Jurisdiction and Validity of the Assessing Officer's Order:The appellant contended that the order issued by the Assessing Officer (AO) was contrary to the principles of equity and natural justice, lacked jurisdiction, and was inconsistent with the provisions of the Income Tax Act, 1961. The appellant argued that the computation of total income at INR 106,69,04,360 was erroneous. The Tribunal noted that the AO's approach was based on previous decisions by the Dispute Resolution Panel (DRP), which had ruled against the appellant in earlier years. However, the Tribunal found that identical issues had been resolved in favor of the appellant in previous years by the jurisdictional Mumbai Bench of the Income Tax Appellate Tribunal.2. Taxability of Receipts from Sale of Software Products as Royalty:The central issue was whether the income from the sale of shrink-wrapped software constituted royalty under section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India and the USA. The appellant argued that the payments were for the sale of a copyrighted article, not a transfer of copyright rights, as the end users only obtained a right to use the software. The Tribunal referenced previous rulings in the appellant's favor, including the Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Private Limited, which held that payments for software by Indian end users to non-resident suppliers do not constitute royalty. The Tribunal concluded that the income should not be treated as royalty and directed the deletion of the addition made by the AO.3. Applicability of Retrospective Amendments:The AO had applied the retrospective amendment to section 9(1)(vi) through Explanation 4 of the Finance Act 2012, asserting that it also affected the definition of 'Royalty' under Article 12 of the DTAA. The Tribunal disagreed, referencing prior Tribunal decisions that did not consider such payments as royalty. The Tribunal emphasized that the retrospective amendment should not alter the interpretation of the DTAA, which is a bilateral agreement.4. Levy of Interest under Sections 234A and 234B:The appellant challenged the imposition of interest under sections 234A and 234B of the Income Tax Act. Given the Tribunal's decision to treat the income from the sale of shrink-wrapped software as non-taxable in India, the basis for levying interest under these sections was effectively nullified. Consequently, the Tribunal's order implied that the interest levied under these sections should be reconsidered in light of the primary decision on the taxability of the software income.Conclusion:The Tribunal allowed the appeal, ruling that the income from the sale of shrink-wrapped software was not taxable as royalty in India. The Tribunal directed the deletion of the addition made by the AO and implicitly addressed the issue of interest levied under sections 234A and 234B, aligning with its primary decision on the non-taxability of the software income. The order was pronounced in the open court on November 27, 2022.