Sublicensing income from standardized software to Indian affiliates not taxable under section 56(1) and India-USA DTAA Article 23(3)

ITAT DELHI held that amount received by assessee from sublicensing standardized software to Indian affiliates was not taxable under section 56(1) of Income Tax Act 1961 read with Article 23(3) of India-USA DTAA. Despite AO treating the amount as taxable income accruing in India, the Tribunal followed its coordinate bench decision in assessee's own case and SC judgment in Engineering Analysis Centre of Excellence case, ruling that sublicensing income from standardized software is not liable to tax. Appeal allowed.

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Issues Involved:
1. Validity of the assessment order.
2. Taxability of software sub-license fees.
3. Nature of income from software sublicensing.
4. Commercial nature of supplied software.
5. Business model and application of "other income" provision.
6. Addition under the head business and profession.
7. Levy of interest under section 234A and 234B.
8. Levy of fees under section 234F.
9. Proposal to initiate penalty proceedings under section 270A.

Summary:

1. Validity of the Assessment Order:
The assessee challenged the validity of the assessment order dated August 22, 2023, passed under section 144C(13) read with section 143(3) of the Income Tax Act, 1961. The assessee argued that the order was "invalid, erroneous and bad in law."

2. Taxability of Software Sub-License Fees:
The Assessing Officer (AO) taxed the receipt of software sub-license fees as "income from other sources" under section 56 of the Act and Article 23(3) of the India-USA Double Tax Avoidance Agreement (DTAA). The assessee contended that the receipt from software sublicensing is in the nature of business income and cannot be taxed in the absence of a Permanent Establishment (PE) in India.

3. Nature of Income from Software Sublicensing:
The AO and the Dispute Resolution Panel (DRP) held that the payment for the use of the software was taxable under section 56 of the Act, read with Article 23(3) of the India-USA DTAA. The assessee argued that the software sold does not fall under the ambit of section 9(1)(vi) of the Act, as supported by the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd vs CIT.

4. Commercial Nature of Supplied Software:
The DRP did not appreciate the true nature of the commercial tools/software supplied for business purposes and erroneously drew an analogy from the income statement of the Indian Associated Enterprise.

5. Business Model and Application of "Other Income" Provision:
The DRP failed to appreciate the business model adopted by the assessee and incorrectly applied the "other income" provision, which is a residuary clause under both the Act and the DTAA.

6. Addition under the Head Business and Profession:
The AO made an addition of INR 1,56,61,460 under the head business and profession without providing a reason for such adjustment.

7. Levy of Interest under Section 234A and 234B:
The AO erred in levying interest under section 234A and section 234B of the Act.

8. Levy of Fees under Section 234F:
The AO also erred in levying fees of INR 10,000 under section 234F of the Act.

9. Proposal to Initiate Penalty Proceedings under Section 270A:
The AO proposed to initiate penalty proceedings under section 270A of the Act, which was contested by the assessee.

Decision:
The Tribunal, after considering the arguments and the material on record, held that the amount received on account of sublicensing of standardized software is not liable to tax. The Tribunal relied on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd vs CIT and the coordinate bench's decision in the assessee's own case. The appeal of the assessee was allowed, and the AO was directed to delete the addition.

Order Pronounced in the Open Court on 17/01/2024.

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