2025 (12) TMI 1279 - AT - Income Tax

Payments under OEM software licence/BREW operator deals by non-residents held business income, not 'royalty' u/s9(1)(vi)/Article 12

Receipts from non-resident OEM subscribers and infrastructure equipment under software licence/BREW operator arrangements were examined for ... Taxability of royalty income received on subscriber unit from Original Equipment Manufacturers (OEMs) located outside India and royalty income on infrastructure equipment - assessee had offered an amount as royalty income taxable @10% u/s 115A on gross basis as per India-USA Double Taxation Agreement (DTAA) HELD THAT:- As decided in own case by Tribunal for AY 2021-22 [2024 (11) TMI 1561 - ITAT DELHI] amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. We are not in agreement with the decision Samsung Electronics Co. Ltd. [2011 (10) TMI 195 - KARNATAKA HIGH COURT] that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY [2012 (9) TMI 409 - DELHI HIGH COURT] as not amounting to acquiring a copyright in the software. Thus, what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income Royalty from BREW operator agreement and 15% thereof is not chargeable to tax in the hands of the assessee u/s 9(1)(vi) of the Act as well as Article 12 of the Indo-USA Tax Treaty. TDS refund - AR submitted that the rectification application has been duly filed by the assessee before the ld AO which has not been disposed of up to the date of hearing of this case before this Tribunal. Hence, we direct the ld AO to dispose of the said rectification application and give credit for TDS as per law. Chargeability of interest u/s 234B is consequential in nature. Interest u/s 234C of the Act, the law is very well settled that the same shall be charged only on the returned income and not on the assessed income. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether royalty received by a non-resident from non-resident licensees/OEMs for patents used in manufacturing subscriber units and infrastructure equipment outside India is chargeable to tax in India under section 9(1)(vi)(c). (ii) Whether, once the royalty is held not taxable under the Act, treaty-based taxation under Article 12(7)(b) requires adjudication for the impugned royalty receipts. (iii) Whether the assessee is entitled to direction for granting credit/refund of taxes withheld where such credit was not allowed, in light of a pending rectification application. (iv) Whether interest under sections 234B and 234C is chargeable, and if so, on what basis. (v) Whether initiation/survival of penalty proceedings under section 270A can stand after deletion of the substantive additions. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Taxability of royalty from non-resident OEMs under section 9(1)(vi)(c) Legal framework: The Court addressed section 9(1)(vi)(c) as the operative domestic-law provision invoked for taxing royalty paid by non-residents, requiring the Revenue to establish that the royalty is payable in respect of rights/property/information used for a business carried on in India or for earning income from a source in India. Interpretation and reasoning: The Court noted that the lower authorities proceeded by relying on earlier-year material and findings, while the issue stood covered by repeated Tribunal decisions in the assessee's own case holding that where patents are exploited in manufacturing outside India, the source activity is manufacturing outside India and the royalty is not taxable in India. The Court also noted that enquiries/letters relied upon by the Revenue in earlier years had been dealt with in prior Tribunal decisions, including the finding that evidence referred to GSM-related business and not the relevant CDMA patent technology, and that for the impugned year no fresh enquiries were undertaken. The Court accepted that the present additions were not supported by independent material demonstrating that non-resident OEMs carried on business in India using the licensed patents, or that they used the patents to earn income from a source in India, as required for section 9(1)(vi)(c). Conclusion: Royalty received from non-resident OEMs/licensees for patents used in manufacturing outside India was held not chargeable to tax in India under section 9(1)(vi)(c); the additions on this account were directed to be deleted for both years (the second year following mutatis mutandis). Issue (ii): Treaty taxation under Article 12(7)(b) after failure of domestic-law charge Legal framework: The Court considered the Revenue's submission that a new 'angle' was taken by applying Article 12(7)(b), though earlier Tribunal decisions had not adjudicated treaty provisions where domestic taxability itself failed. Interpretation and reasoning: The Court followed the approach reflected in the earlier orders relied upon: once the royalty is held not taxable under the Act, examination under the treaty becomes academic for the impugned receipts. Conclusion: The Court did not adjudicate treaty taxability for these receipts and treated the treaty-based ground as academic in light of the domestic-law finding of non-taxability. Issue (iii): Credit/refund of taxes withheld (TDS) and interest on refund offered to tax Legal framework: The Court addressed the assessee's request for credit/refund where a rectification application had been filed before the assessing authority but remained undisposed. Interpretation and reasoning: Since the rectification application was pending and the grievance concerned non-grant of credit as per law, the Court directed administrative disposal rather than undertaking a fresh factual verification in appeal. Conclusion: The assessing authority was directed to dispose of the rectification application and grant credit/refund of taxes withheld as per law. Issue (iv): Levy of interest under sections 234B and 234C Legal framework: The Court treated interest under section 234B as consequential to the final income determination, and expressly stated the settled position on section 234C. Interpretation and reasoning: With the substantive additions deleted, section 234B interest necessarily follows the recomputation. For section 234C, the Court held it is chargeable only on the returned income and not on the assessed income. Conclusion: Section 234B interest was held consequential; section 234C interest was restricted to computation on returned income only. Issue (v): Initiation/survival of penalty proceedings under section 270A Legal framework: The Court considered the effect of deletion of additions on penalty proceedings. Interpretation and reasoning: Since the substantive basis for the penalty (the disputed additions) was removed, the Court held the penalty proceedings could not stand. Conclusion: The Court held that, in view of deletion of the additions, the penalty proceedings under section 270A would have no legs to stand.