TaxTMI 
TaxTMI 
2024 (4) TMI 310
X X X X Extracts X X X X
X X X X Extracts X X X X
....gainst the returned income of INR 9,18,94,072 declared by the Appellant; 2. On the facts and circumstances of the case and in law, the Respondent/DRP grossly erred in taxing 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 (DAA'). 3. On the facts and circumstances of the case and in law, the Respondent/DRP grossly erred in not appreciating that the receipt from software sublicensing is in the nature of business income and cannot be taxed in the absence of Permanent Establishment of the Appellant in India. 4. On the facts and circumstances of the case and in law, the Respondent/ DRP grossly erred in not appreciating the true nature of the commercial tools/ software supplied for the purpose of business and erred in drawing an analogy from the income statement of Indian Associated Enterprise of the Appellant. 5. On the facts and circumstances of the case and in law, the Respondent/ DRP ought to have appreciated the business model adopted by the Appellant and erred in applying "other income' provision which is nothing but a resid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,604/- from rendering certain technical services to its affiliates in India. Also, the Assessee in the course of its business had sub-licensed certain standard software tools to its affiliates in India for their internal use. During the assessment proceedings before the Assessing Officer the assessee submitted that it does not have a business connection in India u/s 9(1)(i) of the Income-tax Act, 1961 and the software sold by it does not fall under the ambit of 9(1)(vi) of the Income-tax Act, 1961 and is covered by the decision of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd vs CIT [2021] 125 taxmann.com 42 (SC). 8. The Assessing Officer did not agree with the contention of the assessee that the software sold by it does not fall under the ambit of 9(1)(vi) of the Income-tax Act, 1961 and held that payment for the use of the software was taxable u/s. 56 of the Act, r.w. Article 23 (3) of the India-USA DTAA. 9. Aggrieved the assessee sought directions of the ld. DRP. 10. The issue before us pertains to taxability of the "software" supplied to Indian affiliates. The Assessing Officer treated the amount as taxable u/s 56(1) of the Income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ware to Wipro-GE is business income u/s 9(1)(i) of the Income-tax Act, 1961, which in the absence of PE, is not taxable. 3.7 The AO further noted that Article 7 of the Indian DTAAs deals with taxation of international business profits. As per which the source country may tax the business profits of a non-resident in India if the non-resident operates in India through a Permanent Establishment (PE). The PE threshold rule is based on physical presence of the non-resident. However, as the digitalized businesses do not require a physical presence m a source country and may operate remotely, the PE threshold rules are inadequale to establish taxable presence of such businesses in a source country. Relying on the OECD BEPS Action plan 1, which was undertaken to consider the tax challenges raised by digitization of businesses, and the lack of international consensus on framing new tax rules for digital economy, he held that under Tax Treaty framework, taxing right is allocated to the contracting states on the basis of categorization/characterization of income: Active or passive income. Generally, with regard to passive income such as dividend, interest, Royalty and FTS or capital....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on thus: (a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India: (b) such relation, shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India. (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the netivity in India, would furnish a strong indication of 'business connection' in India. He accordingly held that there was unanimous view that regularity, continuity, frequency, volume are the basic attributes of a business activities, these attributes signify substantial involvement of a taxpayer. In the instant case, the transaction between the assessee and its Indian AE does not satisfy these criteria. Thus, he urgued that the present case was that of "business ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....12. Further we have also gone through the comments of another member Shri Manvendra Goyal, which are reproduced below: Comments of Member-3 of DRP-I Assessee had supplied software to IB Indian affiliates for which it had received 10,75,55,532/-, which the AO had added to the assessee income as income from other source. The assessee has relied upon the following legal agreements:- Case-laws relied upon by the Assessee A. Software license fees is business income and not other income * JCIT (OSD) vs. Merrill Lynch Capital Market Espana SA SV (112 taxmann.com 119) (Mumbai /TAT) * Bangkok Glass Industry Co. Ltd. VS. ACIT (34 taxmann.com 77) (Madras HC) * CSC Technology Singapore Pte. Ltd. v. ADIT (19 taxmann.com 123) (Delhi ITAT) * Husco International Inc. VS. ACIT (IT), (133 taxmann.com 196) (Pune /TAT) * Channel Guide India Ltd. vs. AC/T (25 taxmann.com 25) (Mumbai ITAT) * McKinsey & Company (Thailand) Co. Ltd. Vs. DDIT (36 taxmann.com 375) (Mumbai ITAT) B. Software license fees is not royalty * DIT vs. Infrasoft Ltd. (2014) 264 CIR 329 * Engineering Analysis Centre of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction that is used to create and manage multiple variable compensation plans. These plans can encompass everything from onetime ad hoc awards to stock options, bonus plans, non-cash incentives, and holiday gifts or bonuses. Assessee draws attention to the leading case of Engineering Analysis, the conclusions of which have been surmised by the assessee as follows:- The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (p) Ltd v. Commissioner of Income Tax (2021) (supra). The Supreme Court in the case of Engineering Analysis (supra) drew the following conclusions: 1. Where the Indian importers do not acquire any copyright and/ or the right to sub-license, transfer, reproduce, etc., the software and instead acquired nonexclusive, non-transferable license to use the software, the transaction is essentially sale of a physical object which contains an embedded computer software, and is therefore, a sale of goods. 2. Right to reproduce a computer programme and exploit the reproduction by sale, transfer, licence, etc., is at the heart of an exclusive right copyright. A non-exclusive, non-transferable licence, me....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pelines are industrial, commercial or scientific equipment and that payments made for their use constitute equipment royalties. 21. India does not agree with the interpretation in paragraph 9.2 of the Commentary on Article 12. It considers that a roaming call constitutes the use of a process. Accordingly, the payment made for the use of that process constitutes a royalty for the purposes of Article 12. It is also the position of India that a payment for a reaming call constitutes a royalty since it is a payment for the use of industrial, commercial or scientific equipment. 22. India does not agree with the interpretation in paragraph 0.3 of the Commentary on Article 12, It considers that a payment for spectrum license constitutes a royalty taxable both under India's domestic law and its treaties with many countries." (Positions on Article 12, OECD Commentary 2014) 155. In DIT V. New skies Satellite BV [20161 68 taxmann.com 8/28 Taxman 577/382 ITR 114 3A, 'New Skies Satellite"), a Division Bench of the High Court of Delhi correctly observed that mere positions taken with respect to the OECD Commentary do not alter the DAA's provisions,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment" (Article 12.3) 157. Similarly, though the India-Singapore DTAA came into force on 8-8:194, it has been amended several times, including on 01-92201,9 and 233-2017, 9 However, the definition of "royalties" has been retained without any changes,. Likewise, the Convention between the Government of the Republic of India and the Government of Mauritius for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment, ["India-Mauritius DTAA" was entered into on 6-12-1983, and was amended subsequently on 10-8-2016, 52 without making any change to the definition of "royalties" 158. It is thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention, incorporated in the DTAAs in the cases before us, will continue to have persuasive value as to the interpretation of the term "royalties" contained therein. 159. Viewed from another angle, persons who pay TDS and/or assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (3) In a situation where India is a signatory nation to an international treaty, and a statute is made in furtherance of such treaty, a purposive rather than a narrow literal construction of such statute is preferred. The interpretation of such a statute should be construed on broad principles of general acceptance rather than earlier domestic precedents, being intended to carry out treaty obligations, and not to be inconsistent with them. 4) In a situation in which India is a signatory nation to an international treaty, and a statute is made to enforce a treaty obligation, and if there be any difference between the language of such statute and a corresponding provision of the treaty, the statutory language should be construed in the same sense as that of the treaty. This is for the reason that in such cases what is sought to be achieved by the international treaty is a uniform international code of law which is to be applied by the courts of all the signatory nations in a manner that leads to the same result in all the signatory nations." 167. The Revenue, therefore, when referring to "royalties" under the DAA, makes a distinction between such royalties, no dou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Income Tax (2021), would be applicable to the appellant and hence the amount paid for the user of software purchased under the license would not be taxable a per the judgement given above. Attention of AO and the concerned CIT (Int. Tax.) is invited to section 150(1) of the I.T. Act 1961, as per which, the AO would be able to reassess the income of and to give effect to any direction of any court. Hence, In case the judicial views were to change in favour of revenue regarding the matters dealt with, the same may be given effect to by an appropriate action to protect the interests of the revenue. In given facts the treatment of these as income from other sources does not seem proper. As there has been no findings of P/E there cannot be taxed as income of P/E. Following the ruling given Hon'ble Supreme Court in the case of Engineering Analysis & keeping in mind of article 141 of the Constitution of India, in my humble view it would appear that a) That income required from provision of software services cannot be in absence of facts) income from other sources has to be taxed as business Income. b) Following Supreme Court Judgement, the same wou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing errors & risk 3 X-Arthur Designer X-Author lets you use Microsoft Excel natively as a user interface (UI) for tasks that need Excel rather than a browser UI 4 Apptus Promotion Management With the Promotions Management application, you can now manage, execute, and analyze promotions using the CPQ product line. With the Promotions Management application, marketing managers can create new promotions, get interal approvals for such promotions, and roll these promotions to their sales channels. 5 SFDC Einstein Analytics Empower customer-facing teams with intelligent analytics and predictions in Salestorce workflows 6 SFDc ELTON Used for information technology inventory, tool tracking, spare parts, evaluation, demonstration equipment and assets. 7 SFDC Chatter Plus The Chatter Plus license is for users who don't have Salesforce licenses but must have access to Chatter and some additional Salesforce objects. Chatter Plus users can be Chatter moderators and have access to standard Chatter people, profiles, groups, and files pages. 8 Oracle Variable Compensation Variable Compensation is a software related to human resource functi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taxability under these articles is subject to fulfilment of conditions enumerated therein. If the particular item of income falling under these articles is not taxable due to non-fulfilment of the conditions mentioned therein, it cannot automatically be re-characterized as other income under Article 23 of the tax treaty. In other words, the residuary provisions of Article 23 will not apply to items of income, which can be classified under other provisions of the tax treaty, but their taxability is subject to fulfilment of conditions mentioned therein. 20. In the facts of the present appeal, to our understanding, the receipts in dispute could have been characterized either as royalty income falling under Article 12 or business income under Article 7 of the tax treaty. However, in view of the ratio laid down in judicial precedents, the income is not taxable as royalty. Alternatively, it could have been taxed as business income under Article 7 of the tax treaty. However, in absence of a PE, it cannot be taxed in India. Thus, in our view, the income in dispute, since can be classified under other Articles of the tax treaty, they cannot be brought under the residuary provision ....