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2019 (4) TMI 1851 - AT - Income TaxRoyalty - consideration received on sale of software - Non-resident entity which is a company incorporated under the laws of USA - assessee in India was engaged in sale of software license relating to information securities and storage technology as well as provision of support and maintenance services with respect to the said software - HELD THAT - The assessee is non-resident entity and is recipient of consideration on sale of software products. The assessee claims that the said income is not taxable in its hands. On the other hand the case of Revenue authorities is that receipts from sale of software license are to be taxed as royalty both under the Income Tax Act and as per DTAA with USA. The assessee claims to have sold standard software to its customers wherein end users were not allowed to modify copy sub-license rent lease or transfer any portion of said software. The said article sold by the assessee was a copyrighted article and the assessee claimed that it had not transferred copyright of the literary artistic or scientific work to the end user. The Hon ble High Court of Delhi in the case of Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT had held that sale of standard software is not covered under the realm of royalty as defined under the Income Tax Act or as per DTAA. Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. DDIT 2019 (3) TMI 458 - ITAT PUNE while deciding the issue of tax deduction at source under section 201(1) of the Act on payment made for purchase of software has elaborated on the settled legal propositions In the hands of recipient had held that where the purchase of software was copyrighted article then the same was not covered by the term royalty under section 9(1)(vi) of the Act and it was further held that the amended definition of royalty under the domestic law could not be extended to the definition of royalty under DTAA where the term originally defined had not been amended. Applying the said ratio to the facts of the present case we hold that in the hands of assessee the consideration received on sale of software is not royalty under Explanation 2 to section 9(1)(vi) of the Act and is also not covered by the definition of royalty under DTAA between India and USA. Accordingly the assessee is not exigible to tax on the said consideration received in its hands. We reverse the orders of authorities below in this regard.
Issues Involved:
1. Taxation of consideration from the sale of software licenses as 'royalty.' 2. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act. Detailed Analysis: Issue 1: Taxation of Consideration from Sale of Software Licenses as 'Royalty' The primary issue in this appeal was whether the consideration received by the assessee, a non-resident entity, from the sale of software licenses should be taxed as 'royalty' under the Income-tax Act, 1961, and Article 12 of the DTAA between India and the USA. The assessee argued that the software licenses sold were standard software products and not customized software, thus the consideration received should not be classified as 'royalty.' The assessee referenced the case of Infrasoft Ltd. (264 CTR 329) where the Delhi High Court ruled that the sale of standard software does not constitute 'royalty.' The assessee also cited the Tribunal's decision in John Deere India Pvt. Ltd. Vs. DDIT, which supported their stance that the sale of software was a sale of copyrighted articles and not a transfer of copyright. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disagreed with the assessee, classifying the receipts as 'royalty' based on precedents such as Microsoft Corporation Vs. ADIT and CIT Vs. Samsung Electronics Co. Ltd. The AO argued that the sale involved granting rights in the copyright of the software, thus qualifying as 'royalty' under section 9(1)(vi) of the Act and Article 12 of the DTAA. Upon review, the Tribunal noted that the assessee's software licenses were sold with restrictions that prohibited modification, copying, sublicensing, renting, leasing, or transferring any portion of the software. The Tribunal referenced the Delhi High Court's decision in Infrasoft Ltd., which distinguished between acquiring a copyright and a copyrighted article. The Tribunal also cited the Pune Bench's decision in John Deere India Pvt. Ltd., which concluded that the purchase of software as a copyrighted article does not fall under the definition of 'royalty.' The Tribunal concluded that the consideration received from the sale of software licenses should not be taxed as 'royalty' under section 9(1)(vi) of the Act or the DTAA. The Tribunal held that the amended definition of 'royalty' under domestic law could not extend to the DTAA definition, which had not been amended. Thus, the assessee was not liable to tax on the said consideration. Issue 2: Initiation of Penalty Proceedings under Section 271(1)(c) The second issue was the initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act. The assessee contended that the AO erred in initiating these proceedings. Since the Tribunal ruled in favor of the assessee on the primary issue of taxation of software license consideration, the basis for initiating penalty proceedings under section 271(1)(c) was nullified. Consequently, the Tribunal did not find any merit in the penalty proceedings initiated by the AO. Conclusion: The Tribunal allowed the appeal filed by the assessee, reversing the orders of the lower authorities. The consideration received from the sale of software licenses was not taxable as 'royalty' under section 9(1)(vi) of the Income-tax Act or the DTAA between India and the USA. Additionally, the initiation of penalty proceedings under section 271(1)(c) was deemed erroneous. The Tribunal's decision was pronounced on April 5, 2019.
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