2015 (10) TMI 2853 - AT - Income Tax

Accrual of income in India - treating receipt from sale of software product as royalty and subjecting it to tax - PE in India or not? - assessee an American Company is engaged in the business of providing information solution - as argued such income has not been offered to tax on the reasoning that as the assessee is not having a P.E. in India such income being in the nature of business income is not taxable under the provisions of India USA DTAA HELD THAT - On a perusal of the material on record it is seen that identical dispute came up for consideration before the co-ordinate bench of the Tribunal in assessee s own case for the assessment year 2007-08 2011 (11) TMI 887 - ITAT MUMBAI wherein after considering the terms of both the agreements as well as other relevant facts came to conclude that the receipts from sale of computer software products is not royalty but business income. in the assessment year 2007-08 also the Departmental Authorities treated the receipt from sale of software product as royalty solely relying upon the nomenclature of the product given in the invoice as intellectual value which is also the case in the impugned assessment year. Tribunal taking into consideration such fact has given a categorical finding that the amount received by the assessee towards sale of software products cannot be treated as royalty and thereby accepted assessee s claim of business income. As there is no material difference in the facts considered by the Tribunal in assessment year 2007 08 and the impugned assessment year we accept assessee s claim that the amount received from sale of software product cannot be considered as royalty but is the business income of the assessee hence as per the provisions of India USA treaty it is not taxable in absence of a P.E - Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of re-assessment proceedings under Section 147 of the Income Tax Act.
2. Treatment of receipts from the sale of software products as royalty and subjecting it to tax.
3. Levy of interest under Section 234A and 234B of the Income Tax Act.
4. Issue of short credit of TDS.

Issue-wise Detailed Analysis:

1. Validity of re-assessment proceedings under Section 147 of the Income Tax Act:
The assessee raised a ground challenging the validity of re-assessment proceedings under Section 147 of the Act. However, the learned Counsel for the assessee submitted that he does not want to press this ground. Consequently, this ground was dismissed as "not pressed."

2. Treatment of receipts from the sale of software products as royalty and subjecting it to tax:
The primary issue in dispute was whether the receipts from the sale of software products amounting to Rs. 62,93,417 should be treated as royalty and subjected to tax. The assessee, an American company, engaged in providing information solutions, argued that the receipts from the sale of software directly imported and sold to customers in India should not be taxable in India as it does not have a Permanent Establishment (P.E.) in India, in accordance with the India-USA Double Taxation Agreement (DTAA).

The Assessing Officer disagreed, treating the receipts as royalty under Article 12(3)(a) of the India-USA DTAA, based on the invoices indicating "intellectual value" and the intellectual property rights remaining with the assessee. The Dispute Resolution Panel (DRP) upheld this decision. However, the Tribunal, referencing its own decision in the assessee's case for the assessment year 2007-08, concluded that the receipts from the sale of software products were business income and not royalty, and thus not taxable in India due to the absence of a P.E. in India. The Tribunal emphasized the distinction between the transfer of a copyrighted product and the transfer of copyright, ruling that the former constitutes business income.

3. Levy of interest under Section 234A and 234B of the Income Tax Act:
The assessee challenged the levy of interest under Sections 234A and 234B. Both parties agreed that the levy of interest is consequential in nature. Consequently, the Tribunal directed the Assessing Officer to give consequential effect in view of the findings and in accordance with the law.

4. Issue of short credit of TDS:
The assessee raised the issue of short credit of TDS. The Tribunal, after considering the submissions of the parties, remitted this issue to the file of the Assessing Officer for verification and to give effect to the TDS.

Conclusion:
The appeals of the assessee were partly allowed. The Tribunal ruled that the receipts from the sale of software products should be treated as business income and not royalty, thus not taxable in India in the absence of a P.E. The issues of levy of interest under Sections 234A and 234B were deemed consequential, and the issue of short credit of TDS was remitted for verification.