2019 (5) TMI 535 - AT - Income Tax

Income accrued in India - consideration received by a non-resident entity for the licensing of copyrighted article/software - royalty under Article 12(3) of the India-Ireland DTAA - existence of PE in India - effect of retrospective amendment made in the provisions of section 9(1)(vi) - HELD THAT - We note that terms of the definition of royalty provided in Article 12 ordinarily the receipt for sale of software shall be treated as royalty only if it is for the use of a copyright . Given the meaning of the term copyright as has been discussed above in the Copyright Act 1957 we note that the revenue accruing from supply of software in India is not chargeable to tax in India based on reading of the Article 12(3) of the India-Ireland DTAA. The amount received by the assessee towards sale of software is on account of sale of copyrighted article and not on transfer of any copyright right . The right to use any copyright in the software was never transferred by the company in favor of the Indian customers. Hence the said sale proceeds cannot be characterized as Royalty as per Article 12 of the India- Ireland DTAA as the same is towards the use of copyrighted article and not towards the use of copyright . The sale proceeds is also not towards the use of or right to use any industrial commercial or scientific equipment as per the provisions of the India-Ireland DTAA. Further as per the Licensing Agreement entered into between the assessee and its Indian customers it is apparent that the assessee has not given any right to the customers to use the copyright in the software. The copy of Licensing Agreement is enclosed at pages 16 to 22 of the paper-book vide para 3(b) of the agreement. Payments for any license for simple use of computer software i.e. where the end-user acquires only the right to run the programme whether on a single computer or on the licensee s computer network and does not acquire any rights to use the copyright in the programme may not be construed as royalties . Therefore we note that since assessee s case is covered by beneficial provisions of the India-Ireland DTAA hence the retrospective amendment made in the provisions of section 9(1)(vi) which provides that royalty would include consideration for transfer of all or any rights in respect of any right property (including granting of software)etc will not override the provisions of the India-Ireland DTAA. We note that the retrospective amendment made in the Act cannot override the provision of Treaty finds support from the principles laid down in the case of Director of Income vs Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT and CIT Vs Siemens Aktiongesellschaft 2008 (11) TMI 74 - BOMBAY HIGH COURT . The amount received by the assessee towards sale of software is on account of sale of copyrighted article and not on transfer of any copyright right . As we have noted above that the right to use any copyright in the software was never transferred by the company in favor of the Indian customers. Hence the said sale proceeds cannot be characterized as Royalty as per Article 12 of the India-Ireland DTAA. Therefore we delete the addition.

Summary

Issues Involved:
1. Validity of the assessment order and directions by the Dispute Resolution Panel (DRP).
2. Taxability of revenue from the sale of software as 'royalty' under the Income Tax Act, 1961.
3. Applicability of Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA) to the sale of software.
4. Distinction between 'copyrighted article' and 'copyright right' in determining the nature of software income.

Detailed Analysis:

Issue 1: Validity of the Assessment Order and Directions by DRP
The assessee challenged the assessment order passed by the Assistant Commissioner of Income Tax (International Taxation)-Circle-1(2) and the directions of the DRP, claiming they were erroneous and bad in law. The core grievance was whether the consideration received for licensing software amounted to royalty under Article 12(3) of the India-Ireland DTAA.

Issue 2: Taxability of Revenue from Sale of Software as 'Royalty'
The assessing officer classified the revenue from the sale of software as 'royalty' under section 9(1) of the Income Tax Act, 1961, and made an addition of Rs. 9,84,51,776/-. The DRP upheld this view, stating that the sale of software licenses involved the transfer of the right to use the software perpetually, akin to a royalty arrangement. The buyer's rights were deemed absolute and perpetual, with limitations on resale and modification, similar to purchasing a copyrighted book with restrictions.

Issue 3: Applicability of Article 12 of the India-Ireland DTAA
The assessee contended that the revenue from the sale of software should not be classified as 'royalty' under Article 12 of the India-Ireland DTAA. Article 12 defines 'royalties' as payments for the use of or the right to use any copyright. The assessee argued that the revenue was for a copyrighted article, not a copyright right, and thus should not be taxed as 'royalty'. The assessee referenced the Delhi High Court judgment in DIT vs. Infrasoft Ltd., which distinguished between 'copyrighted article' and 'copyright right', concluding that payments for the former do not constitute royalty.

Issue 4: Distinction Between 'Copyrighted Article' and 'Copyright Right'
The assessee emphasized the distinction between a 'copyrighted article' and a 'copyright right', arguing that the sale of software constituted the former. The software licenses granted to Indian customers did not transfer any copyright rights but merely allowed the use of the software, making the revenue non-taxable as royalty. The Delhi High Court's judgment in DIT vs. Infrasoft Ltd. supported this view, stating that the transfer of a copyrighted article does not amount to royalty.

Judgment:
The Tribunal analyzed Article 12 of the India-Ireland DTAA, which defines 'royalties' as payments for the use of or the right to use any copyright. It noted that the buyers of the software were not allowed to sell or distribute copies to third parties and only had a right to use the software, not the copyright. The Tribunal referenced the Delhi High Court's ruling in DIT vs. Infrasoft Ltd., which held that payments for copyrighted articles do not constitute royalty.

The Tribunal concluded that the sale of software licenses did not amount to royalty under Article 12 of the India-Ireland DTAA. The revenue from the sale was for a copyrighted article, not a copyright right. The Tribunal also noted that the retrospective amendment to section 9(1)(vi) of the Income Tax Act, 1961, does not override the DTAA provisions, which are more beneficial to the assessee.

The Tribunal allowed the assessee's appeal, deleting the addition of Rs. 9,84,51,776/-. The judgment emphasized the importance of adhering to the DTAA provisions and the distinction between 'copyrighted article' and 'copyright right' in determining the nature of software income.

Order Pronounced:
The appeal of the assessee was allowed, and the order was pronounced on 30.04.2019.