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2023 (8) TMI 875 - AT - Income TaxTaxability of income - Characterization of receipts - taxability of receipts towards software sub-licence fee - income from other sources u/s 56 of the Act and Article 23(3) of India – USA Double Taxation Avoidance Agreement (DTAA) OR business income - HELD THAT:- The facts of the present appeal, admittedly, the item of income sought to be taxed is the receipts from sublicensing of software licences. Therefore, ordinarily, the income can be characterized as royalty under section 9(1)(vi) of the Act and Article 12 of the DTAA. In case, it is not taxable as royalty income, it can be treated as business income under Article 7 of the tax treaty. Thus, to our understanding, the residuary provision under Article 23 can come into play when an item of income is not expressly dealt with in other articles preceding article 23 of the tax treaty. Characterization of an item of income under a particular Article is different from taxability of that income under the said Article. A particular item of income can fall either under Article 7 or Article 12. However, their taxability under these articles is subject to fulfillment of conditions enumerated therein. 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 fulfillment of conditions mentioned therein. 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 contained under Article 23 of the tax treaty. The income cannot be treated as other income under Article 23(3) of the tax treaty. The only provision under which it could have been taxed is as business income under Article 7. Thus in absence of a PE in India, it cannot be taxed under that provision as well. Therefore, we direct the Assessing Officer to delete the addition. Decided in favour of assessee.
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