2009 (10) TMI 906 - AT - Income Tax

Sale of software - Whether the vendor retain ownership or grants user rights only to licensee the amount received for permitting Reliance to utilize the computer software is taxable as royalty within the meaning of Article 12 (3) of DTAA - non-resident company - HELD THAT - Learned counsel however placed reliance upon the decision of ITAT Delhi Bench in the case of Infrasoft Ltd. v. Asstt. 2008 (12) TMI 245 - ITAT DELHI-F to submit that the decision of the Apex Court has limited application and the principle therein cannot be applied to the peculiar facts of the instant case inasmuch as the amount received by the assessee under the license agreement was in lieu of allowing the use of software and thus it cannot be termed as a royalty either under the Income Tax Act or under DTAA. In the light of the decisions cited by the learned counsel appearing on behalf of the assessee and in the absence of any contrary view taken on this issue we do not find any infirmity in the Order passed by the learned CIT (A) and accordingly reject ground No. 1 of the Revenue. Upon hearing ld DR as well as the learned counsel appearing on behalf of the assesses we are of the opinion that in the interests of substantial justice the matter deserves to be restored to the file of the Assessing Officer who is directed to verify as to whether there were two separate payments or one payment and if it is found that there is only one payment the plea of the assessee deserves to be accepted. However since the issue is not examined in proper perspective the Assessing Officer is directed to reconsider the matter in accordance with law. Thus we are of the view that the Order passed by the learned CIT(A) does not call for interference and accordingly reject ground No.3 of the Revenue. In the result appeal filed by the Revenue is treated as partly allowed for statistical purposes.

Summary

Issues:
1. Taxability of payments for software supply as royalty under DTAA.
2. Double addition of the same amount by the Assessing Officer.
3. Deletion of interest levied under section 234B of the Act.

Analysis:
1. The appeal concerned the taxability of payments made by a non-resident company for supplying software to another company under the DTAA for the assessment year 2003-04. The Revenue contended that the payments made by the recipient company amounted to royalty. However, the CIT (A) held that the payments were for the purchase of copyrighted articles and not royalty, citing a previous ITAT decision. The ITAT, Mumbai, after considering arguments from both sides, upheld the CIT (A)'s decision, stating that the amount received was for allowing the use of software and did not qualify as royalty under the DTAA or Income Tax Act.

2. The second issue revolved around the Assessing Officer adding the same amount twice to the non-resident company's income. The ITAT observed that the matter required further examination to determine if there were indeed two separate payments or just one, as claimed by the assessee. The case was remanded back to the Assessing Officer for proper verification and reconsideration in accordance with the law.

3. The final issue involved the deletion of interest levied under section 234B of the Act by the CIT (A), which was based on a decision of the ITAT, Mumbai. The Revenue contested this deletion, but the ITAT found no contrary view presented by the Departmental Representative. Consequently, the ITAT upheld the CIT (A)'s decision to delete the interest levied under section 234B, as there was no basis for interference. The appeal filed by the Revenue was treated as partly allowed for statistical purposes.