The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the Amount received from the sale of software products is not royalty as per Article 12(3) of India -USA DTAA and is not taxable in India.
Digite Inc. USA, the assessee is a foreign company stated to be engaged in the business of development and sales of Project Management Software (‘PMS’) Licenses to various customers all over the world. Assessee electronically filed its return of income declaring total income at Rs. Nil.
The AO noticed that the perusal of AIR as per the ITD system revealed that an amount of Rs.1,49,48,277/- was received by the assessee which the assessee had claimed to be non-taxable. The assessee was asked to show cause as to why the aforesaid receipts which were from license fees by granting the provision of copyrighted software licenses be not taxed as Royalty under the provisions of the Income Tax Act, 1961 and India – USA Double Taxation Avoidance Agreement.
It was noted that in the past assessment years also the assessee had claimed similar receipts to be non-taxable but the same was disallowed by AO. The AO in the draft assessment order passed u/s 144C(1)/143(3) order dated 07.12.2016 held the amount of Rs.1,49,48,277/- to be taxable as Royalty under the Income Tax Act as well as under India – USA DTAA. He accordingly held it to be taxable at 15%, being the rate of tax for royalties as per the DTAAA. The DRP in the order passed u/s 144C(5) of the Act upheld the draft assessment order.
It was submitted that it is not the case of the Assessing Officer that the software sold by the assessee involves any kind of ‘process’. The Assessing Officer has by and largely discussed the various judgments and the stress upon the fact that the consideration is vis-a-vis for the use of; or the right to use as given in Article 12(3) and Indo-US DTAA and Explanation 4 to Section 9(1)(vi).
It was observed that the assessee is into the sale of project management software licenses to various customers and is providing copyright products on a sale basis. No source code or any authority is extended to the customers for making any changes, or duplication of the standard software products and it merely gives user license and no substantial right to reproduce or copyright software is given to the customers.
A Coram comprising of Sh. Anil Chaturvedi, Accountant Member and Sh. Narender Kumar Choudhary, Judicial Member observed that the payment received by the assessee from its customer is held to be from the sale of software products/licenses which does not fall like ‘royalty’ as per Article 12(3), and the same is not taxable in India.
Further observed that since the assessee does not have any PE in India the sale on account of copyrighted projects is not taxable as business income in India. The ITAT held that the amount received by the assessee from the sale of software products/licenses be not royalty as per Article 12(3) and as per Section 9(1)(vi) of the Act. The appeal of the assessee is allowed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
