The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the revenue earned by a non-resident assessee on the sale of a copyrighted article is not like royalty.
The Revenue challenged the order dated 18.10.2021 passed by the Commissioner of Income Tax (Appeals)the decision of learned First Appellate Authority holding that the amount received by Software One Pte Ltd, the assessee from the sale/distribution of software is not royalty within the meaning of Article 12(3) of India – Singapore Double Taxation Avoidance Agreement (DTAA).
The assessee is a non-resident corporate entity incorporated under the laws of Singapore and a tax resident of Singapore. For the assessment year under dispute, the assessee filed its return of income on 31.03.2018 declaring a total income of Rs.1,56,50,870/-.
The assessee is engaged in the business of providing end-to-end software and cloud technology solution to its clients. In so far as FTS is concerned, the assessee voluntarily treated as income like FTS and offered to tax in India.
The assessee pleaded before the Assessing Officer that it is the sale/distribution of copyrighted articles and not the sale of copyright. Therefore, not like royalty. The Assessing Officer, issued a show cause notice to the assessee to explain why income received from the sale of software should not be treated as royalty in terms of provisions of the Act as well as India – Singapore DTAA.
The Assessing Officer concluded that the revenue earned by the assessee is from the transfer of the right to use of copyright, hence, like royalty both under the provisions of the Act as well as under the India – Singapore DTAA. Accordingly, he added the amount of Rs.12,87,22,857/- to the income of the assessee.
On appeal, the Commissioner (Appeals) ultimately accepted the assessee’s claim that the revenue earned by the assessee is like the sale of a copyrighted article and not for transferring the right to use any copyright. Thus, he held that the amount received is not like royalty but like business income and in the absence of a Permanent Establishment (PE) is not taxable in India.
It was observed that software from non-resident manufacturers/sellers, such as Microsoft, Adobe etc. and distributes/sells them to distributors and customers in India. Thus, the assessee itself is not the manufacturer or creator of the software. Therefore, the assessee cannot own copyright over the software as the manufacturer or creator of the software can hold copyright over the software.
“The amount paid by resident Indian end users/distributors to non-resident computer software manufactures/suppliers as consideration for the re-sale/use of the computer software through end user license agreement/distribution agreement is not like royalty for the use of copyright in the computer software, hence, cannot be treated as royalty,” the two-member Shri G S Pannu, President and Shri Saktijit Dey, Judicial Member observed.
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