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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. ASTHA CHANDRA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
The above captioned four separate appeals by the assessee are preferred against the order dated 31.07.2018 framed under section 144C(13) r.w.s 143(3)/254 the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Years 2007-08 to 2010-11.
2. Since common issues are involved in all these four appeals, they were heard together and are disposed of by this common order for the sake of convenience and brevity.
For the sake of our convenience, we are considering the facts of Assessment Year 2007-08 in ITA No. 6194/DEL/2018. The grounds raised by the assessee read as under:
“1. That on the facts and in circumstances of the case and in law, the Deputy Commissioner of Income Tax, Circle - 2(2)(I), International Taxation, Delhi (‘Ld. AO’) has erred in computing the total income of the Appellant at INR 799,99,60,616 as against ‘NIL’ income reported in the return of income by the Appellant.
Taxability of revenue from sale of software
2.1 Final assessment order dated July 31, 2018 passed by Ld. AO pursuant to directions of Ld. Dispute Resolution Panel (‘Ld. DRP’) completely disregarding specific directions issued by this Hon’ble Tribunal vide its order (ITA No. 6089/Del/2012) dated September 26, 2016 to follow decision of the Hon’ble Delhi High Court in case of Infrasoft Limited (220 Taxman 273) is bad in law, unlawful and invalid.
2.2 Ld. DRP and Ld. AO failed to grant legitimate relief, by wrongly placing reliance on Gracemac vs DIT (42 SOT 550), even while noting that same has been held to be not good law by Hon’ble ITAT vide its order in dated September 26, 2016.
2.3 That on the facts and in circumstances of the case and in law, contumacious reiteration by Ld. DRP and Ld. AO that revenue of INR 799,99,60,616 earned by the Appellant from sale by Microsoft Regional Sales Corporation of Microsoft Retail Software Products to distributors belonging to India is taxable as “Royalty” contradicting conclusions reached by this Hon’ble Tribunal, is contrary to settled law.
2.4 In the facts and circumstances of the case and in law, ld. DRP and ld. AO have failed to appreciate that sale of software is a sale of ‘Copyrighted Article’ and not ‘Copyright’ and accordingly, that revenue from sale of software is in the nature of business income not taxable under Article 7 of India - USA DTAA in the absence of a Permanent Establishment of the Appellant in India.
2.5 Ld. DRP and Ld. AO not just travelled much beyond directions of this Hon’ble Tribunal but without prejudice further erred in observing that amount paid by Microsoft Operations Pte Ltd. (‘MO’) to Appellant was for earning income from a source in India.
2.6 Without prejudice to abovementioned grounds of appeal as also contention that payments received by Appellant from MO are not taxable under Income Tax Act, 1961, Ld. DRP and Ld. AO have erred, in determining income of the Appellant for subject Assessment Year at INR 799,99,60,616 being amount received by Microsoft Regional Sales Corporation outside India for sale to distributors from India and thereby, completely ignored the fact that payments received by the Appellant from licensing of manufacturing and distribution rights to MO totally outside India was INR 479,99,76,369 only.
Other Grounds
3. That on facts and in circumstances of the case and in law, the Ld. DRP and Ld. AO have erred in dismissing the arguments taken by the Appellant that interest under section 234B of the Act is not applicable since the alleged royalty income is subject to tax deduction at source.
4. That on facts and in circumstances of the case and in law, the Ld. AO has erred in applying the tax rate of 15% on the alleged royalty income instead of beneficial tax rate of 10% plus applicable surcharge and education cess prescribed under section 115 A of the Income-tax Act, 1961.
5. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1 )(c) of the Act against the Appellant.
Briefly stated, the facts of the case are that, in the first round of litigation, this Tribunal in order dated 26.09.2016, has set aside the impugned issue to the file of the Assessing Officer to decide it afresh, considering the decision of the Hon'ble Delhi High Court in the case of Infrasoft Ltd in ITA No. 1034/DEL/2009 order dated 22.11.2013.
Following the decision of the Tribunal, notice was issued to the assessee. In the year under consideration, the assessee has received Rs. 7,99,99,60,616/- from Microsoft Operations Pte Ltd and claimed that the said amount is not taxable in India. The claim of the assessee was based on the fact that the payments received by MOL from MO for grant of licence for use of software and further grant of rights by MO to MRSC for distribution of Microsoft Retail Software Products are not taxable as ‘Royalty’ under the provisions of the Act and also under India - US DTAA for the reason that the end user purchasing a MS Retail Software Product has only purchased a copyrighted article and has not acquired any copyright in such software.
Strong reliance was placed on various judgments. It was strongly contended before the Assessing Officer that it is only when a right to commercially exploit the copyright in the software has been granted that the consideration in respect of the same could be taxed as ‘Royalty’. Since no such right has been granted, therefore, the consideration in respect of sale of software could not be taxed as ‘Royalty’.
This contention of the assessee did not find any favour with the Assessing Officer. The Assessing Officer was of the opinion that the term ‘Royalty’ takes into its ambit industrial and copyright royalties.
Transfer of the ‘right in the property’ is not subject matter. It is the transfer of the ‘right’ in respect of the property which matters.
According to the Assessing Officer, the two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable use of those rights. In the second category, no purchase is involved and only right to use has been granted.
The Assessing Officer further observed that in the case of ‘Royalty’, the ownership of the property or right remains with the owner and the transferee is permitted to use the right in respect of such property. Since the computer program is a literary work within the meaning of section 2(ffc) and 2(o) of the Copyright Act, the consideration received will be in the nature of ‘Royalty’ if it is in respect of transfer of all or any rights in such work in terms of clause (v) of Explanation 2 of section 9(1)(vi) of the Act.
The Assessing Officer further observed that the payment for the software is the payment for design or model as the software includes design or model. The payment for the software is the payment for information concerning industrial, commercial and scientific experience as the software includes such information. The payment for the software is the payment for trademark as the trademark is involved in such software.
Referring to various judicial decisions and trying to distinguish the facts of the case in hand, with the facts of the case of Infrasoft Ltd [supra], the Assessing Officer came to the conclusion that the entire sum received by the assessee is taxable as ‘Royalty’ in the hands of the assessee.
11. Objections were raised before the DRP but were of no avail.
12. Before us, the ld. counsel for the assessee drew our attention to the decision of the Tribunal in & ITA Nos 945 to 947/DEL/2012 order dated 16.11.2020 and pointed out that the impugned issue has been decided by this Tribunal in the case of the assessee in favour of the assessee and against the Revenue.
We have carefully considered the orders of the authorities below and the decision of the Tribunal in the first round of litigation. We find force in the contention of the ld. counsel for the assessee. This Tribunal, in earlier Assessment Years [supra] had an occasion to consider similar grievance. The relevant findings of the co-ordinate bench read as under:
“9. Before us, the ld. counsel for the assessee, at the very outset, stated that the entire action by the Assessing Officer has been decided in favour of the assessee and against the revenue by the Tribunal in the case of Mocrosoft Corporation for AY.s 1997-98 to 1999-2000 in the case of MOL Corporation for A.Y 2011-12 and further in the case of MOL Corporation for A.Ys 2007-08 to 2010-11. Copies of the orders of the Tribunal have been supplied to us.
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For the sake of brevity, we have considered the decision of the co-ordinate bench in to 1330/DEL/2008 for A.Ys 1997-98 to 1999-2000 order dated 13.05.2019. The relevant discussions are as under:
"9. We have gone through the record in the light of the submissions made on either side. We find that the facts of this case are identical to the facts involved in the case of infra-soft Ltd (supra), more particularly on a reading of the reasoning of the Ld. AO in this case to arrive at the conclusion that the sales/licensing of the software was royalty in juxtaposition to Paragraph No. 11 of order of the Hon'ble jurisdictional High Court which are strikingly similar. Hon'ble Court after dealing with this issue extensively held that what is transferred in this matter is neither the copyright nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in the copyright, and the right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income only.
10.....
11.....
On a careful reading of the facts of Infra-soft Ltd (supra), as could be culled out from paragraphs 3 to 12 we find that the facts in both the cases are identical and the issue that was dealt with is also identical. We, therefore, do not have any hesitation in our mind to hold that in view of the decision of the Hon'ble jurisdictional High Court in the case of Infrasoft (supra), the issue involved in this matter is no longer res integra and has to be answered by stating that there is no transfer of any right in respect of copyright by the assessee and it is the case of mere transfer of copyrighted article and the payment was for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty even under the Income Tax Act, 1961 or under the DTAA. When once we reach such a conclusion, we do not find any need for further verification of any fact at the end of the Assessing Officer. Insofar as the law laid down by the Hon'ble High Court is concerned, whether or not this particular judgement was available before the Assessing Officer at the time of framing of the assessment, it makes little difference because the decision of the Hon'ble High Court binds the learned Assessing Officer in the same way as it binds this Tribunal also. We, therefore, do not find any need to remand the matter back to the file of the learned Assessing Officer.
13....
On the aspect of interest under Section 234B, Ld. AR placed reliance on the decision of the Hon'ble Delhi High Court in the case of DIT Vs GE Packaged Power Inc. (2015) 373 ITR 0065 (Delhi). In this case, the Hon'ble High Court of Delhi referred and followed its decision in the case of Director of Income Tax vs. Jacabs Civil Incorporated (2011) 330 ITR 0578 wherein it was held that Sec. 195 put an obligation on the payer i.e., any person responsible for paying any amount to a non-resident, to deduct tax at source at the rates in force from such payments, thus, entire tax is to be deducted at source which is payable on such payments made by the payer to the non-resident; that if the said payer has defaulted in deducting tax at source, the Department can take action against the payer under the provisions of Section 201 of the Act and compute the amount accordingly; that in such a case, the non-resident is liable to pay tax but there is no question of payment of advance tax; and that, therefore, assessee is not liable to pay interest under Section 234B on account of default of the payer in deducting tax at source from the payments made to the assessee. It is pertinent to note that the decision in Jacabs Civil incorporated(supra) relates to the AY2001-02.
15. Be that as it may, inasmuch as we held in the preceding paragraphs that there is no royalty income involved in this matter, and for want of Permanent Establishment, the business income of the assessee is not taxable in India, we,
therefore, in these circumstances and also while respectfully following the decision of the Hon'ble Jurisdictional High Court, hold this issue in favour of the assessee in all the assessment years."
14. Finding parity of facts, we have no hesitation in following the aforementioned decision of the co-ordinate bench [supra] and respectfully following the same, we direct the Assessing Officer to delete the impugned addition.
Other grounds being consequential in nature need no separate adjudication.
In the result, all the four appeals of the assessee in ITA Nos.
6194 to 6197/DEL/2018 are allowed.
The order is pronounced in the open court on 14.02.2022.