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Facts
The assessee, a US-based company, entered into software distribution agreements in India. They offered royalty income and interest income to tax but did not offer income from the sale of shrink-wrapped software, considering it not royalty under the Act or DTAA.
Held
The Tribunal held that the issue was squarely covered by previous decisions of the Co-ordinate Benches and affirmed by the High Court and Supreme Court. The payments for software sales were not to be treated as royalty under the DTAA.
Key Issues
Whether the income from the sale of shrink-wrapped software is taxable as 'royalty' in India under the Income Tax Act or the India-USA Double Taxation Avoidance Agreement.
Sections Cited
143(3), 144C(13), 234B, 9(1)(vi)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI ANIKESH BANERJEE, HON’BLE
Shri S.P. Chidambaram, A/R Assessee by : Revenue by : Shri Satya Pal Kumar, CIT D/R सुनवाई की तारीख/Date of Hearing : 03/09/2025 घोषणा की तारीख /Date of Pronouncement : 09/09/2025 आदेश/O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order dated 22/01/2025 u/s 143(3) r.w.s. 144C(13) of the Act, pertaining to AY 2022- 23.
The grievance of the assessee can be summarized as under:- “1. To quash the final assessment order passed by the AO under section 143(3) read with section 144C(13) of the Act. 2. To hold the income of the Appellant amounting to INR 1,51,83,65,306 not chargeable to tax in India as per the provisions of the Double Taxation Avoidance Agreement between India and USA or under the Act. 3. To delete the levy of interest under section 234B of the Act. 4. To pass such other orders as your Honours may deem fit considering the facts and circumstances of the case in accordance with the provisions of the Act.” 2 3. Briefly stated the facts of the case are that the assessee is a company registered in the USA and is a resident of USA for the purpose of taxation. The company is engaged in the business of developing and marketing of 3Dmechanical design solutions. The assessee had entered into software distribution agreements with resellers India who buy software from the assessee and in tum sell to customers in India. During the year under consideration, the assessee has offered to tax the Royalty Income of Rs. 29,70,239/- @10% as per Act and Interest on Income tax refund of Rs.66,69,707/-@15% as per DTAA. However, the assessee has not offered an amount of Rs. 1,51,83,65,306/- received on account of Sale of shrink- wrapped software which has not been offered for taxation for the following reasons: The assessee does not impart any right in the software to the resellers in India. The reseller/ end user has no right to reproduce or replicate the software. The receipts are not in the nature of royalty since the sale of the shrink wrap software is for the purpose of resale in India. The receipt cannot be termed as royalty as per the DTAA between India and USA. In the absence of any amendments to the DTAA, the payments cannot be held to be royalty even after the retrospective amendments to section 9(1)(vi) of the Act. 4. During the course of scrutiny assessment proceedings vide notice dated 12/01/2024, the assessee was asked to showcause as to why addition should not be made in line with the assessment order of earlier years.
I.T.A. No. 1879/Mum/2025 3 4.1. From the above it is clear that the assessment proceedings are based upon the findings given in earlier years assessment orders. At the very outset, the ld. Counsel stated that in the earlier assessment years, the impugned issue has been decided by the Co-ordinate Benches in favour of the assessee and against the revenue, right from AY 2005-06 to AY 2021-22. The ld. Counsel also pointed out that the order of the Co- ordinate Bench in AY 2011-12 has been affirmed by the Hon’ble High Court of Bombay in Income Tax Appeals No. 302 of 2018. The ld. D/R could not bring any distinguishing decision in favour of the revenue.
After giving a thoughtful consideration to the orders of the authorities below, we have carefully perused the orders of the Co- ordinate Benches. It would suffice to refer to one of the decisions of the Co-ordinate Bench in AY 2021-22, were similar quarrel was considered and decided by the Co-ordinate Bench as under:- “7. We have given a thoughtful consideration to the orders of the authorities below. We find force in the contentions of the ld. Counsel for the assessee. The impugned issues are squarely covered in favour of the assessee and against the revenue by the judgment of the Hon’ble High Court of Bombay in assessee’s own case in ITA No. 302 of 2018; judgment dt. 28/06/2023, wherein it was held as under:-
“1. Ms. Nagraj in all fairness, as an officer of the Court, submits that the issue in this appeal is squarely covered by the judgment of the Apex Court in Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax and another. At the same time, Ms. Nagraj submits that there is a review petition pending in the Supreme Court and therefore, the Court may dispose the appeal with liberty to appellant to approach this Court to either revive the appeal or file a fresh appeal in case the review petition is allowed in favour of Revenue.
2. Appeal disposed with liberty as prayed for.”
This quarrel has attained finality by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Limited v. CIT [2021] 432 ITR 471 (SC). The most relevant findings of the Hon’ble Supreme Court reads as under:- 156. It is significant to note that after India took such positions qua the OECD Commentary, no bilateral amendment was made by India and the other Contracting States to change the definition of royalties contained in any of the DTAAs that we are concerned with in these appeals, in accordance with its position. As a matter of fact, DTAAs that were amended subsequently, such as the Convention between the Republic of India and the Kingdom of 4 Morocco for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes On Income, 17 "India-Morocco DTAA"], which was amended on 22-10-2019,48 incorporated a definition of royalties, not very different from the definition contained in the OECD Model Tax Convention, as follows: "The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or recordings on any means of reproduction for use for radio or television broadcasting, any patent, trade mark, design or model, plan, computer software programme, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment" (Article 12.3)
Similarly, though the India-Singapore DTAA came into force on 8-8-1994, it has been amended several times, including on 01-9-2011 and 23-3-2017. However, the definition of "royalties" has been retained without any changes. Likewise, the Convention between the Government of the Republic of India and the Government of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment,* ["India-Mauritius DTAA"] was entered into on 6-12-1983, and was amended subsequently on 10-8-2016 without making any change to the definition of "royalties".
It is thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention, incorporated in the DTAAs in the cases before us, will continue to have persuasive value as to the interpretation of the term "royalties" contained therein.
Viewed from another angle, persons who pay TDS and/or assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the treaty provisions that govern them. Such persons and/or assessees can thus place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions. From this point of view also, the OECD Commentary is significant, as the Contracting States to which the persons deducting tax/assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for parting with copyright, or income derived from licence agreements which is then taxed as business profits depending on the existence of a PE in the Contracting State.
The learned Additional Solicitor General, however, relied upon the HPC Report 2003 and the E-Commerce Report 2016. The HPC Rol 2003, noting the various characterisation issues in relation to e-commerce payments, recommended as follows: "...The Committee also recommends that a clear position on each category of transactions should be taken by the Central Board of Direct Taxes ('CBDT"). This will ensure uniformity of approach among all the assessing officers. Since new categories of transactions are likely to emerge at a fast pace with advances in technology, it is also recommended that the CBDT should closely monitor the developments and issue guidelines to the assessing officers on new emerging categories of transactions as a continuing process. The monitoring should be troupe an expert advisory body on which the tax administration, the professions and the concerned industry is represented."
The E-Commerce Report 2016 proposed an equalization levy to be chargeable on specified digital services (see paragraph 11.2) and noted that its recommendation to impose a withholding tax on digital transactions would require an express inclusion in tax treaties in order to be feasible, as follows: 5 "108. After taking cognizance of these observations, the Committee considers that the option of "withholding tax" offers a practical way of allocating partial taxing rights in respect of income from digital economy, which shares attributes that may be similar to royalty or fee for technical services, and which can be complied in respect of B2B transactions by the process of withholding. However, such a tax on income would be feasible only if it is included in the tax treaties, which take precedence over Indian domestic laws, unless it is designed as a tax on the gross payment." (emphasis supplied)
These reports also do not carry the matter much further as they are recommendatory reports expressing the views of the committee members, which the Government of India may accept or reject. When it comes to DTAA provisions, even if the position put forth in the aforementioned reports were to be accepted, a DTAA would have to be bilaterally amended before any such recommendation can become law in force for the purposes of the Income-tax Act.
The learned Additional Solicitor General also sought to rely on a decision of the Audiencia Nacional (Spanish National Court) in Case No. 207019/1990 dated 28-2-1995 and a decision of the Tribunal Supremo (Spanish Supreme Court) in Case No. 8066/1994 dated 2-10-1999. Quite apart from the fact that he only presented certain extracts and not the entire judgment rendered in these cases, these authorities have no relevance to the appeals before us, having been decided on the basis of the taxation law of Spain.
The learned Additional Solicitor General then referred to the judgment of this Court in Commissioner of Customs v. G.M. Exports [2015] 62 taxmann.com 184 (SC), and in particular on the four propositions that were culled out in the context of the levy of an anti-dumping duty in consonance with the General Agreement on Tariffs and Trade (GATT), 1994, as follows:
23. A conspectus of the aforesaid authorities would lead to the following conclusions: (1) Article 51(c) of the Constitution of India is a directive principle of State policy which states that the State shall endeavour to foster respect for international law and treaty obligations. As a result, rules of international law which are not contrary to domestic law are followed by the courts in this country. This is a situation in which there is an international treaty to which India is not a signatory or general rules of international law are made applicable. It is in this situation that if there happens to be a conflict between domestic law and international law, domestic law will prevail. (2) In a situation where India is a signatory nation to an international treaty, and a statute is passed pursuant to the said treaty, it is a legitimate aid to the construction of the provisions of such statute that are vague or ambiguous to have recourse to the terms of the treaty to resolve such ambiguity in favour of a meaning that is consistent with the provisions of the treaty. (3) In a situation where India is a signatory nation to an international treaty, and a statute is made in furtherance of such treaty, a purposive rather than a narrow literal construction of such statute is preferred. The interpretation of such a statute should be construed on broad principles of general acceptance rather than earlier domestic precedents, being intended to carry out treaty obligations, and not to be inconsistent with them. (4) In a situation in which India is a signatory nation to an international treaty, and a statute is made to enforce a treaty obligation, and if there be any difference between the language of such statute and a corresponding provision of the treaty, the statutory language should be construed in the same sense as that of the treaty. This is for the reason that in such cases what is sought to be achieved by the international treaty is a uniform international code of law which is to be applied by the courts of all the signatory nations in a manner that leads to the same result in all the signatory nations.
The conclusions in the aforestated paragraph have no direct relevance to the facts at hand as the effect of section 90(2) of the Income-tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income-tax Act to the contrary, unless more beneficial to the assessee. 6 For all these reasons therefore, these submissions of the learned Additional Solicitor General are rejected.” 9. Respectfully following the decision of the Hon’ble High Court and the Hon’ble Supreme Court (supra), we direct the AO to delete the impugned addition.”