MENTOR GRAPHICS IRELAND LTD.,NEW DELHI vs. ACIT, CIRCLE- 2(2)(1), INTERNATIONAL TAXATION, NEW DELHI

The assessee has raised following grounds of appeal:- 1. “That on facts and in law, the orders passed by the Deputy Commissioner of Income Tax, Circle 2(2)(1), International Taxation, New Delhi [hereinafter referred as the "AO"] and the Dispute Resolution Panel -2 [hereinafter referred as the "DRP"] are bad in law and void ab-initio.

2. That on the facts and in law, AO / DRP have erred in holding / upholding that the consideration received by the Appellant from supply/distribution of its copyrighted software products is chargeable to tax in India as income from 'Royalty' as defined in Article 12 of Agreement for Avoidance of Double Taxation between India and Ireland ('AADT).

The only issue raised in the present appeal is against order of the authorities below in holding that the consideration received by the assessee from supply/distribution of its copyrighted software products is chargeable to tax in India as income from ‘Royalty’ as defined in Article 12 of Agreement for Avoidance of Double Taxation between India and Ireland (‘AADT’).

The assessee is also aggrieved by the order of the Assessing Officer in holding that the consideration received by the assessee for supply/distribution of its copyrighted software products is for grant of ‘right to use’ the copyright in the software and hence, qualifies as royalty.

The Ld.AR for the assessee after taking us through the draft assessment order elaborately and observations of the DRP, pointed out that the issue raised in the present appeal is similar in facts and issue as arising in Assessment Year 2013-14, in assessee’s own case. Our attention was drawn to page 88 of the compilation wherein draft assessment order is placed and it is referred by the Assessing Officer that similar facts and issue had arisen in Assessment Year 2013-14. The Ld.AR for the assessee further pointed out that the Assessing Officer/DRP had relied on the ratio laid down by the Hon’ble Karnataka High Court in Samsung Electronics Company Ltd. 345 ITR 494 (Kar.) & Synopsis International Old Ltd. 212 Taxman 454 (Kar.). Reliance placed upon the decisions of Hon’ble Delhi High Court in DIT vs Infrasoft Ltd. [2013] 220 Taxman 273 (Del.) and DIT vs Ericson A.B., New Delhi [2012] 343 ITR 470 (Del.) was distinguished by the Assessing Officer on the ground that SLP was pending before the Hon’ble Supreme Court. The Ld.AR for the assessee took us through the order of the Tribunal wherein reliance has been placed on the decision of Hon’ble Delhi High Court in DIT vs Ericson A.B., New Delhi (supra) and DIT vs Infrasoft Ltd. (supra) to come to a finding that use of copyrighted product is not ‘Royalty’.

The Ld.CIT DR for the Revenue placed reliance on the orders of the authorities below. However, he fairly admitted that similar issue has been decided by the Tribunal in assessee’s own case for Assessment Year 2013-14.

We have heard the rival contentions and perused the record. Briefly in the facts of the case the assessee is a company incorporated in Ireland and during the year under consideration it was in receipt of certain sum towards “Sale of Software” and “Provision for Support Services” from its Indian Distributors. It is undisputed that the amount received by the assessee from “Provision of Support Services” was been offered to tax on gross basis as per Article 12 of India-Ireland Double Taxation Avoidance Agreement (DTAA). It is also not in dispute that there is no Permanent Establishment (PE) of the assessee in terms of Article 5 of DTAA in India.

However, as far as the amount received on sale of software is concerned, the Assessing Officer was of the view that the same needs to be taxed as income from ‘Royalty’ as per the provisions of section 9(1)(vi) of the Act and Article 12 of the DTAA between India and Ireland. The evidences were submitted by the assessee to establish its case of sale of only copyrighted product and wherein copyright remained with the assessee and same was not transferred to its distributor or user. The Assessing Officer however, held otherwise and the DRP rejected the objections of the assessee and the Assessing Officer passed final assessment order, against which the assessee is in appeal before us.

We find similar issue arose before the Tribunal in assessee’s own case in relating to Assessment Year 2013-14 and vide order dated 26.11.2018, the issue was decided in favour of the assessee. The factual aspect was noted by the Tribunal vide para 2 onwards at page 2 of the order.

The issue arising in the present appeal is identical to the issue raised in assessee’s own case in Assessment Year 2013-14 and applying the ratio laid down by the Jurisdictional High Court in Infrasoft Ltd. (supra), we hold that the receipt from sale of software by the assessee was not in the nature of ‘Royalty’ under Article 12 of DTAA between India and Ireland. Since the treaty provisions are more beneficial, there is no merit in adjudicating the issue vis-à- vis amended provisions of section 9(1)(vi) of the Act. The Ground of appeal Nos. 1 to 5 raised by the assessee are thus allowed.

The Ground of appeal No.6 raised by the assessee is against the levy of interest u/s 234A & 234B of the Act, is consequential and the same is dismissed.

The issue raised vide Ground of appeal No.7 by the assessee for non- granting of credit of TDS has not been argued before us; hence, the same is also dismissed.

The Ground of appeal No.8 raised by the assessee against the initiation of penalty proceedings u/s 271(1)(c) of the Act, is pre-mature; hence, the same is dismissed.

In the result, the appeal of the assessee is allowed.