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Facts
CSG International Ltd., a UK company, provided software licenses and maintenance services to Indian customers (Bharti, Ericsson, Motorola). For AY 2005-06, the Assessing Officer and CIT(A) treated the payments, including Rs. 365,090,258/-, as 'royalty' taxable under Section 9(1)(vi) of the Income Tax Act, 1961, and Article 13 of the India-UK DTAA. The assessee contended that these payments were for the sale of copyrighted articles, not copyright, and thus constituted business profits, not royalty, arguing that the transaction involved a limited, non-exclusive right to use the software.
Held
The Income Tax Appellate Tribunal (ITAT) referred to its previous decision for AY 2003-04 and the Hon'ble Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT. The Tribunal held that payments for software licenses and maintenance services, which merely grant a non-exclusive, non-transferable right to use a copyrighted product, do not constitute 'royalty' under Section 9(1)(vi) of the Act or Article 13 of the DTAA. It emphasized that DTAA definitions for royalty remain unaffected by retrospective amendments to the Income Tax Act.
Key Issues
Whether payments for software licenses and maintenance services are taxable as 'royalty' under the Income Tax Act, 1961, and the India-UK DTAA. Whether the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT applies to the facts of the present case.
Sections Cited
Income Tax Act, 1961: Section 9(1)(vi), Income Tax Act, 1961: Section 9(1)(vii), Income Tax Act, 1961: Section 195, Income Tax Act, 1961: Section 197, Income Tax Act, 1961: Section 208, Income Tax Act, 1961: Section 209(1)(d), Income Tax Act, 1961: Section 234B, Income Tax Act, 1961: Section 234D, Income Tax Act, 1961: Section 143(3), Finance Act 2012 (Explanation 4 to Section 9(1)(vi)), Double Taxation Avoidance Agreement (DTAA) between India and United Kingdom: Article 13, Indian Copyright Act, 1957: Section 14(a), Indian Copyright Act, 1957: Section 14(b), Indian Copyright Act, 1957: Section 30
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “D”NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI PRADIP KUMAR KEDIA
I.T.A.No.1522/Del/2011
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”NEW DELHI BEFORE SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER आ.अ.सं/.I.T.A No.1522/Del/2011 िनधा�रणवष�/Assessment Year: 2005-06 बनाम CSG International Ltd., ADIT (Now Known as Comverse Kenan UK) Vs. Circle-1(1), Level 7, Adelphi Building, International Taxation, 1-11 John Adam Street, London. New Delhi. PAN No.AACCC3819N अपीलाथ� Appellant ��यथ�/Respondent
Assessee by Shri Salil Kapoor, Adv. Ms. Ananya Kapoor, Adv. Revenue by Shri Vivek Kumar Upadhyay, Sr. DR सुनवाईक�तारीख/ Date of hearing: 09.02.2024 07.05.2024 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R PER C.N. PRASAD, J.M.
This appeal is filed by the Assessee against the order of the Ld.CIT(Appeals)-11, New Delhi dated 18.01.2011 for the AY 2005-06. The assessee raised the following grounds: -
“1. That the Learned Commissioner of Income-tax (Appeals) [‘Ld. CIT(A)’] has grossly erred, both on facts and in law in upholding the order of Learned Assessing Officer (‘Ld. AO’) and in taxing the revenue earned by the
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Appellant from supply of software as ‘royalty’ under Article 13 of Double Taxation Avoidance Agreement (‘DTAA’) between India and United Kingdom. 2. That the Ld. CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from supply of software as ‘royalty’ under section 9(1)(vi) of the Income-tax Act, 1961. 3. That the Ld. CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from 'maintenance services’ as ‘royalty/ fee for technical services’ under Article 13 of DTAA between India and United Kingdom. 4. That the Ld.CIT(A) has grossly erred, both on facts and in law in upholding the order of Ld. AO and in taxing the revenue earned by the Appellant from ‘maintenance services’ as ‘royalty/ fee for technical services’ under section 9(1)(vi)/(vii) of the Income-tax Act, 1961. 5. That the Ld. CIT(A) has grossly erred, both on facts and in law in dismissing the entire appeal of the Appellant without adjudicating on the following grounds: a) The Ld. AO has grossly erred both on facts and in law in levying interest under section 234B of the Income-tax Act, 1961. b) The Ld. AO has grossly erred both on facts and in law in levying the interest under section 234D of the Income-tax Act, 1961. 6. Without prejudice to ground 5 above, the Ld. CIT (A) has failed to appreciate that the Appellant was not liable to pay advance tax under section 208 and section 209(1)(d) of the Act since tax was deductible under section 195 of the Act on the payments made to the Appellant and hence, no interest under Section 234B was leviable. 7. Without prejudice to ground 5 above, the Ld. CIT (A) has failed to appreciate that no refund was granted to the
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Appellant for subject assessment year and hence, no interest under Section 234D was leviable.” 2. The Ld. Counsel for the assessee, at the outset, submits that
on identical facts the Tribunal decided the issue of whether the
amounts received by the assessee for supply of software and
maintenance falls under Royalty u/s 9(1)(vi) of the Act read with
Article 13 of DTAA between India and UK. Ld. Counsel submits that
the Tribunal held that the amounts received by Assessee for supply
of software is not royalty. A copy of the order of the Tribunal in ITA
No.264/Del/2008 dated 01.08.2022 is placed on record. Ld. Counsel
for the assessee referring to para 20 of the order of the Tribunal for
the AY 2003-04 submits that the Tribunal following the decision of
the Hon’ble Supreme Court in the case of Engineering Analysis
Centre of Excellence Pvt. Ltd. Vs. CIT held that the payments
received for supply of software is not taxable as Royalty.
Ld. DR strongly placed reliance on the orders of the
authorities below.
Heard rival submissions. The assessee was incorporated under
the laws of United Kingdom (UK) with the primary objective of
carrying on the business of specialist, engineers and dealers in
computer system. For the assessment year under consideration
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Assessee filed its return of income on 31.10.2005 declaring income
of Rs.18,13,72,756/-. The Assessee entered into contracts with
Indian customers such as Bharti, Ericsson and Motorola (hereinafter
relation to its billing software. It is submitted that the Appellant
has entered into the following two types of agreements with its
customers:
• License agreements (like with Ericsson and Motorola) that provide a limited right [i.e. a non- exclusive, personal and non-transferable right] to the said customers to use the software product solely for the purpose of meeting the latter’s obligations to their own customer i.e. BSNL (‘sub-licensee’); and a one- time right to sub-license the software product to the ‘sub-licensee’ is given with further restrictions on the extent and manner of the use of software. The sub- licensee in such a case is also the ultimate user of the software. The ‘sub-licensee’ is identified in the license agreement between the Appellant and its customers and the customers cannot sub-license such software product to any other sub-licensee. • License agreements (like with Bharti) that provide the license to the Appellant's customers to use the software product in its own business without any further sub-licensing rights to any third party. The customers in such a case are the ultimate user of the software. It is submitted that the license does not grant the Appellant’s
Customers/sub licensee any right in the copyright (which remains
with the Appellant), but merely a copy of computer program.
Accordingly, the transaction qualifies as “sale” of “copyrighted
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article” and not grants of any “copyright right”. Accordingly, same
is classifiable as “Business Profits” and since the Appellant does not
have Permanent Establishment (PE) in India, such business profits
are not taxable in India. In light of these facts, income from
licensing of software has not been offered to tax in the return of
income for subject year.
However, the Assessing Officer following the findings rendered
in the assessment order for the AY 2003-04 held that the amounts
received by the assessee during this AY i.e. 2005-06 on account of
licensing of software and rendering of maintenance services are
taxable under the provisions of Section 9(1)(vi) of the Act as well as
under Article 13 of the Tax Treaty between India and UK observing
as under: -
“3. During A.Y. 2003-04, relevant to F.Y. 2002-03, the assessee had licensed the software and provided the maintenance services to the same customers, from which payments are received during the year. The payments received are on account of the agreements, which were also applicable to A.Y. 2003-04. My predecessor has passed a detailed order u/s 143(3) of the Act on 07.03.2006, in which after examining the agreements, the nature of software licensed, the nature of services rendered and also the provisions of Indian Copyright Act, 1957 and the provisions of the Income Tax Act and Article 13 of the Indo-UK tax treaty, he had held that the revenue from software licensing and maintenance services is taxable @15% under the provisions of Article 13 of Indo-UK tax treaty. 5
I.T.A.No.1522/Del/2011
Vide this office letter dated 29.10.2007, the assessee was requested certain information. This letter reads as below: (i) Copy of tax residency certificate of the company. (ii) The details of the customer wise invoices raised, gross amounts received during the year in two categories separately: (a) Amounts, as per assessee are not liable to tax in India & the amount of tax deducted at source in respect of such amounts by the customers. The nature of payment received and why the same is not offered to tax in India? (b) Amounts, which have been offered to tax in India, tax payable & tax deducted at source. (iii) Copy of certificates u/s 197 obtained by the assessee relevant for the year. (iv) Copy of orders u/s 195(2) obtained by payers, of which assessee has a copy. (v) The details of all contracts/ agreements, whether the agreements were entered with final customers, if yes, whether the agreements were performed by the assessee directly or were sub- contracted for performance? (vi) Copy of global accounts of the assessee relevant to the F. Y. 2004-05. (vii) The details of any fixed place of business of the assessee or of its associated enterprise in India. (viii) Details of visits of the employees in the following tabular form:
Name of Designation Duration the Purpose Place of work employee stay
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(ix) The details of information and documents kept and maintained as per Section 9 2D of the IT Act in respect of all the international transactions. The copy of transfer pricing study report, if any, be also submitted. (x) The details of all the deliverables to the customers. The AR has filed its reply vide letter dated 12.11.2007, wherein it has also explained the reasons for not offering the income from software licensing and maintenance fee to tax. The contentions of the assessee are the same, as were raised during the assessment proceedings for A.Y. 2003-04 The payments during the year under consideration are received from the customers on account of licensing of software and rendering of services, the facts and circumstances of the case remains the same and the arguments of the assessee are also same, therefore, for the detailed reasons discussed in the order for A.Y. 2003-04, it is held that the amounts received by the assessee during this year on account of licensing of software and rendering of maintenance services are taxable under the provisions of Section 9(1 )(vi) of the Act as well as under Article 13 of the tax treaty between India and UK.” 6. The Ld.CIT(A) relying on the order of his predecessor passed
for the AY 2003-04 upheld the action of the Assessing Officer for the
assessment year under consideration.
We observe that for the AY 2003-04 the Tribunal in ITA
No.264/Del/2008 dated 01.08.2022 allowed the appeal of the
assessee observing as under: -
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Further on perusal of the assessment order, we observe that it
is the finding of the Assessing Officer that the facts and
circumstances of the case for the AY 2005-06 remains the same and
the arguments of the assessee are also same as was made in the AY
2003-04. Similarly the Ld.CIT(Appeals) also following the order of
his predecessor for AY 2003-04 upheld the action of the AO in
characterizing the income from software licensing as Royalty within
the meaning of section 9(1)(vi) of the Act read with Article 13 of
DTAA. The Tribunal allowed the appeal of the assessee for the AY
2003-04. Thus, facts being identical respectfully following the
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order of the Tribunal, we allow the grounds of appeal of the
assessee.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 07/05/2024
Sd/- Sd/- (PRADIP KUMAR KEDIA) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 07/05/2024 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order
Assistant Registrar, ITAT: Delhi Benches-Delhi