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Facts
The assessee, a Japanese non-resident company distributing software products, received consideration from Indian end customers for the sale of software licenses. The Assessing Officer treated this income as royalty, but the Ld. CIT(A) held it was not royalty and deleted the addition, relying on previous judgments, including the Supreme Court's decision in Engineering Analysis. The Revenue appealed against this deletion.
Held
The Income Tax Appellate Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision. It held that the issue of taxability of income from the sale of software licenses as royalty is settled by the Hon'ble Supreme Court's judgment in *Engineering Analysis Centre of Excellence Private Limited vs CIT*, and therefore, the receipts were not in the nature of royalty under Article 12 of the India-Japan DTAA.
Key Issues
Whether the consideration received by the assessee for the sale of software products constitutes royalty income taxable under Article 12 of the India-Japan DTAA or falls under business profits, in light of the Supreme Court's ruling on software payments.
Sections Cited
Income Tax Act, 1961, Section 143(3), Section 144C(3), Section 9(1)(vi), India - Japan Double Taxation Avoidance Agreement (DTAA), Article 12 of India-Japan DTAA, Article 7 of India-Japan DTAA
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Income Tax Appellate Tribunal, DELHI BENCHES: D : NEW DELHI
Before: DR. B.R.R. KUMAR & SHRI ANUBHAV SHARMA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: D : NEW DELHI
BEFORE DR. B.R.R. KUMAR, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITAs No.1252 & 1253/Del/2023 Assessment Years: 2016-17 & 2017-18 DCIT, Vs Dassault Systems Biovia K.K., Circle 1(2)(2), 2-1-1 Think Park Tower, International Taxation, Osaki Shingawa-KU, New Delhi. Tokyo, Japan. PAN: AAJCA0225D (Appellant) (Respondent) Assessee by : Shri Vishal Kalra, Shri S.S. Tomar, Shri Ankit Sahni & Shri Yishu Goel, Advocates. Revenue by : Shri Sanjay Kumar, Sr. DR Date of Hearing : 11.01.2024 Date of Pronouncement : 23.01.2024 ORDER PER ANUBHAV SHARMA, JM:
These are appeals preferred by the Revenue against the orders dated 20.02.2023 of the Commissioner of Income Tax (Appeals), Delhi-42 (hereinafter referred to as the Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeals No.CIT(A), Delhi-42/10566/2019-20 and CIT(A), Delhi-
ITAs No.1252 & 1253/Del/2023
42/10002/2019-20 arising out of the appeals before it against the orders dated 17.02.2020 and 14.02.2019 passed u/s 143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the ACIT, International Taxation, Circle-1(2)(2), New Delhi (hereinafter referred to as the Ld. AO).
The grounds raised by the Revenue are common for both the appeals and read as under:- “I) Whether on the facts and circumstances of the case the Ld. CIT(A) is correct in holding that the consideration received by the assessee from Indian end customers for sale of software products does not constitute royalty income and is not taxable under Article 12 of the India - Japan Double Taxation Avoidance Agreement( DTAA) and is not business profits under Article 7 of the India Japan DTAA. II) Whether on the facts and circumstances of the case the Ld. CIT(A) is correct in relying on judgement of SC in case of Engineering Analysis, and accordingly holding that the consideration received by the assessee from Indian end customers for sale of software products does not constitute royalty income, despite review petition of revenue against said judgement is pending before SC. III) The revenue craves leave to add, alter, amend or vary from the above grounds of appeal at or before the time of hearing.
Heard and perused the record. 4. At the time of hearing, it came up that the admitted facts are that the assessee is a company incorporated under the laws of Japan and is a part of Dassault Systemes group. The assessee is a non-resident for the purposes of the Act. It is engaged in the distribution software products developed by its associate enterprises and provision of implementation and related services to customers in Asia Pacific region. 2
ITAs No.1252 & 1253/Del/2023
During the year under consideration, the assessee has shown following streams of income: i) Fees for technical services which was offered to tax @ 10% including applicable surcharge and cess as per the Article 12 of India-Japan DTAA; and ii) Sale of Software licenses subscription which was not offered to tax.
The ld. AO had made the addition on account of sale of software licence subscription considering the same to be royalty income and the ld.CIT(A) had set aside by holding as under:- “8.3 The AR also drew my attention to the favourable decision of Mumbai Bench of ITAT in case of one of its group entity, Dassault Systemes vs DDIT [2017] 79 taxmann.com 205, and DDIT vs Solid Works Corporation [2012] 51 SOT 34 (Mumbai), wherein the ITAT on identical facts held that receipt on account of sale of shrink- wrapped software was not in nature of royalty and, hence, was not liable to tax in India in view of provisions of section 9(1)(vi) of the Act as well as article 12(3) of DTAA between India and USA. 8.4 Further, the AR placed reliance on another case of the appellant’s merged company i.e., Dassault Systemes KK In re [2010] 188 Taxman 223, wherein the AAR held that granting software license to the end users did not tantamount to transfer of rights in relation to copyright or right of use in the copyright. 8.5 It has been submitted that the appellant’s position in relation to taxability of software payments has been accepted by the AO in AY 2018- 19 and 2019-20 pursuant to the ruling of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs CIT [2021] 125 taxmann.com 42. Copy of the final assessment order passed by the AO for AY 2018-19 and 2019-20 have been filed.
ITAs No.1252 & 1253/Del/2023
8.6 In view of overall discussion made above and respectfully following Hon’ble Supreme Court decision in the case of Engineering Analysis Centre of Excellence Private Limited vs CIT [2021] 125 taxmann.com 42 and Hon’ble ITAT/AAR/CIT(A) decisions referred above and considering that the AO has himself held the receipts as non- taxable in for AY 2018-19 and 2019-20, it is concluded that the impugned receipts were not in the nature of royalty within the meaning of Article 12 of India-Japan DTAA. The addition made by AO is deleted. This ground is allowed.”
Ld. DR was unable to point any distinction of fact or any proposition of law, to show that ld. CIT(A) has fallen in error in making the deletion. After the judgement of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs CIT (supra), the issue with regard to taxability of the income from the sale of Software licenses subscription, stands settled and same is followed by ld. CIT(A), so there is no infirmity in the impugned orders, requiring interference.
The grounds in appeals have no substance. The appeals of Revenue are dismissed. Order pronounced in the open court on 23.01.2024. Sd/- Sd/- (DR. B.R.R. KUMAR) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 23rd January, 2024. dk
ITAs No.1252 & 1253/Del/2023