Atlassian Pty Limited vs. Deputy Commissioner Of Income Tax - (Income Tax Appellate Tribunal) (25 Aug 2021)

The amounts received by the assessee on account of sale of software and other incidental receipts would not constitute royalty within the meaning of Section 9(1)(vi) of IT Act

MANU/IL/0277/2021

Direct Taxation

The assessee is a foreign company. It is engaged in the business of development and licencing of software products. During the relevant assessment year, it had sold software to various Indian customers. It was noticed by the Department that, the amounts received by assessee for the sale of software / licences is in the nature of royalty in view of the judgment of the High Court in the case of CIT v. Samsung Electronics Limited. Since the assessee did not file return of income for the relevant assessment year, notice was issued under Section 148 of the Income Tax Act, 1961 (IT Act).

The Assessing Officer rejected the contentions of the assessee and passed draft assessment order by bringing to tax an amount of Rs. 1,15,40,710 received by the assessee on account of sale of software licences and other incidental receipts. The AO / TPO held the receipts constituted ‘royalty' as defined in Section 9(1)(vi) of the IT Act and Article 12 of the DTAA between India and Australia.

The solitary issue raised is whether the amounts received by the assessee on account of sale of software and other incidental receipts would constitute royalty within the meaning of Section 9(1)(vi) of the IT Act and Article 12 of the DTAA between India and Australia.

The Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. v. CIT, held that, sale of software would not constitute royalty within the provisions of Section 9(1)(vi) of the IT Act and Article 12 of the treaty. In the instant case, the assessee is a foreign company, which sells software licences to the end-users in India. Therefore, this case falls within the first category grouped by the Apex Court. The Assessing Officer in present case had elaborately examined the end-users licence agreement entered between the assessee and the Indian customers.

On perusal of the end-users licence agreement, it is seen that the end-users licence agreement considered by the Apex Court in the case of Engineering Analysis Centre of Excellence P. Ltd. v. CIT is identical to the end users licence agreement in the instant case. On perusal of the end-users licence agreement, it is clear even in cases where some element of source code were made available to the end-users i.e. the Indian customers, it is only for the purpose of fixing the bugs, customizations etc. Under no circumstances, present Tribunal noticed that, there is a transfer of copy right in the software.

In the facts of the instant case, it is clear that, the amounts received by the assessee is on account of sale of copyrighted software and not transfers of copyright in software. The instant case is identical to the case considered by the Apex Court. Accordingly, in view of the principles laid down in the judgment of the Hon'ble Apex Court, present Tribunal held that, the receipts on account of sale of software licences and other incidental receipts such as provision for software maintenance and related training services would not constitute royalty within the meaning of DTAA between India and Australia and provisions of Section 9(1)(vi) of the IT Act. The appeal filed by the assessee is allowed.

Tags : ASSESSMENT ROYALTY INCLUSION