Case Law Details
Microstrategy Singapore Pte. Ltd. Vs ACIT (ITAT Delhi)
Sale of software, a copyrighted article, cannot be treated as royalty under article 12(3) of India-Singapore DTAA
Facts- The assessee is a non-resident company incorporated in Singapore and is a tax resident of that country. The core activity of the assessee is distribution and maintenance of software to customers in the Asian market. Additionally, the assessee also offers consultancy, system integration and education services to its customers for sale of software products and provision of services. The assessee has entered into agreement with Indian distributors, partners (resellers) for sale of software products as well as related maintenance support services. The maintenance support services include upgradation of software version, addressing critical defect correction and resolving queries over telephone. During the year under consideration, the assessee has sold software products and rendered maintenance services to Indian customers against which it has received a consideration of Rs.2,59,12,204/-. An amount of Rs.26,09,576/- was withheld at source by the Indian customers towards tax. As could be seen, out of the aforesaid amount received, an amount of Rs. 9,17,792/- relating to training/education related services was offered to tax in India while filing the return of income for the impugned assessment year. Whereas, the balance amount of Rs.2,44,94,412/- was not offered to tax on the plea that it is neither royalty nor FTS. Hence, in absence of a PE, the amount, being in the nature of business income, is not taxable.
The AO, however, did not accept the claim of the assessee. Relying upon certain judicial precedents, including, the decision of Hon’ble Karnataka High court in case of CIT Vs. Samsung Electronic Pvt. Ltd. he held that the amount received by the assessee towards sale of software products and provision of software related maintenance services is in the nature of royalty, both under section 9(1)(vi) of the Act as well under Article 12(3) of the India – Singapore DTAA. Further, he held that the amount received by the assessee towards provision of software related maintenance services, as otherwise, is also in the nature of FTS both under Section 9(1)(vii) as well as Article 12(4)(b) of the India – Singapore Tax Treaty. Accordingly, he added back the amount of Rs.2,59,12,204/- to the income of the assessee while completing the assessment. The aforesaid decision of the Assessing Officer was also upheld by learned Commissioner (Appeals).
Conclusion- The assessee has sold is copyrighted article and not the copyright. It is also observed, while treating the payment received by the assessee as royalty, the departmental authorities have been greatly influenced by the decision of the Hon’ble Karnataka High Court in case of Samsung Electronics Pvt. Ltd. (supra). However, the issue is no more res integra in view of the decision of Hon’ble Supreme court in case of Engineering Analysis Centre of Excellence (P.) Ltd. (supra). Since, the factual matrix clearly reveals that the assessee has sold a copyrighted article and not the copyright, the ratio laid down by the Hon’ble Apex Court in the decision referred to above would squarely apply. Accordingly, we hold that the amount received by the assessee from sale of software and provision of software related services cannot be treated as royalty under Article 12(3) of the India – Singapore DTAA.
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