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Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
These two appeals by revenue are directed against order passed by CIT(A) for the assessment years 2016-17 & 2017-18 both are dated 21.2.2023, wherein ld. CIT(A) has deleted the levy of interest and penalty u/s 201(1) & 201(1A) of the Income-tax Act,1961 ['the Act' for short].
2. Facts are similar except change in figures in both the assessment years. We consider the facts narrated in AY 2016-17. The assessee, M/s IBM India Pvt. Ltd., (hereinafter referred to as "IBM India" or "IBM") is a wholly owned subsidiary of & 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 2 of 11 International Business Machines, U.S.A (IBM, U.S.A). The company is primarily engaged in the business of selling computer systems, software and information technology services. During the year under consideration, certain employees of IBM overseas companies were seconded on assignment to IBM India. Further, payments were also made to IBM Singapore Pte. Ltd., towards purchase of software. In the course of assessment proceedings for various years of the associated enterprises of IBM India, it was found that IBM India was making reimbursement of salary expenses to IBM overseas companies towards their seconded employees. IBM India had not deducted tax at source on the reimbursement of salary towards seconded employees paid to IBM overseas companies. The assessee had also not deducted tax on the payments made by it to IBM Singapore for the purchase of shrink-wrapped software. The AO held the payment to be in the nature of royalty, which was taxable both under the Act as well as under the India-Singapore DTAA. As the assessee had failed to deduct tax on the reimbursement of salary expenses of seconded employees and on the payments for the software, the AO held the assessee to be an assessee in default under the provisions of section 201(1) and proceeded to raise the following demands:
2.1 On appeal, the ld. CIT(A) observed that similar issue came for consideration before this Tribunal in assessment year 2013-14 & 2014-15 in to 372/Bang/2023 and in IT(IT)A Nos.47 & & 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 3 of 11 48/Bang/2017 dated 5.8.2021 and allowed the appeal of the assessee. Against this revenue is in appeal before us.
3. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of IBM Singapore Pvt Ltd. in & 178/Bang/2023 for the AYs 2015-16 & 2016-17 vide order dated 3.5.2023, wherein it was held as under: “4. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case for assessment years 2009-10, 2010-11 & 2012-13 in ITA Nos.1311 to 1313/Bang/2018, wherein the Tribunal vide order dated 3.9.2021 held as under: Ground No.3 relate to the assessment of sale proceeds received on sale of software licenses as “Royalty income”. Coordinate bench of this Tribunal in assessee’s own case for assessment year 2014-15 (supra) decided this issue as under: “4. The assessee is a Singapore based company engaged in the business of dealing in software & hardware products. Under the provisions of Indian Income Tax Act, the assessee is a non-resident. During the year under consideration, the assessee has sold software licenses to its Associated Enterprise (AE) and also to other Indian customers. The assessee did not offer any income on such sale for taxation in India. The ld. AR submitted that the AE of the assessee, viz., M/s. IBM India Pvt. Ltd is the authorized distributor of software licenses sold by the assessee. In respect of sales made to Non-Associated enterprises, the 14 A.R submitted that majority of sales were made to "other distributors" and in few eases, it was sold to End users also. The details of sales effected by the assessee during the year under consideration in India are tabulated as under by the A.O. SI. Name of the Party Offered for Sale value No. taxation or (in Rs.) not 1. IBM1ndia Pvt. Ltd. 416,00,24, No 726 2. 2514,40,45 Non Associated No 9 Enterprises 441,94,65, Total 1i54 5. The A.O. took the view that the above said aggregate sale consideration of Rs.441.94 Crores constitute "royalty" in the hands of the assessee both under section 9(1)(vi) of the Income-tax Act,1961 ['the Act' for short] and under Double Taxation Avoidance Agreement (DTAA) entered between. India and Singapore. Accordingly, he made addition of Rs.441.94 crores to the total income returned by the assessee. The A.O. placed his reliance onthe decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. (345 ITR 494) and Synopsis International Old Limited (ITA Nos.11-15/ 2008). The Ld. CIT(A) also confirmed the addition. and hence the assessee has filed this appeal before us. & 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore Page 4 of 11 6. The Ld. A.R. submitted that the assessee has sold only licenses to use the software and it did not part with any of its right over the products within the meaning of Copy right Act. He further submitted that the provisions of DTAA entered between India and Singapore shall govern these transactions and as per the provisions of DTAA, the sale receipts of software licenses cannot be taxed as "royalty". For all these propositions, the Ld A.R placed his reliance on the decision rendered by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (2021) 125 Taxmann.com 42.
The Ld A.R submitted that the tax authorities have placed their reliance on. the decisions rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) and Synopsis International Old Ltd (supra). However, both the decisions have been reversed by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra).
The Ld A.R further submitted that the Hon'ble Supreme Court has delivered its decision holding that the software licenses cannot be taxed as royalty under the provisions of DTAA unless copy rights are parted with. The Hon'ble Supreme Court has examined some agreements entered by software suppliers with the Distributors/ end users on sample basis in this regard. It included the agreements entered by the assessee with its distributors (referred as "re-marketecrs")/ End users and also the End User's License Agreement (EULA) entered between the distributors and the end users.
(a) The agreement entered by the assessee with End users has been extracted in paragraph 44(i) of the order of Hon'ble Supreme Court.
(b) The agreement entered by the assessee with IBM India (re- marketeer) has been extracted in paragraph 44(ii)a of its order by Hon'ble Supreme Court and (c) The agreement entered by IBM India (r-marketeer) with .the end users has been extracted in. paragraph 44(ii)b of the order.
The Ld.AR submitted that the very same terms and conditions of granting license to use software continue during this year also. The Hon'ble Supreme Court has concluded that the payments made by the distributors and end-users to the non-resident software supplier placed in Singapore,-is not "royalty" within the meaning of the provisions of DTAA and hence the distributors/ end users are not liable to deduct tax at source u/s 195 of the Act from the payments made to the non-resident software supplier located in Singapore on the reasoning that the distributor's agreement and end-user's license agreement in the facts of cases before Hon'ble Supreme Court do not create any interest or right in such distributors/end-users, which would amount to use or right to use any copy right.
& 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 5 of 11 9. The Ld A.R submitted that the assessee herein is a Singapore resident governed by the DTAA entered between India and Singapore. On the examination of very same DTAA provisions, the Hon'ble Supreme Court has held that the payments given by the distributors/ end users to the assessee are not "royalty" within the meaning of provisions of DTAA and hence there was no liability to deduct tax at source from those payments u/s 195 of the Act, since no income is chargeable to tax in India. In the instant case, the AO has assessed the sale proceeds received on sale of licenses as "royalty". In view of the above cited decision of Hon'ble Supreme Court, the sale proceeds received on sale of software licenses cannot be assessed as "royalty". Accordingly, the Ld.AR submitted that the impugned addition made by the AO and confirmed by Ld CIT(A) is liable to be deleted.
The Ld. D.R. on the contrary, placed his reliance on the decision rendered by Ld. CIT(A).
We heard the parties on this issue and perused the record. As submitted by Ld. A.R., the Hon'ble Supreme Court has examined the issue whether the payments received by non-resident suppliers for selling software licenses are royalty or not in the case of Engineering Analysis Centre of Excellence (P) Ltd (supra). The Hon'ble Supreme Court examined this question considering four types of situations, which has been narrated as under:-
"4. The appeals before us may be grouped into four categories:
(i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end- users. (iii) The third category concerns cases wherein the distributor happens to be a foreign non-resident vendor, who, after purchasing software from a foreign, non-resident resells the same to resident Indian distributor or end-users. (iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.
The Hon`ble Supreme Court analysed sample agreements in respect of all the four categories and gave the following finding:- "45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non- exclusive, nontransferable license to resell computer software, & 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore Page 6 of 11 it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sublicense or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all.
When it comes to art end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA.
In all these cases, the "license" that is granted vide the EULA, is not a license in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "license" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referrable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting art interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of license or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right too reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way & 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 7 of 11 of license or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for 'the exclusive right to reproduce the book in the territory mentioned by the license.
After analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with non-resident software suppliers, provisions of Copy right Acts, the circulars issued by CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court concluded as under:-
CONCLUSION Given the definition of royalties contained in Article 12 of the 168. DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/ EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. Our answer to the question posed before us, is that the 169. amounts paid by resident Indian end-users/distributors to non- resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/ distribution-agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.
We also notice that the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) has been reversed by Hon'ble Supreme Court in paragraph 101-102 of its order. Similarly, the decision rendered in the case of Synopsis International Old Ltd. (supra) Ltd (supra) by Hon'ble Karnataka High Court has been reversed in paragraph 103 - 109 of its order. Before us, the Ld. A.R. submitted that the terms of agreements remain the same during the year under consideration also. Accordingly, as per the decision rendered by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), sale proceeds received by the assessee on sale of software licenses cannot be categorized as "Royalty" within the meaning of provisions of DTAA. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete the addition made as "royalty" income.
& 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 8 of 11 We heard the Ld. DR on this issue and perused the_ record. We find merit in the submissions of the Ld.AR Respectfully following the aforesaid view we direct the Ld.AO to delete the addition made as royalty income. Accordingly, ground No.3 raised by assessee stands allowed.”
4.1 Further, Hon’ble jurisdictional High Court in assessment years 2006-07 to 2008-09 in of 2019 and Others vide judgement dated 8th September, 2021 held as under:- “Learned Counsel for the appellant – assessee submits that the substantial questions of law raised herein are squarely covered by the ruling of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. The Commissioner of Income Tax and another reported in (2021) 432 ITR 471 (SC).
Learned counsel for the respondents revenue could not dispute the same.
In view of the aforesaid submissions, the substantial questions of law are answered in favour of the assessee and against the revenue. The appeal stands disposed of accordingly.”
4.2 In view of the above order of the Tribunal, we find no infirmity in the order of ld. CIT(A) in these two assessment years. Accordingly, the grounds raised by revenue in both these assessment years i.e. 2015-16 & 2016-17 are dismissed.”
3.1 Further in the case of IBM India Pvt. Ltd. for the assessment year 2013-14 in IT(IT)A No.369 & 370/Bang/2016 dated 5.8.2021, wherein was held as under:
“2. During the course of hearing of the above appeals on 13.06.2017, the learned AR submitted that the grounds taken in the appeals were covered against the assessee by the judgment of the Hon’ble Karnataka High Court in assessee’s own case in of 2005. It was further submitted by the learned AR that against the said judgment of the Hon’ble Karnataka High Court, the assessee has filed SLP before the Hon’ble Apex Court vide SLP No.396 of 2012 / Civil Appeal No.4419 of 2012, which was pending adjudication. The assessee had accordingly filed a declaration in Form No.8 u/s 158A(1) of the I.T.Act (for avoiding repetitive appeals) read with Rule 16 of the Income Tax Rules, 1962, for the year under consideration, submitting that identical question of law is pending before the Hon’ble Supreme Court in SLP and Civil Appeal mentioned above. It was further stated that if ITAT were to apply the final outcome of the SLP to the impugned years, the assessee shall not raise the same question of law in further appeal. A copy of the declaration dated 22.03.2017 in Form No.8 is placed on record.
& 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 9 of 11 3. The ITAT dismissed the above appeals filed by the assessee following the judgment of the Hon’ble Karnataka High Court in assessee’s own case subject to the outcome of the SLP pending before the Hon’ble Supreme Court.
4. By this application u/s 158A(5) of the I.T.Act, it is submitted that the Hon’ble Supreme Court vide its judgment dated 2nd March, 2021 in the case of Engineering Analysis Centre of Excellence Private Limited reported in 432 ITR 471 had overruled the judgment of the Hon’ble Karnataka High Court and decided the issue in favour of the assessee. Therefore, it was submitted that as per section 158A(5) of the I.T.Act, the ITAT is required to amend the order passed by it in IT(IT)A Nos.369/Bang/2016 & 370/Bang/2016 in conformity with the judgment passed by the Hon’ble Apex Court.
5. In conformity with the judgment of the Hon’ble Apex Court, we amend the order of ITAT [in IT(IT)A Nos. 369/Bang/2016 & 370/Bang/2016] and hold that the payment made by the assessee for purchase of software is not coming within the term “royalty” as per the provisions of section 9(1)(vi) and the DTAA. Accordingly, we hold that there is no liability for the assessee to deduct tax at source u/s 195 of the I.T.Act in respect of payment made for purchase of software. Accordingly, the order of the tax authority is set aside.
6. In the result, the appeals filed by the assessee are allowed.”
3.2 Further in the case of IBM India Pvt. Ltd. for the assessment year 2014-15 in IT(IT)A No.371 & 372/Bang/2016 dated 5.8.2021, same view was taken, wherein held as under:
“2. During the course of hearing of the above appeals on 13.06.2017, the learned AR submitted that the grounds taken in the appeals were covered against the assessee by the judgment of the Hon’ble Karnataka High Court in assessee’s own case in of 2005. It was further submitted by the learned AR that against the said judgment of the Hon’ble Karnataka High Court, the assessee has filed SLP before the Hon’ble Apex Court vide SLP No.396 of 2012 / Civil Appeal No.4419 of 2012, which was pending adjudication. The assessee had accordingly filed a declaration in Form No.8 u/s 158A(1) of the I.T.Act (for avoiding repetitive appeals) read with Rule 16 of the Income Tax Rules, 1962, for the year under consideration, submitting that identical question of law is pending before the Hon’ble Supreme Court in SLP and Civil Appeal mentioned above. It was further stated that if ITAT were to apply the final outcome of the SLP to the impugned years, the assessee shall not raise the same question of law in further appeal. A copy of the declaration dated 22.03.2017 in Form No.8 is placed on record.
& 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 10 of 11 3. The ITAT dismissed the above appeals filed by the assessee following the judgment of the Hon’ble Karnataka High Court in assessee’s own case subject to the outcome of the SLP pending before the Hon’ble Supreme Court.
4. By this application u/s 158A(5) of the I.T.Act, it is submitted that the Hon’ble Supreme Court vide its judgment dated 2nd March, 2021 in the case of Engineering Analysis Centre of Excellence Private Limited reported in 432 ITR 471 had overruled the judgment of the Hon’ble Karnataka High Court and decided the issue in favour of the assessee. Therefore, it was submitted that as per section 158A(5) of the I.T.Act, the ITAT is required to amend the order passed by it in IT(IT)A Nos.371/Bang/2016 & 372/Bang/2016 in conformity with the judgment passed by the Hon’ble Apex Court.
In conformity with the judgment of the Hon’ble Apex Court, we amend the order of ITAT [in IT(IT)A Nos. 371/Bang/2016 & 372/Bang/2016] and hold that the payment made by the assessee for purchase of software is not coming within the term “royalty” as per the provisions of section 9(1)(vi) and the DTAA. Accordingly, we hold that there is no liability for the assessee to deduct tax at source u/s 195 of the I.T.Act in respect of payment made for purchase of software. Accordingly, the order of the tax authority is set aside.
In the result, the appeals filed by the assessee are allowed.”
3.3 Further, in assessee’s own case for the assessment year 2015- 16 vide IT(IT)A No.47 & 48/Bang/2017 vide order dated 5.8.2021, same view was taken. 3.4 Further, the jurisdictional High Court of Karnataka in assessee’s own case vide order No.411/2015 for the assessment year 2012-13 dated 6.3.2021 it has been held as under: “3. When the matter was taken up today, learned counsel for the assessee submitted that the issue involved in this appeal has been put to rest in view of the decision rendered by the Supreme Court in Civil Appeal Nos.8733-8734/2018 between ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VS. THE COMMISSIONER OF INCOME TAX & ANOTHER, vide order dated 2.3.2021 and the issue involved in this appeal has been answered against the Revenue and in favour of the assessee.”
3.5 Further, same view was taken by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. & 318/Bang/2023 M/s. IBM India Pvt. Ltd., Bangalore
Page 11 of 11 CIT reported in 432 ITR 47 (SC). In view of the above decision, we inclined to decide the issue in favour of the assessee and against the revenue.
In the result, both the appeals of the revenue are dismissed.
Order pronounced in the open court on 8th June, 2023