DCIT, CIRCLE-3(1)(2) INT. TAZATION, NEW DELHI vs. SOFTWARE ONE PTE LTD, SINGAPORE

आदेश /O R D E R PER SAKTIJIT DEY, J.M.

Captioned appeal by the Revenue arises out of order dated 18.10.2021 passed by the learned Commissioner of Income Tax (Appeals)-43, New Delhi pertaining to Assessment Year 2017-18.

I.T.A.No.103/Del/2022

within the meaning of Article 12(3) of India – Singapore Double

Taxation Avoidance Agreement (DTAA).

entity incorporated under the laws of Singapore and a tax resident

of Singapore. For the assessment year under dispute assessee filed

its return of income on 31.03.2018 declaring total income of

Rs.1,56,50,870/-. As observed by the Assessing Officer, the

assessee is engaged in the business of providing end to end software

and cloud technology solution to its clients. In the year under

consideration the assessee entered into certain transactions in India

and earned revenue as under:

as income in the nature of FTS and offered to tax in India.

However, in so far as revenue earned from sale of software, the

assessee pleaded before the Assessing Officer that it is

sale/distribution of copyrighted article and not sale of copyright.

Therefore, not in the nature of royalty. The Assessing Officer,

however, was not convinced with the pleading of the assessee.

Therefore, he issued a show cause notice to the assessee to explain 2

I.T.A.No.103/Del/2022

why income received from sale of software should not be treated as

royalty in terms of provisions of the Act as well as India – Singapore

DTAA. In response to the show cause notice issued by the Assessing

Officer, assessee furnished a detailed reply in support of its claim

that the income earned is from sale of copyright article and not sale

copyright itself. The Assessing Officer, however, did not find merit

in the submissions of the assessee. Ultimately, he concluded that

the revenue earned by the assessee is from transfer of right to use

of copyright, hence, in the nature of royalty both under the

provisions of the Act as well as under the India – Singapore DTAA.

Accordingly, he added the amount of Rs.12,87,22,857/- to the

income of the assessee. Assessee contested the aforesaid addition

before learned Commissioner (Appeals).

context of facts and materials available on record and following the

ratio laid down by the Hon’ble Supreme Court in case of Engineering

Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 125

taxman.com 42 (SC). Learned Commissioner (Appeals) ultimately

accepted assessee’s claim that the revenue earned by the assessee

is in the nature of sale of a copyrighted article and not for

transferring the right to use any copyright. Thus, he held that the

I.T.A.No.103/Del/2022

amount received is not in the nature of royalty but in the nature of

business income and in absence of a Permanent Establishment (PE)

is not taxable in India.

relied upon the observations of the Assessing Officer and submitted

that the assessee has distributed/sold software to various customers

in India. He submitted, though, the software sold is a copyrighted

article, however, along with the software the assessee has

sold/transferred the right to use the copyright. Therefore, the

amount received from sale of software has to be treated as royalty.

He submitted, the fact that the assessee has offered the revenue

earned from software sale related services as FTS also proves that

what the assessee has transferred is right to use the copyright.

Microsoft Corporation Vs. Assistant Director of Income Tax in ITA

No. 1392/Del/2005. learned Departmental Representative

submitted, the software sold by the assessee involves computer

programme which is a process when it executes instruction lying in

it in passive state. Therefore, the consideration received is for use

of process which will amount to royalty under section 9(1)(vi) of the

I.T.A.No.103/Del/2022

Act. Thus, he submitted, the Assessing Officer was justified in

treating the amount received as royalty.

relied upon the observations of learned First Appellate Authority

and submitted that the facts on record would clearly reveal that

what the assessee has sold to the customers are copyrighted articles

and were sold on principal to principal basis. She submitted, the

assessee is a non resident distributor who purchases software from

non-resident manufacturers/sellers and re-sales them to

distributors/end users in India. She submitted, when the assessee

itself does not have any right in the copyright and purchases from

another party for re-sale, how can it transfer such non-existent

right to others? Thus, she submitted, assessee’s case is squarely

covered by the decision of the Hon’ble Supreme Court in case of

Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (supra).

Further, she submitted the decision of the Tribunal in case of

Microsoft Corporation (supra) relied upon by the Revenue could be

of no help as in an appeal preferred by the said assessee the

Hon’ble Delhi High Court has accepted assessee’s claim and

reversed the decision of the Tribunal.

I.T.A.No.103/Del/2022

materials on record.

hence, a non resident entity. Facts on record reveal that the

assessee is simply a distributor of software. It purchases software

from non-resident manufacturers/sellers, such as, Microsoft, Adobe

etc. and distributes/sells them to distributors and customers in

India. Thus, the assessee itself is not the manufacturer or creator

of software. Therefore, assessee cannot own copyright over the

softwares as the manufacturer or creator of the software can hold

copyright over the software. From the submissions made before the

departmental authorities, these facts are clearly discernible. Thus,

the products sold by the assessee are ready to use off the shelf or

shrink wrapped softwares, which are nothing but copyrighted

articles. From the nature of software products sold by the

assessee, it can be very well construed that the copyright over the

software sold by the assessee were owned by the companies

creating such softwares like Microsoft, Adobe, etc. The assessee is

merely a trader of software, hence, has no domain or ownership

over the software. Thus, when the assessee does not have any

ownership over the softwares sold, it could not have transferred the

I.T.A.No.103/Del/2022

right to use of copyright of the software to distributors/customers

in India. In case of Engineering Analysis (supra), the Hon’ble

Supreme Court had an occasion to examine when the consideration

received from sale of software can be considered to be in the

nature of royalty. The Hon’ble Supreme Court had segregated the

transactions relating to the sale of software to following 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 distributors happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors 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.” 11. Undisputedly, assessee’s case falls within the third category.

While deciding the issue whether the payment made is in the nature

of royalty, the Hon’ble Supreme Court very clearly and categorically

held that the amount paid by resident Indian end users/distributors

I.T.A.No.103/Del/2022

to non-resident computer software manufactures/suppliers as

consideration for the re-sale/use of the computer software through

end user license agreement/distribution agreement is not in the

nature of royalty for the use of copyright in the computer software,

hence, cannot be treated as royalty. Thus, the aforesaid ratio laid

down by the Hon’ble Supreme Court clearly applies to the facts of

the present appeal. Thus, in our considered opinion, learned

Commissioner (Appeals) has adopted the right course of action

while deleting the addition made by the Assessing Officer, following

the ratio laid down by the Hon’ble Supreme Court in case of

Engineering Analysis (supra). Pertinently, for the sake of

completeness, we must observe, though, learned Departmental

Representative had placed strong reliance upon the decision of the

Tribunal in case of M/s Microsoft Corporation Vs. ADIT (supra),

however, while deciding the appeal filed by Microsoft Corporation,

the Hon’ble Jurisdictional High Court in order dated 18.07.2022 in

ITA No. 663/Del/2011, following the decision of the Hon’ble

Supreme Court in case of Engineering Analysis Center of Excellence

Pvt. Ltd. Vs. CIT (supra), has allowed assessee’s appeal, thereby,

reversing the decision of the Tribunal. Therefore, the decision

I.T.A.No.103/Del/2022

cited by learned Departmental Representative would be of no help

to the Revenue.

decision of learned Commissioner (Appeals) on the issue. Grounds

are dismissed.

Order pronounced in the open court on 26/12/2022

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 26.12.2022

*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