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

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.

The grievance of the Revenue is with regard to the decision of learned First Appellate Authority holding that the amount received by the assessee from sale/distribution of software is not royalty

Briefly the facts are, the assessee is a non resident corporate 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:

In so far as FTS is concerned, the assessee voluntary treated as income in the nature of FTS and offered to tax in India.

After considering the submissions of the assessee in the 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.

Before us, learned Departmental Representative strongly 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.

Referring to the decision of the Tribunal in case of M/s 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.

In reply, learned Counsel appearing for the assessee strongly 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).

We have considered rival submissions and perused the materials on record.

Undisputedly, the assessee is a tax resident of Singapore, 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:

In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals) on the issue. Grounds are dismissed.

In the result, appeal is dismissed.