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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. ASTHA CHANDRA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. CIT(A) - 43 New Delhi dated 30.09.2019 pertaining to Assessment Year 2016-17.
The solitary grievance of the assessee is that the ld. CIT(A) erred in assessing the receipt of sale of software licenses as ‘Royalty’ in accordance with the provisions of section 9(1)(vi) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] and Article 12 of the DTAA between India and Singapore.
The representatives of both the sides were heard at length, the case records carefully perused.
Briefly stated, the facts of the case are that during the course of scrutiny assessment proceedings, the Assessing Officer found that the assessee has received an amount of Rs. 3,79,82,439/- from sale and maintenance services of software license to M/s HCL Infosystems Ltd. The Assessing Officer noticed that the assessee has not offered this amount to tax in his return of income.
Vide notice dated 03.10.2018, the assessee was asked to show cause as to why receipts of Rs. 3,79,82,439/- on sale of software license not be treated as royalty as per the provisions of section 9 of the Act and under Article 12 of the DTAA between Singapore and India treaty.
The assessee filed detailed reply contending that in view of the provisions of India-USA DTAA, the assessee’s income from sale of software license is not taxable in India. Strong reliance was placed on various judgments in support of its claim.
It was explained that receipts from sale of software licenses are not taxable as royalty. It was further explained that the assessee has not granted the purchaser the right to reproduce the software but only the right to create a backup copy for internal purposes which is permissible u/s 52(1)(aa) of the Act and does not amount to grant of an exclusive right/copy right.
Submissions of the assessee and various judicial decisions relied upon by it were dismissed by the Assessing Officer who was of the firm belief that as per Explanation 2 to section 9(1)(vi) of the Act, the term ‘Royalty’ squarely applied on the facts of the case in hand and proceeded on taxing the receipts as royalty.
The assessee strongly agitated the matter before the ld. CIT(A) but without any success.
We have carefully considered the orders of the authorities below.
We are of the considered view that the impugned quarrel is now well settled by the decision of the Hon'ble Supreme Court in favour of the assessee and against the Revenue in the case of Engineering Analysis Center of Excellence Pvt Ltd. [2021] 432 ITR 471 wherein the Hon'ble Supreme Court, in a bunch of appeals, conclusively held as under:
“168. Given the definition of royalties contained in Article 12 of the 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(l)(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.
169 Our answer to the question posed before us, is that the 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.
The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.”
Respectfully following the aforesaid decision of the Hon'ble Apex Court [supra], we direct the Assessing Officer to delete the impugned addition.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 07.06.2022.