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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 dated 25.07.2017 framed under section 144C(13) r.w.s 143(3)/254 of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Year 2014-15.
The sum and substance of the grievance of the assessee is that the Assessing Officer/DRP erred in holding that the payments received by the assessee on sale of software to India resellers/distributors is in the nature of ‘Royalty’ chargeable to tax u/s 9(1)(vi) of the Act and under Article 12 of the India – USA Double Taxation Avoidance Agreement [DTAA].
3. Representatives were heard at length. Case records carefully perused.
Briefly stated, the facts of the case are that the appellant is engaged in the business of developing, manufacturing and distribution of software products and has entered into international distributor/reseller agreements in India for supplying software products and maintenance support services to the end customers in India.
During the year under consideration, the assessee has received the following income from Indian distributors/resellers: i) Receipts from sale of software products Rs. 4,86,91,372/- ii) Receipts from provision ancillary support services Rs. 1,12,06,404/-
Return was filed on 29.09.2014 declaring NIL income. The aforementioned receipts were considered as not taxable in India as the same does not constitute royalty/fees for technical services [FTS] under India – USA DTAA.
Return was selected for scrutiny assessment and accordingly, statutory notices were issued and served upon the assessee. The Assessing Officer was of the firm belief that income from sale of software licensing to Indian distributions/resellers is taxable as ‘Royalty’ under Article 12 of the India – USA DTAA and so also the income from ancillary services.
Objections were raised before the DRP and the DRP, vide order dated 28.06.2017 upheld the additions proposed by the Assessing Officer. Accordingly, final assessment order was framed.
Article 12 of the India – USA DTAA deals with “Taxability of Royalty Payment”, the relevant extract of which is reproduced as under:
The term "royalties" as used in this Article means:
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph film or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. "
A perusal of the above shows that the term ‘Royalty’ means payment received, inter alia, for use or right to use, any copy right or a literary, artistic, or scientific work, patent, trademark, design, model, plan, secret formula or process. A perusal of the agreement with the Indian distributors/resellers shows that the resellers/distributors have a non-exclusive, non-transferrable right to sell/ re-sell the assessee’s products and Maintenance Technical MTSS services (“MTSS”) to customers within the specified territory. Reseller/ Distributor cannot make copies of the products for resale and cannot alter the product package that it receives from the assessee in any way. All the rights, including all intellectual property rights in the products, updates and other localizations or translations are owned by the assessee and no ownership rights have been transferred to Reseller/Distributor.
It is further provided that the Reseller/ Distributor cannot make any representation or warranties to resellers or customers on assessee’s behalf and trade with products that are not made by the assessee. It is also provided that the Reseller/ Distributor cannot reproduce the software products or modify and create any derivative work and copies of assessee’s product. The Reseller/Distributor can use the trademark of the assessee only for the specific purpose of indicating to the public that they are authorized by the assessee, but they will indicate that the assessee is sole owner of trademark and on termination will immediately cease all use of assessee’s trademark.
A careful perusal of the agreement entered into by the assessee with the resellers in India and keeping in mind the aforementioned specific clauses, in our considered opinion, it is clear that such agreements are entered into solely for the sale of software products and not in any way entail transfer of patent, copy right or any other intellectual property right.
On the above factual matrix, in our consider opinion, the quarrel is squarely covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Supreme Court in a land mark judgment in the case of Engineering Analysis Center of Excellence Pvt Ltd. [2021] 432 ITR 471 has laid down the following:
“Given the definition of royalties contained in article 12 of the DTAAs 168 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 beneficial to the assessees, have no application in the facts of these cases.
"Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non- resident computer s. manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the pay of royalty for the use of copyright in the computer software, and that same does not give rise to any income taxable in India, as a result of 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 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 rule the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from impugned judgments of the High Court of Delhi are dismissed.”
The factual matrix involved in the case in hand, read with the ratio laid down by the Hon'ble Supreme Court [supra], we are of the considered view that no right in copy right is being transferred and accordingly, consideration received by the assessee cannot be brought to tax as per India – USA DTAA.
Incidentally, in Assessment Years 2018-19 and 2019-20, the Revenue has accepted the stand of the assessee. Considering the facts of the case in totality, in light of the decision of the Hon'ble Supreme 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 17.02.2022.