CSG INTERNATIONAL LTD.,LONDON vs. ADIT, NEW DELHI

PER VIKAS AWASTHY, JUDICIAL MEMBER: This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-XI, dated 18.01.2011 for AY 2006-07. The assessee in appeal has raised as many as 12 grounds, the gist of issues raised by the assessee in appeal is as under:-

(i) Ground no. 1 to 4 assailing findings of the CIT(A) in upholding revenue earned by the assessee from sale of software as royalty under Article 13 of

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. India-UK Double Tax Avoidance Agreement (DTAA) and revenue earned by the assessee from maintenance services upheld by the CIT(A) as royalty/Fee for Technical Services (FTS) under Article 13 of India-UK DTAA and u/s.9(i)(vi)(vii) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’)

(ii) Ground no. 5 assailing findings of the CIT(A) in upholding that the assessee has Permanent Establishment (PE) in India.

(iii) Ground no. 6(a) assailing findings of the CIT(A) in upholding that entire revenue earned by the assessee is liable to be taxed at blanket rate of 15% even where the Work Order has been entered on or after 01.06.2005.

Ground no. 6(c) assailing initiation of penalty proceedings u/s.271 (1)(c), 271AA and 271BA of the Act.

Ground no. 6(d) assailing levy of interest u/s.234B of the Act; and No credit of withholding tax was given.

Ground no. 6(e) assailing not providing credit for the refund due to the appellant.

Ground of appeal no. 7 to 11 are repetition of the issues already assailed in ground no. 6 of appeal.

(i) Income from professional services – Rs.10,62,52,883/-; (ii) Income from software licenses – Rs.20,18,67,250/-;

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. (iii) Income for maintenance services- Rs.15,81,30,621/- ; & (iv) Income from training fees- Rs.83,71,082/-. In so far as receipts at serial no. (i) and (iv) are concerned, since the assessee had offered the receipts to tax as FTS, there is no dispute. With regard to receipts at serial no. (ii) and (iii) above, the assessee claimed that the said receipts are not taxable in India, as the said receipts does not qualify as FTS or Royalty as defined under India- UK DTAA. Further, the assessee has no PE in India. The revenue has disputed the same, the Assessing Officer (AO) vide assessment order dated 24.12.2008 held that income earned by the assessee from sale of software in India is taxable as royalty under Article 13 of India-UK DTAA. The AO further held that the income earned by the assessee from maintenance service is taxable in India as royalty/FTS under Article 13 of India-UK DTAA as well as u/s.9(i)(vi)(vii) of the Act read with Explanation 2 to section 9(i) of the Act. Further, the AO held that the assessee has PE in India as per provisions of Article 5(2)(k)(i) of India-UK DTAA.

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. 4.1. With regard to ground no. 5 of appeal assailing findings of the AO alleging that the assessee is having services PE in India, the ld. Counsel submits that the AO did not grant opportunity to furnish details of employees who had visited India for internal administration purposes. The assessee furnished details before the CIT(A), however, the same were not considered by the First Appellate Authority. The ld. Counsel furnished the relevant information in written submissions as were furnished before the CIT(A). The relevant extract of same is as under:-

“(4) Stay is less than 90 days -Further, 4 employees have visited India for internal administration purposes and their stay (which is less than 90 days) cannot be considered while computing threshold for determining whether the Appellant has PE in India. The table submitted before CIT(A) is as under: Traveller and Designation From date Return date Solar Days Kevin Longstaff, Head of Customer 12-Sep-05 16-Sep-05 5 Support Rajshree Mistry, Training Team 19-Aug-05 04-Sep-05 17 Robert Durrant, Head of Facilities 11-Feb-07 25-Feb-07 15 Robert Durrant, Head of Facilities 11-Apr-05 16-Apr-05 6 Robert Durrant, Head of Facilities 09-May-05 13-May-05 5 Robert Durrant, Head of Facilities 06-Jun-05 20-Jun-05 15 Robert Durrant, Head of Facilities 10-Oct-05 21-Oct-05 12 Michael Joseph, IT Officer 11-Apr-05 19-Apr-05 9 Michael Joseph, IT Officer 06-Jun-05 26-Jun-05 21 Michael Joseph, IT Officer 26-Sep-05 15-Oct-05 20

From the above, it may note that there are overlap of travel by different employees in FY 2005-06 (AY 2006-07). Enterprise-level table of unique India presence days for FY 2005-06 (01-Apr- 2005 to 31-Mar- 2006), with overlaps between employees removed is given below. Each row represents a continuous period during which at least one employee was in India; each calendar day is counted once only, regardless of how many employees were present. Enterprise-Level Unique India Days - FY 2005-06

Solar Unique Solar Traveler and Designation From date Return date Days Days Remarks Overlap with stay of Michal Joseph -11 Robert Durrant. Head of April 05 to 19 April Facilities 11-Apr-05 16-Apr-05 6 05 Michael Joseph, IT Officer 11-Apr-05 19-Apr-05 9 9

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. Robert Durrant. Head of Facilities 09-May-05 13-May-05 5 5 Overlap with stay of Robert Durrant. Head of Michal Joseph - 06 Facilities 06-Jun-05 20-Jun-05 15 Jun 05 to 20 Jun 05 Michael Joseph, IT Officer 06-Jun-05 26-Jun-05 21 21 Rajshree Mistry, Training Team 19-Aug-05 04-Sep-05 17 17 Part of training team Kevin Longstaff, Head of Customer Support 12-Sep-05 16-Sep-05 5 5 Michael Joseph, IT Officer 26-Sep-05 15-Oct-05 20 20

Total enterprise-level unique India days in FY 2005-06 (excluding FY 2006- 07) is less than 90 days In this regard, reliance may be placed on the judgement of ITAT- Mumbai in the case of Clifford Chance, United Kingdom v. Deputy Commissioner of Income-tax [2002] 82 ITD 106 (MUM.) wherein the following observation was made: “In our opinion multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one fiscal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year. Therefore this system of multiple counting leads to absurdity. Therefore it should be avoided.” Without prejudice to above, stay of Rajshree Mistry should not be included in above as Rajshree was part of training team [as submitted before CIT(A)] and revenue earned by the Appellant from training services has already been offered to tax on gross basis in the return of income filed by the Company.” Hence, even on based on number of days, no attribution is required.”

4.2. The ld. Counsel further asserted that while passing assessment order, the AO had held that the assessee has PE in India but no attribution on account of profit arising out of maintenance services was made by the AO. Now, if the matter is restored back to the AO for verification. The AO cannot make attribution in the remand proceedings. The ld. Counsel further submitted that since Indian group companies have already been remunerated at arm’s length, no further attribution would be required.

4.3. With regard to blanket rate of 15% tax applied by the AO, the ld. Counsel submits that after amendment to section 115A of the Act w.e.f 01.06.2005 the rate of

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. tax has been reduced to 10%. Therefore, the Work Orders (Master Services Agreement) that have been entered into on or after 01.06.2005 receipts in respect thereof are liable to be taxed at the reduced rate of 10%. In this regard, he placed reliance on the decision rendered in the case of Sulzer Brothers 46 ITD 546 (Chennai).

4.4. The ld. Counsel further submits that the AO has not given credit of withholding tax and refunds due to the assessee. He prayed for directions to the AO to allow the same.

5.1. On the issue of assessee having PE in India, the ld. DR submits that the assessee has given only names of employees and there duration of stay in India without any corroborative evidence before the CIT(A). Therefore, the information furnished by the assessee before the CIT(A) is unsubstantiated. Without prejudice, he submits that even if the information provided by the assessee is accepted at its face value, even then it will ex-facie depicts existence of assessee’s PE in India.

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. appeal of the assessee for A.Y. 2003-04, has decided these issues in favour of the assessee holding that receipts from sale of software are not in the nature of royalty. The relevant excerpts from the Tribunal order dated 01.08.2022 in ITA No.264/Del/2008 for AY 2003-04 are reproduced herein below:

“15. The issue of royalty or not on software has been examined by the Hon’ble High Court in case of Nokia Networks OY. Where in it was held that supply of software is not ‘royalty’ despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as “royalty”, the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG (310 ITR 320) (Bombay), it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act. 16. The Hon’ble Apex Court dealt with 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 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. 17. In the instant case, before us, falls under the first two categories. The Hon’ble Apex Court after examination of the entire conundrum held that “45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a nonexclusive, non-transferable licence to resell computer software, 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 sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, nonresident 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

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. 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. 46. When it comes to an 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. 47. In all these cases, the "licence" that is granted vide the EULA, is not a licence 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 "licence" 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 referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an 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 licence 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 to 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 of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence.” 18. The Hon’ble Apex Court held that a non-exclusive, nontransferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. 19. The right to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the context of nonexclusive EULAs, not being so. At this juncture, we have examined the written submission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user right only. The buyer has no right to re-sale the product and it still remained a copyrighted article which the buyer cannot alter modified, reproduced i.e. own will unless authorized. And such authorization has been given to re-supply to BSNL for their use, at the same time, keeping the all other rights with the assessee.

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. 20. Holding thus, the Hon’ble Supreme Court decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end- users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for royalty for the use of copyright in the computer software considering the definition of royalty under the DTAAs. Hence, keeping in view the judgment of Hon’ble Apex Court, we hereby allow the appeal of the assessee on merits.” 7. In appeal for AY 2005-06, the Tribunal followed its order for AY 2003-04 and decided the issue in favour of assessee.

Without commenting on the merits, we deem it appropriate to restore this issue back to the file of AO for examination and to decide the issue keeping in view the judicial precedents, provisions of the DTAA and the provisions of the Act. Thus, the issue is restored to the AO. The ground no. 5 of appeal is allowed for statistical purpose.

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. the assessee, after 1st June, 2005. This issue is restored back to the AO for reexamination. The AO shall decide this issue in accordance with law.

Order pronounced in the open court on Monday the 18th of May, 2026. Sd/- Sd/- MANISH AGARWAL VIKAS AWASTHY ACCOUNTANT MEMBER JUDICIAL MEMBER Delhi Dated: 15-June-2026

ITA 1521/DEL/2011 CSG INTERNATIONAL LTD. Copy to: CSG INTERNATIONAL LTD., (NOW KNOWN AS COMVERSE KENAN UK ), LEVEL 7, ADELPHI BUILDING, 1-11 1 JOHN ADAM STREET, LONDON-, NOT LISTED ADIT, CIRCLE-1(1), INTERNATIONAL 2 TAXATION,, NEW DELHI-, DELHI 3 THE PCIT / CIT, 4 THE D.R., ITAT, DELHI BENCH 5 GUARD FILE