BETA CAE SYSTEMS INTERNATIONAL AG ,BANGALORE vs. DCIT, INTERNATIONAL TAXATION, CIRCLE-1(1), BANGALORE

ITITA 548/BANG/2025Status: DisposedITAT Bangalore01 April 2026AY 2022-2323 pages
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What were the facts?

The assessee, M/s. Beta CAE Systems International AG, a Swiss company, filed an appeal against the final assessment order for Assessment Year 2022-23. The Assessing Officer (AO) treated income of Rs. 50,93,03,724/- from software licenses as royalty/Fees for Technical Services (FTS). The assessee claimed this income as business income and exempt under Section 10(50) of the Income Tax Act, 1961. The AO, disagreeing with the assessee's reliance on the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd., passed a draft assessment order. The Dispute Resolution Panel (DRP) upheld the AO's view, directing the AO to proceed with the assessment. The AO subsequently made the assessment, confirming the levy.

What did the Tribunal hold?

The Tribunal held that the income earned by the assessee from the sale of software products as software licenses, sale of software embedded in hardware, and hardware replacement and support services is not royalty within the meaning of Article 12 of the India-Switzerland DTAA. The Tribunal relied on the decisions of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra), which was also sustained in review, and subsequent decisions in Microsoft Regional Sales Pte Limited and MOL Corporation. The Tribunal found that these decisions cover the facts of the present case, including the nature of software licenses and embedded software. The reasoning was that the supply of software licenses, even post-amendment, does not constitute royalty as per the beneficial provisions of the tax treaty. The Tribunal explicitly noted that the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. covers the sale of software products as software licenses, sale of software embedded in hardware, and hardware replacement and support services. Therefore, the addition made by treating the income as royalty/FTS was deleted.

What were the issues?

1. Whether the supply of software licenses amounting to Rs. 50,93,03,724/- is to be treated as royalty or Fees for Technical Services (FTS) under the Income Tax Act, 1961, and the India-Switzerland Double Taxation Avoidance Agreement (DTAA), contrary to the assessee's claim of it being business income. 2. Whether the AO and DRP erred in not appreciating the binding nature of the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. and subsequent jurisprudence. Assessee's Contentions: - The supply of software licenses does not constitute royalty or FTS as the assessee does not part with the software permanently and customers cannot make prints or modify it. The license is for a limited period. - The use or right to use a copyrighted article is akin to the sale of goods, and receipts from software licenses should be classified as business profits under the tax treaty. - The assessee only transfers the 'right to use the software' and not the 'right to use the copyright embodied in such software'. - The confidentiality clauses protect the trade interests and do not grant additional rights to the user. - The income has already suffered Equalisation Levy under Section 165A of the Finance Act, 2016. - Reliance on the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. and subsequent judgments like Microsoft Regional Sales Pte Limited and MOL Corporation. Revenue's Contentions: - The assessee's revenue streams do not fall within the categories decided by the Supreme Court in Engineering Analysis Centre of Excellence P. Ltd. - The assessee is an original equipment manufacturer selling network-based solutions with limited features, and software licenses can be purchased separately. Distributors are given non-exclusive, non-transferable licenses with restrictions on copying and modification.

Which sections of the Income-tax Act were involved?

Section 10(50),Section 144(3),Section 144C(13),Section 144C(5),Section 9(1)(vi),Section 165A,Section 164(i),Section 234B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE

Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.

For Appellant: Shri Rajgopal, CA
For Respondent: Dr. Divya K.J, CIT-DR

PER SOUNDARARAJAN K., JUDICIAL MEMBER

This is an appeal filed by the assessee challenging the final assessment order passed by the Ld.DCIT, Intl Taxation Circle – 1(1), Bangalore dated 15/01/2025 in respect of the A.Y. 2022-23 and raised the following concise grounds of appeal:

“1. The impugned order passed by the learned Assessing Officer (Ld. AO) under section 144(3) r.w.s. 144C(13) of the Indian Income Tax Act 1961 (Act) to the extent which is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case. IT(IT)A No. 548/Ba

The order continues below.

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