M/S. ZENDESK INC.,UNITED STATES OF AMERICA vs. DEPUTY COMMISSIONER OF INCOME-TAX, (INTERNATIONAL TAXATION), CIRCLE-2(2), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against order of DCIT (International Taxation) Circle-2(2), Bangalore passed u/s 143(3) r.w.s. 144C(13) of the Act. The assessee raised following grounds of appeal:

The grounds mentioned herein are without prejudice to one another: 1. That the order of the Respondent/Assessing Officer (‘AO’ for short) dated 16.10.2023, passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (‘the Act’), pursuant to the directions of the learned Dispute Resolution Panel (‘the DRP’ for short), is bad in law, contrary to the facts and circumstances of the case and is liable to be set aside. 2. On the facts of the case and in law, the AO erred in making an addition of Rs. 9,64,79,070/- to the total income of the Appellant for assessment year 2021-22. 3. That the DIN purportedly allotted to the directions dated 22.09.2023 issued by the DRP cannot be authenticated on the e-portal of the Income-tax Department

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 2 of 26 and therefore, the directions issued contrary to the Circular No.19/2019 dated 14.08.2019 issued by the Central Board of Direct Taxes, is invalid, and consequently, the final assessment order is bad in law and liable to be quashed. I. Taxability of amount received by the Appellant from its Indian customers for providing access to standard customer relationship management (CRM) platform as ‘royalty’. 4. That the AO and the DRP erred on facts and in law in treating the income earned by the Appellant for providing access to the CRM platform as ‘royalty’ under Section 9(1)(vi) of the Income-tax Act, 1961 (“the Act”) and also under Article 12 of the India-USA Double Taxation Avoidance Agreement (“India-USA DTAA”). 5. That the AO and the DRP erred on facts and in law in holding that the Appellant is not providing a standard software solution which is accessible through a platform and is instead offering its customers ‘the use’ or ‘right to use’ a design, model or process and hence is liable to tax in India as per the Act as well as the India-USA DTAA, without appreciating that the sale of software as a service is a sale of ‘copyrighted article’ and not ‘copyright’ and accordingly, the revenue from sale of software as a service is in the nature of business income not taxable under the India-USA DTAA in the absence of a permanent establishment of the Appellant in India. 6. That the AO and the DRP, in placing undue reliance on the expression “for the use of”, failed to appreciate the difference between the use of a platform vis-à- vis the use of the copyright or other intellectual property in the platform. 7. That the AO and the DRP failed to appreciate the fact that the software used in each such solution offered by the Appellant is standard in nature, and not only is there no change made by the Appellant to the software code or to the engineering of the software solutions at the customers’ request, the customers of the Appellant are also not permitted to modify the software code or reverse engineer the software. 8. That the AO and the DRP erred in holding that the payment received by the Appellant from its Indian customers are for the use of the Appellant’s software and would constitute ‘royalty’ without appreciating the settled principles laid down by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT and another, [(2021) 125 taxmann.com 42 (SC)] wherein it was held that the payment towards use of non-exclusive and non-transferable software/ computer program would not be in the nature of royalty under the India-USA DTAA. 9. That the AO and the DRP erred in holding that the Master Service Agreement (‘MSA’) entered by the Appellant with its Indian Customers does not expressly prevent reverse engineering, without considering the fact that the terms of the MSA specifically provide that Appellant’s customers are not permitted to decipher, decompile, reverse engineer or discover the source code of any software associated with the solution offered by the Appellant.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 3 of 26 10. That the AO and the DRP erred in holding that the customized and customizable nature of the software means that the customer obtains/enjoys rights in respect of the processes, models and designs underlying and defining the software/platform, when it ought to have appreciated that the Appellant’s customers only receive an access to the platform and do not have any control, possession or access to the server. 11. That the AO and the DRP erred in holding that in the context of copyright v. copyrighted article, the term ‘article’ necessarily constitutes something physical, tangible and enjoying corporeal presence, and narrowing the meaning of software, without giving regard to the decision of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Private Limited v. CIT and another [supra], where it was held that ‘article’ would also include a computer software which can be accessed through a physical medium or by downloading through the internet/ intranet. 12. That the AO and the DRP erred on facts and in law in not appreciating the fact that, the Appellant grants only the use of the platform with a limited, non- exclusive and non-transferable right to its Indian customers and thus, involves only sale of a copyrighted article. II. Erroneous computation of total income of the Appellant by the AO 13. That the AO erred on facts and in law in levying interest without specifying the provisions of the Act under which the interest is levied. III. Initiation of penalty proceedings 14. The AO erred in initiating penalty proceedings under Section 270A(9) of the Act. 15. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. IV. Relief 16. The Appellant prays that the appeal may be allowed, and the impugned final assessment order be set aside, in the interests of justice and equity. 2. Ground Nos. 1 to 3 are general in nature, which do not require any adjudication. 3. With regard to ground Nos.4 to 12, facts of the issue are that the Assessee is a Company incorporated in the United States (‘USA’) and is a tax resident of the USA. The Assessee is engaged in providing Software-as-a-Service (‘SAAS’) customer service platform (‘service platform’ in short) to customers, wherein it offers various web tools including helpdesk, e-mail, live chat, ticketing system etc. to end-

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 4 of 26 users for managing the service recipient’s customer relationships, engagement, and interactions.

3.1 During the previous year relevant to the assessment year 2021-22, the Assessee offered its software solutions (e.g. ‘Zendesk Support’ (ticketing solution)) which helps organizations address the rise in customer expectations and to enrich customer experiences.

3.2 The software solution offered to customers to manage their customer relationships and interactions is standard in nature and may be accessed through cloud computing technology. The software solution is hosted on the server provided by Amazon Web Services (AWS). The SAAS operated by the Assessee requires no human intervention for use of the software and it is easy to use and set up. The services/ platform provided is standard in nature and the customers select those services which are most suitable to their business model.

3.3 There is no customization involved as there is no change to the software code or to the engineering of the software solutions. The software solutions offered by the Assessee are owned by it. Further, the copyright, source code and intellectual property rights are all owned by the Assessee. The customers do not have any exclusive right to such software application/ tools developed by the Assessee.

3.4 The Assessee filed its return of income for the assessment year 2021-22, claiming a refund of the entire taxes deducted at source, given that no income chargeable to tax in India accrued/arose in its hands.

3.5 While so, the Respondent – Assessing Officer, picked up the return so filed for assessment, and passed a draft assessment order dated 27.12.2022, holding that the payments received from Indian customers towards subscriptions to the platform is for the use or

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 5 of 26 right to use a design, model or process and is hence taxable as “royalty”.

3.6 Challenging the draft assessment order, the Assessee filed its objections before the DRP, which vide its directions dated 22.09.2023 dismissed the objections raised by the Assessee, upholding the draft assessment order. Pursuant to the same, the final assessment order is passed.

3.7 The Assessee is a SAAS software development company that owns various web tools and provides a standard platform to customers to manage their customer relationship, improve business- customer relationships and customer communications through messaging, live chat, ticketing system, help centre, etc. The facility given by the Assessee allows its customers to access the application platform which is hosted on the server provided by AWS. The Assessee owns various web tools/ products which is offered to its customers on a standard basis at a subscription fee.

3.8 The Assessee’s web tools are designed to help organizations engage with people in innovative ways and to foster long-term customer loyalty and satisfaction through a variety of different channels, such as email, chat, voice, social media and websites. The Assessee owns the copyright, source code and intellectual property rights of the web tools/ platform provided to the customers and the customers do not have an exclusive right to such application of the Assessee and also do not manage or control the software.

3.9 Diagrammatic representation of the process involved for the Assessee’s customers to use the platform is as under:

Appellant AWS Cloud platform hosting software application of the Payment of Appellant subscription fees for use of SAAS Outside India India Appellant‘s Indian Access to the SAAS Customer

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 6 of 26 4. The ld. A.R. for the assessee submitted that the key features of the standard facility delivered to customers as explained to the AO and the DRP are as under:

• The Assessee allows its customers to access the application software through cloud computing technology. The platform is accessible by the customer using the login credentials (i.e. username and password) provided by the Assessee. The services are provided to the customers in the form of a subscription in consideration for a subscription fee.

• The application does not require any human intervention in providing the service. The services are standardized and not catering to any specific needs or customization of the Indian customers. The customers will select the configuration of the software that is the most suitable for its business requirements.

• The customers are not permitted to copy, modify, transfer or commercially exploit, make any improvements or enhancements in the application.

• There is no exclusivity in the provision of service to the Indian customers, since a similar platform is provided to various other customers and payments are also made towards standardized services.

• The customers only receive an access to the platform and no access is provided to any equipment of the Assessee or any design or process which has helped the Assessee in providing the service. All infrastructure and process required for provision of the services has always been used and under the control of the Assessee and no right to use the intellectual property or any equipment is given by the Assessee to its customers who are availing the services.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 7 of 26 • Neither the copyright in the software nor the use of copyright in the software is transferred to the Indian customer, only the right to use the copyrighted article is given which is distinct from the rights in a copyright.

• The servers on which the platforms are hosted, are legally and economically owned by the Assessee and the customers do not have any control, possession or access to the server. Also, no customer is devoted or earmarked a specific server of the Assessee. The customers are neither aware of the processes, designs, plans and models which is used for rendering the services by the Assessee.

• The customers do not get any right to use or modify the process, design, model and the agreement clearly stipulates all rights, title and interest in the platform remains with the Assessee and the customer is prohibited from any unauthorized commercial exploitation in any form of the access provided.

4.1 He submitted that the relevant clauses of the Master Subscription Agreement, which clearly enunciates that the Assessee has granted a limited, non-exclusive and non-transferable right to merely use the platform and no access to the process, design, plan, copyright, etc has been granted to the customers are as under:

“Section 2. Use of the Services. 2.3. ….. Further, in Your use of the Services, You agree not to (a) modify, adapt, or have the services or otherwise attempt to gain authorized access to the Services or related systems or networks; (b) falsely imply any sponsorship or association with Zendesk or the Zendesk group; (c) use the Service in any unlawful manner, including but not limited to violation of any person’s privacy rights; (d) attempt to bypass or break any security or rate limiting mechanism on any of the Services or use the services in any manner that interferes with or disrupts in integrity, security or performance of the Services and its components; (e) attempt to decipher, decompile, reverse engineer or otherwise discover the source code of any software making up the Service; (f) to the extent Youa re subject to the US health insurance portability and accountability Act of 1996, and its implementing regulations

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 8 of 26 (HIPAA), use the services to store or transmit any “protected health information” as defined by HIPAA, unless expressly agreed to otherwise in writing by Zendesk; …...” Section 12. Intellectual Property Rights 12.1 Each Party shall retain all rights, title and interest in any Intellectual Property Rights. The rights granted to You, Agents and End Users to use the Service(s) under this Agreement do not convey any additional rights in the Service(s), or in any Intellectual Property Rights associated therewith. Subject only to limited rights to access and use the Service(s) as expressly herein, all rights, title and interest in and to the Services and all hardware, software and other components of or used to provide the Services, including all related intellectual property rights, will remain with and belong exclusively to Zendesk.

12.2 The Zendesk Group shall have a fully paid-up royalty-free, worldwide, transferable, sub-licensable (through multiple layers), assignable, irrevocable and perpetual license to implement, use, modify, commercially exploit, incorporate into the Services or otherwise use any suggestions, enhancement requests, recommendations or other feedback We receive from You, Agents, End Users, or other third parties acting on Your behalf. The Zendesk Group also reserves the right to seek intellectual property protection for any features, functionality or components that may be based on or that were initiated by suggestions, enhancement requests, recommendations or other feedback We receive from You, Agents, End Users, or other third parties acting on Your behalf.

12.3 You may only use the Zendesk Marks in a manner permitted by Our Trademark Usage Guidelines available on Zendesk’s Intellectual Property Website, provided You do not attempt, now or in the future, to claim any rights in the Zendesk Marks, degrade the distinctiveness of the Zendesk Marks, or use the Zendesk Marks to disparage or misrepresent Zendesk or Our Services.” 4.2 He submitted that as per Section 90(2) of the Act, in relation to the assessee to whom any double taxation avoidance agreement applies, provisions of the Act shall apply to the extent they are more beneficial to that assessee. Based on this, he submitted that since the Assessee is a tax resident of USA, it is entitled to avail the provisions under the India-USA Double Taxation Avoidance Agreement (‘DTAA’) to the extent they are more beneficial than the Act. Hence, the subject payments received by the Assessee during the subject AY would be taxable in India only if they qualify as “royalty” under the India-USA DTAA.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 9 of 26 4.3 He submitted that as per Article 12 of the DTAA, the term ‘royalty’ has been defined as under:

“Article 12 — Royalties and fees for included services .. 3. 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, copyright of a literary, artistic or scientific work, including cinematography films 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 for 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. …” 4.4 He submitted that it is the allegation of the AO that the consideration is paid to the Assessee by the customers for the use or right to use a design, model or process. A design or a model, refers to features applied to an article whether in 2D or 3D formats and a process is any industrial process, for manufacturing or otherwise. Under the terms of use, the Indian customers only get a right to access the platform which is essentially a software and do not have any right or access to the copyright embedded in the platform. The customers do not have the access to the source code in the software platform. Further, the commentary to the Organization for Economic Co-operation and Development (“OECD”) Model Convention discusses the concept of ‘design’ and ‘model’ as under:

“10.2 A payment cannot be said to be "for the use of, or the right to use" a design, model or plan if the payment is for the development of a design, model or plan that does not already exist. In such a case, the payment is made in consideration for the services that will result in the development of that design, model or plan and would thus fall under Article 7. This will be the case even if the designer of the

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 10 of 26 design, model or plan (e.g. an architect) retains all rights, including the copyright, in that design, model or plan. Where, however, the owner of the copyright in previously-developed plans merely grants someone the right to modify or reproduce these plans without actually performing any additional work, the payment received by that owner in consideration for granting the right to such use of the plans would constitute royalties.” 4.5 Therefore, the question of there being any ‘design’ or ‘model’ for use does not arise at all.

4.6 It is, therefore submitted by the ld. A.R. that the payment received by the Assessee from its customers cannot be construed as ‘royalty’ under Article 12 of the DTAA. He placed reliance on following case laws:

(i) Salesforce.com Singapore Pte. v. Deputy Director of Income-tax, (International Taxation), [2022] 137 taxmann.com 3 (Delhi - Trib.) (paras 13 to 17 and 28 to 30); (ii) MOL Corporation v. Deputy Commissioner of Income-tax (International Taxation), [2022] 137 taxmann.com 286 (Delhi - Trib.) (paras 8 to 8.4); (iii) Urban Ladder Home Décor Solutions Pvt. Ltd. v. ACIT (International Taxation), Order dated 17.08.2021 passed by this Hon’ble Tribunal in IT(IT)A No. 615 to 620/2020 (paras 21 to 25); (iv) Director of Income-tax v. New Skies Satellite B.V., [2016] 68 taxmann.com 8 (Delhi) (paras 26-46); (v) Datamine International Ltd. v. Additional Director of Income-tax, Range-1, International Taxation, New Delhi, [2016] 68 taxmann.com 97 (Delhi - Trib.) (paras 11, 12.6-12.7, 13); (vi) Pluralsight LLC. V. DCIT (order dated 21.08.2023 passed by this Hon’ble Tribunal in ITA No. 37/Bang/2023) – paras 11-14 and 20. 4.7 He submitted that given that the terms of use are identical to the End-user license agreement (‘EULA’) considered by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT, [2021] 125 taxmann.com 42 (SC) and has similar restrictions placed on the users, the above judgment of the Supreme Court is squarely applicable.

4.8 Further, he submitted that with the advent of modern technologies, software program can be made available to the distributors or end users through internet. In many cases, the end-

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 11 of 26 users may not even need to download the software on the computer, rather the supplier provides SAAS wherein the users access the software, as a bundled service, on the data centre/server of the cloud service provider.

4.9 As regards electronically downloaded digital products, he submitted that in para 17.2 and 17.3 of the commentary, the OECD’s comments are as under:

“17.2 …. Where the consideration is essentially for something other than for the use of, or right to use, rights in the copyright (such as to acquire other types of contractual rights, data or services), and the use of copyright is limited to such rights as are required to enable downloading, storage and operation on the customer's computer, network or other storage, performance or display device, such use of copyright should not affect the analysis of the character of the payment for purposes of applying the definition of "royalties". 17.3 This is the case for transactions that permit the customer (which may be an enterprise) to electronically download digital products (such as software, images, sounds or text) for that customer's own use or enjoyment. In these transactions, the payment is essentially for the acquisition of data transmitted in the form of a digital signal and therefore does not constitute royalties but falls within Article 7 or Article 13, as the case may be. To the extent that the act of copying the digital signal onto the customer's hard disk or other non- temporary media involves the use of a copyright by the customer under the relevant law and contractual arrangements, such copying is merely the means by which the digital signal is captured and stored. This use of copyright is not important for classification purposes because it does not correspond to what the payment is essentially in consideration for (i.e. to acquire data transmitted in the form of a digital signal), which is the determining factor for the purposes of the definition of royalties. There also would be no basis to classify such transactions as "royalties" if, under the relevant law and contractual arrangements, the creation of a copy is regarded as a use of copyright by the provider rather than by the customer.” 4.10 He submitted that the rights in such software remain protected and cannot be considered to have been transferred, nor has a license been granted in respect of such software contained in the software embedded products supplied by the Assessee. Therefore, the consideration paid by the Indian customers to the Assessee is

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 12 of 26 towards purchase of software embedded products (which is a copyrighted article) and not for receiving any right in the copyright subsisting in the software embedded.

4.11 He submitted that the Respondent failed to appreciate that the Assessee’s case was a simple case of sale of software in which the purchasers of the software had no right, proprietary or exclusivity, and that, therefore, the question of payments made to the Assessee being in the nature of ‘royalty’ would not arise.

4.12 Therefore, he submitted that the payments received by the Assessee for sale of software were, at best, business profits and, in the absence of the Assessee having a permanent establishment in India, the said payments would not be chargeable to tax in India under Article 7 of the DTAA.

4.13 He further relied on the order of Tribunal in the case of M/s. Pluralsight LLC in ITA No.37/Bang/2023 for the AY 2016-17 dated 21.8.2023.

4.14 In view of the above, he humbly prayed that this Tribunal be pleased to allow the appeal, in the interests of justice and equity.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 13 of 26 solutions similar to chatbox with customers, customer grievance handling system, etc. to help business enhance their own customers' experience by providing customer support service through messaging and live chat, ticketing system, help centre, etc." and that its software solutions are "hosted on AWS cloud servers located outside India and accessible to customers through cloud computing technologies." It is also the assessee's contention that its services are provided to the customers in the form of a subscription in consideration for a subscription fee. 5.1 Further, she submitted that as per above explanation 2, para (iv) of sub-paragraph (a) which is relevant. It covers two circumstances — "for the use of' and "for the right to use". If the assessee's customers pay either for the use or for the right use the assessee's copyright, the sums paid would constitute royalty. The two terms cannot be treated as synonymous with each other.

5.2 She submitted the ld. DRP in his order also highlighted and reproduced relevant para's of Article 12(3) of the DTAA as under ARTICLE 12 - Royalties and fees for included services —3. The term “royalties” as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the fight to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for 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 the payments made to Zendesk Inc get squarely covered under the provision. She submitted that as per Explanation 2(iii) to Section 9(l)(vi) : the use of any patent, invention, model, design, secret formula or process or trade mark or similar property and also the provisions of Explanation

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 14 of 26 2(iva) to section : the use or right to use any Industrial, commercial or scientific equipment. Therefore, she submitted that the payments received by assessee amounting to Rs.9,64,79,070/- was correctly treated as Royalty by the AO and accordingly, the ld. DRP did not find any infirmity in the action of the AO and rejected the ground raised by the assessee. 5.3 Without prejudice to the above arguments, she submitted that the issue is decided against the department. The Tribunal may remit the issue to the file of ld. AO to consider the applicability of section 10(50) of the Act and it should be subject to equalization levy on such payment made by the assessee. 6. We have heard the rival submissions and perused the materials available on record. Admittedly in this case, assessee is a company incorporated in the United States of America (USA). It owns and operates a Customer Relationship Management (CRM) platform. The assessee contends that its activities in this respect are in the nature of Software as a Service (SAAS). It contends in its written submissions that it is a software-as-a-service (SaaS) software development company. It states that it provides a "customer service platform to help business organizations focused on customer relationship management, customer engagement and customer retention through a variety of different channels, such RS email, chat, voice, social media and websites." It states that it "provides various software solutions similar to chatbox with customers, customer grievance handling system, etc. to help business enhance their own customers' experience by providing customer support service through messaging and live chat, ticketing system, help centre, etc." and that its software solutions are "hosted on AWS cloud servers located outside India and accessible to customers through cloud computing technologies." It is also the assessee's contention that its services are provided to the customers in the form of a subscription in consideration for a subscription fee.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 15 of 26 6.1 It is also noted that with the advent of modern technologies, software program can be made available to the distributors or end users through internet. In many cases, the end-users may not even need to download the software on the computer, rather the supplier provides SAAS wherein the users access the software, as a bundled service, on the data centre/server of the cloud service provider. As regards electronically downloaded digital products, he submitted that in para 17.2 and 17.3 of the commentary, the OECD’s comments are as under: “17.2 …. Where the consideration is essentially for something other than for the use of, or right to use, rights in the copyright (such as to acquire other types of contractual rights, data or services), and the use of copyright is limited to such rights as are required to enable downloading, storage and operation on the customer's computer, network or other storage, performance or display device, such use of copyright should not affect the analysis of the character of the payment for purposes of applying the definition of "royalties". 17.3 This is the case for transactions that permit the customer (which may be an enterprise) to electronically download digital products (such as software, images, sounds or text) for that customer's own use or enjoyment. In these transactions, the payment is essentially for the acquisition of data transmitted in the form of a digital signal and therefore does not constitute royalties but falls within Article 7 or Article 13, as the case may be. To the extent that the act of copying the digital signal onto the customer's hard disk or other non- temporary media involves the use of a copyright by the customer under the relevant law and contractual arrangements, such copying is merely the means by which the digital signal is captured and stored. This use of copyright is not important for classification purposes because it does not correspond to what the payment is essentially in consideration for (i.e. to acquire data transmitted in the form of a digital signal), which is the determining factor for the purposes of the definition of royalties. There also would be no basis to classify such transactions as "royalties" if, under the relevant law and contractual arrangements, the creation of a copy is regarded as a use of copyright by the provider rather than by the customer.” 6.2 The rights in such software remain protected and cannot be considered to have been transferred, nor has a license been granted in respect of such software contained in the software embedded products supplied by the Assessee. Therefore, the consideration paid

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 16 of 26 by the Indian customers to the Assessee is towards purchase of software embedded products (which is a copyrighted article) and not for receiving any right in the copyright subsisting in the software embedded.

6.3 Further, as rightly pointed out by the ld. A.R., we have carefully gone through the clauses of Master Subscription Agreement, which clearly enunciates that the Assessee has granted a limited, non- exclusive and non-transferable right to merely use the platform and no access to the process, design, plan, copyright, etc has been granted to the customers are as under: “Section 2. Use of the Services. 2.3. ….. Further, in Your use of the Services, You agree not to (a) modify, adapt, or have the services or otherwise attempt to gain authorized access to the Services or related systems or networks; (b) falsely imply any sponsorship or association with Zendesk or the Zendesk group; (c) use the Service in any unlawful manner, including but not limited to violation of any person’s privacy rights; (d) attempt to bypass or break any security or rate limiting mechanism on any of the Services or use the services in any manner that interferes with or disrupts in integrity, security or performance of the Services and its components; (e) attempt to decipher, decompile, reverse engineer or otherwise discover the source code of any software making up the Service; (f) to the extent Youa re subject to the US health insurance portability and accountability Act of 1996, and its implementing regulations (HIPAA), use the services to store or transmit any “protected health information” as defined by HIPAA, unless expressly agreed to otherwise in writing by Zendesk; …...” Section 12. Intellectual Property Rights 12.1 Each Party shall retain all rights, title and interest in any Intellectual Property Rights. The rights granted to You, Agents and End Users to use the Service(s) under this Agreement do not convey any additional rights in the Service(s), or in any Intellectual Property Rights associated therewith. Subject only to limited rights to access and use the Service(s) as expressly herein, all rights, title and interest in and to the Services and all hardware, software and other components of or used to provide the Services, including all related intellectual property rights, will remain with and belong exclusively to Zendesk.

12.2 The Zendesk Group shall have a fully paid-up royalty-free, worldwide, transferable, sub-licensable (through multiple layers), assignable, irrevocable and perpetual license to implement, use, modify, commercially exploit, incorporate into the Services or otherwise use any suggestions, enhancement requests, recommendations or other feedback We receive from

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 17 of 26 You, Agents, End Users, or other third parties acting on Your behalf. The Zendesk Group also reserves the right to seek intellectual property protection for any features, functionality or components that may be based on or that were initiated by suggestions, enhancement requests, recommendations or other feedback We receive from You, Agents, End Users, or other third parties acting on Your behalf.

12.3 You may only use the Zendesk Marks in a manner permitted by Our Trademark Usage Guidelines available on Zendesk’s Intellectual Property Website, provided You do not attempt, now or in the future, to claim any rights in the Zendesk Marks, degrade the distinctiveness of the Zendesk Marks, or use the Zendesk Marks to disparage or misrepresent Zendesk or Our Services.” 6.4 As per Section 90(2) of the Act, in relation to the assessee to whom any double taxation avoidance agreement applies, provisions of the Act shall apply to the extent they are more beneficial to that assessee. Based on this, he submitted that since the Assessee is a tax resident of USA, it is entitled to avail the provisions under the India-USA Double Taxation Avoidance Agreement (‘DTAA’) to the extent they are more beneficial than the Act. Hence, the subject payments received by the Assessee during the subject AY would be taxable in India only if they qualify as “royalty” under the India-USA DTAA.

6.5 As per Article 12 of the DTAA, the term ‘royalty’ has been defined as under:

“Article 12 — Royalties and fees for included services .. 3. The term "royalties" as used in this Article means: (c) payments of any kind received as a consideration for the use of, or the right to use, copyright of a literary, artistic or scientific work, including cinematography films 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 for 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 (d) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 18 of 26 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. …” 6.6 It is the allegation of the AO that the consideration is paid to the Assessee by the customers for the use or right to use a design, model or process. A design or a model, refers to features applied to an article whether in 2D or 3D formats and a process is any industrial process, for manufacturing or otherwise. Under the terms of use, the Indian customers only get a right to access the platform which is essentially a software and do not have any right or access to the copyright embedded in the platform. The customers do not have the access to the source code in the software platform. Further, the commentary to the Organization for Economic Co-operation and Development (“OECD”) Model Convention discusses the concept of ‘design’ and ‘model’ as under:

“10.2 A payment cannot be said to be "for the use of, or the right to use" a design, model or plan if the payment is for the development of a design, model or plan that does not already exist. In such a case, the payment is made in consideration for the services that will result in the development of that design, model or plan and would thus fall under Article 7. This will be the case even if the designer of the design, model or plan (e.g. an architect) retains all rights, including the copyright, in that design, model or plan. Where, however, the owner of the copyright in previously-developed plans merely grants someone the right to modify or reproduce these plans without actually performing any additional work, the payment received by that owner in consideration for granting the right to such use of the plans would constitute royalties.” 6.7 Therefore, the question of there being any ‘design’ or ‘model’ for use does not arise at all. As such, in our opinion, the issue is squarely covered by the earlier order of the Tribunal in the case of M/s. Pluralsight LLC cited (supra) wherein the Tribunal held as under:

“11. Based on the definition of ‘Royalty’ under the India-USA DTAA, it is important to understand the meaning of the term ‘copyright’. The term ‘copyright’ is not defined under the provisions of the Act. Therefore, the provisions of the Copyright

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 19 of 26 Act, 1957 (‘Copyright Act’) has to be examined. As per section 14 of the Copyright Act, ‘copyright’ means the exclusive right to do any of the acts specified therein, viz., to reproduce the work, to issue copies of the work to public, to make any translation or adaptation of the work, etc. Unless any of the exclusive rights or a combination thereof as stated under section 14 of the Copyright Act are transferred by the copyright holder, it cannot be said that the use or right to use the copyright has been granted. Thus, payment made for acquiring the right to use any copyrighted product, wherein the payer does not get any of the ‘exclusive right’ as stated in section 14 of the Copyright Act, does not amount to payment made for the use or right to use the ‘copyright’ in the product and therefore, shall not be covered within the scope of ‘royalty’. The aforesaid principles have been upheld by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (supra). The Hon’ble Supreme Court has held that the amount paid by resident Indian enduser/distributors to non-resident computer software manufacturers/suppliers is not payment of royalty for use of copyright since the end- use/distributor does not get any of the rights under section 14 of the Copyright Act and does not get the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc., which is at the heart of the definition of ‘copyright’ under the Copyright Act. While holding so, the Apex Court has upheld the conclusions derived from the judgements of the Hon’ble Delhi High Court on the said issue as under: “117. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: . . . iv. A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the "licensed" computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise.

v. A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 20 of 26 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.

vi. The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in Starte Bank of India (supra) (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 21 of 26 MASTER SUBSCRIPTION AGREEMENT …….. Pluralsight provides an online technology learning platform on its websites http://www.pluralsight.com and any applicable sub domains thereof, and through any applications, functionalities, content, materials, Interactive Features (as defined below), or other online services provided by Pluralsight (collectively, the “site”). Customer desires to acquire business subscriptions for a number of its employees or its Affiliates’ employees (collectively, the “Business Users”) to access the Site, and Pluralsight agreed to grant such subscriptions subject to the terms and conditions set forth in this Agreement. TERMS AND CONDITIONS

a. Use of Materials. The Site contains copyrighted materials, trademarks, proprietary and confidential information, and intellectual property of Pluralsight and licensors of Pluralsight (collectively, “Proprietary Materials”), including, but not limited to, source code, video, text, software, photos, graphics, image, music, and sound. Customer agrees, for itself and for each business User, not to modify, publish, perform, make available to the public, transmit, participate in the transfer of sale of , create derivative works or adaptations of , or in any way exploit, in whole or in part, any Proprietary Materials. Proprietary Materials may only be accessed through the Site, and not from any other site or means. The License granted by this Agreement is a right of access through the Site only, and does not grant Customer or its Business Users any right to download or store any Proprietary Materials in any medium, other than that

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 22 of 26 downloadable content that is provided for certain training courses and specifically identified as available for download, including exercise files, course slides, and sample code (“Authorized Downloadable Materials”). Authorized Downloadable Materials are held by Customer or its business Users pursuant to a limited right only, and are subject to all restrictions described in this Agreement, including the prohibition on further transfer, sale , creation of derivative works, or exploitation in any manner. Customer shall not, directly or indirectly: (a) sublicense , resell, rent, lease, distribute or otherwise transfer rights or usage in the Proprietary Material ; (b) provide the Proprietary Material on a timesharing, service bureau, service provider or other similar basis ; or (c) remove or alter any copyright, trademark or proprietary notice in the Proprietary Material.

b. Reservation of Rights. Pluralsight reserves all intellectual property rights to the Proprietary Materials, other than as specifically granted under the License contained in this Agreement. No posting, copying, transmission, retransmission, distribution, redistribution, publication, republication, or otherwise reproducing , storing transmitting, modifying or commercially exploiting any Proprietary Materials in any form or by any means , for any purpose, is permitted without the express written permission of Pluralsight. Customer and Subscribers may not decompile, disassemble , or reverse engineer any software comprised in the Proprietary Material except to the limited extent as it permitted by law notwithstanding contractual prohibition.

a. Prohibited Conduct. Customer will use the Site in compliance with applicable law and acknowledges and agrees that neither it nor its Business Users may: 1.reproduce , redistribute, transmit, assign, sell, broadcast, rent, share, lend, modify, adapt, edit, create derivative works of , license, capture, download, save , upload, print, or otherwise retain information and content available on the Site other than with regard to Authorized Downloadable Materials, subject to the limited permissions set forth in this Agreement; 2. permit or provide others access to the Site’s library using a Business User username and password or otherwise, or the username and password of another authorized user; 3. remove or modify any copyright, trademark, legal notices, or other proprietary notations from the Proprietary Materials or any other content available on the site; 4. violate or attempt to violate the Site’s security mechanisms or digital rights management, or otherwise breach the security of the Site or corrupt the Site in any way; 5. attempt to gain unauthorized access to the Site or assist others to do so; 6. co-brand or frame the Site or establish a link in such a way as to suggest any form or association, approval, or endorsement on our part, without the prior express written permission of an authorized representative of Pluralsight;

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 23 of 26 7. post to the Interactive Features or any other portion of the Site any inappropriate, offensive, racist, hateful, sexist, pornographic, false, misleading, infringing, defamatory, or libelous content; 8. use or attempt to use the Site to store or transmit software viruses, worms, time bombs, Trojan horses, or any other computer code, files, or programs designed to interrupt, destroy, or limit the functionality of any computer software, hardware, or telecommunications equipment; or 9. manually or systematically harvest, scrape, collect or otherwise extract information or data contained on the Site, other than permitted use of Authorized Downloadable Materials or temporary storage of video materials for offline viewing as permitted by the Site’s intended features. (Emphasis supplied) 13. From a perusal of the MSA, we find that the subscribers only get a nonexclusive, non-transferable license to view the videos on the website. Neither any copyright in the software/database, nor any copyright in the videos is granted to the subscribers. The assessee reserves all intellectual property rights in its Proprietary Material, which includes the source code, videos, text, software, intellectual property of the assessee etc. The subscribers are not even allowed to download, store, transmit or edit such videos. Further, while the subscribers are allowed to download certain ancillary course material (Authorized Downloadable Materials) such as exercise files, course slides etc., are subject to all the restrictions mentioned in the agreement and even such material cannot be shared, transferred, sold or exploited in any manner. In essence, in view of the restrictions imposed under the MSA, the subscribers are not allowed:

to download or reproduce the Proprietary Material in any form • including the storing of it in any medium by electronic means; to further distribute, sell, sub-license, rent, lease or issue copies of the • Proprietary Material; to create any derivative work or exploit the Proprietary Material in any • manner; to remove or alter any copyright, trademark or proprietary notice in the • Proprietary Material; to decompile, disassemble, or reverse engineer the Proprietary • Material/database.

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 24 of 26 assessee’s database. The Mumbai Bench of the Tribunal in the case of Elsevier Information Systems GmbH v. DCIT: ITA No. 1683/Mum/2015, wherein on similar facts, has held as under: “13. … It is also clear from the terms of subscription agreement, the assessee has not transferred use or right to use of any copyright of literary, artistic or scientific work to its subscribers. What the assessee has done is, it has allowed customers to access its database and utilize the information available therein for their use. Further, it is observed, the data available in assessee’s database relates to the subject of chemistry and from the list of clients submitted in the paper book it is very much clear that they are either chemical or chemical related companies. There is no material on record which could even remotely demonstrate that while allowing the customer /users to the access the database, the assessee had transferred its right to use the copyright of any literary, artistic or scientific work to the subscribers. Further, from the invoices raised by the assessee, sample copies of which are placed in the paper book, it is noticed that the subscription is period based and further the subscriber may not even use the data stored in the database. That being the case, the payment made cannot be treated as royalty under Article–12(3) of the India–Germany Tax Treaty. . . . . 17. … By way of illustration we may further observe, online databases are provided by Taxman, CTR online, etc. which are accessible on subscription not only to professionals but also any person who may be having interest in the subject of law. When a subscriber accesses the online database maintained by Taxman/CTR online etc. he only gets access to a copyrighted article or judgment and not the copyright. Similar is the case with the assessee. Therefore, in the facts of the present case, the subscription fee received by the assessee cannot be treated as royalty under Artile–12(3) of India–Germany Tax Treaty.” (emphasis supplied)

a) Elsevier BV, In re: (2021) 123 taxmann.com 143 (AAR) b) Dow Jones & Company Inc. vs. ACIT: (2022) 135 taxmann.com 270 (Del ITAT) c) DIT(IT) vs. Dun & Bradstreet Information Services India (P.) Ltd.: (2011) 338 ITR 95 (Bom HC) d) Dun & Bradstreet Espana S.A., In re : (2005) 272 ITR 99 (AAR) e) Mc Kinsey Knowledge Centre India Pvt Ltd v. ITO: ITA No. 407/Del/2013 (Del ITAT) f) DCIT (IT) vs. Welspun Corporation Ltd.: (2017) 183 TTJ 697 (Ahd ITAT) g) ITO (IT) vs. Cadila Healthcare Ltd.: (2017) 184 TTJ 178 (Ahd ITAT) h) Iqvia AG v. DCIT: ITA No. 1203/Mum. /2021 (Mumbai ITAT)

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 25 of 26 16. In view of the above, we hold that the subscription fees received by the assessee does not amount to ‘royalty’ for use of or right to use of any ‘copyright’.”

6.8 Further, it was also held in the said order of Tribunal cited (supra) as follows:

IT(IT)A No.1079/Bang/2023 Zendesk Inc., USA Page 26 of 26 6.9 In view of the above order of the Tribunal, we are inclined to decide the issue in favour of the assessee and hold that the amount received by assessee from customer in India during the relevant previous year is not Royalty in terms of Article 12 of the DTAA with the India-USA. 6.10 The ld. D.R. argued with regard to equalization of levy u/s 10(50) of the Act which does not arise out of the order of lower authorities. Hence, does not arise and we dismiss the argument of ld. D.R. Accordingly, we allow the ground Nos.4 to 12 of the appeal. 7. Ground No.13 is consequential in nature and to be computed accordingly. 8. Ground Nos.14 & 15 are preposterous. Accordingly, dismissed as infructuous. 9. Ground No.16 is general in nature, which do not require any adjudication. 10. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 7th Aug, 2024

Sd/- Sd/- (Keshav Dubey) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 7th Aug, 2024. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.