DEPUTY COMMISSIONER OF INCOME-TAX , INTERNATIONAL TAXATION CIRCLE-1(2) , BENGALURU vs. M/S. BLUE YONDER INC. (FORMERLY KNOWN AS JDA SOFTWARE INC.), UNITED STATES OF AMERICA

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

These are cross appeals directed against the assessment order passed by CIT(A)-12, Bangalore dated 21.8.2023 for the assessment year 2019-20. The assessee has raised following grounds of appeal in IT(IT)A No.401/Bang/2023 for the AY 2019-20:

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 2 of 19 1. The order passed by the Learned Commissioner of Income-tax (Appeals) ['Ld. CIT(A)'] under section 250 of the Income-tax Act, 1961 ['the Act'] pursuant to the appeal filed by the Appellant against the order of the Learned Deputy Commissioner of Income Tax (International Taxation), Circle-1 (2), Bangalore ('Ld. AO') is bad in law and on facts. 2 Erroneous treatment of the reimbursements received towards computer software maintenance, subscription charges and telecommunication charges from Blue Yonder India Private Ltd. ['BY India] being taxable as 'royalty1/ 'Fees for Included Services' 2.1. On the facts and circumstances of the case and in law, the Ld. AO has erred in holding that the reimbursement received by the Appellant towards computer software maintenance, subscription charges and telecommunication charges taxable as 'Fees for Included Services' in India and the Ld. CIT(A) erred in upholding the same as 'royalty' in India. 2.2. Even otherwise, the Ld. AO and Ld. CIT(A), failed to appreciate that pure cost reimbursements are not taxable in India in the absence of an 'income' element. 3 Erroneous taxation of reimbursement towards computer software maintenance as 'royalty' 3.1. On the facts and circumstances of the case and in law, the Ld, CIT(A) grossly erred in holding that reimbursement of computer software maintenance is taxable as 'royalty' in India under Article 12 of the India- USA Tax Treaty, by misplacing reliance on the Hon'ble Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income Tax & Anr. [Civil Appeal Nos. 8733- 8734 of 2018]. 3.2. The Ld. CIT(A) grossly erred in making unilateral inferences on the contracts provided by the Appellant to draw an erroneous conclusion that the Appellant has received modification/ customization rights from Cisco without considering the agreement in entirety wherein restrictive covenants are contained in relation to the transfer of rights or grant of reproduction rights in the software. 3.3. Without prejudice to the ground 3.1 above, on the facts and circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) erred in concluding that the ancillary/ support services in relation to sale of software are taxable when the consideration for sale of the software itself is not taxable in terms of Article 12(3) of the India-USA Tax Treaty

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 3 of 19 to modify/customize the software and is solely for granting authorized access to and use of the purchased subscription service. 4.3. Without prejudice to the ground 4.1 above, the Ld. CIT(A) erred in concluding that reimbursement of subscription service constitutes 'royalty' in India under Article 12 of the India-USA Tax Treaty, without accepting the Appellant's reliance on the legal principles laid down by the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income Tax & Anr. [Civil Appeal Nos. 8733-8734 of 2018]. 5. Erroneous taxation of the reimbursement towards telecommunication charges as royalty 5.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that reimbursement of telecommunication charges is taxable as 'royalty' in India under Article 12 of the India-USA Tax Treaty 5.2. The Ld. CIT(A) grossly erred in concluding that the payments made by the Appellant for telecommunication service is 'process royalty' without appreciating the fact that the telecommunication charges are paid for use of a standard facility and the Appellant does not have right/ access to any asset of the service provider. 6. Taxability of reimbursement of INR 124,875,363 as fees for technical services/ fees for included services 6.1. The Ld. CIT(A) has erred in not adjudicating on the alleged taxability of reimbursement of expenses towards computer hardware maintenance and host country tax as fees for technical services/ fees for included services. 6.2. The Ld. CIT(A) ought to have appreciated that reimbursement of expenses towards computer hardware maintenance and host country tax would not constitute 'fees for technical services/ fees for included services'. 7. That on the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under Section 234B and 234D of the Act. The Appellant submits that the above grounds are independent of, and without prejudice, to one another.

The-Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 4 of 19 2. The Learned CIT(A) erred in basing her decision on the decision of IT AT in the case of the assessee for AY 2014-15 on the issue of sale of software, without going into the peculiar facts of AY 2019-20. 3. The learned CIT (A) erred in failing to take cognizance of the fact the assessee is into sale of customized software also and not merely shrink-wrapped software and hence, the decisions of Supreme Court in the case of Engineering Analysis may not be squarely applicable.”

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 5 of 19 Aggrieved by the aforesaid assessment order, the Assessee preferred an appeal before the Commissioner of Income Tax Appeals ("CIT(A)"), who vide order dated 21.03.2023, granted partial relief to the Assessee by directing that the amount of Rs. 26,15,83,740/- could not be taxed twice over and that the amount of Rs. 18,08,12,620/- could not be taxed as the same was covered by the decisions in the Assessee's own case for previous assessment years. Aggrieved by the order of the ld. CIT(A) to the extent it did not grant relief to the Assessee, the Assessee has preferred an appeal before us. To the extent that the ld. CIT(A) granted relief to the Assessee, the Revenue has filed the above appeal before us.

4.1 In this regard, the ld. A.R. submitted that during the year, the Assessee had received a sum of Rs. 47,94,44,402/- towards reimbursements of expenses incurred by the Assessee on behalf on BY India. The break-up of such reimbursements is as under: Sl. No Nature of reimbursement Amount 1. Computer hardware maintenance 3,88,04,561 2. Employee immigration expenses 2,85,02,503 3. Employee insurance charges 11,44,589 4. Professional fees 3,98,45,239 5. Host country tax 8,60,70,802 6. Computer software maintenance 17,37,43,255 7. Subscription charges 7,52,70,596 8. Telecommunication charges 1,97,41,529 9. Restricted Stock Unit expenses 1,63,21,328 Total 47,94,44,402 4.2 He submitted that the Assessing Officer held the aforesaid payments to be in the nature of ‘fees for technical services’ in the hands of the Assessee on the ground that the Assessee makes available technical and managerial skills and knowledge to BY India for the latter to function seamlessly in software product development

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 6 of 19 and services. On appeal, with respect to the payments towards (i) Employee immigration expenses; (ii) employee insurance charges; (iii) professional fees; and (iv) restricted stock unit expenses, the CIT(A) deleted the addition made holding that the same would not fall under the category of technical or consulting services and that they do not satisfy the conditions to be treated as ‘fees for included services’. As regards payments received towards (i) computer software maintenance; (ii) subscription charges; and (iii) telecommunication charges, the CIT(A) held the same to be in the nature of ‘royalty’ and sustained the addition. However, the ld. CIT(A) failed to adjudicate on reimbursements received towards (i) computer hardware maintenance; and (ii) host country tax. He submitted that the Assessee has filed an application under Section 154 of the Act before the CIT(A) seeking rectification to the said extent and the same is pending adjudication. 4.3 In this regard, he submitted that the payments received by the Assessee were purely in the nature of cost-to-cost reimbursements and does not contain any income element. The various services are procured centrally from various vendors for commercial and administrative reasons and the costs pertaining to the relevant BY entities is cross charged without any mark-up. While the Assessee procures the services centrally, the distribution, installation, post- sale services if any are the responsibility of the service provider and the Assessee is not involved at any stage. He submitted that the terms of the cost reimbursement agreement clearly evidences that the payments made to the Assessee were pure reimbursements without any mark-up being charged. In this regard, he placed reliance is placed on the following decisions: - DIT v. A.P. Moller Maersk A S (reported in [2017] 78 taxmann.com 287 (SC)) paras 10-11; - CIT v. Siemens Aktiongesellschaft – (reported in [2009] 177 Taxman 81 (Bombay)) para 33; and

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 7 of 19 - CIT v. Dunlop Rubber Co. Ltd. (reported in [1982] 10 Taxman 179 (Calcutta)) pages 37-39 of the caselaw compilation.

4.4 The ld. A.R. has given a brief description of the reimbursements as follows:

(i). Computer software maintenance: (a) The Assessee has entered into agreement with Dell and Cisco for software and hardware maintenance support services on a day-to-day basis for its group companies, including BY India. In terms of the agreement, the cost in this regard is borne by the Assessee and allocated to BY India on a cost-to-cost basis for the charges allocable to BY India. (ii). Subscription charges: (b) The Assessee makes payments to LinkedIn and Monster for usage of their database by group companies including BY India for hiring potential candidates. The Assessee does not obtain any modification or reproduction rights from the vendors. The cost incurred by the Assessee is allocated to each group entity including BY India and cross charged on a cost-to-cost basis. (iii). Telecommunication charges: (c) He submitted that the Assessee makes payment to ‘Sprint’ for the usage of link lines. This provides customers with a secure VPN solution with any-to-any intranet connectivity, as a private means to connect their enterprise sites and between multiple customers over VPN. The Assessee bears the cost and the same is allocated to BY India on a proportionate and cost- to-cost basis. 4.5 The ld. A.R. submitted that while the Assessing Officer held the above to be FTS, the ld. CIT(A) held the receipts to be in the nature of royalty. Under the DTAA, in order for a payment to be in the nature of fees for technical services, the services ought to ‘make available’ technical knowledge, experience, skill, know-how or processes, or

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 8 of 19 consists of the development and transfer of a technical plan or technical design. Technology will be considered ‘make available’ when the person acquiring the service is enabled to apply the technology without depending on the provider. He placed reliance in this regard on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. De Beers India Minerals (P.) Ltd. (reported in [2012] 21 taxmann.com 214 (Karnataka) – para 22. In the present case, the mandatory precondition of ‘make available’ is not satisfied in any of the aforesaid services, and therefore the payments are not in the nature of fees for technical service. In view of the above, he submitted that the reimbursements received from BY India is not taxable in India either under the Act or under the DTAA.

4.6 With regard to taxability of computer software and hardware maintenance expenses, the ld. A.R. submitted that the services are provided to BY India on a need basis and post availing such services, BY India will not be able to independently apply the knowledge. No technical knowledge, skill etc. are made available to BY India by the service providers. Therefore, the receipts in respect of these expenses cannot be held to be FIS under Article 12 of the DTAA.

4.7 The ld. A.R. submitted that the ld. CIT(A) was also not correct in holding the same to be ‘royalty’. As is evident from the agreements entered into between the Assessee and Cisco, and the Assessee and Sai Global, no exclusive or proprietary right in the software is made available to the user of the software and only a mere right to use the software is given. The order of the CIT(A) nowhere discusses how the payments for software maintenance can be construed as royalty. He placed reliance on the following decisions:

- Hon’ble Supreme Court of India in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT; and

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 9 of 19 - Hon’ble Karnataka High Court’s order for assessment year 2008-09 and AY 2010-11 and this Tribunal’s order for assessment year 2014-15 in Assessee’s own case – para 4.1 4.8 On the issue of taxability of subscription charges, the ld. A.R. submitted that the payments are made for usage of the database by the group companies for hiring of potential candidates. The reimbursements received from BY India towards the use of database of Salesforce is in the nature of a consideration to obtain rights to use the copyrighted database and not the right to use the copyright in the database. He submitted that the copyright is not transferred to the subscribers. He further submitted that BY India does not get the physical access or control over the equipment used by Salesforce in collating and maintaining the database. The subscription fee paid is not for the use of the equipment but for availing the facility of accessing the data/information collated by Salesforce. On a perusal of the agreement with Service Now Inc. it is evident that the customer is granted non-sublicensable, non-transferable and non-exclusive licenses. He placed reliance on the following decisions:

- 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; - Goldman Sachs & Co. LLC v. DCIT (reported in [2023] 152 taxmann.com 251 (Mumbai – Trib.)) – paras 16-19; and - DCIT v. Welspun Corporation Limited (reported in [2017] 77 taxmann.com 165 (Ahm.)) – paras 46-50.

4.9 On the issue of taxability of telecommunication expenses, the ld. A.R. submitted that the ld. CIT(A) has relied on the decision of this Tribunal in the case of Vodafone South Limited v. DDIT to hold that telecommunication charges claimed as reimbursement are to be held to be royalty under the DTAA which has now been reversed by the jurisdictional High Court reported in Order dated 14.07.2023 passed in ITA No. 160/2015 and connected matters. In any event,

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 10 of 19 he submitted that reimbursements received from BY India towards the usage of link line provided by Spirit for basic bandwidth services does not involve any right to use scientific equipment. He placed reliance on the following decisions:

- Telefonica Depreciation Espama v. ACIT (order dated 10.08.2023 passed by this Hon’ble Tribunal in IT(IT)A No. 2657/Bang/2019) – paras 3.8 to 5.2.21; - Communications Global Network Services Limited v. DCIT (order dated 29.08.2023 passed by this Hon’ble Tribunal in IT(IT)A No. 89/Bang/2019) – paras 5-8; and - Cerner Healthcare Solutions India (P.) Ltd v. DCIT (reported in [2022] 141 taxmann.com 564 (Bangalore - Trib.)) – Paras 15-20.

JUDGMENT

Learned Advocate for the assesses submits that issue involved in this petition's covered by the decision of the Hon'ble Supreme Court in Civil Appeal Nos.8733- 8734/2018, which is sought to be reviewed. 2. The same is not disputed by Shri K.V.Aravind, learned standing counsel for the Revenue.

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 11 of 19 3. Hence, the following: ORDER (1) Appeal is allowed.

(2) Substantial questions of law are answered in favour of assessee and against Revenue. (3) As prayed for, liberty is reserved to re-open this appeal based on the outcome of review petition in R.P.(C) No.001422-001497/2021 pending before the Hon'ble Supreme Court. No costs.”

6.1 Further, the Tribunal in assessment year 2014-15 had an occasion to examine the same issue in IT(IT)A No.2696/Bang/2017 dated 12.8.2021 wherein held as under: “3. Brief facts of the case are as follow: The draft assessment order was passed on 31.12.2016, wherein it was concluded that the amount received by the assessee-company for sale of software would constitute royalty within the meaning of Article 12(3) of the DTAA and as per the provisions of section 9(1)(vi) of the I.T.Act. The A.O. also brought to tax the receipts from Indian customers on account of annual maintenance service, implementation and consulstancy as fees for technical services u/s 9(1)(vii) of the I.T.Act and fees for included services under Article 12(4)(a) of India-US DTAA. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP issued directions dated 08.09.2017. The DRP rejected the objections raised by the assessee. Accordingly, final assessment order was passed on 12.10.2017 u/s 143(3) r.w.s. 144C(13) of the I.T.Act.

4.1 As regards the amounts received towards annual maintenance services, implementation and consultancy services, it was stated that when the receipts on account of sale of software itself not included as

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 12 of 19 royalty. Miscellaneous income on the same such as annual maintenance also cannot be brought to tax as fees for technical services.

4.2 The learned Departmental Representative was not able to controvert the submissions made by the assessee. In view of the judgment of the Hon’ble Apex Court, which is identical to the facts of the instant case, we hold that the payment received by the assessee-company towards sale of software would not constitute royalty and cannot be brought to tax. Further the miscellaneous receipts on account of sale of software also cannot be brought to tax as fees for technical services. It is ordered accordingly.

6.2 Contrary to this, now the ld. D.R. wants to reargue the case on same issue considered by jurisdictional High Court as well as by the Tribunal on earlier occasion stating that the agreements of the present assessee were not examined by the Hon’ble Supreme Court. In our opinion, when the issue is already settled by the Hon’ble Supreme Court, we are not in a position to take a different view on the same matter. Judicial discipline requires consistency in its proceedings. Being so, applying the ratio laid down by earlier decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. cited (supra), we allow the ground Nos.2 to 5 in favour of the assessee. Accordingly, these grounds of the appeal of the assessee are allowed. 7. Next ground No.6 is with regard to non-deduction of alleged taxability of reimbursements of expenses towards computer hardware maintenance and host country tax as FTS.

7.1 The ld. A.R. submitted that as stated above, the Assessee makes payments to Dell and Cisco towards computer hardware maintenance support services being carried out on a day-to-day basis. The cost in this regard is allocated to BY India on a cost-to- cost basis. Further, the Assessee incurs cost of certain employees deputed to BY India which are in the nature of tax paid in the USA

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 13 of 19 on behalf of the employees assigned in India and the same are crossed charged to BY India on a cost-to-cost basis.

7.2 He further submitted that the ld. CIT(A) has not adjudicated on reimbursements received towards computer hardware maintenance and host country tax. In any event, he submitted that the expenses in the form of computer hardware maintenance and host country taxes is not taxable as FTS or Fee for Included Services under Article 12 of the India-USA DTAA since there is no make available of any technical knowledge, experience, skill etc to BY India. 8. The ld. D.R. has strongly opposed the argument of assessee’s counsel and submitted that the issue may be remitted back to the file of ld. CIT(A) for fresh consideration. 9. We have heard the rival submissions and perused the materials available on record. The reimbursement received towards computer hardware maintenance is having no element of profit. It is just reimbursement of cost incurred by assessee. Being so, it cannot be considered as FTS. Similarly, reimbursement of host country tax also cannot be considered as FTS and it is just reimbursement. Considering these facts, we uphold the argument of assessee’s counsel and this ground of assessee’s appeal is allowed. 10. Next ground No.7 is with regard to erroneous levy of interest u/s 234B & 234D of the Act.

10.1 The ld. A.R. submitted that the Assessing Officer has erred in charging interest under Section 234B of the Act amounting to Rs. 1,64,58,368/- and interest under Section 234D of the Act amounting to Rs. 39,69,374/. Therefore, the ld. A.R. requested that this Tribunal may be pleased to direct the Assessing Officer to delete the interest levy. Wherefore, he prayed that this Tribunal may be pleased to allow the appeal preferred by the Assessee and dismiss the appeal preferred by the Revenue, in the interests of justice and equity.

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 14 of 19

14.1 The ld. A.R. submitted that as stated above, while filing the return of income, the Assessee had declared Rs. 44,23,96,360/- as income and claimed the same amount as exempt income in Schedule EI thereby declaring NIL income. In the assessment order, the only issue on which an addition was sought to be made was the reimbursements received from BY India which the AO sought to treat as ‘Fees for Included Services’. While computing the total assessed income, the Assessing Officer erroneously proceeded on the basis that Rs. 44,23,96,360/- is the returned income and computed the assessed income at Rs. 92,18,40,761/- as under: Sl. No Particulars Returned income 1. Returned income 44,23,96,360/- 2. Reimbursement receipts considered 47,94,44,402/- taxable by the Assessing Officer 3. Total assessed income 92,18,40,761/- The break-up of Rs. 44,23,96,360/- is as under:

Sl. No Particulars Returned income 1. Software and maintenance receipts 18,08,12,620/- 2. Reimbursement receipts from BY India 26,15,83,740/- 3. Total receipts as per return of income 44,23,96,360/- 14.2 Thus, it is evident that the Assessing Officer taxed software, annual maintenance and installation receipts to the tune of Rs.

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 15 of 19 18,08,12,620/-, without providing any reasons for the same and clearly the same was on account of an error in computation rather than an intended addition to the total income.

14.3 The ld. A.R. submitted that in any case, the Assessee had received a sum of Rs. 18,08,12,620/- towards sale of software and provision of annual maintenance and installation services to third party Indian customers, which is neither taxable under Section 9(1)(vi) of the Act nor under Article 12 of the India-USA Double Taxation Avoidance Agreement (‘India-USA DTAA’ for short) as ‘royalty’. The CIT(A) granted relief to the Assessee holding that the same would not qualify as royalty and consequently, the consideration received by the Assessee towards maintenance services, implementation and consultancy services would not be taxable in India as fees for technical services. He submitted that the ld. CIT(A) placed reliance on the decision of this Tribunal in Assessee’s own case for assessment year 2014-15 and held that the sale of software would not constitute royalty under the provisions of the Act and the India-USA DTAA. Further, it was held that since the receipts on account of sale of software are not in the nature of royalty, the income received towards annual maintenance services, implementation and consultancy services also cannot be brought to tax as FTS.

14.4 The ld. A.R. submitted that the issue on taxability of income from sale of software is squarely covered by the decision of the Hon’ble Karnataka High Court in Assessee’s own case for assessment year 2008-09 and 2010-11 (Order dated 29.05.2023 in ITA No. 977/2017) and this Tribunal for assessment year 2014- 15 in Assessee’s own case (Order dated 12.08.2021 in IT(IT)A No. 2696/Bang/2017), and also by the decision of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (reported in [2021] 125 taxmann.com 42 (SC)). Further, the

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 16 of 19 issue on taxability of income from AMC is squarely covered in Assessee’s own case for the assessment years 2008-09 and 2010- 11 by the decision of the High Court of Karnataka and for assessment year 2014-15 by the decision of this Tribunal.

14.5 He submitted that the Revenue, in the written submissions filed on 07.09.2023, has attempted to distinguish the above decisions alleging that the Assessee provides customized software solutions over cloud based on the specific needs of its customers and not merely shrink-wrapped software. For this purpose, the draft assessment order for assessment year 2021-22 has been relied upon.

14.6 He submitted that firstly, an assessment order for a subsequent assessment year, that too a draft one, where the Company has contested the underlying addition to total income, cannot be the basis to decide the issue for the current assessment year. Further, it is also submitted that the material/ agreements gathered as a part of assessment proceedings for a subsequent assessment year cannot be used for concluding on the taxability of underlying transactions in a prior assessment year.

14.7 Secondly, there is no customization involved. The Assessee is engaged in sale of standardized software. There are various standard modules that the Assessee has already created in the software that it licenses. Depending on the sector that the customer belongs to and the requirement laid down, the modules are provided to the customer. There is no further customization of the software codes etc. based on customer’s requirements. He submitted that the Assessee does not provide any rights to the customer to exploit the software sold and the software is used by the customer in their capacity as an end/ ultimate user.

14.8 He submitted that clause 5 relied upon in the agreement with Asian Paints produced along with the Revenue’s written submissions

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 17 of 19 dated 07.09.2023 nowhere indicates that there is customization. All that the clause states is that there could be some third party software embedded in the software provided by the Assessee to the end customers and states that such third party software is subject to additional terms of use. This cannot, by any stretch of imagination, lead to the conclusion that there is parting with the copyright right in the software. Which of the rights contemplated in Section 14 of the Copyright Act has been parted with is not forthcoming from the written submissions filed. The responses to notices issued 133(6) for assessment year 2021-22 as extracted in the draft assessment order for assessment year 2021-22 of Pepsi Co. do not also indicate that it is customized software. It is only an inference drawn by the Assessing Officer on the basis of surmises.

14.9 He further submitted that as stated above, the purchasers of the software had no right, proprietary or exclusive, except to use the said software for their internal business. The payments received by the Assessee is for the use of copyrighted article and not for the use of a copyright. He submitted that no right vests in the end-users to reproduce, sell or make copies of the same.

14.10 He submitted that a non-exclusive, non-transferable and royalty-free license was granted to the purchasers that merely enabled use of a copyrighted product and thus, the consideration received would not be ‘royalty’ in terms of Section 9 (1)(vi) of the Act. Section 9(1)(vi) of the Act defines royalty to inter alia mean any consideration received for (i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property (clause (i)); (ii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property (clause (iii)); (iii) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 18 of 19 Section 44BB (clause (iva)). He submitted that the Assessee owns the title, copyright and other intellectual property rights in the software and the same is not transferred to the customers in India and therefore, the consideration received by the Assessee would not constitute royalty in terms of Section 9(1)(vi) of the Act.

14.11 Even in terms of Article 12 of the India-US DTAA, Article 12(3) of the India-USA DTAA defines the term ‘royalty’ as “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 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 …..”

14.12 He submitted that even in terms of the DTAA, the payments made to the Assessee would not constitute ‘royalty’ within the meaning of Article 12 of the India-USA DTAA as the payments are not for transfer of copyright to the purchasers but for sale of software.

14.13 With respect to annual maintenance and installation services rendered to Indian customers, the Assessee submits that the said services are a part and parcel of the sale of software and therefore, the nature of such services would derive its value from the principal component of the transaction, i.e., sale of software. Therefore, he submitted that the said receipts also cannot be brought to tax given that the underlying software would not be taxable as royalty under the provisions of the Act read with the DTAA.

14.14 Without prejudice to the above, the ld. A.R. submitted that that the income towards AMC would not constitute Fees for Included services under India-USA DTAA given that:

IT(IT)A No.401/Bang/2023 Blue Yonder Inc., United States of America Page 19 of 19 - the AMC services are inextricably and essentially linked to sale of underlying software, which is not chargeable to tax as royalty; and - The Assessee does not ‘make available’ any technical knowledge, experience, skill, etc. to the customers while provision of such services. 14.15 The ld. A.R. also placed reliance on the decision of Hon’ble Karnataka High Court (rendered for AY 2008-09 and AY 2010-11) and this Tribunal’s decision (rendered for AY 2014-15) in Assessee’s own case, wherein it was held that income towards AMC is not liable to tax in India.

Sd/- Sd/- (Madhumita Roy) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 3rd Jan, 2024. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.