IBM SINGAPORE PTE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1(2), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER

IT(IT)A No.729/Bang/2023

Assessment year : 2020-21

IBM Singapore Pvt. Ltd., Vs. The Asst. Commissioner of Income- C/O IBM India Private Limited, tax, 12, Subramanya Arcade, Circle International Tax – 1(2), Bannerghatta Road, Bangalore. Dharmaram College S.O, Bangalore South, Bangalore-560 029.

PAN – AACCI 2917 B APPELLANT RESPONDENT

Assessee by : Shri Sharath Rao, CA Revenue by : Shri D.K Mishra, CIT (DR)

Date of hearing : 29.11.2023 Date of Pronouncement : 30.11.2023

O R D E R Per Beena Pillai, Judicial Member

The present appeal by assessee is filed against the final assessment order of Ld.AO for the assessment year 2020-21 dated 27.07.2023 on following grounds of appeal:. “1. The Final Assessment Order ("FAO") passed by the Learned Assessing Officer ("Ld. AO") and the directions passed by the Honorable Dispute Resolution Panel ("Hon'ble DRP") upholding the taxability of sale of software as royalty is bad in law and on facts of the case.

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sample agreement in deciding the said issue. However, even assuming (without accepting) that the Ld. AO's analysis is right that the Hon'ble SC ought not to have decided the question of law by relying on the related party agreement between IBM India and the Appellant, even in such case it would only stand true in the case of Non-AEs and will not impair the judgement of the Hon'ble SC in IBM's own case. 10. The Ld. AO and the Hon'ble DRP has erred in misinterpreting the nature of offering and has erroneously concluded that the same falls within the ambit of fees for technical services and fees for included services besides being a fee for utilizing the software and proceeding to tax it a royalty which is spurious under the given facts of the case. 11. Without prejudice to any other ground taken above, given that the Review Petition is filed by the Department in the Hon'ble SC, the Ld. AO purely in the interest of revenue has proceeded to treat sale of software as transfer of right in software and has assessed such receipts as Royalty income in the hands of the Appellant without appreciating the facts of the subject case. 12. The Ld. AO has erred in erroneously levying interest under section 234A of the Act, without appreciating the fact that return has been filed within the due-date prescribed under section 139 of the Act. 13. Consequent to the above, the Ld. AO has erred in erroneously computing interest under section 234B of the Act. 14. That on the facts and in the circumstances of the case and without prejudice to any other grounds taken herein, the Learned AO has erred in adjusting credit of refund already issued amounting to Rs 1,355,935 which has not been received by the Appellant till date. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.”

Brief facts of the case are as under: 3.1 The assessee filed its return of income for A.Y. 2020- 21, declaring income of Rs.3,25,60,460/-. The case was taken up for scrutiny subsequently. 3.2 During the year under consideration, the assessee had following payments towards supply of off the shelf software also known as shrink wrapped software to the IBM India and Non AE’s. as detailed below:

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1 Payment received from Rs.389,08,14,241/ IBM India Pvt. Ltd. - 2 Payment received from Rs.32,03,90,247/- Non-Associated

3.3 The Ld.AO in the draft assessment order treated the amounts received by the assessee from the sale of software to its Indian AE i.e. IBM India and other non-AEs as royalty; both under the Act as well as the treaty. The findings of the Ld.AO are summarized below: • Since the use of a computer programme involves the use of a process, it is covered by the definition of royalty u/s 9(1)(vi), as far as the users are concerned. • Explanation 4 to section 9 (1)(vi) which was inserted by the Finance Act, 2012 w.e.f. 1.4.1976, clarified that consideration for use or the right to use computer software is royalty. In particular, the Memorandum to the Finance Bill, 2012, clarified the legislative intent behind taxing the sale of software as royalty. • Since the DTAA had been entered into force after 7th Sept, 1990, this position of the Indian Government that use of software under license amours to royalty, was already known to other treaty partners, at the time of entering to DTAA, hence it was wrong on the part of the assessee to plead that the Explanation 4 was unilaterally overriding the DTAA.

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• As per Article 12 of the DTAA payment for the use of, or the right to use any copyright of literary work, including, consideration for alienation of such right, is royalty. Since a computer programme is a literary work, payment for the use of or the right to use of copyright in it (computer programme), including consideration for alienation of copyright right in it, is royalty under the DTAA also. • The software is an embodiment of the knowledge, skill, experience and expertise of its (Software's) developer. In the case of software, a right in the software is the just or legal claim of its developer to it and such right is called the 'Copyright'. Thus, the right is not embodied in the software but it subsists in it. The very nature of the software is that it, being a computer programme, cannot be sold without the transaction involving some transfer of copyright. • Copyright as defined in Section 14 of Copyright Act is not an indivisible right but a bundle of rights. Further, the bundle of rights comprising copyright is also not an indivisible bundle, but consists of discreet rights bundled together. • Sec.14(b)(ii) of the Copyright Act which deals specifically with computer programme makes the right of selling or renting out a copy of the computer programme a copyright. Such a right is not a copyright in the case of a book, which can be sold as a chattel without transferring any copyright. But

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the software (computer programme) cannot be sold as a chattel without the transaction involving some transfer of copyright, which in turn is the bundle of rights defined in Sec.14(a) of the Copyright Act. • While the original copyright owner has the option to retain the exclusivity and keep all the rights to himself, he also has the option under the Copyright Act to assign one or more of these rights. The licensee does not become the owner of one or more rights comprised in the copyright as in the case of an assignee but gets an interest in the right. Such interest in the right which is not the right itself is usually the right to use the copyright without becoming the owner of the copyright. • The assessee has not parted with or been divested of its exclusive right to do or to authorize others to do the acts specified in Sec.14(b) of the Copyright Act in respect of the software developed by it. All it has done is, by exercising its right as the owner of copyright in the software, is just authorizing IBM India to sell or offer for sale that software to various remarketers and/or end-users. This is done in terms of an agreement entered between the assessee and IBM India, called IBM Software Remarketer Agreement (SRA). Since, as per the Software Remarketer Agreement, IBM India was only authorized (licensed) to sell or offer for sale the software in question, and the software is not sold to it, the consideration paid by IBM India to the

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assessee is for granting of license (authorization) to use the copyright in the software as specified in Sec.14(b)(ii) and not for the sale of such software. • There is a transfer of copyright right, though non- exclusive, between the assessee and IBM India and not sale of software as claimed by the assessee. The legal title of the computer program is not transferred to IBM India & others. It still lies with the supplier only i.e. the assessee. • The transaction by which the end user is authorized to store the software is in terms of an agreement between the end user and IBM Singapore which is called Software License Agreement. • The license is granted to the end user by the copyright holder in respect of copyright mentioned in Sec.14(a)(i). That means the programme is licensed to the end user, not sold. Neither the agreement nor the invoices consider the transaction concerned as 'Sale'. • Since the software in question is only licensed and not sold as per the Software License and Maintenance Agreement, any transaction in terms of this agreement through which the license is granted is not a purchase/sale transaction and the consideration paid by the end user is for granting of license to use the copyright. • The fact that the IBM India does not duplicate the software acquired from the assessee prior to its sale to the customers does not alter the fact that in the

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instant case there is a transfer of copyright right from the assessee to IBM India within the purview of Sec.9(1)(vi) of the Income Tax Act. • Further, licensing of copyright in respect of right to use is inextricably linked to the transaction of sale of software with licenses for resale since the distributor cannot in turn sell the license to use the intellectual properties without being licensed as a distributor. In fact, the license to sell enables the distributor to transact the right to use the intellectual property. The Ld.AO thus treated the payment for software as royalty.

2.2.12 On examination of the agreements of the assessee with related party, there is use of software to further develop application software to integrate it into its own software. For example, it is very clearly brought out by the AO in the draft assessment order by analyzing the section 14 of the copyright Act that in case of the assessee falls under the category of adoption of original work. It is thus clear that the assessee has given substantially liberty to the related party to decide on pricing and setting terms to sell items belonging to IBM Singapore Pte Ltd, which clearly highlights the grant of rights to modify the products to suite the related party end-users. In view of the above, the Panel concurs with the opinion of the AO that there is clear indication from the agreements that the assessee has parted with at least one of the rights as listed in section 14(b) of the copyrights Act.

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2.2.13 It is not out of place mention that the Department has filed a review petition on the order of the Hon'ble Supreme Court dated 02.03.2021 in the above case of the Engineering Analysis Centre of Excellence Private Limited. In the said review petition one of the pleas taken is that in the batch of cases decided by the Hon'ble Supreme Court the above case the owner of the software has in fact parted with at least one of the rights listed in section 14(a)I14(b) of the copyrights Act. Another issue raised in the review petition is that the India has expressed reservations to the OECD commentary on the aspect of taxing of software royalty. Further, the circulars have been issued by the CBDT while interpreting the Explanation 4 to section 9(1)(vi) which was inserted vide Finance Act, 2012 (w.e.f 1-6-1976) to further emphasis that the sale of software is Royalty 2.2.14 Further, the definition of royalty under the DTAA is wider than the one contained in the Income Tax Act. It also ropes in payment of consideration for the use of, or the right to use any copy right and that it is not necessary that the copy right holder has to convey exclusive rights either in assignment or licence. And, in terms of DTAA, the consideration paid for the use or right to use confidential information in the form of computer programme software itself would constitute royalty. 2.2.15 It is seen from the documents submitted, that the assessee has entered into agreement with related party like IBM India Pvt Ltd, to provide IBM Singapore Pte Ltd products and services as part of their service offerings to the assessee. From the agreements it is evident that IBM Singapore Pte Ltd grants the related party on-exclusive non-transferrable right to 'resell products and services to the end-users as a component of total solution of products and additional significant added value. As seen from the agreement the products including software and hardware and services are purchased by the related party and then offered as various solutions to the customers. Hence, the company doesn't differentiate between their product offering and software as both are included within the definition of product. It is also relevant that year under consideration the assessee has sold software licenses to Indian customers who have deducted correctly tax at source for the payments made to the assessee company for the purchase of integrated software, which includes hardware, software and supply of services, treating the whole integrated software as royalty. The assessee has mentioned that all the services are

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provided under a "comprehensive agreement" and the prices agreed on overall basis. This effectively means that this amount is charged irrespective of the fact as to whether any such services are availed or not. Considering the facts that software-- -seems to be rendered falls within the ambit of Fees for Technical Services and fees included Services besides being a Fee for utilizing the software the DRP considers the entire payment as Royalty. 2.2.1.6 In the light of the above discussion we find that the AG for valid reasons taxed the impugned receipts as 'royalty' and the same is upheld. Accordingly, we do not find any merit in the objections raised in various grounds including the additional submissions as above by the assessee. Therefore, these grounds of the assessee are rejected.”

3.1 On receipt of the DRP direction, the Ld.AO passed the impugned order making addition in the hands of the assessee at Rs.4211,12,04,488/- being the impugned receipts as ‘Royalty’.

3.2 Aggrieved by the order of the Ld.AO the assessee is in appeal before this Tribunal.

4.After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case for assessment years 2009-10, 2010-11 & 2012-13 in ITA Nos.1311 to 1313/Bang/2018, wherein this Tribunal vide order dated 3.9.2021 held as under: Ground No.3 relate to the assessment of sale proceeds received on sale of software licenses as “Royalty income”. Coordinate bench of this Tribunal in assessee’s own case for assessment year 2014-15 (supra) decided this issue as under: “4. The assessee is a Singapore based company engaged in the business of dealing in software & hardware products. Under the provisions of Indian Income Tax Act, the assessee is a non-resident. During the year under consideration, the assessee has sold software licenses to its Associated Enterprise (AE) and also to other Indian customers. The assessee did not offer any income on such sale for

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taxation in India. The ld. AR submitted that the AE of the assessee, viz., M/s. IBM India Pvt. Ltd is the authorized distributor of software licenses sold by the assessee. In respect of sales made to Non- Associated enterprises, the 14 A.R submitted that majority of sales were made to "other distributors" and in few eases, it was sold to End users also. The details of sales effected by the assessee during the year under consideration in India are tabulated as under by the A.O. SI. Name of the Party Offered for Sale value No. taxation or (in Rs.) not 1. 416,00,24, IBM1ndia Pvt. Ltd. No 2514,40,45 726 2. Non Associated No Enterprises 9 Total 441,94,65, 1i54 5. The A.O. took the view that the above said aggregate sale consideration of Rs.441.94 Crores constitute "royalty" in the hands of the assessee both under section 9(1)(vi) of the Income-tax Act,1961 ['the Act' for short] and under Double Taxation Avoidance Agreement (DTAA) entered between. India and Singapore. Accordingly, he made addition of Rs.441.94 crores to the total income returned by the assessee. The A.O. placed his reliance onthe decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. (345 ITR 494) and Synopsis International Old Limited (ITA Nos.11-15/ 2008). The Ld. CIT(A) also confirmed the addition. and hence the assessee has filed this appeal before us. 6. The Ld. A.R. submitted that the assessee has sold only licenses to use the software and it did not part with any of its right over the products within the meaning of Copy right Act. He further submitted that the provisions of DTAA entered between India and Singapore shall govern these transactions and as per the provisions of DTAA, the sale receipts of software licenses cannot be taxed as "royalty". For all these propositions, the Ld A.R placed his reliance on the decision rendered by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (2021) 125 Taxmann.com 42.

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(a) The agreement entered by the assessee with End users has been extracted in paragraph 44(i) of the order of Hon'ble Supreme Court.

(b) The agreement entered by the assessee with IBM India (re- marketeer) has been extracted in paragraph 44(ii)a of its order by Hon'ble Supreme Court and (c) The agreement entered by IBM India (r-marketeer) with .the end users has been extracted in. paragraph 44(ii)b of the order.

The Ld.AR submitted that the very same terms and conditions of granting license to use software continue during this year also. The Hon'ble Supreme Court has concluded that the payments made by the distributors and end-users to the non-resident software supplier placed in Singapore,-is not "royalty" within the meaning of the provisions of DTAA and hence the distributors/ end users are not liable to deduct tax at source u/s 195 of the Act from the payments made to the non-resident software supplier located in Singapore on the reasoning that the distributor's agreement and end-user's license agreement in the facts of cases before Hon'ble Supreme Court do not create any interest or right in such distributors/end- users, which would amount to use or right to use any copy right.

The Ld A.R submitted that the assessee herein is a Singapore 9. resident governed by the DTAA entered between India and Singapore. On the examination of very same DTAA provisions, the Hon'ble Supreme Court has held that the payments given by the distributors/ end users to the assessee are not "royalty" within the meaning of provisions of DTAA and hence there was no liability to deduct tax at source from those payments u/s 195 of the Act, since no income is chargeable to tax in India. In the instant case, the AO has assessed the sale proceeds received on sale of licenses as "royalty". In view of the above cited decision of Hon'ble Supreme Court, the sale proceeds received on sale of software licenses cannot be assessed as "royalty". Accordingly, the Ld.AR submitted that the impugned addition made by the AO and confirmed by Ld CIT(A) is liable to be deleted.

The Ld. D.R. on the contrary, placed his reliance on the 10. decision rendered by Ld. CIT(A).

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We heard the parties on this issue and perused the record. As 11. submitted by Ld. A.R., the Hon'ble Supreme Court has examined the issue whether the payments received by non-resident suppliers for selling software licenses are royalty or not in the case of Engineering Analysis Centre of Excellence (P) Ltd (supra). The Hon'ble Supreme Court examined this question considering four types of situations, which has been narrated as under:-

"4. The appeals before us may be grouped into 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. The second category of cases deals with resident Indian (ii) 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 resells the same to resident Indian distributor 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. 12. The Hon`ble Supreme Court analysed sample agreements in respect of all the four categories and gave the following finding:-

"45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non- exclusive, nontransferable license 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 sublicense or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident 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 distributor to the end-user in India, the

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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 art 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 "license" that is granted vide the EULA, is not a license 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 "license" 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 referrable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting art 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 license 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 too 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 license or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for 'the exclusive right to reproduce the book in the territory mentioned by the license.

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CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court concluded as under:-

"CONCLUSION Given the definition of royalties contained in Article 12 of the 168. DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/ EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. Our answer to the question posed before us, is that the 169. amounts paid by resident Indian end-users/distributors to non- resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/ distribution-agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income- tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment." 14. We also notice that the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) has been reversed by Hon'ble Supreme Court in paragraph 101-102 of its order. Similarly, the decision rendered in the case of Synopsis International Old Ltd. (supra) Ltd (supra) by Hon'ble Karnataka High Court has been reversed in paragraph 103 - 109 of its order. Before us, the Ld. A.R. submitted that the terms of agreements remain the same during the year under consideration also. Accordingly, as per the decision rendered by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), sale proceeds received by the assessee on sale of software licenses cannot be categorized as "Royalty" within the meaning of provisions of DTAA. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete the addition made as "royalty" income.

We heard the Ld. DR on this issue and perused the record. We find merit in the submissions of the Ld.AR Respectfully following the aforesaid view we direct the Ld.AO to delete the addition made as royalty income. Accordingly, ground No.3 raised by assessee stands allowed.”

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4.1 Further, Hon’ble jurisdictional High Court in assessment years 2006-07 to 2008-09 in ITA No.301 of 2019 vide order dated 8/09/2021 held as under:- “Learned Counsel for the appellant – assessee submits that the substantial questions of law raised herein are squarely covered by the ruling of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. The Commissioner of Income Tax and another reported in (2021) 432 ITR 471 (SC). 2. Learned counsel for the respondents revenue could not dispute the same. 3. In view of the aforesaid submissions, the substantial questions of law are answered in favour of the assessee and against the revenue. The appeal stands disposed of accordingly.”

The Ld.AR submitted that the MSA that was analysed by Hon’ble Supreme court while dealing with the assessee in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), is the same as the year under consideration, and that there is no change in the factual matrix of the transaction. In view of the above order of Hon’ble High Court, and as per 4.2 the decision rendered by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), wherein the transaction of the assessee with its AE has been analysed, sale proceeds received by the assessee on sale of software licenses cannot be categorized as "Royalty" within the meaning of provisions of DTAA. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and direct the Ld.AO. to delete the addition made as "royalty" income.

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Accordingly, the grounds raised by the assessee stands allowed.

Order pronounced in court on 30th day of November, 2023

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member

Bangalore, Dated, 30th November, 2023 / vms /

Copy to:

Asst. Registrar, ITAT, Bangalore