M/S. SYNAMEDIA ASIA PRIVATE LIMITED,SINGAPORE vs. INCOME-TAX OFFICER, (INTERNATIONAL TAXATION), WARD-2(1), BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 (in IT(IT)A No. 530/Bang/2023) Assessment Year : 2020-21 M/s. Synamedia Asia The Income Tax Pvt. Ltd., Officer, 3 Temasek Avenue, International #27-03 Centennial Taxation Ward Tower, 2(1), Singapore – 039190 Vs. Bangalore. PAN: ABCCS1700R APPELLANT RESPONDENT Assessee by : Shri P.C. Kincha, CA : Dr. G. Manoj Kumar, Revenue by CIT DR Date of Hearing : 10-10-2023 Date of Pronouncement : 31-10-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of the final assessment order dated 22.06.2023 for A.Y. 2020-21 on the following grounds of appeal:

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Brief facts of the case are as under: 2. The assessee company, a NRI, has e-filed return of income on 12.02.2021 by declaring NIL income for the year under consideration. During the year under consideration the assessee company has offered NIL income and has claimed the entire TDS deducted of Rs.52,78,120/- as refund. The assessee company is domiciled in Singapore and is engaged in the business activities of providing video solutions globally. The Company has provided Video Solutions and Services for Pay TV operators such as Bharati Telemedia Ltd, Dish TV India Ltd. Subsequently the case has been selected for complete scrutiny under CASS to verify the refund claim of the assessee.

Page 8 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 2.1 The Ld.AO after considering the submissions of the assessee, passed the draft assessment order on 30.09.2022 by holding as under:

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2.2 Aggrieved by the draft assessment order, the assessee preferred objections before the DRP. The DRP after considering the submissions of the assessee observed and held as under: “3.4 The submissions of the assessee have duly been considered. As already discussed supra, the objection 1 of the assessee has not been accepted by this Panel. Consequently, the above objection of the assessee is also not accepted as the support services provided are inextricably linked to supply of hardware components/ software for which royalty has been paid. In such circumstances, the same is found to be within the scope of Fees for Technical Services (FTS) as defined under the DTAA under clause 4(a) and clause 4(b) of the article 12. Therefore, receipts from provision of support services are in the nature of FTS and so AO has correctly held the same to be taxable in India. Considering the above, the objection No.2 of the assessee is not accepted." 2.3 On receipt of the DRP directions, the Ld.AO passed the final assessment order by making addition of Rs.1,61,62,422/- in the hands of the assessee. Aggrieved by the order of the Ld.AO, assessee preferred appeal before this Tribunal.

Page 10 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 3. At the outset, the Ld.AR submitted that the issue stands squarely covered in favour of the assessee by the order of this Tribunal in assessee’s own case for A.Y. 2014-15 reported in (2022) 140 taxmann.com 265. 3.1 He submitted that for the preceding assessment years prior to A.Y. 2014-15 also this Tribunal has taken a consistent view in respect of the issues alleged herein. Referring to the agreement placed at page 124 of the appeal set, the Ld.AR submitted that it is the same agreement that is continuing from 2007 and there is no change in the circumstances between the assessee and Bharti Telemedia. 3.2 The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 4. We note that for A.Y. 2014-15 and for the preceding assessment years, this Tribunal has considered identical issue on similar facts. From the orders placed in the paper book, we note that this Tribunal has analysed the terms on the license agreement between assessee with its customers and concluded that the terms of the agreement in the case of assessee is similar with various circumstances that has been observed by Hon’ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. CIT reported in [2021] 125 taxmann.com 42. Coordinate Bench of this Tribunal for A.Y. 2014-15, after considering all the aspects and the orders passed in the preceding assessment years observed and held as under:

Page 11 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 “9. With regard to issue (i) where the receipts towards software license treated as 'royalty' the Tribunal has held that,— 27. The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the licencee. It is nonexclusive non- tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty. 10. The next issue raised by the assessee is the treatment of software receipts embedded in hardware as regarded as 'royalty'. This issue is also considered by the Tribunal in assessee's own case (supra) where the Tribunal has held that— 24. The terms of the other licence agreement between the various parties have not been set out in the order of assessment though the copies of the same are available in the Paper Book. The terms of the agreement are clearly similar to the terms of the agreement which the Hon'ble Supreme Court analyzed in the case of Engineering Analysis. We shall anlyse the terms of the Agreement between the Assessee and Bharati Telemedia as a sample. Techinical and commercial proposal given by the Assessee alongwith the STB provides technical specifications for the engineering of the relevant systems. That by itself cannot be the basis to conclude that there has been use of any copyright or that technical services have been provided. This is like providing a technical and user manual describing the system and does not imply granting of any copyright rights or transferring technical knowledge. The software is only licensed for use without granting any license over the copyrights [see article 3 - 3.01 - clause (a) at Page 58]. There are further restrictions on such license like (a) no copies to be made (b) no reverse engineering decompiling or otherwise (c) no sub-license rights (see clause 3.02 at Page 59). The clauses are typical clauses in a Software End User License Agreement (EULA) as analysed by Hon'ble Supreme Court in the Engineering Analysis case (see paras 45 - 47 of the SC judgment). The Viewing cards, Set Top Boxes and the software to run it are together an integrated system. This is similar to the fourth category examined by the Supreme Court. The Supreme Court approved the judgment of Delhi High Court (para 118 ) in the cases of Ericsson and Nokia which dealt with the sale of integrated telecom equipment with embedded software (para 110). The AO also acknowledges that STB, Viewing Card and embedded software is an integrated system. There were certain inferences drawn by the AO based on the FAO given along with the STB. Even if software is licensed and not sold, it is akin to sale based on real nature of transaction. Bharti is just a distributor of Assessee's products (i.e., integrated system). Distributor is buying products for onward sale - para

Page 12 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 45 of SC judgment. Use of hardware and software to run are key characteristics of an integrated system. Even if it is licensed, the real nature is that of a sale as per para 51 of SC judgment (one has to look at the real nature of the transaction upon reading the agreement as a whole as laid down by the Hon'ble Supreme Court and para 52 of SC judgment (licensing is akin to sale - reference to SC judgment in TCS case). With reference to paras 4.1 to 4.8 of FAO, it is clear from para 73 of SC judgment that granting of license has to be granting license over copyright rights as per section 14(b) read with 14(a) of Copyright Act. In para 97 the Hon'ble Supreme Court has observed that under software license agreement, customer is licensed to only use the software as such and not the copyrights in the software, therefore granting of license in such cases does not amount to royalty (Assessee's case is similar - see article 3.01 and 3.02 of the Agreement). In para 109 of SC judgment, it has been specifically laid down that it is wholly incorrect to say that license in software EULA is license to use copyrights. In para 117 for overall conclusions of SC in the context of distinction between license over copyright and license to use copyrighted product - specifically para 117(v), the Hon'ble Supreme Court has held that even if fee schedule refers to royalty payment, this is consideration for purchase of an integrated system. One has to look at the overall agreement and the real nature of the transaction (para 51 of SC judgment). On the AO's reference in para 4.4 of FAO as license being for use of IPR over viewing cards and software is incorrect since as per article 3.01 and 3.02 (page 58-59 of paper book), license is for simplicitor use of the software, with several restrictions. Also, as per clause 3.04 (No license to accessed materials) and clause 3.05 (Ownership), no license whatsoever is granted over using the IPR in the software. License is to only use software to enable using the accompanying hardware, as part of an integrated system. Aspect of training referred to in para 4.5 of FAO does not advance AO's case since software and hardware are part of an integrated system akin to supply of goods. When training is provided to use it, it is similar to initial training provided by a vendor of any high end electronic or integrated equipment (for example, telecom equipment as examined by Delhi HC in Ericsson case). This doesn't amount to training in furtherance of license of copyright. With reference to para 4.6 on provision of operations and maintenance manual, this is akin to provision of a User Manual which describes the functioning of any equipment. For example, every sale of a TV comes with an operations and user manual. With refence to para 4.7, the providing of AMC services like repair, etc is akin to post-sale standard AMC services provided in the case of any sale of equipment. This AMC service does not in any way make the original transaction a royalty transaction. Since the AY is AY 2010-11 (i.e., prior to the Finance Act, 2012 amendment by way of inserting Explanation 4 to Section 9(1)(vi) of the Act, as per the SC in its judgment, the Finance Act, 2012 amendment has to be read as expanding the scope of royalty with prospective effect from the Assessment Year 2013-14 (After FA, 2012 was

Page 13 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 enacted) and cannot be upheld as clarificatory so as to apply retrospectively for previous assessment years (para 73 - 74, 78 and 79). Therefore, the payments made under the customer contracts are not be treated as "royalty" under section 9(1)(vi) of the Act itself for the subject AY 2010-11, even without reference to the DTAA. Under the DTAA, clearly these are not "royalty" payments under article 12 of the India - UK DTAA as held by the SC (UK DTAA has also been examined by the SC para 40. 25. As already observed in the earlier paragraph, the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon'ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts: 1. The seven acts enumerated in sub-clause (a); and 2. The eighth act of selling or giving of commercial rental or offering for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any medium electronically; 2. To issue copies of the work to the public, provided they are not copies already in circulation; 3. To perform the work in public, or communicate it to the public; 4. To make any cinematographic film or sound recording in respect of the work; 5. To make any translation of the work; 6. To make any adaptation of the work; and 7. To do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (1) to (6). The court held that a licence from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a licence issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is 'licensed' by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end- user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd. [2011] 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned

Page 14 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 addition stood overruled by the Hon'ble Supreme Court. We have already set out the terms of the Agreement under which software in question was sold by the Assessee to its distributions and the terms of the EULA. The same are identical to the case decided by the Hon'ble Supreme Court and hence the ratio laid down therein would squarely apply to the present case also. 26. On the question whether the provisions of the Act can override the provisions of the DTAA, the Hon'ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the "transfer of all or any rights" in respect of any right, property, or information included and had always included the "transfer of all or any right for use or right to use a computer software". The court ruled that Explanation 4 to section 9(1)(vi) expanded the scope of royalty under Explanation 2 to section 9(1)(vi). Prior to the aforesaid amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or other similar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of 'royalties' will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term 'copyright' has to be understood in the context of the Copyright Act. The court said that by virtue of article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for "the use of, or the right to use, any copyright "of a literary work includes a computer program or software. It was held that the regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. 11. The last issue of receipts on account of rendering support services regarded as FTS, is also considered by the Tribunal in assessee's own case (supra) and held that "28. On the question whether the sums in question can be taxed as FTS, we agree with the submissions made by the learned counsel for the Assessee set out in paragraph-18 & 19 of this order and hold that the sums in question cannot be brought to tax as FTS. 29. As far as the question whether the sum which was offered to tax by the assessee and which by virtue of our conclusions as aforesaid cannot be regarded as royalty or FTS and hence cannot be taxable, the Revenue should be directed to not to tax the aforesaid sum also. The first aspect that may require consideration is as to whether the

Page 15 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 assessee can seek to lay a claim that the amount offered tax in the return of income is not taxable. On this issue, the law is well settled and the Hon'ble Delhi High Court in the case of Indglonal Investments and Finance Limited v. ITO, Writ Petition (Civil) 15639/2006 and 7127/2008 dated 36-2011 after considering the decision rendered in the case of CIT v. Shelly Products 261 ITR 361 (SC) came to the conclusion that if by mistake or inadvertently or on account of ignorance included in his return of income in income which is not income within contemplation of law, bring the same to the notice of tax authorities and the tax authorities can grant him relief and repay of tax in excess. The Hon'ble Court referred to article 265 of the Constitution of India which provides that there shall be no tax levied or collected except by authority of law. We therefore are of the view that in the light of the discussion in the earlier part of this order regarding taxability of receipts on sale of set-top-box, the amount offered to tax by the assessee which is now found to be not taxable cannot be brought to tax. We hold and direct accordingly and allow the ground of appeal." 12. The order of the DRP in assessee's own case for the assessment 2016-17 dated 31-3-2021 (Page number 1790 to 1803 of Paper Book) was submitted and was taken on record. In the said order we observe that the DRP has considered the identical issues and has issued directions to the AO to delete the additions. With regard to issue of treating receipts pertaining to software license and the receipts towards embedded software as 'royalty' the DRP in para 1.5 of the order had allowed the ground in favour of the assessee following the ratio laid down by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd (supra). With regard to treatment of receipts towards Support Services as 'FTS" the DRP in para 2.3 had discussed the provisions article 13 of India - UK DTAA in addition to placing reliance on the judgment of the Supreme Court and on and held that "The service contract of the assessee with Indian customer is merely a technical and after sales support services. These services are not making available the technical know-how to the Indian Customers. We find that 'make available' clause as per article 13 is not being satisfied in present case. Therefore the addition made by the AO is deleted. Accordingly this ground is allowed" 13. We have taken into consideration the materials on record and the binding effect of the order of the coordinate bench of the Tribunal in assessee's own case (supra). Respectfully following the judgment of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. (supra) and the order of the coordinate bench of the Tribunal in assessee's own case (supra), we allow this appeal in favour of the assessee with regard to issues contended before us.” Respectfully following the above view which is based on the decision of Hon’ble Supreme Court in case of Engineering Analysis

Page 16 of 17 IT(IT)A No. 530/Bang/2023 & S.P. No. 36/Bang/2023 Centre of Excellence (P.) Ltd. vs. CIT(supra), we do not find any reason to uphold the order of the Ld.AO and the addition made therein is hereby deleted. Accordingly, the grounds raised by assessee from 3 to 5 stands allowed. 5. Ground no. 6 need not be adjudicated as we have already held the issue on merits in favour of assessee. 6. Ground no. 7 & 8 are consequential in nature. 7. Ground nos. 9-12 are general in nature and therefore are not adjudicated. We note that the assessee has also raised petition for admission of additional ground. It has been submitted by the Ld.AR that as the issue on merits are in favour of assessee, therefore these grounds becomes infructuous and need not be adjudicated. Accordingly, we dismiss the petition of admission of additional grounds in limine. The stay petition becomes infructuous. In the result, the appeal filed by the assessee stands allowed and the stay petition become infructuous. Order pronounced in the open court on 31st October, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 31st October, 2023. /MS /

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Assistant Registrar, ITAT, Bangalore