QUALYS INC vs. THE COMMISSIONER OF INCOME TAX

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HC-KAR NC: 2025:KHC:48334 WP No. 9668 of 2022

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 18TH DAY OF NOVEMBER, 2025 BEFORE THE HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR WRIT PETITION NO. 9668 OF 2022 (T-IT) BETWEEN:

QUALYS INC 1600, BRIDGE PKWY, 2ND FLOOR, REDWOOD CITY, CA, USA – 94065 PAN: AAACQ2222M (A PRIVATE LIMITED COMPANY INCORPORATED IN THE UNITED STATES OF AMERICA) AND IS A TAX RESIDENT OF USA REP. BY AUTHORISED SIGNATORY MR. AMIT GAHRAURE S/O DILIP GHARPEURE AGED 45 YEARS OCC: SERVICE R/AT A1-1103, SHIMMER N SHINE HINGANE KHURD, SINHAGAD ROAD PUNE – 411 051 …PETITIONER (BY SRI. PERCY PARDIWALA, SENIOR COUNSEL FOR SRI. ANKUR PAI DHUNGAT, ADVOCATE)

AND:

Digitally signed by CHANDANA B M Location: High Court of Karnataka

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THIS W.P. IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO DIRECTION UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA CALLING FOR THE RECORDS OF THE PETITIONERS CASE AND AFTER EXAMINING THE LEGALITY AND VALIDITY THEREOF QUASH THE IMPUGNED ORDER DATED 04.02.2022 PASSED BY THE RESPONDENT NO.1 UNDER SECTION 264 OF THE IT ACT IN DIN & ORDER NO:ITBA/REV/F/REV7/2021-22/1039395099(1) FOR THE AY 2018-19 VIDE ANNEXURE-J AND ETC.,

THIS PETITION, COMING ON FOR PRELIMINARY HEARING IN ‘B’ GROUP, THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

CORAM: HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR

ORAL ORDER

In this petition, petitioner seeks for the following reliefs:- “i. this Hon’ble Court may be pleased to issue a writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the Petitioner’s case and after examining the legality and validity thereof quash the impugned Order dated 04.02.2022 passed by the Respondent No.1 under Section 264 of the IT Act in DIN & Order No:ITBA/REV/F/REV7/2021-22/1039395099(1) for the AY 2018-19 vide ANNEXURE-‘J’;

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ii. this Hon’ble Court may be pleased to issue a writ of Mandamus or a writ in the nature of Mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India directing the Respondent No.3 to issue the eligible refund of taxes along with applicable interest under section 244A of the IT Act; iii. issue any other writ, order or direction to which the Petitioner is found entitled to in the present facts and circumstances.” 2. Heard learned Senior counsel for the petitioner and learned counsel for the respondents and perused the material on record. 3. In addition to reiterating the various contentions urged in the memorandum of petition and referring to the material on record, learned Senior counsel for the petitioner submits that on 28.03.2019, the petitioner filed income tax returns, which was processed by respondent No.2, who issued a notice under Section 143(1) of the Income Tax Act. It was pointed out that when the petitioner filed the said returns, the various High Courts had delivered judgments as regards taxability of the income tax classified as royalty on the Income Tax Act and on the basis of the

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said judgments, the petitioner filed returns to seek refund in the event the said issue is answered in favour of the assessee by the Apex Court. It is submitted that subsequently, the judgment of this Court in the case of CIT Vs. Samsung Electronics Co. Ltd – (2012) 345 ITR 494 was reversed by the Apex Court, which answered the issue in favour of the petitioner-assessee by holding that the amounts paid as resident Indian end users/distributors to non-resident computer software manufacturers/supplies as consideration for the resale/use of the computer software through end-user license agreement (EULA) / distribution agreements were not in the nature of royalty and that the same did not give rise to any taxable income in India and the persons referred to under Section 198 of the I.T. Act were not liable for TDS under Section 90 of the I.T. Act. It is accordingly submitted that pursuant to the aforesaid judgment of the Apex Court which attained finality and became conclusive and binding upon the respondents, petitioner filed revision application under Section 264 of the I.T. Act, which was rejected by the respondent by passing the impugned order at Annexure-J dated 04.02.2022, which is assailed in the present petition.

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pending before the Supreme Court of India, the Company reserves its right to claim refund by lodging an appropriate claim basis the outcome of the matter. ii. Recharges made by Qualys India Qualys India has made certain payments towards recharges to Qualys Inc., pertaining to various expenses, such as Payroll Processing Charges, ESOP cross-charge, Travd charges, etc. Qualys Inc had accordingly raised a debit note of INR 7,579,597/- on Qualys India, the break-up of which is as follows: Particulars Amount in INR (Gross) Payroll Processing charges 3,119,150 ETP Software Usage charges 1,793,335 Training Expenses 460,135 Recruitment Expenses 120,590 Total 7,579,597

Payroll Processing Charges. ADP Payroll Processing has entered into a global contract with Qualys Inc for carrying out payroll processing services for Qualys Group. As such costs amounting to INR 3,119,150, attributable to Qualys India, has been charged by Qualys Inc to Qualys India, without any profit element. These charges are "reimbursements" in nature without any profit element and hence, not chargeable to tax. The same has been upheld in various judicial precedents like the following:

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• CIT v. Siemens Aktiogesellschaft (310 ITR 320) (Bombay High Court); • Mahindra and Mahindra Ltd vs DCIT (122 TT) 577); • Zuari Agro Chemicals (ITA No. 3834/3835 of 1984) (Mum); • United Hotels Ltd. v. ITO (93 TT) 882) (Delhi HC);

However, without prejudice to the argument that these are mere reimbursements, the above payments, if regarded as made towards services rendered, would also not fall within the character of "fees for technical services" under Article 12 of the DTAA, as the services rendered do not make available any technical knowledge, experience or skill, know-how or processes to Qualys India, which enable them to apply it independently / utilize it on its own in the future. This contention has been upheld in various judicial pronouncements listed such as: • US Technology Resources (P.) Ltd. (407 ITR 327) (Kerala High Court); • Ernst & Young (P) Ltd. (323 ITR 184) (AAR); • Raymond Ltd. vs. DCIT (86 ITD 791) (Mumbai Tribunal); • CIT v. De Beers India Minerals Private Limited (346 ITR 467) (Karnataka HC); • Sandvik Australia Pty. Ltd. vs. DDIT (Int. Tax)-11, Pune (141 ITD 598) (Pune Tribunal); • C.E.S.C. Ltd. (87ITD 653) (Karnataka HC);

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• Federation of Indian Chambers of Commerce and Industries (FICCI) (320 ITR 124) (AAR); • DIT v. Guy Carpenter & Co. Ltd. (346 ITR 504) (Delhi HC) Hence, the reimbursements of payroll processing charges from Qualys India has not been offered to tax by Qualys Inc. ERP Software Usage Charges The ERP Software usage recharges amounting to INR 1,793,335 made by Qualys India to Qualys Inc is towards the cost allocation of the ERP software procured globally and used by Qualys Group. The cost attributed to Qualys India, without any profit element, on a ‘cost to cost basis’ is charged by Qualys Inc. Such recharges are not liable to tax as ‘Royalty’ as per the provisions of the DTAA as the same is towards right to use a ‘copyrighted’ article, as opposed to a right to use a ‘copyright’ and accordingly, the same has not been offered to tax by the Company. The various Judicial Courts have upheld the same view in various judgments like the following: • John Deere India Pvt. Ltd vs DDIT (102 Taxmann.com 267) (Pune ITAT) • DIT vs Infrasoft Ltd (39 taxmann.com 88) (Del HC) • Motorola Inc vs DCIT [2005] 95 ITD 269 (Del) (SB) • DIT vs Ericsson A.B. [2012] 343 ITR 470 (Del)

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• DIT vs Nokia Networks Oyj [2013] 212 Taxman 68 (Del) Training expenses, Travel expenses & Recruitment expenses: The Company has incurred various costs in relation to travel charges, training charges, recruitment charges, etc. amounting to INR 2,667,112/- on behalf of Qualys India. The said expenses has been cross-charged to Qualys India on a ‘cost to cost’ basis without any profit mark-up. As there is no profit element involved in such reimbursement the same is not taxable in India. Reliance in this regard has been placed on the following judicial precedents, amongst others: • CIT v. Siements Aktiogesellschaft (310 ITR 329(Bombay High Court); • Mahindra and Mahindra Ltd vs DCIT (122 TTJ 577); • CIT v. Industrial Engineering Projects Pvt. Ltd. (202 ITR 1014) (Delhi HC); • Rolls Royce India Ltd. V ITO (25 ITD 136) (Del) (TM); • Zuari Agro Chemicals (ITA No.3834/3835 of 1984) (Mum); • United Hotels Ltd. V. ITO (93 TTJ 882) (Delhi HC); • CIT vs. Indian Textile Engineers (141 ITR 69) (Bombay HC); and

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Co. Ltd., (2012) 345 ITR 494, by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to nonresident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 [“Income Tax Act”], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [“TDS”] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue. 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. ii) The second category of cases deals with resident Indian 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.

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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 seller, resells the same to resident Indian distributors 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. 168. Given the definition of royalties contained in Article 12 of the 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. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end- users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the

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resale/use 226 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. 170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.” 7. A perusal of the impugned order at Annexure-J dated 04.02.2022 will indicate that despite the said judgment of the Apex Court having been produced and relied upon by the petitioner, the respondent summarily rejected the revision petition on the erroneous premise that the petitioner having declared income on its own will and volition and never challenged the taxability of the amount before any judicial forum, cannot be permitted to retract from the same, I am of the considered opinion that the said finding recorded by the respondent in rejecting the revision application on

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the ground that the petitioner having declared his income on its own will and volition cannot take benefit of the judgment of Engineering Analysis (supra), in as much as the notes appended to the Income Tax Returns, the petitioner has categorically stated that in the event the petitioner files a revision application, the respondent would pass order in favour of the assessee and the petitioner would be entitled to seek refund of the tax paid by him. Consequently, the said finding recorded by the respondent deserves to be set aside. 8. The respondent has also committed an error in coming to the conclusion that the petitioner was not a party to the order passed in the case of Engineering Analysis (supra) and the said judgment would not enure to the benefit of the assessee. In this context also, the respondent failed to appreciate that the Apex Court is dealing with the issue/question as to whether the income in the hands of the assessee was taxable or not including the petitioner, who was similarly situated and consequently, the respondents clearly fell in error in coming to the conclusion that it is not permissible for the petitioner to seek judgment on the erroneous premise that the petitioner was not a party to the said

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order/proceedings and as such, the said finding recorded by the respondent also deserves to be set aside. However, since the claim of the petitioner seeking revision of the notice/intimation issued under Section 143(1) has been summarily rejected without adverting to the merits of the petition and claim for refund of the tax paid by the petitioner, I deem it just and appropriate to allow the petition by setting aside the impugned order and by remitting the matter back to the respondent for reconsideration afresh in accordance with law, within a stipulated timeframe. 9. In the result, I pass the following: ORDER (i) The petition is allowed. (ii) The impugned order at Annexure-J dated 04.02.2022 passed by respondent No.1, is hereby set aside. (iii) The matter is remitted back to respondent No.1 for reconsideration of the revision application at Annexure-E submitted by the petitioner dated 30.03.2021, for reconsideration afresh in accordance with law, bearing in mind the

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observations made in body of the order and the judgment of the Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. the Commissioner of Income Tax and another - Civil Appeal Nos.8733 and 2734 of 2018 dated 02.03.2021 and also the observations made in the body of this order. (iv) The petitioner shall appear before respondent No.1 on 15.12.2025, without awaiting further notice. (v) Liberty is reserved in favour of the petitioner to file pleadings, documents etc., which shall be considered by the respondents, who shall pass appropriate orders within a period of three months from the date of receipt of a copy of this order. Sd/- (S.R.KRISHNA KUMAR) JUDGE BMC:List No.: 2 Sl No.: 0