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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI C.N. PRASAD
PER C.N. PRASAD, JM :
This appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-43, New Delhi (“Ld. CIT(A)”) dated 28.2.2018 pertaining to the assessment year (“AY”) 2013-14.
The main issue involved in the appeal is whether consideration received by a non-resident from supply of standardised software to an Indian end customer amounts to royalty or business income in the hands of the non-resident recipient.
The brief facts of the case are that the assessee is engaged in the business of software development/ distribution and rendition of related services. The assessee is a tax resident of United States of America (USA)
and is entitled to be governed by the provisions of the Double Taxation Avoidance Agreement between India and USA (“India-USA DTAA”) being more beneficial to the assessee. The assessee filed its return of income for the AY 2013-14 on 29.11.2013 declaring a total income of Rs. 66,03,57,410/-. The Assessing Officer (“AO”) assessed the total income at Rs. 71,89,69,971 under section 143(3) read with section 144C(3)(b) of the Income Tax Act, 1961 (the “Act”) on 6.1.2017 after making an addition of Rs. 5,86,12,564/-. The addition was made in respect of consideration received by the assessee under the agreements for supply of software to four end customers in India i.e. HCL Technologies Ltd., Satyam Computer Services Ltd., Terex India Pvt. Ltd. and Quest Engineering (collectively referred to as “Indian end users”). The AO made the impugned addition treating the payments from the supply of software as royalty both under the Act as well as the India-USA DTAA. The AO followed the order of his predecessor for earlier years in assessee’s own case and relied upon the judgement of the Hon’ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd. [(2012) 345 ITR 494 (KAR)] and several other cases to decide the matter against the assessee.
On appeal, the Ld. CIT(A) following his predecessor’s order pertaining to AY 2011-12 and 2012-13 concluded that the payments made to the assessee from the supply of software to Indian end users is for a copyrighted article and cannot be considered as royalty payments. The Ld. CIT(A) further analysed whether such payments can be treated as “consideration for a process or consideration for any information concerning commercial or industrial knowledge”. He was of the view that the software supplied being “Off the shelf software” cannot be treated as complex process being implemented by the assessee in clients business and hence the consideration from such software cannot be treated as process royalty or royalty from transfer of information related to industrial or commercial knowledge.
Aggrieved, the Revenue is in appeal before us raising the following grounds of appeal:-
“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of income, from receipts of HCL Technologies Ltd, Satyam Computer Services Ltd, Terex India P Ltd & Quest Engineering, which is essentially receipts with respect to the use of computer software by the end users together with or without technical support and hence is in nature of Royalty (of Rs. 5,86,12,564) taxable u/s 9(l)(vi) of the Act as well as covered under Article 12(a) of Indo-USA DTAA?
Whether on the facts and in the circumstances of the case, the Ld CIT(A) has erred in not appreciating that the transaction is not outright sale of goods (Software) but a transaction to provide license to use the copyrighted article (software) which is useful for commercial or industrial knowledge?
The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time of or before the hearing of the appeal.”
With regard to Ground no.1, the Ld. AR submitted that the issue is squarely covered by the favourable judgement of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. Vs. CIT and another, dated 2 March 2021 reported in [2021] 432 ITR 471 (SC). The Ld. DR did not advance any argument against the submissions of the Ld. AR but strongly relied on the order of the AO.
Now coming to the facts of the case, during the subject AY the assessee entered into agreements with various customers for licence and /or outright sale of software and rendition of related services. These agreements are standard end user licence agreements granting non-exclusive, non- transferrable right to the end user in India for use of the software only for internal business purpose along with other clauses imposing restriction on rights of transfer, further sale, exchange, making of back-up copies etc. in
respect of use of computer software. The assessee offered income amounting to Rs. 66,03,57,410/- from agreements with Siemens Industry Software Pvt. Ltd., Textron India Pvt. Ltd., Geometric Ltd. and Quest Global Services, for licensing of software to be taxed as royalty. However, income of Rs. 5,86,12,564/- under the agreements with the Indian end users were treated by the assessee as outright sale of copyrighted article and thus in the nature of business income not taxable in India in the absence of permanent establishment (“PE”) of the assessee in India in terms of provisions of Article 5 read with Article 7 of the India-USA DTAA. The grievance of the Revenue is that the income from the Indian end users is also in the nature of royalty and hence taxable in India.
We are of the considered view that this issue now stands squarely covered in favour of the assessee by the judgement of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence P. Ltd. (supra). The Hon’ble Supreme Court vide a common order has disposed of 86 batch of appeals from various High Courts and Authorities for Advance Rulings (“AAR”). The Court grouped these appeals into four categories, out of which one of the 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 manufacture. In our view, the case of the assessee falls within this category. In respect of this category, the Hon’ble Court held that End User Licence Agreements (“EULAs”) do not create any interest or right in end users which would amount to the use of or right to use any copyright. On applicability of provisions relating to royalty under the Act, the Hon’ble Court held that the provisions which deals with royalty contained in Section 9(1)(vi) along with Explanation 2 and 4 thereof, not being more beneficial to the taxpayers, have no application in the facts of these cases. The Hon’ble Court concluded that the amounts paid by resident Indian end users to non resident computer software suppliers/ manufactures, as consideration for the use of the computer software through EULA, 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. While delivering its judgement, the Hon’ble Court dealt with several cases on this issue decided both in favour of the taxpayer as well as the Revenue. The Court specifically approved the judgements of the jurisdictional Delhi High Court in the case of Ericsson AB, Nokia Networks OY, Infrasoft Ltd., ZTE Corporation which are favourable to the assessee and reversed the ruling of the AAR in Citrix Systems and the judgements of the Hon’ble Karnataka High Court in CIT vs. Samsung Electronics Co. Ltd. and CIT vs. Sunray Computers P. Ltd. which are unfavourable to the assessee holding that these judgements do not state the law correctly.
The relevant paragraphs of the judgment of the Hon’ble Supreme Court (supra) are reproduced below.
“42. The subject matter of each of the DTAAs with which we are concerned is Income- tax payable in India and a foreign country. Importantly, as is now reflected by Explanation 4 to section 90 of the Income-tax Act and under article 3(2) of the DTAA, the definition of the term "royalties" shall have the meaning assigned to it by the DTAA, meaning thereby that the expression "royalty", when occurring in section 9 of the Income-tax Act, has to be construed with reference to article 12 of the DTAA. This position is also clarified by Central Board of Direct Taxes Circular No. 333 dated April 2, 1982,* which states as follows** :…
When it comes to an 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.
In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in section 14(a) and 14(b) of the Copyright Act, but is a "licence" 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 referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in section 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.
There can be no doubt as to the real nature of the transactions in the appeals before us. 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 in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this court in the context of a sales tax statute in Tata Consultancy Services v. State of A.P. [2005] 1 SCC 308* (see paragraph 27).
The conclusions that can be derived on a reading of the aforesaid judgments are as follows :
"(i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts.
(ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/ DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copy right remaining exclusively with the owner.
(iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical sub stance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act.
(iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copy right Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the 'licensed' computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is cus tomised to its specifications or otherwise.
(v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.
(vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Col lector of Customs [2000] 1 SCC 727 (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so."
Consequently, the view contained in the determinations of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft (supra), ZTE (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India's DTAAs are based.
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.
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 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. 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.”
In light of the judgement of the Hon’ble Supreme Court, the addition of Rs. 5,86,12,564/- under the agreements with the Indian end users is not in accordance with law. The impugned payments are not royalty but are payments made towards the purchase of copyrighted article which is to be treated as business income of the assessee, not taxable in India in the absence of PE of the assessee in India. Accordingly, the order of the CIT(A) is upheld.
With regard to Ground no. 2, the Ld. CIT(A) in Para 5.3 of his order 9. recorded the following findings:
“5.3 Apart from the above, it is also required to be seen whether the software which has been developed and delivered by the appellant has to be treated only like a copyrighted article resulting in royalty or the nature of the software extends to a position beyond a simple sale of goods and due to such reason can be covered in the other 2 limbs of royalty i.e. consideration for a process or consideration for information concerning commercial or industrial knowledge. In the present case, it is seen that the softwares delivered by M/s Siemens PLM to the clients were principally in the nature of “Off the Shelf’ softwares. For example: the software being delivered to one client M/s Geometric Ltd. is Parasolid royalty which is solid emulation software. Other invoices submitted by the appellant included software such as Mac 1 Design
software, Team Centre software, 2D Viewer software & Catia V4 Engineering software. These softwares are basically used in the Automation Industry for modeling and surface study. These being “Off the Shelf’ software cannot be classified as complex processes being implemented by the assessee in the client’s business. Therefore the consideration from such software cannot be treated as process royalty or royalty from transfer of information related to industrial or commercial knowledge.”
We concur with the findings of the Ld. CIT(A). Accordingly, we are of the view that the payments made to the assessee are not for any process or for any information concerning industrial, commercial or scientific experience so as to make such payments fall within the purview of the definition of “royalty” under the India-USA DTAA. There is no merit in this ground.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 8th February, 2022.
sd/- sd/-
(G.S. PANNU) (C.N. PRASAD) PRESIDENT JUDICIAL MEMEBR
Dated: 08/02/2022 Veena Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi