EDUNXT GLOBAL SDN BHD,MALAYSIA vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1), INTERNATIONAL TAXATION, 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. 2496/Bang/2017 Assessment Year : 2014-15 M/s. EduNxt Global SDN BHD, The Deputy Unit A(II) Level 5. Commissioner of Income Menara Shell, Tax, 211 Jalan Tun Circle 1(1), Sambathan, International Taxation, Kuala Lumpur, Vs. Bangalore. MY – 50470, Malaysia. APPELLANT RESPONDENT Assessee by : Shri Padamchand Khincha, CA : Shri K.V. Aravind, Advocate and Revenue by Standing Counsel for Revenue Date of Hearing : 23-03-2022 Date of Pronouncement : 30-03-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by non resident assessee arises out of final assessment order dated 26.09.2017 passed by the Ld.DCIT(IT), Circle -1(1), Bangalore for Assessment Year 2014-15 on following grounds of appeal: “General and Legal Grounds 1. The order passed by the learned assessing officer and the directions of Hon'ble DRP to the extent prejudicial to the appellant is had in law and liable to be quashed.

Page 2 of 9 IT(IT)A No. 2496/Bang/2017 Grounds relating to treatment of income from distance education under provisions of Income Tax Act,1961. 2. The Hon'ble DRP has erred in confirming the action of Id. AO in passing the assessment order under section 143(3) read with section 144(C) of the Act. 3. The Hon'ble DRP and the ld. AO have erred in holding that the income earned by the appellant is in nature of royalty under section 9(1)(vi) of the Income Tax Act,1961. 4. The ld. AO has failed to appreciate that the payment made by a resident company to the appellant cannot be treated as royalty, as the students are only provided with the course material and the Indian company did not obtain the use or right to use the copyright or literary work. 5. The ld. AO has erred by not appreciating that the services provided by the appellant do not allow the Indian Company to enjoy any patent, trademark or copyright. Therefore, receipt from such services cannot be considered as royalty under section 9(1)(vi) of the Act. 6. The Id. AO has erred in not appreciating that as the payer was not under an obligation to deduct tax at source and the income earned by appellant was also not chargeable to tax in India. Grounds relating to treatment of income from distance education under provisions of DTAA. 7. The ld. AO has erred in holding that the payment received by the appellant is in the nature of Royalty as per Article 12 of the DTAA entered into between India and Malaysia. 8. The Hon'ble DRP and Id. AO have erred in not appreciating that the income of the appellant constituted business profits under article 7 of the DTAA, and in the absence of a PE in India, the business profits was not chargeable to tax in India under the Treaty. Prayer 9. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the id. AO be quashed or in the alternative, the addition of Rs. 1,27,42,140 be deleted. The appellant prays accordingly.” 2. Brief facts of the case are as under: The assessee is incorporated under the local laws of Malaysia. The company is an educational institution based out of Malaysia which provides online education courses to individuals and corporates. Edunxt is an educational institution based out of

Page 3 of 9 IT(IT)A No. 2496/Bang/2017 Malaysia which provides online education courses to individuals for various post-graduation courses. During the FY 2013-14, Edunxt had provided services to ABMC in the form of online education in MBA course to certain employees of ABMC. 2.1 It is submitted that the program was delivered and offered through the Edunxt platform (Learning Management System hosted on a third party cloud which is located outside India). The program duration is approximately 24 months comprising of 9 core subjects, 2 elective subjects and 1 research project. Each of the subject is 14 weeks in duration and delivered in a blended mode of online asynchronous discussions and webinars. 2.2 Assessee submitted that the course is primarily driven on the concept of self-study i.e., the students would be provided with the course material and the students are expected to st.idy the same on their own. The students are also provided with e-books and lecture videos recorded by the faculty. 2.3 Thus it was submitted that at the end of the course, the students would be tested through an online examination. Post the examination, the faculty undertakes a manual correction of the answers given by the students and declares the results. Subsequently, a certificate is provided to such students based on their results. 3. During the year under consideration the non resident assessee Rs.9,84,13,296/- towards sale of software licenses and software implementation support fees and annual maintenance fee from Aditya Birla Management Corporation Ltd. In the draft assessment order, Ld.AO concluded that the amount received by the non resident assessee constituted royalty within the meaning

Page 4 of 9 IT(IT)A No. 2496/Bang/2017 of Article 12 (3) of the India Malaysia DTAA and as per the provisions of section 9(1)(vi) of the Act. The Ld.AO brought to tax the receipts from Aditya Birla Management Corporation Ltd., on account of providing educational programme for Masters degree in Business Administration as Royalty under article 12(3) of India Malaysia DTAA. 3.1 Aggrieved by the order of the Ld.AO, assessee raised objections before the DRP. The DRP observed as under: “Having considered the submissions, we not at the outset, that the assessee could not furnish any documentation as to the terms governing the used of Edunxt platform (Learning Management System), though called for. Only the invoice raised by the assesse was submitted which do not contain any terms of use of the software provided and delivered to the employees of ABMCL. It is rather difficult to accept the contention that the assessee had not entered into any agreement either in writing or e-form as to the terms of use of the said software provided to the ABMC and its employees. The issue of taxability is addressed in this factual frame work.” 3.2 The DRP thus upheld the observations of Ld.AO by observing as under: “Edunext through its Edunext platform(Learning Management System) provides access to ABMC and its employees to its course content and for such usage, the impugned payments were made; such course content held in the form of computer database would fall within the scope of ‘literary work’ under Article 12(3) of the DTAA. Thus, in terms of DTAA consideration paid for use or right to use of the literary work in the form of course content, tutorials, webinar through the software would constitute ‘Royalty’ under DTAA with Malaysia. Accordingly, we are inclined to uphold the action of the AO.”

Page 5 of 9 IT(IT)A No. 2496/Bang/2017 3.3 Upon receipt of the DRP directions, the Ld.AO passed impugned order by making an addition of Rs.1,27,42,135/- in the hands of the non resident assessee. 4. Aggrieved by the order of Ld. AO, the non resident assessee is in appeal before this Tribunal. 4.1 The Ld.AR submitted that the subscription fee received by the assessee from Indian customer for providing access to the database is not in the nature of royalty, either under the Act or under the India-Malaysia DTAA. He submitted that the subscription fees received by the assessee are in the nature of business income. However, in the absence of a PE in India, the amount received is not taxable as per the provisions of India- Malaysia DTAA. 4.2 Ld.AR submitted that, the assessee being a tax resident of Malayasia has to be governed under the India-Malaysia DTAA. He submitted, the definition of royalty under Article-12 of the India-Malaysia is narrower than the definition of royalty under the Act. He submitted, while providing access to the online database the assessee does not provide the customer any right to use the copyright in the database. It is submitted, the assessee does not transfer any ownership right to the subscriber such as right to copy the database for reproduction and sale, right to grant license to any person who wishes to use the database. 4.3 He submitted, by providing access to the database, the assessee does not impart any information relating to underlying experience, skill, etc., which is required for evolving the database. It was also submitted that assessee do not share its

Page 6 of 9 IT(IT)A No. 2496/Bang/2017 experience, technique, or methodology employed in evolving the database with the subscriber. It does not provide any right to the subscriber to use any industrial, commercial or scientific equipment. Thus, he submitted, the subscription fee received by the assessee for providing publicly available information cannot be treated as royalty. He placed reliance on the following decisions:  DIT(IT) v Dun & Bradstreet Information Services India (P.) Ltd [2012] 338 ITR 95 (Bombay)  Dun & Bradstreet Espana. S.A., In re [ 005] 272 ITR 99 (AAR)  Elsevier Information Systems GmbH v DCIT(IT) [2019] 106 taxmann.com 401 (Mumbai - Trib.)  American Chemical Society v DCIT(IT) [2019] 106 taxmann.com 253 (Mumbai - Trib.)  ITO(IT) v Cadila Healthcare Ltd [2017] 77 taxmann.com 309 (Ahmedabad - Trib.)  The Regents of the University of California UCLA Anderson School of Management Executive Education, USA (AAR No. 1656 of 2014)  Hughes Escort Communications Ltd. v DCIT [2012] 21 taxmann.com 171 (Delhi) 4.4 On the contrary, the Ld.CIT.DR strongly relied on the observations of the Ld.AO and the DRP submitted that the data provided by the assessee through the database are customized data catering to the specific need of the customer. Therefore, the fee received by the assessee is in the nature of royalty as the assessee has transferred the right to use the copyright to the customer in India. He submitted, the decisions relied upon by the Ld.AR are not applicable to the facts of the present case. 5. We have perused the submission advanced by both sides in light of records placed before us. The Ld.AR submitted that under India Malayasia DTAA as per Article 12(3) of the "Royalty" is defined as "payments of any kind received as a consideration for the, “use of”, or the “right to use”,

Page 7 of 9 IT(IT)A No. 2496/Bang/2017 any copyright of a literary, artistic, or scientific work, including cinematographic films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial, or scientific experience. The relevant article reads as under: “12. Royalty ……… 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information (know-how) concerning industrial, commercial or scientific experience.” 5.1 It is thus submitted by the Ld.AR that the Indian customer do not have right to use the copyright in the detabase and hence the payments cannot be termed as Royalties under Article 12(3) of the DTAA. 5.2 In our view, payments towards all kind of information would not be in the nature of Royalty. To determine the exact nature of the payment, the type of information passed on, needs to be verified. A perusal of Article 12(3) shows that, it brings within the ambit of the definition of 'Royalty', payment made for use of, or the right to use any copyright of a literary, artistic, or scientific work. In our understanding Article 12(3) covers only those payments that allow a payer to use/acquire a right to use copyright in literary, artistic or scientific work are covered within the definition of 'Royalty'. Hon’ble Supreme Court

Page 8 of 9 IT(IT)A No. 2496/Bang/2017 in case of Engineering Analysis Centre of Excellence Pvt.Ltd. vs CIT reported in (2012) 432 ITR 471 as well as the decisions relied by the Ld.AR herein above. Hon’ble Supreme Court after analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with non- resident software suppliers, provisions of Copy Right Act, the circulars issued by CBDT, various case laws relied by the parties, concluded as under:- “CONCLUSION 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 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.” The Ld.AR was called upon by the bench to produce agreement if any, in order to understand the right that the Indian customer holds on the database shared by the assessee. At the time of hearing, the Ld.AR produced the Master Service Agreement dated 01/04/2013 between EduNxt Global SDN BHD and Aditya Birla Management Corporation Ltd., we observe that this agreement has not been filed before the authorities below. The

Page 9 of 9 IT(IT)A No. 2496/Bang/2017 DRP categorically observed that except for the invoice, assessee did not produce any other relevant information. In the interest of justice it is appropriate to remit the issue in dispute to the file of the Ld.AO for deciding the comparability of these transactions in the light of the judgment of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Private Limited (supra) and the decisions relied by the Ld.AR reproduced herein above. Accordingly, the issue in dispute is remitted to the Ld.AO for fresh decision with the above directions. In the result the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 30th March, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 30th March, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore