MOUNTAIN TRAIL FOODS PRIVATE LIMITED,BANGALORE vs. PRINCIPAL COMMISSIONER OF INCOME TAX, BENGALURU-4, BENGALURU

We heard the parties and perused the record. We notice that the Ld Representative of the assessee could not appear before the bench for the reason that he was arguing another case before another bench. He also submitted that he appeared before the bench, which heard these appeals, subsequently on the very same day, but he was informed that the appeals have already been heard. Under these set of facts, we are of the view that there was sufficient cause for the assessee for non-appearance. Accordingly, exercising the power granted to the Tribunal under Rule 24 of the Appellate Tribunal Rules, 1963, we recall the ex-parte order passed in all the 34 appeals. APPEALS FILED BY THE ASSESSEE:- 5. The Ld A.R submitted that all these appeals may also be disposed of, since the issues contested therein are now covered by the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd Vs. CIT (2021) (125 taxmann.com 432). Accordingly, with the concurrence of both the parties, all these appeals were taken up for hearing. 6. The Ld A.R submitted that that the assessee filed all these appeals before Ld CIT(A) u/s 248 of the Act denying its liability to deduct tax at source. The assessee had initially paid the TDS amount applicable to the payments made to the Non-residents and has filed these appeals denying its liability to deduct TDS from those payments. The issues contested in all these appeals broadly involve the question whether the payments made to various non- resident persons are for the right to use any copyright and whether such payments fall under the category of “royalty”, requiring

M.P Nos.99 - 132/Bang/2021 & - 2004/Bang/219 deduction of tax at source. He submitted that the above said issue now stands covered by the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd Vs. CIT (2021) 125 taxmann.com 432, wherein the decision rendered by Hon’ble Karnataka Court in the case of Samsung Electronics Co Ltd (ITA Mos. 2808/2005 (16 taxmann.com 141)(Kar) was reversed. He submitted that the Ld CIT(A) had followed the decision rendered by Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) to decide the issue against the assessee. In view of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra), the decision rendered by Ld CIT(A) needs to be reversed.

The Ld. D.R. submitted that the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra) cannot be blindly followed. She submitted that each payment made by the assessee needs to be examined on the basis of the agreement entered between the assessee and the suppliers of software in order to find out whether there was transfer of copy right or not. Accordingly, the Ld. D.R. submitted that the entire issues may be restored to the file of the A.O. for examining it afresh and assessee may be directed to furnish the agreements/ other information and explanations that may be called for by the A.O.

We heard the parties. We notice that the Ld CIT(A) has followed the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd (supra) to decide the issues against the assessee. However the above said decision has M.P Nos.99 - 132/Bang/2021 & - 2004/Bang/219 since been reversed by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). The issue of granting license to use software was examined in the context of its taxability as royalty by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (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.3 (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.4 (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.5 (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. The Hon’ble Supreme Court analysed the agreements entered in respect of all the four categories mentioned above and gave following finding:-

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 sections 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 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 licence 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 to 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 licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be M.P Nos.99 - 132/Bang/2021 & - 2004/Bang/219

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 Acts, the circulars issued by CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court 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. 11. We notice that the Ld CIT(A) has also referred to Copy right Act in his order. It is also pertinent to mention that the Hon’ble Supreme Court has analysed the provisions of Copy right Act and their applicability to the payments made for use of software. We also notice that the decision rendered by Hon’ble Karnataka High

However, as rightly pointed out by Ld D.R, we are of the view that the issues contested in all these appeals require fresh examination at the end of Ld CIT(A) applying the ratio of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). Accordingly, we set aside the orders passed by Ld CIT(A) in all these appeals and restore all the issues to his file for examining them afresh applying the ratio of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra).

In the result, all the miscellaneous applications are allowed and all the appeals filed by the assessee are treated as allowed for statistical purposes.