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Facts
The Revenue filed appeals against the CIT(A)'s orders for A.Y. 2015-16 and 2017-18 concerning additions made by the Assessing Officer. The dispute revolved around whether payments made by the assessee for software solutions (turnitin and ithenticate) to a Singaporean entity constituted 'Royalty' taxable in India, thereby requiring the deduction of TDS under the Income Tax Act.
Held
Following the Hon'ble Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt Ltd and a co-ordinate bench ruling, the Tribunal held that payments for software, in cases such as the assessee's (Category III), do not constitute royalty for the use of copyright and thus do not give rise to income taxable in India. Consequently, the provisions of TDS under Section 195 were deemed inapplicable, and the Assessing Officer was directed to delete the impugned additions.
Key Issues
Whether payments for software solutions made to a foreign non-resident supplier constitute 'royalty' under the Income Tax Act and DTAA, thereby mandating TDS deduction.
Sections Cited
9(1)(vi), 40(a)(i), 195
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Income Tax Appellate Tribunal, DELHI ‘C’ BENCH,
Before: SHRI YOGESH KUMAR US, & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
The above captioned two appeals by the Revenue are preferred against the order of the ld. CIT(A), New Delhi dated 19.01.2024 for A.Y 2015-16 and order of the ld. CIT(A) - 4, New Delhi dated 29.11.2024 for A.Y 2017-18 respectively. Cross objection has been filed by the assessee for A.Y 2015-16.
Since the underlying facts are common in both the appeals of the Revenue and pertain to same assessee, they were heard together and are disposed of by this common order for the sake of convenience and brevity.
Briefly stated, the quarrel in both the appeals of the Revenue and cross objections by the assessee is in respect of treatment of products, namely turnitin and ithenticate being software solutions and not journals as mentioned in Form No. 15CA filed and claimed by the assessee. provisions of section 9(1)(vi) of the Income-tax Act, 1961 [the Act, for short], consideration for software constitutes ‘Royalty’ under the Act and such royalty is taxable in India and hence the company was required to deduct TDS on payments made to Innovative Education Services PTE Ltd, Singapore.
According to the Assessing Officer, provisions of India- Singapore DTAA will govern the taxability of such payments.
The assessee was asked to show cause as to why expenses incurred by the assessee company for purchase of turnitin and Ithenticate should not be disallowed u/s 40(a)(i) of the Act as due TDS was not deducted on such remittances even though the amount was taxable in India.
The assessee filed detailed reply which did not find any favour with the Assessing Officer who, after referring to various decisions, made addition of Rs. 6,19,69,194/- in A.Y 2015-16 and Rs. 11,54,03,806/- in A.Y 2017-18. without any success.
Before us, the ld. counsel for the assessee straightaway relied upon the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt Ltd 432 ITR 471 and vehemently stated that the impugned quarrel has now been decided by the Hon'ble Supreme Court in favour of the assessee and against the revenue. The ld. counsel for the assessee submitted that the assessee case is also squarely covered in favour of the assessee and against the Revenue by the decision of the co-ordinate bench in assessee’s own case for A.Y 2016-17.
The ld. DR fairly conceded to the above submission of the assessee.
We have heard the rival submissions and have perused the relevant material on record. We find that the co-ordinate bench in assessee’s own case for A.Y 2016-17 had an occasion to deal with similar issue wherein the issue was decided in favour of the assessee and against the Revenue in for A.Y 2016-17.
The relevant finding of the Tribunal read as under:
“10. We have carefully considered the orders of the authorities below. It is a fact that the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence [supra] has settled the dispute in favour of the assessee and against the Revenue. The Hon'ble Supreme Court has grouped four categories while deciding the appeal as under:
(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 present appellant comes under Category III.
The DTAA considered by the Hon'ble Supreme Court at Para 40 as the DTAA between India and Republic of Singapore at Item No. 14. Category III which belongs to the assessee has been considered by the Hon'ble Apex Court at Para 44 of its judgment and the Hon'ble Supreme Court has arrived at a conclusion as under:
“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.
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”.
Supreme Court [supra], we direct the Assessing Officer to delete the impugned addition. The ground of Revenue is dismissed.
12. Since we have deleted the addition made by the Assessing Officer in A.Ys 2015-16 and 2017-18, the cross objection of the assessee becomes infructuous and is dismissed as such.
263/DEL/24 as well as CO No. 34/DEL/2018 of the assessee stand dismissed.
The order is pronounced in the open court on 09.04.2025.