GE INDIA INDUSTRIAL PRIVATE LIMITED(GE INDIA EXPORTS PRIVATE LIMITED),DELHI vs. ASST. DIT-I, (INTERNATIONAL TAXATION), HYDERABAD

Brief facts of the case are that the assessee is a company engaged in the business of providing software development and other Information Technology Enabled Services (ITES). During the assessment year 2008-09, learned Assessing Officer noticed that total payments amounting to US$ 378,989 were made to M/s. GE Industrial Systems America (GEISA) without deduction of tax at source as required under section 195 of the Act. During the year ended 31/03/2008, the company had remitted a sum of US$ 90,086,40 (INR Rs. 36,03,456/-) towards use of Pro-E software and US$ 263,695 (INR Rs. 1,05,47,800/-) towards use of support software. The Pro- E is an engineering design software developed by Parametric Technology Corporation, USA and is a copyright and proprietary to Parametric Technology Corporation, USA. GE Company, USA acquired the Enterprise license to use the Pro-E across the GE entities/locations all over the world. GEIEPL was cross-charged the license fees, other maintenance and support charges on the use of the Pro-E software based on the number of licenses used by GEIEPL. Apart from this, the assessee was found paying amounts in respect of the software licenses for the use of Oracle ERP Software, My Work Place, Global Web. All the payments were made without deducting tax at source as required under section 195 of the Act and, therefore, learned Assessing Officer found that the assessee was liable to pay an amount of Rs. 16,70,810/- by way of tax under section 201(1) of the Act , 273 & 274/Hyd/2012 and Rs. 2,84,037/- by way of interest under section 201(1A) of the Act, by order dated 31/03/2009 under section 201(1) of the Act.

Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal before the Ld. CIT(A) and submitted that they did not purchase the copyright or copyrighted article, but only a standard software which does not contain any element of proprietary knowledge which could be re-used; and that the payments were made for the purchase of goods which cannot be taken as royalty. Assessee referred to the terms of agreement, entered into with the vendors of the software, in support of their contention that what was granted and agreed to grant to the assessee was a non-exclusive and non-transferrable right to use the software without further right either to distribute or to copy the software or the source code therein, it does not give rise to any royalty.

Ld. CIT(A) on an appraisal of the contentions raised by the assessee in the light of the agreements and case law on this aspect observed that Pro-E software purchased by the assessee is a complete mechanical machine and assembly designing product, develops 3D design concepts, detailed drawing generation, system validation, development of manufacturing tools, used to generate new design concept and to analyse the design feasibility apart from checking proper manufacturing, and is also used to check mechanical integrity and to develop manufacturing drawings to help the plants and vendors to produce final components to correct dimensions. Basing on this, Ld. CIT(A) concluded that this software not only furnishes the instructions but also actually designs the machines, and, therefore, any payment made to derive such benefit answers the description of royalty. , 273 & 274/Hyd/2012 5. In respect of the Oracle and My Work Place softwares, Ld. CIT(A) held that the use of these packages does not provide any technical expertise and, therefore, payment for such lincense cannot be termed as ‘royalty’. Ld. CIT(A), however, in respect of the payments made for the use of Global Web provided by M/s.GEC, USA did not agree with the submissions of the assessee that only bandwidth was provided but not any further usage was there. He observed that all sophisticated equipment with M/s. GEC, is designed to provide bandwidth services, VOIP services and other services to its various users, which the assessee used through this equipment and, therefore use of this equipment looking from the angle of pricing structure which varies on the use of equipment by various subsidiaries all over the world which implies that greater the use of bandwidth for greater time the greater the services of M/s. GEC servers dedicated to the data, voice and other services used by the assessee. On this premise, the Ld. CIT(A) held that the payments made for such usage by the assessee amounts to royalty, and for want of deduction of the tax at source the assessee is ‘assessee-in-default’.

Assessee is, therefore, before us challenging the reasoning adopted by the Ld. CIT(A) is fallacious, inasmuch as the Ld. CIT(A) does not dispute the fact that the assessee purchased the software in question and services. According to the learned AR, when once the computer software is purchased by the assessee directly, who is a resident, from a foreign non- resident, supplier or manufacturer merely because the assessee derives certain advantages, such a fact will not relate back to change the character of the purchase consideration into royalty so as to dub the assessee an ‘assessee-in-default’. He placed reliance on the decisions reported Engineering Analysis Centre Of Excellence (P) Ltd vs. CIT (2021) 125 , 273 & 274/Hyd/2012 Taxmann.com 42 (SC) for the proposition that amount paid by resident Indian and user/distributor to non-resident computer software manufacturers/suppliers, as consideration for resale/use of computer software through EULAs/distribution agreement, is not payment of royalty for use of copyright in computer software, and thus, same does not give rise to any income taxable in India.

Per contra, while placing reliance on the orders of the authorities below learned DR submitted that the software involved in this matter is a replacement for not only the instructions but also the export services and, therefore, the authorities rightly held that the payments made for the use of this particular sort of software amounts to royalty.

We have gone through the record in the light of the submissions made on either side. It could be seen from the impugned order that the Ld. CIT(A) referred to the agreement between the GEC in the United States and various vendors of the software, which the GEC made available to the group company’s worldwide. Insofar as the Pro-E software is concerned, it is a standard 3D software product owned by Parametric Technology Corporation (PTC), US that helps in developing design concepts, detailed drawings generation, system validation, developing manufacturing tools and it is in confirmation. One of the software supporting services, Global Web, it is a web server owned by GEC, USA and hosts the internet of the assessee company as well as GEISA, and the payments were made to M/s GEC for availing a host of services to enable the assessee in its business of software development and provision of other services. The equipment used was industrial and commercial in nature. Submission of the assessee was that only bandwidth was provided, it is a data base software which , 273 & 274/Hyd/2012 hosts GE’s Internet to help the IIC division of GEIE to share internal information with its employees for which GEISE charges IIC, the division of GEIEPL for the use of the application is hosted by GEC/GEISA from its server in USA base on the usage.

GEC entered into an agreement/arrangement with the PTC in accordance with the terms and conditions of the arrangement. The Master Agreement entered into between PTC and the GE vide para 2 of Exhibit-A on “license grant” clearly reads that the PTC grants and agrees to grant GE non-exclusive, non-transferable (except as agreed to in writing by the parties or in accordance with section 2.3 of the agreement, license to use the license program). Vide para 2.3.1 thereof, if GE is acquiring the license program under the United States Government contract, GE agrees that it will include all necessary and applicable restricted rights Legend is on the licensed programs and the documentation to protect PTCs proprietary rights under the FAR and other similar regulations of other federal agencies. Vide para 3 thereof, it is clearly stated that for all practical purposes PTC shall be considered the owner of the license program and of any copies thereof, and of all copyright, trade secret, patent, trademark and other intellectual or industrial property rights therein; and that physical copies of the licensed programs in firmware, diskette, tape, Papa or other form provided by PTC, shall remain the property of the PTC, and such copies shall be deemed to be on loan to GE. Apart from this, vide paragraph 5 it was agreed that the PTC represents and warrants that it is the sole owner of the licensed program or has procured the license program under a license from the bonus thereof, and PTC further represents and warrants that it has full power and authority to grant the rights therein granted without the consent of any other person. , 273 & 274/Hyd/2012 10. Nothing could be more clear that the contents of the agreement referred to above to show that PTC is the sole owner of the Pro-E software and GEISA/GEIE only has limited right to use the software subject to the conditions stipulated in the agreement. There is no sale of copyright of software, but the sale is only in respect of the rights to use the software and not the right to the code in itself. When once the transaction is very clear that no copyright of the software is sold but only the rights to use the software were sold without impacting any rights to the source code, merely because the assessee puts it to a particular use, such a usage will not relate back to change the nature of transaction from the sale of product to the sale of copyright.

As a matter of fact, at paragraph No. 4.9, Ld. CIT(A) in no unequivocal terms observed that the main software purchased was the Pro-E software. When once the software is purchased for a particular usage under a non-transferable and non-exclusive grant of license, by no stretch of imagination could be said that any payment made for the usage of software could be royalty. Engineering Analysis Centre Of Excellence (P) Ltd (supra), the Hon’ble Apex Court considered the nature of payments made in cases in which computer software is purchased directly by an end- user, resident in India, from a foreign, non-resident supplier or manufacturer, and held that the amount paid by resident Indian end-user /distributors to non-resident computer software manufacturers/suppliers, as consideration for resale/use of computer software through EULAs/distribution agreement, is not payment of royalty for use of copyright in computer software, and thus, same does not give rise to any income taxable in India. , 273 & 274/Hyd/2012 12. Facts of the case involved in this matter are squarely covered by the decision of the Hon’ble Apex Court in the case of Engineering Analysis Centre Of Excellence (P) Ltd (supra). We, therefore, while respectfully following the same hold the issue in favour of the assessee and inasmuch as such payments do not result in any income taxable in India, the person referred to in section 95 of the Act is not liable to deduct any tax under section 195 of the Act. We, therefore, hold that the remittances made by the assessee to GEISA towards use of Pro-E software or Global Web are not royalty income chargeable to tax under the Act as well as under the treaty and consequently the assessee cannot be treated as an ‘assessee- in-default’ under section 201 of the Act for non-deduction of taxes under section 195 of the Act. Grounds of appeal are accordingly allowed.

In the result, appeal of assessee for the assessment year 2008-09 is allowed.

Since the facts of & 274/Hyd/2012 for the assessment years 2009-10 & 2010-11 are identical to one as decided by us in ITA No. 272/Hyd/2012 for the assessment year 2008-09 (supra) and, therefore, our findings in the said appeal, mutatis mutandis, would apply to these appeals as well. Hence, these appeals of assessee are also allowed.

To sum-up, all the appeals of assessee are allowed.