M/S. INFOSYS LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE- 1(2), BANGALORE

The assessee is a company incorporated in India and is engaged in the business of rendering software development services and also sale of software products and rendering information technology services. In the course of its business of software development, the Assessee uses other software under a license from its owners, it gets access to various

There is no dispute in these appeals that the Assessee deducted tax at source on the payment for the services referred to above to non-residents. There is also no dispute that as per the agreement with the non-resident, the Assessee was to bear the taxes payable by the non-resident and that the Assessee had deducted tax at source on the grossed-up sum payable including taxes payable by the non-resident.

In terms of Sec.248 of the Act, where under an agreement or other arrangement, the tax deductible on any income under Section 195 of the Act, is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on IT(IT)A Nos.2145 to 2167/Bang/2019 M/s. Infosys Limited, Bangalore Page 3 of 26 such income. In terms of Sec.249 (2)(a) of the Act, such appeal shall be presented within thirty days from the date of payment of the tax. The Assessee filed one appeal for payments made in a month. For example in ITA 2145/Bang/2019, the Assessee has made 16 payments to different non-residents in respect of different services in the month of April, 2017 and those 16 payments were subject matter of appeal by the Assessee u/s.248 of the Act before the first appellate authority, viz., the CIT(A). In an appeal u/s.248 of the Act, there would be no order passed by Income tax authority against which appeal is being filed because the appeal is filed only for a declaration that no tax is payable on the sum paid to the non- resident in the hands of the non-resident in India. The Hon’ble Karnataka High Court in the case of Jindal Thermal Company Ltd. Vs. DCIT (TDS) (2010) 321 ITR 31 (Karn.) has held that an appeal u/s.248 is maintainable even though there was no adjudication by the Income Tax Authority under the Act.

The appeals filed by the Assessee were decided by the CIT(A) by consolidating the 23 appeals filed for the period comprising of months April, 2017 to February, 2019 (23 months). The CIT(A) passed a common order for all the 23 appeals. On the basis of the classification and conclusions of the CIT(A), the payments by the Assessee to the non-residents can be classified in the following three broad categories viz., (1) Payments for software license fee, access to various online databases, web hosting, cloud computing, cloud space hiring, access of hardware access through software, access to online software training, membership fees, subscription of RSA token involving the right of right to use the software. (2) Data connectivity charges (also known as Network connectivity charges, LAN connectivity charges, Link connectivity charges, Link charges etc., (3) Data Centre Racks and Links Fees: (4) consulting fees connected and interlinked with software or cloud services; (5) Legal fees, professional fees, training fees, certification fees, sub-contracting charges etc.,

The CIT(A) first identified same payees each month for the aforesaid period and for identical services. This exercise has been carried out by the CIT(A) in paragraphs 10 to 299 of the impugned common order and in paragraph-300 of the impugned order, the CIT(A) has summarized the nature of payments to the non-residents as follows: “In the payments listed above, the majority of the payments are consideration paid for purchase of software, access to various databases, cloud computing, cloud space hiring, access of hardware overseas through software, access to online software training, etc. The argument of the appellant is that these payments are not in the nature of royalty. The grounds in this respect are therefore considered as under: Analysis of payments for software, access portals, access to online databases, etc.”

In paragraph 301 to 303, the CIT(A) has discussed the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co.Ltd. (2012) 16 taxmann.com 141(Karn.) and has concluded in paragraph 304 that in terms of the said decision payment made by Indian residents to the non-resident for supply of software and access to database is royalty.

Thereafter the CIT(A) dealt with and rejected the claim of the Assessee that the definition of Royalty under the Double Taxation Avoidance Agreement (DTAA) between India and the country in which the non- residents are tax resident has to be applied and not the definition of “Royalty” under the Act, and concluded as follows:

The final conclusion of the CIT(A) on the issue is in paragraph 331 of his order which reads thus: “331. In view of the above, the argument of the appellant that consideration paid for purchase of software, access to various databases, cloud computing, cloud space hiring, access of hardware overseas through software, access to online software training, membership fees, subscription of RSA token, etc. [involving transfer of the right to use the software] is not royalty is not acceptable. The grounds in this respect are therefore dismissed.”

Thereafter the CIT(A) examined the question whether payment of Data Connectivity Charges and Data Centre Racks and Links Fees are in the Royalty from paragraph 332 of the impugned order. In paragraph 333 to 350 of the impugned order, the CIT(A) has detailed as to how internet and telecommunications networks and the type of switching and circuits. In paragraph 351 to 357, the CIT(A) has concluded as follows:

In Paragraph 358 to 372 of the impugned order, the CIT(A) has primarily discussed and placed reliance on decision of Hon’ble Madras High Court in the case of Verizon Communications Singapore Pvt.Ltd. Vs. ITO, to 149 of 2011 and 230 of 2012 dated 7.11.2003 wherein the provisions of Explanation 4 and 5 inserted by the Finance Act, 2012 w.e.f. 1.6.1976 were introduced to the definition of royalty u/s.9(1)(vi) of the Act.

Thereafter the CIT(A) identified payment to various payees towards consulting fees, training fees etc., and concluded that these payments are in the nature of “fees for technical services rendered”. The following were the conclusions of the CIT(A) in this regard:

Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeals before the Tribunal.

The learned counsel for the Assessee on the issue of payment for software license fees submitted that the question whether a payment to a non-resident is in the nature of royalty or not has to be tested in the light of the relevant provisions of DTAA between India and the country of which the non-resident payee is a tax resident. He submitted that the definition in the Act and the amendment to those provisions will have no impact on the tax

The Ld. Counsel for the assessee submitted that payees are tax residents of various countries with whom India has a DTAA and therefore in view of Section 90(2) of the Act the provisions of the Act or the DTAA whichever is more beneficial to the assessee shall apply. He submitted that since the definition of royalty provided under the relevant Article of DTAA of whom the payees are tax residents provides for a much restricted definition of “Royalty”, the said definition provided under the DTAA is more beneficial as compared to the provisions of Section 9(1)(vi) of the Act, therefore, the provisions of DTAA shall apply. He pointed out that the CIT(A) in the impugned order has come to a conclusion that the payments in question are in the nature of royalty and hence taxable in the hands of the non- resident in India by placing reliance on the decision of the decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics

The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon’ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). In the case of a computer

The court held that a license from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a license issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. 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 the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by end- users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon’ble Supreme Court. It was submitted by the learned counsel for the Assessee that the case of the Assessee in the present

On the question whether the provisions of the Act can override the provisions of the DTAA, the Hon’ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the "transfer of all or any rights" in respect of any right, property, or information included and had always included the "transfer of all or any right for use or right to use a computer software". The court ruled that Explanation 4 to section 9(1)(vi) expanded the scope of royalty under Explanation 2 to section 9(1)(vi). Prior to the aforesaid amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or other similar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of ‘royalties’ will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term ‘copyright’ has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for "the use of, or the right to use, any copyright "of a literary work includes a computer program or software. It was held that the regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the license granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive license, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licensed on a CD/other physical media cannot be classed as a royalty.

The learned counsel for the Assessee cited the terms of the End user’s Licence Agreement (EULA) with some of the non-residents and submitted

With regard to the payments towards webhosting charges and cloud computing/cloud hosing charges, the learned counsel for the Assessee submitted that those charges are paid to get access to cloud space wherein the payer can store his data, applications, software etc. The payer is given an user id and password to use the storage space provided on cloud. It is a payment made for infrastructure service. The payer gets access to use software/processes which are copyrighted by the owner. He brought to our notice some of the terms of the agreement between the Assessee and Amazon Web Services Inc. And Virtusgreat Inc. and highlighted that on similar terms of agreement between another Assessee and Amazon Web Services Inc., the Pune Bench of ITAT in the case of EPRSS Prepaid Recharge Services India Pvt. Ltd. Vs. ITO (2018) 100 taxmann.com 52(Pune-Trib.) held that payments made for use of cloud space does not amount to payment of royalty. He highlighted the fact that the Pune Bench placed reliance on decision of Hon’ble Delhi High Court in the case of DIT Vs. New Skies Satellite BV (2016) 68 taxmann.com 8 (del) to a come to a conclusion that web hosing charges are not in the nature of royalty.

With regard to payments towards Data Connectivity Charges (also known as Network Connectivity charges, Lan Connectivity charges, Bandwidth Charges, Link Connectivity charges, Link Charges etc., the learned counsel highlighted the fact that the CIT(A) after discussing the technical facts and the workings involved in data or bandwidth connectivity concluded that payment is for use of equipment as well as several processes which are secreted and patented and hence in the nature of “royalty” under the DTAA and therefore liable to TDS u/s.195 of the Act.

With regard to payments towards consulting fees, legal fees, professional fees, training fees, certification fees and sub-contracting charges, the learned counsel submitted that the payments were treated as royalty because they were related to purchase of software, training, online subscription etc. and therefore would also be in the nature of ‘royalty’. He submitted that once the payment for use of software, access to online etc., is regarded as not in the nature of royalty, these payments should also be regarded not in the nature of royalty and hence not liable to TDS. Alternatively it was submitted that the conclusion that the payments were in the nature of Fees for Technical Services (FTS) cannot be sustained because the applicable DTAA regarding taxation of FTS need to be considered. According to him therefore the issue needs re-examination by the income tax authorities in the light of the applicable DTAA provisions.

The learned DR relied on the order of the CIT(A).

We have given a careful consideration to the rival submissions. It is clear from a perusal of the conclusions of the CIT(A) that the CIT(A) has primarily placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 in favour of the revenue and against the Assessee. As rightly submitted by the learned counsel for the Assessee, the said decision of the Hon’ble Karnataka High Court, now stand overruled by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC). The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon’ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). The Court noted that the End User License Agreements (EULA) of the software do not transfer or assign the copyright over the software. The “license” that is granted vide the EULA, is not a license 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 “license” which imposes restrictions or conditions for the use of computer software.The Court held that the transaction is similar to ‘a sale of goods’ IT(IT)A Nos.2145 to 2167/Bang/2019 M/s. Infosys Limited, Bangalore Page 18 of 26 as held by the SC in the case Tata Consultancy Services v. the State of A.P., 2005 (1) SCC 308. In this regard, Court held that: – “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 program, 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. the State of A.P., 2005 (1) SCC 308”

The Court noted that the terms of the Double Taxation Avoidance Agreement (DTAA) with foreign companies will have application in the case. The definition of ‘royalty’ in DTAAs will have application. Once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. 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 assessee, have no application.The decision of the Hon’ble Karnataka High Cour in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon’ble Supreme Court.

Since the revenue authorities primarily relied on the decision of Hon’ble Karnataka High Court in the case of Samsung Electronics Co.Ltd. (supra) in holding that the payment in question was in the nature of royalty and since in the light of the subsequent pronouncement of the Hon’ble Supreme Court in the case of Engineering Analysis (supra) overruling the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co.Ltd. (supra) and since the analysis of the EULA is necessary to come to a conclusion regarding the nature of the right that is given to the user of the software and since this exercise has not been IT(IT)A Nos.2145 to 2167/Bang/2019 M/s. Infosys Limited, Bangalore Page 19 of 26 carried out by the authorities below, we deem it fit and appropriate to remit the issue to the AO for consideration afresh in the light of the principles laid down by the Hon’ble Supreme Court in the case of Engineering Analysis (supra). The AO will afford opportunity of being heard to the Assessee in the set aside proceedings.

With regard to the payments towards webhosting charges, the Pune Bench of ITAT in the case of EPRSS Prepaid Recharge Services India Pvt.Ltd. Vs. ITO (2018) 100 taxmann.com 52(Pune-Trib.) held that payments made for use of cloud space does not amount to payment of royalty. The Pune Bench placed reliance on decision of Hon’ble Delhi High Court in the case of DIT Vs. New Skies Satellite BV (2016) 68 taxmann.com 8 (del), which decision has been approved by the Hon’ble Supreme Court in the case of Engineering Analysis (supra), to a come to a conclusion that web hosing charges are not in the nature of royalty. The learned counsel also relied on the decision of the Mumbai Bench of ITAT in the case of DIT Vs.Savvis Communication Corporation (2016) 69 taxmann.com 106 (Mum-Trib). The Mumbai Bench explained the concept of use of scientific equipment whether would amount to royalty or not by observing as follows: “9. We have noted that the very basis of the impugned addition is Assessing Officer's finding that the receipts in question were on account of use of scientific equipment, and, for that reason, giving rise to an income taxable under section 9(l)(vi] of the Act as also article 13[1)(» of the Indo US tax treaty. This finding, however, proceeds on the fallacy that when a scientific equipment is used by the assessee for rendering a service, the receipt will be construed as a receipt for use of scientific equipment. Undoubtedly, when the assessee receives an income on account of allowing a customer to use a scientific equipment, it does become taxable for the reason of its being characterized as such, but the use of a scientific equipment by the assessee, in the course of giving a service to the customer, is something very distinct from allowing the customer to use a scientific equipment. The true test is in finding out the answer to the fundamental question- is it the consideration for rendition of services, even though involving the use of scientific equipment, or is it the consideration for use of equipment simpUctor by the assessee? In the case of former, the consideration is not taxable, in the case of the latter, the consideration is taxable. In the case of Kotak Mahindra Primus Ltd Vs DDIT [(2007) 11 SOT 578 (Bom)], a coordinate bench, dealing with a situation in which the mainframe

With regard to cloud computing/cloud hosting charges, the concept of Cloud computing is the delivery of different services through the Internet, including data storage, servers, databases, networking, and software. Cloud-based storage makes it possible to save files to a remote database and retrieve them on demand. Traditionally we store our data in our computer and can access the data only if the computer is available. In cloud computing the data is store in a server and can be accessed through any system. The Mumbai Tribunal in the case of Rackspace, US Inc. and ITA Nos. 3507 & 1075/Mum/2017 order dated 29.5.2019 followed the earlier decision rendered in the case of American Chemical Society vs. DCIT in ITA No. 6811/Mum/2017 for the AY 2014-15 vide order dated 30.04.2019, wherein identical issue was decided in the context of right to use material in the form of journal,. The Tribunal held that the cloud hosting company creates / maintains information online and grants access to the journals, the assessee neither shares its experiences, techniques or methodology employed in evolving databases with the users, nor imparts any information relating to them. The terms of the agreement between the cloud host and the customer proider that the customer gets right to search, view and IT(IT)A Nos.2145 to 2167/Bang/2019 M/s. Infosys Limited, Bangalore Page 21 of 26 display the articles (whether online or by taking a print) and reproducing or exploiting the same in any manner for personal use. The customers do not get any rights to the journal or articles therein. It was held that there was No 'use or right to use' in any copyright or any other intellectual property of any kind is provided by the assessee to its customers. Furthermore, the information resides on servers outside India, to which the customers have no right or access, nor do they possess control or dominion over the servers in any way.Therefore, the question of such payments qualifying as consideration for use or right to use any equipment, whether industrial, commercial or scientific, does not arise. The tribunal thereafter applied the ratio to the case of the Assessee Rackspace, US Inc. and held that the agreement between the assessee and its customer is for providing hosting and other ancillary services to the customer and not for the use of / leasing of any equipment. The Data Centre and the Infrastructure therein is used to provide these services belong to the assessee. The customers do not have physical control or possession over the servers and right to operate and manage this infrastructure / servers vest solely with the assessee. The agreements entered into the service level agreements. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on higher or lease. The customer is not even aware of the specific location of the server in the Data Centre where the customer application, web mail, websites etc. The tribunal therefore held that income from cloud hosting services was not royalty within the meaning of explanation (2) to section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA DTAA.

The conclusions with regard to payment for right to use software will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties.

With regard to payments towards Data Connectivity Charges (also known as Network Connectivity charges, Lan Connectivity charges,

With regard to payments towards transponder capacity, bandwidth, the concept has been explained by the Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co Ltd. Vs. DIT (2011) 197 Taxman 263 (Delhi) The assessee in that case viz., Asia Satellite Telecommunications Co. Ltd., was a company incorporated in Hong Kong and carries on business of private satellite communications and broadcasting facilities.

The conclusions with regard to payment for right to use software and the overriding effect of DTAA over the Act, will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties.

These appeals are accordingly treated as allowed for statistical purpose. Order pronounced in the open court on 25th Aug, 2021.