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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
Per Bench These appeals are by the assessee directed against the common order dated 28.10.2019 of the CIT(Appeals), Bengaluru-12, Bengaluru for the assessment years 2018-19 & 2019-20.
The assessee has raised the following common grounds in all these appeals. The grounds raised for AY 2018-19 are as follows:-
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“The grounds mentioned hereinafter are without prejudice to one another: S. Relevant section Issue Ground of Appeal No. (s) of the Act 1 Section 250 of Order is bad in That the order of the learned the Income-tax law Commissioner of Income-tax (Appeals)- Act, 1961 (`the 12, Bengaluru [`CIT(A)'] is bad in law and Act') liable to be quashed. 2A Section 195 of Tax is not That, on the facts and in the the Act deductible circumstances of the case, the CIT(A) erred in holding that the appellant is liable to deduct tax at source under section 195 of the Act on payment of software license fee of INR 45,325,644 made to Cadence Design Systems (Ireland) Ltd (`Cadence') in terms of the Software license and Maintenance Agreement (`SLMA'). 2B Section 195 of Tax is not That the learned CIT(A) erred in the Act deductible holding that tax deduction tax at source is required to be enforced even in respect of gross sums, the whole of which do not represent income chargeable to tax under the Act. Article 12 of India Software That, on the facts and in the 3 — Ireland Tax payment is circumstances of the case, the CIT(A) Treaty (`the not in the erred in holding that the software Treaty' or nature of license fee of INR 45,325,644 paid to ' DTAA') royalty' Cadence is in the nature of 'royalty' as defined under Article 12 of the Treaty. Section 248 of the Refund of That, on the facts and in the 4 Act taxes paid circumstances of the case, CIT(A) erred in not directing the jurisdictional Assessing Officer to refund the taxes deducted at source of INR 5,036,182 deposited by the Appellant. The Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this appeal.” 3. The assessee is an Indian company and has made payments to non-resident entity viz., Cadence Design Systems (Ireland) deducting tax at source as per the rates applicable u/s. 195 r.w.s. 195A of the Income-tax Act, 1961 [the Act]. The assessee claimed that the payments to non- residents were not chargeable to tax under the Act and India-Ireland DTAA
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which was rejected by the lower authorities and hence these appeals by the assessee before us.
We have heard both the parties and perused the material on record. The issue in dispute in all these appeals is issue is settled by the judgment of Hon’ble Supreme Court in the case of ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOME TAX & ANOTHER – AIR 2021 SC 124 / 432 ITR 471 (SC). The Apex Court in the aforesaid case has held in paragraphs 27, 47, 52, 168 & 169 as under:
“27. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, “chargeable under the provisions of [the] Act”, to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under Section 2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Importantly, such deduction is only to be made if the non-resident is liable to pay tax under the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under Section 195(1) of the Income Tax Act, or such person has, after applying Section 195(2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in Section 201 of the Income Tax Act, follow, by virtue of which the resident-payee is deemed an “assessee in default”, and thus, is made liable to pay tax, interest and penalty thereon. This position is also made amply clear by the referral order in the concerned appeals from the High Court of Karnataka, namely, the judgment of this Court in GE Technology (supra).
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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 referred 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 characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 52. There can be no doubt as to the real nature of the transactions in the appeals before us. 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 programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for
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the assessees, is the law declared by this Court in the context of a sales tax statute in Tata Consultancy Services v. State of A.P., 2005(1) SCC 308 (see paragraph 27). 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 S.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 (S. 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 manufacture/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. 170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.”
Being so, the issue of rendering software services including the ancillary support services by the assessee to non-residents is squarely covered by the above judgment of Hon’ble Supreme Court. Accordingly, all the appeals are allowed.
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In the result, all the appeals of the assessee are allowed.
Pronounced in the open court on this 20th day of July, 2021.
Sd/- Sd/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore, Dated, the 20th July, 2021.
/Desai S Murthy /
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.