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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER BEENA PILLAI, JUDICIAL MEMBER Present appeals have been filed by assessee against orders dated 22/1/2016 passed by the ITO (Intl. Taxation), Bangalore for assessment years 2010-11 to 2013-14.
The assessee is a Singapore based company. It was submitted that assessee is engaged in the business of distribution of Computer Software and providing ancillary services to its Indian distributors/customers. In certain cases assessee also sold hardware to Indian parties. It is submitted that the sale of software/hardware was made outside India, and the sale proceeds of the sale/ancillary services from the Indian distributors/customers were received by assessee outside India.
2.1 For year under consideration, the assessee filed return of Income declaring Nil taxable income. The return was selected for scrutiny. The Ld.AO observed that assessee received USD35,543,777/- as consideration towards software licensed to Indian distributors/customers. The Ld.AO while passing Draft Assessment order held that the consideration so received amounts to Royalty u/s 9(1)(vi) of the Act and Art 12 of India- Singapore DTAA.
2.2 The Ld.AO also proposed to tax the consideration received from Indian distributors/customers for sale of hardware as royalty on the basis that hardware and software are inseparable and that the software cannot function in the obscene of hardware.
2.3. On filing objection before the DRP, it was held as under:-
“(2.1.16) The assessee has not been able to prove so before this panel too and hence, we reject this ground of the assessee as well. This ground Page 3 of 9 IT(TP)A No.294/Bang/2015,1758/Bang/2013,489/Bang/2016 &191/Bang/2017 is similar to the grounds taken before the earlier DRP panels as well and we find no reason to take a different stand in the assessees case. These grounds are accordingly rejected. However, we are of the considered view that as the receipts are taxed With reference to actual remittances as per the provisions of the DTAA, and as there is no explicit restriction in the DTAA that the remittances ought to made within the same financial year, we do not find any justification in the AO's action in adopting differential rates of taxation for the remittances made in the same year and for the remittances made relating to other years. We also note that the AO also has not given any reasoning for adopting the differential rates. Therefore, we consider it appropriate to direct the AO to adopt the rate specified in the DTAA, in regard to all the remittances made.” 2.4. The DRP relied decision of Hon’ble Karnataka High Court in cse of M/s Synopsis International Pvt. Ltd. in by order dated 3/8/2010 and Samsung Electronics Ltd. reported in 2011-TIL-43-HC-KAR-INTLI. The Ld.AO on receipt of DRP direction passed final assessment orders in all years under consideration.
Aggrieved by the order of Ld.AO assessee is in appeal.
At the outset it has been submitted by both sides that issues involved in all appeals under consideration as same on identical facts. We are therefore disposing off these appeals by way of a common order.
For the sake of convenience, we reproduce grounds of appeal raised by assessee for assessment year 2012-13 as under:
The Appellant submits as under: 1 Assessment bad in law and on facts The assessment order dated 22 January 2016 passed by the Income- tax Officer (International Taxation), Ward-1(l) ['the AU'] under section 143(3) read with section 144C of the Income- tax Act, 1961 (the Act'), is bad in law and on facts. 2 Erroneous demands The AO has erred in:
Page 4 of 9 IT(TP)A No.294/Bang/2015,1758/Bang/2013,489/Bang/2016 &191/Bang/2017 a) Determining the total income of the Appellant at Rs. 2,090,790,838; b) Levying income-tax of Rs. 219,658,486; and c) Raising a demand of Rs. 16,969,420 upon the Appellant. 3 Erroneous treatment of the consideration received for sale of software as 'royalty' 3.1 The AO and the Dispute Resolution Panel ('DRP') have erred in not holding that consideration received by the Appellant would not qualify as 'royalty' under Article 12 of the Double Taxation Avoidance Agreement between India and Singapore ('the DTAA') and under the provisions of the Act. 3.2 The AO and the DRP have erred in not holding that the definition of royalty' under the DTAA has not undergone any change despite of the retrospective amendment made vide Finance Act, 2012, to section 9(l)(vi) of the Act. 3.3 The AO and the DRP have erred in holding that the definition of royalty' under the Act and the DTAA are pari-materia i.e. they should be construed with reference to each other. 3.4 The AO and the DRP erred in not holding that the consideration received by the Appellant was not for transfer of copyright to the distributors or end-users but for sale of software/ copyrighted product. 3.5 The AO and the DRP erred in not holding that the Appellant does not hold copyright in the software, despite of the fact that it had only distribution/ limited rights of the copyrighted product. 3.6 The AO and the DRP failed to appreciate that access to software wherein a subject matter of copyright is embedded, without the right to exploit the copyright, does not amount to use or right to use the copyright in the copyrighted work. 3.7 The AO and the DRP have erred in holding that the Appellant had effectively sold the software to end-users, even where the Appellant had entered into agreement with the distributors/ resellers who in turn had sold the software to the end users. 3.8 The AO and the DRP have erred in not holding that as the payment received by the Appellant from the Indian distributors was not to be measured by reference to the productivity or use of the software, it could not be construed as royalty. 3.9 The AO and the DRP erred in not holding that since software is classifiable as 'goods' under the Karnataka Value Added Tax Act, 2003, payments received for the sale of software could not be construed as royalty'. 3.10 The AO and the DRP have erred in not following certain decisions rendered by the Delhi High Court, the Authority for Advance Ruling and various benches of the Tribunal.
Page 5 of 9 IT(TP)A No.294/Bang/2015,1758/Bang/2013,489/Bang/2016 &191/Bang/2017 4 Erroneous treatment of the consideration received for sale of hardware as 'royalty' The AO and the DRP have erred in law in treating the consideration received by the Appellant from Indian distributors/ customers for sale of hardware as 'royalty' income taxable in India.
5. Erroneous conclusion on applicability of Article 24 of the DTAA 5.1 The AO and the DRP have erred in concluding that the provisions of Article 24 of the DTAA are applicable to the facts of the Appellant. 5.2 Without prejudice to the ground in para 5.1 above, the AO and the DRP have erred in not applying the rate of tax as per the DTAA even though the Appellant had received the entire consideration in Singapore in respect of the invoices raised during the period 1 April 2011 to 31 March 2012. 5.3 The AO has erred in applying surcharge and cess on the tax computed.
Short credit of tax deducted at source The AO has erred in not granting credit of tax deducted at source to the extent of Rs. 647,927.
Initiation of penalty The AO has erred in initiating penalty proceedings under section 271(1 )(c) of the Act.
Relief The Appellant prays that the AO be directed to grant all such relief arising from the preceding grounds as also all relief consequential thereto. The Appellant submits that the above grounds and sub-grounds are independent of and without prejudice to one another.
Admittedly, the issue involved in present appeals has been set at rest by the decision of Hon’ble Supreme Court in a recent case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT reported in 2021 SCC online SC 159. Hon’ble Supreme Court while considering the issue of royalty on sale of software have considered the decision of Hon’ble Karnataka High Court in case of CIT vs Samsung Electronics Co Ltd. (supra) and various other decisions.
Page 6 of 9 IT(TP)A No.294/Bang/2015,1758/Bang/2013,489/Bang/2016 &191/Bang/2017 12. We have perused the submissions advanced by both sides in light of records placed before us. We note that Hon’ble Supreme Court considered the issue by observing as under:-
"3. One group of appeals arises from a common judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to non-resident, foreign software suppliers, amounted to royalty and as this was .so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 ["Income Tax Act"], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source ['I'DS"] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue. 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. 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. 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. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/ equipment." Hon'ble Supreme Court, considered various arguments advanced by the Revenue as well as the assessee's and came to the conclusion 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 Ta Act (section 9(1)(vi, along with explanations 2 and 4 thereof), which deal with royalty, Page 7 of 9 IT(TP)A No.294/Bang/2015,1758/Bang/2013,489/Bang/2016 &191/Bang/2017 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. 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 (AJAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed."
We note that cse of present assessee falls within the second and forth category analysed by Hon’ble Supreme Court. Respectfully following the above view by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (Supra). We hold that purchase of software in the present facts does not amount to give rise to any taxable income in India as a result of which provisions of sec.195 of the Act are not attracted. The assessee does not have any obligation to deduct tax at source. Therefore, provisions of sec.9(1)(vi) along with Explant6ion 2 is not applicable to present assessee’s. Accordingly we allow the appeal in terms of Ground No.3. All other grounds becomes academic. The above view is applied mutatis mutandis to the other assessment years under consideration. In the result all appeals filed by assessee stands allowed. Order pronounced in the open court on 14th June, 2021 Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 14th June, 2021.
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