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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of the order of learned Commissioner of Income Tax (Appeals)-16, Chennai [CIT(A)] dated 15-05-2017 in the matter of order passed by Ld. Assessing Officer [AO] u/s. 201(1) / (1A) of the Act on 29- 02-2016. The assessee has filed concise grounds which read as under:
The Commissioner of Income Tax (Appeals) failed to appreciate that the Appellant is engaged in the business of banking software solutions and the share of cost of software paid to foreign group company cannot be considered as royalty and hence there is no requirement to deduct tax at source under Section 195 of the Income Tax Act, 1965.
2. The Commissioner of Income Tax (Appeals) erred in concluding that the share of cost towards software is in the nature of royalty and hence the provisions of Section 195 shall apply. 3. The Commissioner of Income Tax (Appeals) failed to appreciate that the Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. Commissioner of Income Tax (2021) SCC Online SC 159 has held that the cost of purchase of software is not subject to deduction of tax under Section 195. 4. The Commissioner of Income Tax (Appeals) ought to have appreciated that there is no dispute on the fact that the payment was made only for the purchase of software.
Drawing attention to grounds of appeal
, Ld. AR submitted that the issue of requirement of deduction of tax at source (TDS) on royalty payment now stand covered in assessee’s favor by the recent decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT [2021] SCC Online SC 159 (SC). A copy of the same has been placed on record. The Ld. AR submitted that the assessee paid cost of shared software to foreign group entity. The said payment would not constitute royalty as per this decision and hence, there was no requirement to deduct tax at source on these payments. The Ld. DR defended the orders of lower authorities but could not disturb the position as put forth by Ld. AR.
3. Having heard rival submissions and after due consideration of material facts in the light of cited decision, our adjudication would be as given in succeeding paragraphs. 4.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in providing banking software solutions. One of the group entities of the assessee i.e., M/s Temenos USA Inc. procured Microsoft License software programmes which was 3 - shared amongst the group entities. Accordingly, the assessee paid to its group entity towards its share of global access rights. The payment was stated to be mere reimbursement in nature and it was submitted that the provisions of Sec. 195 would not apply to these payments. In the invoices, the product was described as ‘Microsoft Desktop Optimization License’. The Microsoft optimization pack is a suite of technologies available as a subscription to Microsoft Software Assurance Customers designed to help IT professional virtualize the user experience, applications and windows. 4.2 However, an order u/s. 201(1) / (1A) was passed by Ld. AO on 29.02.2016 wherein the assessee was held to be assessee-in-default for non-deduction of TDS on aforesaid payments. It was observed by Ld. AO that the group obtained global access rights on a negotiated price which were made available to all its geographies and was billed in proportion to the usage. The assessee submitted that the payments were nothing but mere reimbursement without any margins. The assessee also submitted that the software access payment was neither purchase of copyright of the software nor royalty. 4.3 However, rejecting the same, Ld. AO chose to rely upon the decision of Delhi Tribunal in SPX India (P.) Ltd. Vs. CIT [2013] 36 Taxmann.com 377 as well as decision of other Chennai Tribunal in Ashok Leyland Ltd. Vs. DCIT [2009] 20 ITR 14 wherein it was held that TDS provisions would be applicable to reimbursements also. Reliance was also placed on the decision of Hon’ble Karnataka High Court in the case of CGI Information Systems & Management Consultants (P.) Ltd. Vs. CIT (48 Taxmann.com 264) which held that the question for consideration would be whether what is paid by the assessee to the 4 - Canadian Company represents royalty payable for the license granted to use the said facility or is it a cost of acquisition of the said intellectual property rights. What is provided by the Canadian Company to the assessee was not intranet facility and it is only leased line charges. The same reasoning holds good even in respect of the said facility made available to the assessee. Similarly, in the case of Hon’ble AAR in Citrix Systems Asia Pacific Pty Ltd.(18 Taxmann.com 72), it was held that use of software without a license would make the user liable for infringement of copyright embedded in the software and hence the sale of licensing of the software involves the grant of right to use the copyright in the software. 4.4 The Ld. AO held that the payment made by the group could not be said to be mere purchase of goods rather it was a license granted on Annual basis and the term of the agreement was 3 years. The same would prove that there was no purchase of software but only a license to use the software. 4.5 In the above background, it was finally held that the usage of a particular software for fee involves transfer of copyright. Accordingly, the payment would be royalty taxable @10%. The Explanation-4 to Sec. 9(1)(vi) makes it clear that the royalty means any consideration for transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of licenses). in the present case, though copyright vests with owner of the software, it allows the assessee to use the software by granting license / right to use a computer software subject to certain terms and conditions. Therefore, the payments by the assessee would be royalty for usage of software 5 - and taxable in India in the hands of the Non-Residents in terms of Article 12 of the India USA treaty. Since, the assessee failed to deduct TDS on these payments, the assessee was treated as assessee-in-default and a demand of Rs.82.57 Lacs was raised against the assessee including interest demand of Rs.14.33 Lacs. The stand of Ld. AO, upon confirmation by Ld. CIT(A) in the impugned order, is under challenge before us. Our findings and Adjudication 5. Upon careful consideration of material fact, it could be gathered that the assessee’s group entity has procured Microsoft License software programmes which has been shared amongst the group entities. The assessee has reimbursed the foreign entity towards his share of cost, The payment of the license is on Annual Basis and the terms of the license is said to be 3 years. Quite clearly, what the group entity has procured is mere license to use the software. It has been accepted by the Ld. AO that the copyright in the license vested with the Vendor. This being the case, the cited decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT [2021] SCC Online SC 159 (SC) would become applicable to the facts of assessee’s case. This decision has reversed the decision of Hon’ble AAR in Citrix Systems Asia Pacific Pty Ltd. (18 Taxmann.com 72).
Upon perusal of this decision, we find that the transactions that could have been entered into by the assessee were categorized in 4 categories viz.: - (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 by foreign, non-resident suppliers to resident Indian distributors or end- users. It was finally held by the Hon’ble Court as under: - CONCLUSION 172. 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.
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."
The ratio of this decision has recently been applied by Hon’ble High Court of Madras in the case of CIT V/s Dasault Systems Sumulia Pvt. Ltd. (127 Taxman.com 27; 30.03.2021) which concerned with a case where the assessee had purchased only a right to use copyright i.e., software and not entire copyright itself. It was held by Hon’ble Court that amount paid by resident Indian end-users / distributors to non-resident computer software manufacturers / suppliers, as consideration for resale / use of computer software through EULAs / distribution agreements, is not payment of royalty for use of copyright in computer software and same did not give rise to any income taxable in India, as a result of which persons referred to in section 195 were not liable to deduct TDS under section 195.
Applying the ratio of aforesaid decisions, we find that the assessee has been granted mere right to use a software. The term "royalties" as defined in Article 12 of India USA Double Taxation Avoidance Agreement (DTAA), would mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. In the cited decision, Hon’ble Supreme Court has 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 8 - owning the physical material in which the copyrighted work may be embodied. It was further observed by Hon’ble Court that Computer programs would be categorized as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorize 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. In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts i.e., the seven acts as enumerated in sub-clause (a) and the eights act of selling or giving of commercial rental or offering for sale or commercial rental any copy of the computer program. It was finally held that a license from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright and it is different from a license issued u/s 30 the Copyright Act, which is a license which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the "licensed" computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customized to its specifications or otherwise. A non- exclusive, non-transferable license, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a license to enjoy all 9 - or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.
So far as the Explanation-4 (as inserted by Finance Act, 2012) to Section 9(i)(iv) is concerned, it was held that Explanation 4 was inserted 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 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 10 - under section 14(b) of the Copyright Act read with sub-section 14(a) the payment of such license could not be held to be royalty.
In view of the foregoing, the assessee could not be fastened with the liability to deduct tax at source on shared cost and thus, could not be termed as assessee-in-default. Consequently, the demand raised against the assessee would fail.
The appeal stands allowed in terms of our above order. Order pronounced on 21st February, 2022.