CITRIX SYSTEMS ASIA PACIFIC PROPRIETARY LTD.,BANGALORE vs. ITO, BANGALORE

The assessee company is a foreign company incorporated in Australia. The company is granting licenses for use of software programs. The assessee has entered into an agreement with independent Indian distributors for distribution and sale of its software licenses and hardware products in India. The assessee contended before the tax authorities that consideration received by it towards sale of software licenses in India is not taxable, since it does not have a Permanent Establishment in India.

The assessee company also filed an application before Authority for Advanced Ruling (“AAR”) for determining the taxability of consideration received by it from distributors towards sale of software programs in India. The AAR held that the consideration received by the assessee is royalty within the meaning of section 9(1)(vi) of the Act and also under Article 12 of DTAA entered between India and Australia. The AO also held the same view.

The assessee had received a sum of Rs.17.57 crores in assessment year 2008-09 and Rs.16.97 crores in assessment year 2009-10 towards sale of software licenses. Accordingly, the AO brought to tax the above said amounts in assessment years 2008- 09 and 2009-10 respectively. The Ld. CIT(A) also held that the above said payments constitute royalty in the hands of the assessee. Aggrieved, the assessee has filed these appeals before us.

The Ld A.R submitted that the Hon’ble Supreme Court has consolidated all appeals arising from the orders passed by Hon’ble Karnataka High Court, Hon’ble Delhi High Court and the AAR. The Hon’ble Supreme Court has rendered its decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (Civil appeal Nos.8733-8734 of 2018 dated 02.3.2021). The Ld. A.R. submitted that the decision rendered by AAR in the assessee’s case is referred in para 94 of the Hon’ble Supreme Court decision and in para 100, the Hon’ble Supreme Court has held that the decision rendered by the AAR in the assessee’s case does not constitute the law correctly and accordingly, it was set aside. Finally, the Hon’ble Supreme Court concluded that the software licenses sold by the assessee by way of distributor agreements/EULA (End user licence Agreements) do not create any interest or right in such distributor/End users, which would amount to the use of or right to use any copy right. Accordingly, it was held that the payment does not constitute royalty. Accordingly, the Ld. A.R. submitted that the assessments made by the A.O. in IT(IT)A Nos.476 & 477/Bang/2018 Citrix Systems Asia Pacific Proprietary Ltd., Bangalore

We heard Ld. D.R. and perused the record. We notice that the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. has given its conclusion as under: “168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgement, 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. 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 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 judgement. 170. The appeals from the impugned judgements of the High Court of Karnataka are allowed, and the aforesaid judgements are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgements of the High Court of Delhi are dismissed.”