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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 17TH DAY OF SEPTEMBER, 2025 PRESENT THE HON'BLE MR. JUSTICE S.G.PANDIT AND THE HON'BLE MR. JUSTICE K. V. ARAVIND INCOME TAX APPEAL NO. 680 OF 2023 BETWEEN:
PR.COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) KORAMANGALA, BANGALORE.
THE DEPUTY COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION INTERNATIONAL TAXATION, CIRCLE 1(2), KORAMANGALA, BANGALORE. …APPELLANTS (BY SRI. SUSHAL TIWARI, STANDING COUNSEL)
AND:
M/S. IBM SINGAPORE PTE LTD., C/O IBM INDIA PVT. LIMITED, NO.12, SUBRAMANYA ARCADE, BANNERGHATTA MAIN ROAD, BANGALORE-560029 PAN: AACC12917B. …RESPONDENT (BY SMT. MANASA ANANTHA, ADV.)
THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23/08/2021 PASSED IN ITA NO. 3229/BANG/2018, FOR THE ASSESSMENT YEAR 2014-15, PRAYING TO 1). DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 23/08/2021 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘C’ BENCH, BANGALORE, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN ITA
Digitally signed by NANJUNDACHARI Location: HIGH COURT OF KARNATAKA
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
NO. 3229/BANG/2018 FOR A.Y. 2014-15 (ANNEXURE-A) AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS APPEAL, COMING ON FOR ADMISSION, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER:
CORAM: HON'BLE MR. JUSTICE S.G.PANDIT AND HON'BLE MR. JUSTICE K. V. ARAVIND
ORAL JUDGMENT (PER: HON'BLE MR. JUSTICE K.V.ARAVIND)
Heard Sri Sushal Tiwari, learned Standing Counsel for the appellants–Revenue, and Smt. Manasa Ananthan, learned counsel for the respondent–assessee.
These appeals by the Revenue are directed against the common order dated 23.08.2021 passed in ITA Nos.3229/Bang/2018, pertaining to the assessment year 2014-15, by the Income Tax Appellate Tribunal “C” Bench, Bengaluru (for short, ‘the Tribunal’).
The Revenue has raised the following substantial questions of law: 1. Whether on the facts and in the circumstances of the case, the Tribunal's order is perverse in nature in by holding that the payment made to non-resident
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
entities in respect of purchase of software was not royalty and that the same did not give rise to income taxable in India and therefore, the petitioners were not liable to deduct tax at source under Section 195 of the Act?
Whether on the facts and in the circumstances of the case, the Tribunal's order is perverse in nature in holding that the payments made to non-resident entities were not in the nature of royalty as defined in Explanation 2 to Section 9(1)(vii) of the Act and the Double Taxation Avoidance Agreement as well?
Whether on the facts and in the circumstances of the case, the Tribunal's order is perverse in nature in holding that the sale of software license did not include a right or interest in copyright, which thus did not give rise to payment of royalty and would be an Income deeded to accrue in India under Section 9(1)(vi) of the Act, requiring the deduction of tax at source?
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
Whether on the facts and in the circumstances of the case, the Tribunal's order is perverse in nature in not considering the fact that the development of advanced cloud-based computer software by the assessee would not come under copyright as envisaged in Section 14(a)/14(b) of the Copy Right Act?
Whether on the facts and in the circumstances of the case, the Tribunal's order is perverse in nature in not appreciating that conditions for holding applying Explanation 2(v) to Section 9(1)(vi) of the Act were fully satisfied in present case as payments were made to a non-resident by way of royalty for use of or the right to use any copy right and Review Petition filed by Revenue is pending for adjudication before Supreme Court in case Engineering Analysis Centre of Excellence (reported in 432 ITR page 471)?
The respondent–assessee is a foreign company engaged in the business of marketing and servicing data
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
processing equipment. The assessee filed returns of income for the assessment year 2014-15. During the course of scrutiny, the Assessing Officer held that the assessee had transferred copyrighted software for the purpose of making further sales, and accordingly held that the income was taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 (for short, ‘the Act’). The assessee, however, contended that what was sold was a copyrighted article and not the copyright itself. The Assessing Officer rejected this contention and held that there was a transfer of copyright between the end-user and the copyright holder, and that the payments made by the end-users for the subscription of the software fell within the ambit of Section 9(1)(vi) of the Act as royalty, and were, therefore, chargeable to tax in India.
The finding of the Assessing Officer was challenged before the Commissioner of Income-tax (Appeals) [‘CIT(A)’]. The CIT(A), referring to the judgment of this Court in Commissioner of Income-tax and
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
Another v. Samsung Electronics Company Ltd1., confirmed the assessment order, holding that the payment received as royalty was chargeable to tax in India under Section 9(1)(vi) of the Act. The assessee preferred appeals before the Tribunal. The Tribunal, following its earlier orders, deleted the addition made towards royalty income.
Sri Sushal Tiwari, learned Standing Counsel for the Revenue, submits that the Hon’ble Supreme Court, in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income-tax and Another2 [Engineering Analysis], has laid down the principles governing the taxation of income under the head ‘Royalty’. It is submitted that the present case requires reconsideration in the light of the said judgment. It is the specific submission that the End User Licence Agreement requires examination to determine the applicability of the principles laid down by the Hon’ble Supreme Court.
1 (2012) 345 ITR 494 2 (2021) 432 ITR 471
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
Learned counsel further submits that the Revenue has preferred a review petition before the Hon’ble Supreme Court seeking review of the judgment in Engineering Analysis. It is therefore prayed that the hearing of these appeals be deferred pending adjudication of the said review petition.
On the other hand, Smt. Manasa Ananthan, learned counsel for the respondent–assessee, submits that the substantial questions of law raised in these appeals are no longer res integra in view of the law laid down by the Hon’ble Supreme Court in Engineering Analysis. It is submitted that what is sold is a copyrighted article and not the copyright itself, and therefore, the consideration received on the sale of software does not constitute ‘royalty’ under Section 9(1)(vi) of the Act. It is further submitted that the Tribunal, after examining the transactions in detail and the findings of the Assessing Officer, has rightly held that the income is not chargeable to tax in India as royalty.
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
8.1. Learned counsel further submits that, in the case of the payer, IBM India, proceedings under Section 201 of the Act were initiated, treating IBM India as the assessee in default for failure to deduct tax, on the ground that the consideration paid to the respondent–assessee was in the nature of royalty. The contention of the Revenue was accepted by this Court. The said order was carried in appeal before the Hon’ble Supreme Court and was disposed of along with Engineering Analysis by a common order. It is his submission that, once it has been held in the case of the payer that the payment is not in the nature of royalty by the Hon’ble Supreme Court, it cannot be held to constitute royalty in the case of the payee.
8.2. Insofar as the pending review petition, as contended by the Revenue, learned counsel submits that the Revenue had preferred Review Petition (C) Diary No(s).35475/2013 etc., in the case of The
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
Commissioner of Income Tax vs. GE India Technology Private Limited, which has been rejected by the Hon’ble Supreme Court by order dated 23.04.2024. It is further submitted that the rejection of the review petition has also been referred to by the Hon’ble Supreme Court in Deputy Director of Income-tax and Another vs. M/s. Vodafone Idea Limited in Special Leave Petition (Civil) Diary No.24154/2024 by order dated 26.07.2024, while dismissing the special leave petition. It is, therefore, submitted that deferment of the hearing of this appeal is not warranted in view of the dismissal of the review petition in the case of IBM India (payer).
We have given our thoughtful consideration to the submissions of learned counsel for the parties and perused the appeal papers.
The facts that emerge from the record are that the respondent-assessee has sold copyrighted software and received consideration therefor. The assessee is a
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
foreign company, and the Double Taxation Avoidance Agreement is attracted in the case. The Revenue contends that the income from the sale of software is taxable in India as royalty, being income from the sale of, or licence to use, copyright. The case of the respondent–assessee, on the other hand, is that what has been sold is a copyrighted article and not the copyright itself, and hence, the income is not taxable in India as royalty.
The Tribunal, upon examining the End User Licence Agreement and after considering the judgment in Engineering Analysis, held that the income is not chargeable to tax in India as royalty.
The Revenue contends that the case of the assessee requires examination in the context of the law laid down by the Hon’ble Supreme Court in Engineering Analysis. However, it is noticeable that the Assessing Officer has held that the assessee has not parted with its copyright so as to enable IBM Singapore to claim that it
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
had sold the software to IBM India. In view of the specific finding recorded by the Assessing Officer, and in the light of the judgment of the Hon’ble Supreme Court referred to supra, it cannot be held that the mere sale of a copyrighted article renders the income chargeable to tax in India as royalty.
The contention of the Revenue is unacceptable for yet another reason. The Hon’ble Supreme Court, in the case of IBM India (payer), in a common judgment along with Engineering Analysis, has held that the payment is not in the nature of royalty. If, in the case of the payer, it has been held that the payment is not royalty, the consequences in the hands of the payee remain unaltered. For this reason also, the income from the sale of software in the case of the respondent–assessee cannot be held to be taxable in India as royalty.
In our view, the questions raised for consideration before this Court are no longer res integra
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HC-KAR NC: 2025:KHC:37114-DB ITA No. 680 of 2023
and stand covered by the judgment of the Hon’ble Supreme Court in Engineering Analysis. The submission of the Revenue to defer consideration of this appeal, pending disposal of the review petition, is also untenable for the reasons assigned above.
Accordingly, the appeal is dismissed as being devoid of merit.
Sd/- (S.G.PANDIT) JUDGE
Sd/- (K. V. ARAVIND) JUDGE
NC CT:bms List No.: 1 Sl No.: 18