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ITA 7/2019 1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 26TH DAY OF MARCH, 2021 PRESENT
THE HON’BLE MR.JUSTICE SATISH CHANDRA SHARMA AND
THE HON’BLE MR. JUSTICE S.VISHWAJITH SHETTY
I.T.A.No.7/2019 BETWEEN: Nice Ltd., (Formerly called Nice Systems Ltd.) 22, Zarhin Alexander, Raanana, Israel - 45825. PAN AADCN2524J Represented herein by its Corporate Vice-President (Finance), Hagit Ynon.
C/o: Nice Interactive Solutions Pvt. Ltd., 8th Floor, Wing A & B of Block Rhine, Rajiv Gandhi Infotech Park, Phase II Embassy Tech Zone, Pune - 411 057.
And at: Nice Interactive Solutions Pvt. Ltd., 3, Quadrant, 8th Floor, Tower-1, Umiya Business Bay, Marathahalli, Sarjapur Outer Ring Road, Bangalore - 560 103.
… APPELLANT
(By Sri Suryanarayana.T., Adv.)
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AND:
Assistant Commissioner of
Income-tax, (International
Taxation), Circle - 1(1),
Bangalore.
(Formerly Assistant Director
of Income-tax, (International
Taxation), Circle-1(1),
Bangalore)
BMTC Building, 80 feet Road,
6th Block, Near KHB Games
Village, Koramangala,
Bengaluru - 560 095.
Principal Commissioner of
Income-tax, (International
Taxation), Bangalore
BMTC Building, Koramangala,
Bengaluru - 560 095.
… RESPONDENTS
(By Sri K.V.Aravind, Adv.)
This Income Tax Appeal is filed under Section 260-A of Income Tax Act, 1961, praying to set aside the order dated 31.08.2018 passed in IT(IT)A No.1501/Bang/2016 (Annexure-C) by the Income Tax Appellate Tribunal.
This appeal coming on for Final Hearing, this day, Satish Chandra Sharma J., delivered the following:
JUDGMENT
The present appeal is arising out of the order dated 31.08.2018 passed by the Income Tax Appellate Tribunal
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(ITAT) in IT(IT)A.No.1501/Bang/2016 for the assessment year 2011-12.
The facts of the case reveal that the appellant is a non- resident company incorporated under the laws of Israel and is a tax resident of Israel. The appellant-company is engaged in the business of developing, manufacturing, marketing and selling communication products. It has been further stated that during the previous year relevant to the assessment year 2011-12 and in the usual course of business, the appellant- company sold commercial off-the-shelf software to its customers in India who were of the following two types, (a) business partners; and (b) end-users. The business partners are authorized to sell the software and are required to identify the customers to whom such software is to be sold. The business partners, thus, act as the distributors of the appellant’s software in India and as per the agreement entered into by the business partners with the appellant, the appellant grants to the business partner only a limited right of distribution in respect of the software.
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The facts further reveal that the appellant, in case of sale of software through Business Partners and directly to the end users, provides a link to the end users through which they can download the software. A separate licence key is also given to the end users which is solely in order to allow them to activate the software. In the agreement executed between the customers and the appellant, the Business Partners and the end users are specifically prohibited from making copies of, altering, modifying, reverse engineering, decompiling, or in any manner changing the appellant’s software. The appellant also provides non exclusive licence to use the software to the end users. Neither the Business Partners nor the end users are permitted to commercially exploit the copyright in the software and the customers are only given a limited and minimum right to use the software. All rights, title to and interest in the software remains with the appellant and no interest in or title to the software is conveyed at any point of time to the appellant’s customers. The appellant, under a bona fide belief that the consideration received for sale of the aforesaid software to its customers in India is not taxable in India as royalty under Section 9 of the
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Act as well as under Article 12 of the India – Israel Double Taxation Avoidance Agreement, did not offer to tax the receipts from the sale of software in its return of income for the assessment year 2011-12.
The return of the assessee was taken up for assessment by the Assistant Commissioner of Income-tax (International Taxation), Circle-1, under Section 143(3) of the Income-tax Act and an assessment order was passed on 15.4.2014. In the assessment order it was held that the amount received by the appellant from the sale of software was in the nature of royalty in terms of Section 9(1)(vi) of the Income-tax Act. Being aggrieved by the order passed by the Commissioner of Income-tax, an appeal was preferred before the Commissioner of Income-tax (Appeals) and the appellate authority has dismissed the appeal on 14.6.2016. Thereafter, an appeal was preferred before the Income Tax Appellate Tribunal and the Tribunal has also dismissed the appeal on 31.8.2018 and the present appeal has been preferred against the order passed by the Tribunal.
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The present appeal has been admitted to consider on the following substantial question of law:
“Whether the Tribunal was justified in confirming the order of assessment whereunder it came to be held that amount received by the Assessee for sale of software amounted to royalty as defined under Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961 and under Section 12 of the India-Israel (DTAA) and thereby giving rise to an income chargeable to tax in India?”
Heard the learned counsel for the parties at length.
The controversy involved in the present case, as informed by the learned Counsel for the parties stands concluded on account of the judgment delivered by the 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. 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
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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
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Court of Karnataka, namely, the judgment of this Court in GE Technology (supra).
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
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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.
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
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by the learned counsel for 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).
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.
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
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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.
In the light of the aforesaid judgment delivered by the Hon’ble Supreme Court, the question of law framed in the present appeal is decided in favour of the assessee and against the revenue.
Sd/- JUDGE
Sd/- JUDGE