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2021 (2) TMI 508 - AT - Income TaxIncome accrued in India - Taxability as Royalty income - sale to Resellers - assessee earned revenue from sale of software licenses in India including certification and software for authentication business which was claimed as not chargeable to tax in the absence of it having any Permanent Establishment (PE) in India - AO show caused the assessee as to why the receipts from sale of software licenses should not be taxed as Royalty - India and USA DTAA - HELD THAT - assessee has entered into agreements with Resellers for establishing contact with the end customers and make sales. Resellers are obliged to purchase the Symantec Products from the assessee for resale. A Reseller simply gets a user name and password for accessing to the Reseller Console of the assessee just for the purpose of purchasing Symantec Products and then for further sale to the customers. Price per product is already settled at which the Symantec products will be available to the Resellers. Price to be charged by the Reseller from customers is to be decided by him without the assessee s involvement. Right in the intellectual property of the computer software remains with the assessee at all times. Thus it is abundantly clear that it is not a case as projected on behalf of the Revenue that the Resellers have been given a license by the assessee for consideration to commercially exploit such license at their end. Resellers have not been conferred with any right to copy the software for further sale by them. They just purchase the Symantec Products as such for resale to the end customers in India. Each item of Symantec product is to be separately purchased by them for resale. The position would have been otherwise, if the assessee, instead of selling Symantec Products to the Resellers, would have licensed them the right to copy it for their commercial exploitation, which would have merited consideration of the matter from a different perspective. In our considered opinion, the position qua the sale to Resellers is no different from the direct sales made by the assessee to its end customers in India. Thus the essential ingredient of the Royalty, being, granting of use or right to use the copyright is lacking insofar as sale to Resellers is concerned. It is not as if the Distributors or the Resellers acquire any right from the assessee to copy the software and then exploit it commercially. Their transactions are confined to purchasing specific Symantec Products from the assessee and then eventually selling the same to the end customers in India. There is no qualitative difference between the direct sales made by the assessee to its customers in India, which have already passed the scrutiny by the Tribunal in assessee s own case for earlier year and the sales made by the assessee through the Distributors or the Resellers. In both the sets of circumstances, it is only one-to-one sale of the Symantec Products by the assessee and at no stage the right to use the copyright in the software is licensed either to the Distributor or the Reseller. Thus, the decision taken by the Tribunal in the context of direct sales made by the assessee to end customers in India applies with full force insofar as the sales through Distributors and Resellers are concerned. That being the position, we hold that the income earned by the assessee from sale of software, either directly to the customers in India or through Distributors or Resellers constitutes its business income and not the Royalty income. As admittedly the assessee did not have any Permanent Establishment in India, such income will not magnetize Indian taxation. - Decided in favour of assessee.
Issues Involved:
1. Taxability of ?16,11,97,746/- as Royalty income. 2. Nature of income earned from the sale of software licenses. 3. Applicability of the India-USA Double Taxation Avoidance Agreement (DTAA) to the income in question. 4. Classification of transactions involving Resellers and Distributors. Issue-wise Detailed Analysis: 1. Taxability of ?16,11,97,746/- as Royalty income: The core issue in this appeal is whether the income of ?16,11,97,746/- earned by the assessee from the sale of software licenses is taxable as Royalty income. The Assessing Officer (AO) classified this income as Royalty under Article 12 of the DTAA between India and the USA, based on the direction given by the Dispute Resolution Panel (DRP) for the preceding assessment year 2013-14. The AO relied on the judgment of the Karnataka High Court in CIT Vs. Samsung Electronics Co. Ltd. to support this classification. However, the Tribunal had previously ruled in favor of the assessee for the assessment year 2013-14, deciding that the income from the sale of software licenses was not Royalty income but business income. 2. Nature of income earned from the sale of software licenses: The Tribunal had to determine whether the income from the sale of software licenses constituted business income or Royalty income. The assessee argued that the software licenses sold were for internal business use by the users and did not involve the transfer of any copyright. The Tribunal noted that the sale of computer software is considered the sale of a copyrighted article and not the transfer of copyright in the software. Consequently, such transactions do not amount to Royalty under Article 12 of the DTAA, which defines Royalties as consideration for the use of or the right to use any copyright. 3. Applicability of the India-USA Double Taxation Avoidance Agreement (DTAA) to the income in question: The Tribunal examined Article 12 of the DTAA, which defines Royalties and concluded that the amendment to the definition of Royalty under section 9(1)(vi) of the Income-tax Act, 1961, does not alter the meaning of Royalties under the DTAA. The Tribunal held that the income from the sale of software licenses did not qualify as Royalties under the DTAA, as the transactions involved the sale of off-the-shelf software and not the transfer of copyright. 4. Classification of transactions involving Resellers and Distributors: The Tribunal analyzed the agreements between the assessee and its Resellers and Distributors. The Reseller Agreement indicated that Resellers purchased products for resale to customers without acquiring any right to copy the software for commercial exploitation. Similarly, the Distributor Agreement showed that Distributors were appointed to facilitate the sale of Symantec Products to Resellers without transferring any right, title, or interest in the software. The Tribunal concluded that the transactions with Resellers and Distributors were similar to direct sales to end customers and did not involve the transfer of the right to use the copyright. Therefore, the income from these transactions also constituted business income and not Royalty income. Conclusion: The Tribunal held that the income earned by the assessee from the sale of software, whether directly to customers or through Resellers and Distributors, constituted business income and not Royalty income. As the assessee did not have a Permanent Establishment in India, such income was not subject to Indian taxation. The appeal was allowed, and the impugned order was overturned. Order: The appeal is allowed. Order pronounced in the Open Court on 11th January, 2021.
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