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2021 (9) TMI 21 - AT - Income TaxIncome deemed to accrue or arise in India - Royalty u/s.9(1)(vi) - Payments made to non-residents - TDS u/s 195 - right to use software - overriding effect of DTAA - Payments for software subscription, access to portals, access to online databases etc. - Payments for software subscription, access to portals, access to online databases etc. - HELD THAT - 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 owning the physical material in which the copyrighted work may be embodied. Computer programs are 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 authorise the doing of certain acts in respect of a work, including literary work. Since the revenue authorities primarily relied on the decision of Samsung Electronics Co.Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT in holding that the payment in question was in the nature of royalty and since in the light of the subsequent pronouncement in the case of Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT overruling the decision of Samsung Electronics Co.Ltd. (supra) and since the analysis of the EULA is necessary to come to a conclusion regarding the nature of the right that is given to the user of the software and since this exercise has not been carried out by the authorities below, we deem it fit and appropriate to remit the issue to the AO for consideration afresh. Payments towards webhosting charges - As in the case of EPRSS Prepaid Recharge Services India Pvt.Ltd. 2018 (10) TMI 1434 - ITAT PUNE held that payments made for use of cloud space does not amount to payment of royalty. Cloud computing/cloud hosting charges - The concept of Cloud computing is the delivery of different services through the Internet, including data storage, servers, databases, networking, and software. Cloud-based storage makes it possible to save files to a remote database and retrieve them on demand. Traditionally we store our data in our computer and can access the data only if the computer is available. In cloud computing the data is store in a server and can be accessed through any system - conclusions with regard to payment for right to use software will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties. Payments towards Data Connectivity Charges (also known as Network Connectivity charges, Lan Connectivity charges, Bandwidth Charges, Link Connectivity charges, Link Charges etc. - Revenue authorities concluded that payment is for use of equipment as well as several processes which are secreted and patented and hence in the nature of royalty under the DTAA and therefore liable to TDS u/s.195 - Hon ble Delhi High Court in the case of New Skies Satellite BV 2016 (2) TMI 415 - DELHI HIGH COURT has held that income from providing data transmission services by lease of transponders would not be regarded as royalty under the DTAA.The Hon ble Karnataka High Court in the case of CIT Vs. Infosys Technologies Ltd. 2015 (3) TMI 850 - KARNATAKA HIGH COURT has also taken similar view on taxability of Data connectivity charges (Down linking charges). The conclusions with regard to payment for right to use software will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties. Payments towards transponder capacity, bandwidth - There is a wellknown distinction between lease of equipment and use of equipment . The Court held that there was no use of a process by the TV channels when no such purported use has taken place in India as the assessee and its customers are situated outside India. The agreements were executed abroad. The transponder was in orbit and merely because its footprint was on India did not mean that the process had taken place in India. The Court held that since the end consumers i.e. persons watching TV in India are paying the cable operators who in turn are paying the TV channels, the flow of fund is traced to India and therefore the sum is taxable in India was held to be a far-fetched argument and ignores the fact that the income which is generated in India has been subjected to tax in India in the hands of the telecast operators. The payment by the telecast operators outside India to the assessee cannot be taxed on the basis that the end consumers are in India; The conclusions with regard to payment for right to use software and the overriding effect of DTAA over the Act, will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties. Payments towards consulting fees, legal fees, professional fees, training fees, certification fees and sub-contracting charges - Once the payment for use of software, access to online etc., is regarded as not in the nature of royalty, these payments should also be regarded not in the nature of royalty and hence not liable to TDS - another conclusion of the revenue authorities was that the payments were in the nature of Fees for Technical Services (FTS) cannot be sustained because the applicable DTAA regarding taxation of FTS have not been considered - issue needs re-examination by the income tax authorities in the light of the applicable DTAA provisions. Assessee appeal allowed for statistical purpose.
Issues Involved:
1. Payments for software subscription, access to portals, access to online databases, etc. 2. Bandwidth charges or connectivity charges. 3. Legal fees, professional fees, training fees, certification fees, etc. Detailed Analysis: 1. Payments for Software Subscription, Access to Portals, Access to Online Databases, etc.: The CIT(A) classified the payments made by the assessee into three categories, with the first category being payments for software subscription, access to portals, and online databases. The CIT(A) referred to the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd. (2012) to conclude that such payments are considered "royalty" under the Act. The CIT(A) rejected the assessee's claim that the definition of "royalty" under the Double Taxation Avoidance Agreement (DTAA) should apply instead of the Act's definition, stating that the payments for the use of or right to use the software are considered royalty under various treaties and need to be taxed in India. The CIT(A) also examined the Copyright Act, 1957, specifically Section 14, to determine whether the assessee received any rights that could be considered royalty. The CIT(A) concluded that the grant of a license for the right to use or limited distribution is considered a copyright under Section 14(a)(iii) and 14(b)(ii) of the Copyright Act. The CIT(A) further rejected the claim that the use of software is not royalty within the IT Act, citing the decision of the Karnataka High Court in the case of Samsung Electronics. The Tribunal, however, noted that the decision of the Karnataka High Court in Samsung Electronics has been overruled by the Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021). The Supreme Court held that payments for software do not constitute royalty if the end-user only gets a non-exclusive license to use the software without any transfer of copyright. The Tribunal remitted the issue back to the Assessing Officer (AO) for fresh consideration in light of the Supreme Court's decision and the End User License Agreements (EULA). 2. Bandwidth Charges or Connectivity Charges: The CIT(A) examined whether payments for data connectivity charges and data center racks and links fees are considered royalty. The CIT(A) concluded that these payments are for the use of equipment, processes, and algorithms, and therefore, are taxable as royalty under the DTAA. The CIT(A) rejected the appellant's claim that these payments are not taxable in India under the tax treaties. The Tribunal noted that the Delhi High Court in the case of New Skies Satellite BV held that income from providing data transmission services by lease of transponders is not regarded as royalty under the DTAA. The Tribunal also noted that the Supreme Court in the case of Engineering Analysis approved the Delhi High Court's decision. The Tribunal remitted the issue back to the AO for fresh consideration in light of the Supreme Court's decision and the agreements between the parties. 3. Legal Fees, Professional Fees, Training Fees, Certification Fees, etc.: The CIT(A) identified payments towards consulting fees, training fees, etc., and concluded that these payments are in the nature of "fees for technical services rendered." The CIT(A) rejected the appellant's claim that TDS is not deductible on these payments, stating that the appellant failed to furnish evidence regarding the nature of payments and agreements. The Tribunal noted that once the payment for the use of software and access to online services is regarded as not in the nature of royalty, the related payments for consulting fees, legal fees, professional fees, training fees, certification fees, and sub-contracting charges should also not be regarded as royalty. The Tribunal remitted the issue back to the AO for re-examination in light of the applicable DTAA provisions and the agreements between the parties. Conclusion: The Tribunal allowed the appeals for statistical purposes and remitted the issues back to the AO for fresh consideration in light of the Supreme Court's decision in the case of Engineering Analysis and the agreements between the parties. The AO is directed to afford the assessee an opportunity of being heard in the set-aside proceedings.
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