2021 (10) TMI 857 - AT - Income Tax

TDS / Withholding tax u/s 195 - Income accrued or taxable in India - Royalty income - off-shore supply of standardised/shrink wrapped software - taxing the same under the provisions of section 9(1)(vi) of the Act r.w Article 12 of the India- Singapore DTAA - HELD THAT - As decided in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT 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. Thus 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. - Decided in favour of assessee.

Summary

Issues Involved:
1. Computation of income by the AO and DRP.
2. Classification of revenue from offshore supply of software as 'royalty'.
3. Applicability of Section 90(2) of the Income Tax Act.
4. Nature of revenues from the sale of copyrighted articles.
5. Definition of 'royalty' under Article 12 of the India-Singapore DTAA.

Detailed Analysis:

1. Computation of Income by the AO and DRP:
The assessee contested the computation of income at ?18,15,86,344/- by the AO and DRP, arguing that it should be 'NIL' as returned by the assessee. The Tribunal examined the underlying facts and concluded that the computation was erroneous based on the subsequent findings related to the nature of the revenue.

2. Classification of Revenue from Offshore Supply of Software as 'Royalty':
The primary grievance was that the AO and DRP assessed the revenue from offshore supply of standardized/shrink-wrapped software as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12 of the India-Singapore DTAA. The DRP based its findings on the Hon'ble Karnataka High Court decision in Samsung Electronics Co. Ltd., and amendments brought by the Finance Act, 2012.

3. Applicability of Section 90(2) of the Income Tax Act:
The assessee argued that under Section 90(2) of the Act, they opted to be governed by the more beneficial provisions of the India-Singapore DTAA, which should override the provisions of Section 9(1)(vi) of the Act. The Tribunal agreed, noting that the DTAA's definition of 'royalty' was more beneficial and thus applicable.

4. Nature of Revenues from the Sale of Copyrighted Articles:
The assessee contended that their revenues were derived from the sale of a copyrighted article (computer program) and did not involve any transfer of the 'right to use' the copyright itself. The Tribunal, referencing the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd., upheld this view, stating that the sale of software did not constitute 'royalty'.

5. Definition of 'Royalty' under Article 12 of the India-Singapore DTAA:
The Tribunal referred extensively to the Supreme Court's decision, which clarified that payments for the resale/use of computer software do not amount to 'royalty' under Article 12 of the DTAA. The Supreme Court's judgment overruled the DRP's reliance on the Karnataka High Court's decision and other similar cases, emphasizing that the DTAA's definition should prevail.

Conclusion:
The Tribunal concluded that the revenue from offshore supply of software does not constitute 'royalty' and is not taxable in India under the DTAA. Consequently, the assessee's appeals were allowed, and the AO and DRP's orders were set aside. The Tribunal's decision was pronounced in the open court on 01.07.2021, in the presence of both representatives.