2021 (12) TMI 571 - HC - Income Tax

Income accrued in India - royalty receipts - transfer of copyright in the software - I ndia-UK DTAA - payment received by EYGSL (UK) for providing access to computer software to its member firms of EY Network located in India payment received by EYGSL (UK) from EYGBS (India) to be taxed as royalty - HELD THAT - As it is essential to show a transfer of copyright in the software to do any of the acts mentioned in Section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licencee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end-user to have access to and make use of the licenced software over which the licencee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as royalty . In the present case, the EYGBS (India), in terms of the Service Agreement and the MOU, merely receives the right to use the software procured by the EYGSL (UK) from third-party vendors. The consideration paid for the use of the same therefore, cannot be termed as royalty as held by the Supreme Court in Engineering Analysis Centre 2021 (3) TMI 138 - SUPREME COURT In determining the same, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is the Agreement between the EYGSL (UK) and the EYGBS (India). As the same does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term royalty as held by the Supreme Court in Engineering Analysis Centre The submission of the learned counsel for the Revenue that the judgment of the Supreme Court in Engineering Analysis Centre (supra) cannot be applied because it confines itself only to the four categories mentioned in paragraph 4, also cannot be accepted. Though the Supreme Court was on facts considering the four categories of cases that arose in the appeals before it, it has laid down the law for general application. The law, as laid down by the Supreme Court, when applied to facts of the present case, squarely covers the same in favour of the petitioners. The submission made by the learned counsel for the revenue relying upon the amendment to Section 9(1)(vi) of the Income Tax Act, 1961 has also been specifically considered and rejected by the Supreme Court. The Impugned Rulings passed by the learned AAR are set aside and it is held that the payment received by EYGSL (UK) for providing access to computer software to its member firms of EY Network located in India, that is, EYGBS (India), does not amount to royalty liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA. - Decided in favour of assessee.

Issues Involved:

1. Whether amounts received by EYGSL (UK) from EYGBS (India) for services and/or deliverables are chargeable to tax in India as "fee for technical services" under the India-UK Tax Treaty.
2. Whether the amounts received by EYGSL (UK) from EYGBS (India) as reimbursement of costs would constitute "income" under Section 2(24) of the Income-tax Act, 1961.
3. Whether payments received by EYGSL (UK) for giving "Right to benefit from the Deliverables and/or Services" are in the nature of "royalty" under Explanation 2 to clause (vi) of Section 9(1) of the Act and Article 13 of the India-UK Tax Treaty.
4. Whether the payments received by EYGSL (UK) would be chargeable to tax in India in light of the declaration that EYGSL (UK) does not have a permanent establishment in India.
5. Whether the receipts by EYGSL (UK) from EYGBS (India) would suffer withholding tax under Section 195 of the Act, and at what rate.

Detailed Analysis:

1. Taxability of Amounts as "Fee for Technical Services":
The court examined whether the consideration received by EYGSL (UK) from EYGBS (India) for services and/or deliverables qualifies as "fee for technical services" under Article 13 of the India-UK Tax Treaty. The AAR ruled that the consideration received on account of provision of services/deliverables is not "fee for technical services" (FTS). The court upheld this view, indicating that the nature of services provided did not meet the criteria for FTS under the treaty.

2. Reimbursement of Costs as "Income":
The court analyzed whether the amounts received by EYGSL (UK) as reimbursement of costs for giving the "Right to benefit from the Deliverables and/or Services" would constitute "income" under Section 2(24) of the Income-tax Act, 1961. The AAR ruled that the consideration received amounts to service fees and does not amount to reimbursement of expenses. The court agreed with this interpretation, emphasizing that the payments were for services rendered and not mere reimbursements.

3. Nature of Payments as "Royalty":
The court scrutinized whether the payments received by EYGSL (UK) for providing the "Right to benefit from the Deliverables and/or Services" are in the nature of "royalty" under Explanation 2 to clause (vi) of Section 9(1) of the Act and Article 13 of the India-UK Tax Treaty. The AAR concluded that consideration received for giving the right to benefit from computer software procured from third-party vendors is "royalty" under both the Act and the treaty, whereas consideration for services is not. The court, however, referred to the Supreme Court's judgment in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, which clarified that payments for the use of software without transfer of copyright do not constitute "royalty". The court applied this principle, determining that the payments made by EYGBS (India) to EYGSL (UK) for software usage did not amount to "royalty".

4. Taxability in Absence of Permanent Establishment:
The court considered whether the payments received by EYGSL (UK) would be chargeable to tax in India, given that EYGSL (UK) does not have a permanent establishment in India. The AAR had ruled that consideration for computer software is taxable as royalty irrespective of the existence of a permanent establishment. However, the court, applying the Supreme Court's ruling, found that since the payments were not "royalty", they were not taxable in India under the India-UK DTAA.

5. Withholding Tax under Section 195:
The court examined whether the receipts by EYGSL (UK) from EYGBS (India) would suffer withholding tax under Section 195 of the Act, and at what rate. The AAR had ruled that consideration received for software would suffer withholding tax. The court, however, set aside this ruling, holding that since the payments were not "royalty", they would not be subject to withholding tax under Section 195.

Conclusion:
The court set aside the Impugned Rulings dated 10.08.2016 by the AAR, holding that the payments received by EYGSL (UK) for providing access to computer software to EYGBS (India) do not amount to "royalty" and are not liable to be taxed in India under the Income Tax Act, 1961, and the India-UK DTAA. The petitions were allowed, and no costs were ordered.

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