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2022 (4) TMI 166 - AT - Income TaxRoyalty receipts - use of copyright in the computer software - consideration received by the Assessee from various entities on account of sale/ supply of software - scope of Article 12(3) of the India-Singapore- DTA - as per AO transaction of sale of computer software to its customers implicit involved making of multiple copies of the software clearly indicates transfer of copyright and therefore the consideration received qua said transactions amounts to royalty - HELD THAT - Recently the Hon ble Apex Court in Engineering Analysis Centre of Excellence Pvt. Ltd 2021 (3) TMI 138 - SUPREME COURT clearly held that the 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. Recently in the case of CIT (International Taxation) Vs. GRACEMAC CORPORATION 2022 (3) TMI 482 - DELHI HIGH COURT wherein, the Assessee was also holding the licensing of software products of Microsoft company in the Territory of India and selling to its customers in India,dealt with the identical issue as involved in the instant cases and while relying upon dictum laid down in Engineering Analysis Centre of Excellence Pvt. Ltd. case, accepted the proposition that licensing of software products of Microsoft in the territory of India by the Respondent (Assessee) is not taxable in India as Royalty under Section 9(1)(vi) of the Act read with Article 12 of the Indo US DTAA - Decided in favour of assessee.
Issues Involved:
1. Whether the consideration received by the Assessee from various entities on account of sale/supply of software is 'royalty' within the meaning of Article 12(3) of the India-Singapore-DTAA. 2. Interpretation of terms used in Article 12(3) of DTAA as per clarification provided in Explanation 4 to section 9(1)(vi) Finance Act 2012. Detailed Analysis: Issue 1: Whether the consideration received by the Assessee from various entities on account of sale/supply of software is 'royalty' within the meaning of Article 12(3) of the India-Singapore-DTAA. The Revenue department contended that the Assessee, a Singapore-based company, provided software and network equipment to Indian companies, and the payment received for the sale of software should be treated as 'royalty' under the Act and DTAA. The AO added the consideration received as income, treating it as 'royalty'. However, the Ld. Commissioner deleted the addition, relying on various judgments, including those from the jurisdictional High Court, which held that such payments do not constitute 'royalty'. The Revenue argued that the right to reproduce and use computer software are distinct rights, and the customers of the Assessee had the right to make multiple copies, thus constituting 'royalty'. The Assessee countered that it purchased software licenses from Microsoft, which did not grant the right to reproduce or make changes, and thus, the payments could not be treated as 'royalty'. The Tribunal referred to the Hon’ble Apex Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that payments for the resale/use of computer software through EULAs/distribution agreements do not constitute 'royalty'. The jurisdictional High Court in CIT (International Taxation) Vs. GRACEMAC CORPORATION also held that licensing of software products of 'Microsoft' in India is not taxable as 'royalty' under Section 9(1)(vi) of the Act read with Article 12 of the Indo US DTAA. The Tribunal concluded that the identical issue had been elaborately discussed and decided by the Hon’ble Apex Court and followed by the jurisdictional High Court, thus dismissing Ground No. 1 raised by the Revenue department. Issue 2: Interpretation of terms used in Article 12(3) of DTAA as per clarification provided in Explanation 4 to section 9(1)(vi) Finance Act 2012. The Revenue department did not specifically raise this ground and conceded that it had already been decided in favor of the Assessee by the Hon’ble Courts. Consequently, Ground No. 2 was dismissed. Issue 3: Formal Nature of Ground Ground No. 3 was formal in nature and did not require independent adjudication. Conclusion: Both appeals of the Revenue department were dismissed. The Tribunal upheld the Ld. Commissioner's decision to delete the additions made by the AO, aligning with the judgments of the Hon’ble Apex Court and jurisdictional High Court, which held that payments for the sale/supply of software do not constitute 'royalty' under the relevant DTAA provisions. The order was pronounced in the open court on 31/03/2022.
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