2023 (2) TMI 338 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipts - Assessee company has licensed software to Reliance Jio under two separate agreements and the ld AO had considered that the receipts to be taxed as royalty on the basis that the transaction squarely falls within the provisions of section 9(1)(vi) of the Act and also under the relevant Article 12 of India-Singapore Treaty - HELD THAT - Assessee has not agreed for absolute transfer or assignment, sub-license or lease of the rights to the Reliance Jio as 3rd Party but rather the right has been restricted by the Clause 9(a) as it is an exception clause - it is only in regard to the business operation related to providing services to Reliance Jio assignment, lease, transfer or sub-license to a 3rd party is permitted. That only indicates that when the 3rd party is providing any service by its business operations to Reliance Jio only, in those circumstances the said 3rd party may be allowed to use the software license or documents by the buyer, reliance Jio. Such transfer of any interest by assignment, lease, transfer or sub-license to 3rd party is not for the own benefit of the 3rd party or generate revenue from independent business operations in which Reliance Jio would have no interest. Thus the first reason cited by the ld CIT(A) is not sustainable. Coming to the second reason it can be observed that the ld CIT(A) himself has found that right to decomplile the software has been given for a limited extent. Clause 9(b) again is part of exception clause and infact restricts decompilation, re-assemble or reverse engineering of the software and the clause mentions that it is only when the law, if any, mandates such decompilation the same would be permitted under the agreement in favour of the Reliance Jio. Thus, it is not under the agreement entered between the parties, the right to decompile has been allowed but only as exception, where the law of the land would mandate or to say casts duty for such decompilation, then the Reliance Jio has been permitted to do the same. Third reason cited by the ld CIT(A) is not sustainable as the provision made of source code escrow arrangement is only to deal with the contingency so that the buyer‟s business continues during the term of agreement of five years if likely to be effected by uncertainty like Bankruptcy etc of the assessee. Escrow arrangement is merely remedial measures to give continuity to the agreement during its life and cannot be said to be arrangement to part of the rights in favour of the buyer to use the license software to support any 3rd party processing. Fourth reason, CIT(A) has failed to appreciate that in the case in hand, when the agreement specifically mentions that the Assessee has given to his buyer non-exclusive and non transferable but enterprise wide unlimited use rights in the software, then reproduction for multiple end users, within the association of buyers cannot be construe to be conferring proprietary interest on the licensee, by parting with any copyright in the software. It is merely for the convenience and to avoid multiple transactions and consequent agreement for every end user of the Reliance Jio. Reason number five, it can be observed that reproduction of the software in unlimited CPUs cannot be considered to be a license in terms of section 30 of Copyright Act. The concept of end user License Agreement (EULA) has been examined extensively by the Hon'ble Supreme Court in case of Engineering Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT and held that it is not agreement under which the vendor part of any interest relatable to any right mentioned in section 14A and 14B of the Copyright Act. The CPUs being used by Reliance Jio‟s employees, consultants and implementers of the software, would certainly require installation by reproductions, when the enterprise wide unlimited use rights in the software are given. As in the case of the buyer Reliance Jio, the Mumbai Bench 2021 (3) TMI 1408 - ITAT MUMBAI has upheld the order of the ld CIT(A) in holding that no tax is deductible of the payment/ credit made by Reliance Jio to present Assessee, SDL, for the software. The coordinate bench has relied on the judgment of the Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd 2021 (3) TMI 138 - SUPREME COURT - Impliedly, not treating the receipts of the present appellant company as Royalty and consequently not chargeable to tax in India. Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of receipts as royalty under section 9(1)(vi) of the Income Tax Act and Article 12 of India-Singapore Treaty.
2. Interpretation of agreements between the Assessee company and Reliance Jio Infocomm Ltd.
3. Application of judicial precedents on taxability of software license receipts.
4. Consideration of source code escrow arrangement and rights conferred under the agreements.
5. Analysis of reasons provided by the ld CIT(A) for treating receipts as royalty.
6. Comparison with a similar judgment involving Reliance Jio Infocomm Ltd.
7. Final decision on the taxability of receipts and assessment order.

Analysis:

1. The appeals were filed against the order of the First Appellate Authority (FAA) upholding the taxability of receipts as royalty for Assessment Years 2015-16 and 2016-17. The Assessee, a Singapore-incorporated company, was engaged in software development and services. The dispute centered around the licensing of software to Reliance Jio Infocomm Ltd, deemed as royalty by the ld AO under section 9(1)(vi) and Article 12 of the India-Singapore Treaty.

2. The agreements between the Assessee and Reliance Jio outlined the scope of deliverables, rights, and restrictions. The ld CIT(A) considered clauses granting rights to Reliance Jio for business purposes, decompilation of software, source code arrangements, reproduction rights, and unlimited users as reasons for treating the receipts as royalty.

3. The Assessee cited the judgment of the Hon'ble Supreme Court in a similar case and argued that the receipts should be treated as business profits not taxable in India due to the absence of Permanent Establishment (PE). The ld DR defended the tax authorities' position, referencing the principles from a judgment of the Hon'ble Karnataka High Court.

4. The tribunal analyzed each reason provided by the ld CIT(A) for treating the receipts as royalty. It found that the rights granted were not absolute transfers, decompilation was limited by law, source code arrangements were for business continuity, reproduction rights did not confer proprietary interest, and unlimited CPU reproduction did not imply copyright transfer.

5. The tribunal compared the case with a Mumbai Bench judgment involving Reliance Jio, where it was held that no tax was deductible on payments made for software. Relying on the Supreme Court's precedent, the tribunal concluded that the receipts were not royalty and not chargeable to tax in India, overturning the FAA's decision.

6. Ultimately, the tribunal allowed the appeals in favor of the Assessee, highlighting the error in sustaining the assessment order. The decision was based on the interpretation of agreements, legal precedents, and the nature of rights conferred, leading to the conclusion that the receipts were not taxable as royalty.

This detailed analysis covers the issues involved in the legal judgment, providing a comprehensive understanding of the arguments, considerations, and final decision made by the tribunal.