2023 (9) TMI 145 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipt - amount received by the assessee from sale/distribution of software - addition within meaning of Article 12(3) of India Singapore DTAA - assessee is a non resident corporate entity incorporated under the laws of Singapore - HELD THAT - Assessee is simply a distributor of software. It purchases software from non-resident manufacturers/sellers, such as, Microsoft, Adobe etc. and distributes/sells them to distributors and customers in India. Thus, the assessee itself is not the manufacturer or creator of software. Therefore, assessee cannot own copyright over the softwares as the manufacturer or creator of the software can hold copyright over the software. From the submissions made before the departmental authorities, these facts are clearly discernible. Thus, the products sold by the assessee are ready to use off the shelf or shrink wrapped softwares, which are nothing but copyrighted articles. From the nature of software products sold by the assessee, it can be very well construed that the copyright over the software sold by the assessee were owned by the companies creating such softwares like Microsoft, Adobe, etc. The assessee is merely a trader of software, hence, has no domain or ownership over the software. Thus, when the assessee does not have any ownership over the softwares sold, it could not have transferred the right to use of copyright of the software to distributors/customers in India. In case of Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT while deciding the issue whether the payment made is in the nature of royalty, the Hon ble Supreme Court very clearly and categorically held that the amount paid by resident Indian end users/distributors to non-resident computer software manufactures/suppliers as consideration for the re-sale/use of the computer software through end user license agreement/distribution agreement is not in the nature of royalty for the use of copyright in the computer software, hence, cannot be treated as royalty Thus, in our considered opinion, Commissioner (Appeals) has adopted the right course of action while deleting the addition made by the Assessing Officer. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of whether the amount received from the sale/distribution of software is royalty under India-Singapore DTAA.
2. Determination of whether the revenue earned from the sale of software is in the nature of business income and not taxable in India due to the absence of Permanent Establishment.

Analysis:

Issue 1:
The primary issue in this case revolves around whether the amount received by the assessee from the sale/distribution of software constitutes royalty under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The Assessing Officer contended that the revenue earned was from the transfer of the right to use copyright, hence, should be treated as royalty under both the provisions of the Act and the DTAA. However, the learned Commissioner (Appeals) accepted the assessee's claim that the revenue was from the sale of a copyrighted article and not the transfer of copyright. This decision was supported by the Supreme Court's ruling in a relevant case, emphasizing that the consideration for the resale/use of computer software through end-user license agreements is not royalty. The Tribunal concurred with this interpretation, highlighting that the assessee, as a distributor, did not have ownership over the software and therefore could not have transferred the right to use the copyright.

Issue 2:
Another crucial aspect of the case was whether the revenue earned from the sale of software should be considered as business income and not taxable in India due to the absence of a Permanent Establishment (PE). The Tribunal analyzed the nature of the transactions conducted by the assessee, noting that it acted as a distributor purchasing software from non-resident manufacturers and selling them in India. As the assessee did not create the software and merely traded in copyrighted articles, it was deemed that there was no transfer of the right to use copyright. This, coupled with the absence of ownership over the software, led to the conclusion that the revenue was in the nature of business income and not subject to taxation in India. The Tribunal dismissed the grounds raised by the Revenue, emphasizing the applicability of the Supreme Court's decision and the reversal of a similar Tribunal decision by the High Court.

In conclusion, the Tribunal upheld the decision of the learned Commissioner (Appeals) and dismissed the appeal, emphasizing that the revenue earned from the sale of software was not royalty but business income, and therefore not taxable in India.