2024 (6) TMI 415 - AT - Income Tax

Income chargeable to Tax in India or not - Royalty receipts - reimbursement of software license expenses received from its group entity - amount received from Indian entity - assessee, a tax resident of Denmark - AO held that the assessee receives from its group concerns is charges for allowing use of its IT Infrastructure which consists of various third party software, owned/leased/supported platforms including hardware systems, hence, the receipts are taxable as royalty as per explanation 2(iva) to section 9(1)(vi) of the Act - HELD THAT - We have gone through the facts and in agreement with the fact that the software used by SGIPL and the amount for which is cross charged by assessee, does not pertain to any use or right to use of any copyright as neither the assessee nor SGIPL can sub-license, transfer, reverse engineer, modify or reproduce the software / user license. SGIPL acknowledges that the Microsoft Software has been granted to assessee by Microsoft Denmark ApS under an object code-only, non-exclusive, non-sublicensable, non-transferable, revocable license to access and use the object code version of the proprietary software, solely for assessee and its group/associate companies' internal business purposes. A reading of the judgment EY Global Services Ltd 2021 (12) TMI 571 - DELHI HIGH COURT and Engineering Analysis Centre of Excellence Pvt. Ltd 2021 (3) TMI 138 - SUPREME COURT clearly show that for the payment received by the assessee to be taxed as royalty , 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 authorize 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 end therefore, the payment received cannot be termed as royalty . The software used by SGIPL and the amount for which is cross charged by assessee, does not pertain to any use or right to use of any copyright as neither the assessee nor SGIPL can sub-license, transfer, reverse engineer, modify or reproduce the software / user license. SGIPL acknowledges that the Microsoft Software has been granted to assessee by Microsoft Denmark ApS under an object code-only, non-exclusive, non-sublicensable, non-transferable, revocable license to access and use the object code version of the proprietary software, solely for assessee and its group/associate companies' internal business purposes. Thus, we hold that no liability arises on the assessee. The mere fact that tax has been deducted doesn t automatically make the receipt taxable as royalty . Appeal of the assessee is allowed.

Issues Involved:
1. Taxability of reimbursement of software license expenses as royalty.
2. Applicability of the Supreme Court decision in M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT.
3. Allegation of maintaining IT infrastructure for providing third party software.
4. Disregard of directions by the Hon'ble DRP.
5. Examination of relevant facts and documents regarding IT infrastructure.

Issue-wise Detailed Analysis:

1. Taxability of reimbursement of software license expenses as royalty:
The assessee contended that the amount received from its group entity SGIPL as reimbursement for software license expenses should not be treated as taxable income in India. The Assessing Officer (AO) had considered these receipts as royalty for the use of equipment. The assessee argued that the reimbursement per se does not constitute taxable income and that it only purchases software for its own use and for group concerns, without maintaining any IT infrastructure.

2. Applicability of the Supreme Court decision in M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT:
The assessee argued that the principles laid down by the Supreme Court in the case of M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT should apply to its case. The AO, however, held that the Supreme Court decision was not applicable as the transaction involved the use of industrial, commercial, or scientific equipment, rather than standard software.

3. Allegation of maintaining IT infrastructure for providing third party software:
The AO alleged that the assessee maintained IT infrastructure and provided third-party software through enterprise applications and servers, thus charging group concerns for the use of this IT infrastructure. The assessee countered that the software in question were standard offerings of third-party vendors and any IT infrastructure was maintained by these vendors, not by the assessee.

4. Disregard of directions by the Hon'ble DRP:
The assessee claimed that the AO disregarded the directions of the Hon'ble Dispute Resolution Panel (DRP) to factually verify the submissions made by the assessee and to pass a reasoned order. The DRP had directed the AO to consider the assessee's submission dated 03.04.2023 and verify the facts based on available documents without conducting any fresh inquiry.

5. Examination of relevant facts and documents regarding IT infrastructure:
The DRP noted that the AO did not record any observations regarding the examination of relevant facts and documents. The DRP emphasized that the AO should verify the assessee's submission that the IT infrastructure was maintained by Microsoft and not by the assessee. The DRP also highlighted that the cost-to-cost reimbursement does not have any income element and thus cannot be brought to tax.

Conclusion:
The Tribunal concluded that the software used by SGIPL and the amount cross-charged by the assessee did not pertain to any use or right to use of any copyright. The software licenses were granted under a non-exclusive, non-sublicensable, non-transferable, revocable license solely for internal business purposes. The Tribunal relied on the judgments of EY Global Services Ltd. Vs. ACIT and Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, which clarified that a non-exclusive, non-transferable license enabling the use of a copyrighted product does not entail parting with the copyright and cannot be construed as royalty.

In view of the factual position and judicial pronouncements, the Tribunal held that no liability arises on the assessee. The mere fact that tax has been deducted does not automatically make the receipt taxable as royalty. Consequently, the appeal of the assessee was allowed.

Order Pronounced in the Open Court on 16/04/2024.

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