2022 (7) TMI 1426 - HC - Income Tax

Income taxable in India - Addition of recharacterization of receipts from sale of software licenses to Indian customers/distributors as royalty - taxing the same receipts in hands of Respondent would result in double taxation - HELD THAT - In the opinion of this Court, the issue of taxability of software receipts in the present cases is no longer res integra as the Supreme Court in Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT 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, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 - Decided in favour of assessee.

Summary

Issues:
Challenge to deletion of addition made in the hands of respondent on account of recharacterization of receipts from sale of software licenses to Indian customers/distributors as royalty. Cross objections filed by the respondent challenging the findings of ITAT with regard to upholding taxability of software receipts as royalty.

Analysis:
The present appeals were filed by the Appellant-Revenue challenging the order passed by the Income Tax Appellate Tribunal regarding the deletion of addition made in the hands of the respondent on the grounds of recharacterization of receipts from software licenses as royalty. The ITAT upheld the addition made in the hands of another corporation but deleted the addition in the respondent's hands to avoid double taxation. Subsequently, the respondent filed Cross Objections challenging the ITAT's findings regarding the taxability of software receipts as royalty, which were taken on record by the Court.

The Court referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax and Anr., where the taxability of software receipts was discussed in various scenarios. The Court analyzed the distinction between copyright and copyrighted articles, emphasizing that the license for the use of software does not include the right to use the copyright embedded therein. The Court also highlighted the importance of interpreting the term "copyright" in the context of relevant statutes and Double Taxation Avoidance Agreements (DTAA).

The Court concluded that the amounts paid by resident Indian end-users/distributors to non-resident software manufacturers/suppliers for the resale/use of software through EULAs/distribution agreements do not constitute royalty for the use of copyright in the software. Therefore, such payments do not give rise to any income taxable in India, and there is no liability to deduct TDS under section 195 of the Income Tax Act. The Court allowed appeals from the High Court of Karnataka, set aside the judgments, and dismissed the appeals from the High Court of Delhi based on the Supreme Court's ruling.

As a result, no substantial question of law arose in the present appeals, leading to their dismissal. Since the appeals filed by Revenue were dismissed, the respondent did not press its cross objections, which were consequently dismissed as well.