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TMI Blog2021 (7) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... 'royalty' and that the same did not give rise to any 'income' taxable in India and, wherefore, the assessee was not liable to deduct any tax at source. See SAMSUNG ELECTRONICS CO. LTD. OTHERS [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT] . - Also see NICE LTD. [ 2021 (5) TMI 877 - KARNATAKA HIGH COURT] amounts paid by resident Indian end-users/distributors to non-resident computer software manufacture/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. - IT ( IT ) A No. 913/Bang/2019 - - - Dated:- 5-7-2021 - N.V. Vasudevan, Vice President And Chandra Poojari, Member (A) For the Appellant : T. Suryanarayana, Advocate For the Respondents : Pradeep Kumar, CIT (DR) ORDER Per Chandra Poojari, Accountant Member This appeal is by the assessee against the order of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO erred and the DRP further erred in not appreciating that the consideration received by the Appellant for sale of software to Indian resellers/distributors/customers does not constitute payments in respect of a secret process. 8. That the AO and DRP failed to appreciate that since the payment received by the Appellant for sale of software was not to be measured with reference to the productivity or use of the software, it could not be construed as 'royalty'. 9. That the AO erred and the DRP further erred in not following certain decisions delivered by the Hon'ble High Courts of Delhi and Bombay, the Authority for Advance Rulings and various Benches of this Hon'ble Tribunal on the same issue that arises in the Appellant's case. 10. That the AO erred in classifying the consideration received by the Appellant towards support services as royalty/fees for technical services under Article 12 of DTAA. The DRP further erred in rejecting the Appellant's objections by holding that the said payments received by it qualify as royalty as they are for use of a copyright. 11. That the AO erred in considering the higher of the amounts appearing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he broader meaning of the term 'royalty' under the Act. [Para 16] The dispute between the revenue and the assessee in these cases is whether payments made by the assessee to the non-resident would constitute 'royalty' or 'Income from business' and if it is to be treated as 'Income from business', whether the non-resident is required to have a permanent establishment in India. Further, in the absence of any permanent establishment of the non-resident in India, is there no obligation on the part of the payee, the assessee herein, to deduct tax at source under section 195. Therefore, the fact that the payments made by the assessee to the non-resident would constitute income of the non-resident is indisputable. However, the dispute is as to whether such income in the hands of the non-resident is to be treated as sale and income from business covered under article 7 of the DTAA with respective countries or whether the payments would amount to royalty in the hands of the non-resident, for which no permanent establishment is required for making payment in India. There is also no dispute that if the payments made by the assessee are held to be royalty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred that the customer-assessee shall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and copyright continue to be with the non-resident as per the agreement, Even as per the agreement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the software, upon payment of the licenses set forth in the agreement only to end-users pursuant to a valid actuate shrink wrap or other actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the software the documentation or any derivative works based upon the software or document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the assessee that there is no transfer of copyright or any part thereof under the agreements entered into by it with the non-resident supplier of software cannot be accepted. [Para 20] It is well-settled that the intent of the Legislature in imposing sales tax and income-tax are entirely different as income tax is a direct tax and sales tax is an indirect tax and, wherefore, mere finding that the computer software would be included within the term 'sales tax would not preclude the Court from holding that the said payments made by the assessee to the non-resident company in the instant case would amount to 'royalty' unless the assessee is able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in the absence of any permanent establishment of the non-resident supplier, there is no obligation on the part of the payee to make deduction under section 195(1). [Para 22] It is well-settled that in the absence of any definition of 'copyright' in the Income-tax Act or the DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software, cannot be accepted. What is supplied is the copy of the software of which the supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act. Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software, or off-the-shelf software is not the price of the C.D. alone nor software alone nor the price of licence granted. This is a combination of all and, in substance, unless licence is granted permitting the end user to copy and download the software, the dumb C.D. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct tax at source under section 195 and consequences would follow. On facts and circumstances of the case, the Tribunal was not justified in holding that the amount(s) paid by the assessee to the foreign software suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and, wherefore, the assessee was not liable to deduct any tax at source. [Para 25] . 5. Similar issue for AY 2011-12 in the case of Nice Ltd. came up before the Hon'ble High Court of Karnataka in ITA No. 7/2019 and vide judgment dated 26.3.2021 it was held as under:- 7. The controversy involved in the present case, as informed by the learned Counsel for the parties stands concluded on account of the judgment delivered by the Hon'ble Supreme Court in the case of ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOME TAX ANOTHER - AIR 2021 SC 124/432 ITR 471 (SC). The Apex Court in the aforesaid case has held in paragraphs 27, 47, 52, 168 169 as under: 27. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provision contained in Section 9 read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 52. There can be no doubt as to the real nature of the transactions in the appeals before us. What is licensed by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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