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TMI Blog2024 (4) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... s directed against the final assessment order dated 25.10.2023 passed by the Ld. ACIT, International Taxation, Intl Taxation Circle 1(2), Bangalore for A.Y. 2021-22 on following grounds of appeal: "1. The Final Assessment Order ("FAO") passed by the Learned Assessing Officer ("Ld. AO") and the directions passed by the Honourable Dispute Resolution Panel ("Hon'ble DRP") upholding the taxability of sale of software as royalty is bad in law and on facts of the case. 2. The Ld. AO and the Hon'ble DRP have grossly erred in law and on facts, in treating the entire consideration, received from IBM India Private Limited ("IBM India") and other Non-Associated Enterprises ("Non-AEs") of the Appellant towards sale of software, as royalty income under Article 12 of the Double Taxation Avoidance Agreement ("DTAA" or "tax treaty"). 3. The Ld. AO and the Hon'ble DRP have erred in disregarding the observations and the interpretations made by the Hon'ble Supreme Court ("SC") in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [Civil appeal nos. 8733 -- 8734 of 2018 and others] wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guely concluding that 'cloud based services' give rise to royalty income on account of rendering customized services to its end-users as against simple software product. which is clearly not the facts of the case. In doing so, the Ld, AO and the Hon'ble DRP have completely disregarded the submission made by the Appellant substantiating the fact that the Appellant has not granted any right to the distributor I end users to commercially exploit the copyright in the software i.e.. the end users cannot sub-license, copy, multiply, modify. decode, reverse engineer it etc., but they can only access the software to use it for their internal business purpose. 9. While the Ld. AO and the Hon'ble DRP have appreciated the change in mechanics of sale of software under cloud-based service, however, the Ld. AO and the Hon'ble DRP have erred in still not applying the principle of the Hon'ble SC in Engineering Analysis (supra) to such cloud-based services and subjecting the same to tax as royalty income. 10. The Ld. AO and the Hon'ble DRP have grossly erred in denying the fact that the Appellant has not received any payments for the transfer of all or any rights in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia-Singapore DTAA. 2.2 During the year under consideration, the assessee had sold software licenses to its associated enterprises and to other Indian customers, as detailed below: 1 IBM India Pvt. Ltd. (AE) 448,64,08,844 2 Non-Associated Enterprises 34,76,97,304 2.3 The AO treated the amounts received by the assessee from the sale of software to its Indian AE i.e. IBM India and other non-AEs as royalty; both under the Act as well as the treaty. The findings of the AO are summarized below: • Since the use of a computer programme involves the use of a process, it is covered by the definition of royalty u/s 9(1)(vi), as far as the users are concerned. • Explanation 4 to section 9 (1)(vi) which was inserted by the Finance Act, 2012 w.e.f. 1.4.1976, clarified that consideration for use or the right to use computer software is royalty. In particular, the Memorandum to the Finance Bill, 2012, clarified the legislative intent behind taxing the sale of software as royalty. • Since the DTAA had been entered into force after 7th Sept, 1990, this position of the Indian Government that use of software under license amours to royalty, was already known to other treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive right to do or to authorize others to do the acts specified in Sec.14(b) of the Copyright Act in respect of the software developed by it. All it has done is, by exercising its right as the owner of copyright in the software, is just authorizing IBM India to sell or offer for sale that software to various remarketers and/or end-users. This is done in terms of an agreement entered between the assessee and IBM India, called IBM Software Remarketer Agreement (SRA). Since, as per the Software Remarketer Agreement, IBM India was only authorized (licensed) to sell or offer for sale the software in question, and the software is not sold to it, the consideration paid by IBM India to the assessee is for granting of license (authorization) to use the copyright in the software as specified in Sec.14(b)(ii) and not for the sale of such software. • There is a transfer of copyright right, though nonexclusive, between the assessee and IBM India and not sale of software as claimed by the assessee. The legal title of the computer program is not transferred to IBM India & others. It still lies with the supplier only i.e. the assessee. • The transaction by which the end user is au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2014-15 (supra) decided this issue as under: "4. The assessee is a Singapore based company engaged in the business of dealing in software & hardware products. Under the provisions of Indian Income Tax Act, the assessee is a non-resident. During the year under consideration, the assessee has sold software licenses to its Associated Enterprise (AE) and also to other Indian customers. The assessee did not offer any income on such sale for taxation in India. The ld. AR submitted that the AE of the assessee, viz., M/s. IBM India Pvt. Ltd is the authorized distributor of software licenses sold by the assessee. In respect of sales made to Non-Associated enterprises, the 14 A.R submitted that majority of sales were made to "other distributors" and in few eases, it was sold to End users also. The details of sales effected by the assessee during the year under consideration in India are tabulated as under by the A.O. Sl.No. Name of the Party Sale value (in Rs. ) Offered for taxation or not 1. IBM India Pvt. Ltd. 416,00,24,726 No 2. Non Associated Enterprises 25,94,40,459 No Total 441,94,65,185 5. The A.O. took the view that the above said aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 44(i) of the order of Hon'ble Supreme Court. (b) The agreement entered by the assessee with IBM India (re-marketeer) has been extracted in paragraph 44(ii)a of its order by Hon'ble Supreme Court and (c) The agreement entered by IBM India (r-marketeer) with .the end users has been extracted in. paragraph 44(ii)b of the order. The Ld.AR submitted that the very same terms and conditions of granting license to use software continue during this year also. The Hon'ble Supreme Court has concluded that the payments made by the distributors and end-users to the non-resident software supplier placed in Singapore,-is not "royalty" within the meaning of the provisions of DTAA and hence the distributors/ end users are not liable to deduct tax at source u/s 195 of the Act from the payments made to the non-resident software supplier located in Singapore on the reasoning that the distributor's agreement and end-user's license agreement in the facts of cases before Hon'ble Supreme Court do not create any interest or right in such distributors/end-users, which would amount to use or right to use any copy right. 9. The Ld A.R submitted that the assessee her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed sample agreements in respect of all the four categories and gave the following finding:- "45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non-exclusive, nontransferable license to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sublicense or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant agreements entered by the assessees with non-resident software suppliers, provisions of Copy right Acts, the circulars issued by CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court concluded as under:- "CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/ EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the 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/ distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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