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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 ..... rises ("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] wherein IBM India, being the Appellant's distributor in India was a party to the said decision of the Hon'ble SC and the payments in question were the same as in the subject year. Further the Hon'ble SC in deciding the issue in favor of the taxpayers has considered the same Software Remarketer Agreement dated 1 October 2004 between IBM India and the Appellant (para 44(ii) of the Sit judgement), and also the End User License Agreement ("EULA") issued by IBM to end-users (para 44(iii) of the SC judgement). 4. The Ld. AO and the Hon'ble DRP have erred in disregarding the fact that the Hon'ble Karnataka High Court ("KHC") in the case of the Appellant for the AY 2006- 07 to AY 2008-09, the Hon'ble Income Tax Appellate Tribunal ("IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice, 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 respect of the copyright in the software product and is merely towards sale of software for the purpose of making further sales as stated in the Distribution Agreement. 11. The Ld. AO and the Hon'ble DRP erred in overriding the decision of the Hon'ble SC in Engineering Analysis (supra) and holding that Organization for Economic Co-operation and Development ("OECD") commentary on Article 12 of the DTAA is unbefitting with respect to taxability of royalty and the provisions of the Act shall apply. 12. The Ld. AO and the Hon'ble DRP have erred in overriding the decision of the Hon'ble SC in Engineering Analysis (supra) in stating that related party agreement between IBM India and the Appellant may not be a representative sample agreement in deciding the said issue. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 treaty partners, at the time of entering to DTAA, hence it was wrong on the part of the assessee to plead that the Explanation 4 was unilaterally overriding the DTAA. * As per Article 12 of the DTAA payment for the use of, or the right to use any copyright of literary work, including, consideration for alienation of such right, is royalty. Since a computer programme is a literary work, payment for the use of or the right to use of copyright in it (computer programme), including consideration for alienation of copyright right in it, is royalty under the DTAA also. * The software is an embodiment of the knowledge, skill, experience and expertise of its (Software's) developer. In the case of software, a right in the software is the just or legal claim of its developer to it and such right is called the 'Copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * 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 authorized to store the software is in terms of an agreement between the end user and IBM Singapore which is called Software License Agreement. * The license is granted to the end user by the copyright holder in respect of copyright mentioned in Sec.14(a)(i). That means the programme is licensed to the end user, not sold. Neither the agreement nor the invoices consider the transaction concerned as 'Sale'. * Since the software in question is only licensed and not sold as per the Software License and Maintenance Agreement, any transaction in terms of this agreement through which the license is granted is not a purchase/sale transaction and the consideration paid by the end user is for granting of license to use the copyright. * The fact that the IBM India does not duplicate the software acquired from the assessee prior to its sale to the cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 aggregate sale consideration of Rs. 441.94 Crores constitute "royalty" in the hands of the assessee both under section 9(1)(vi) of the Income-tax Act, 1961 ['the Act' for short] and under Double Taxation Avoidance Agreement (DTAA) entered between. India and Singapore. Accordingly, he made addition of Rs. 441.94 crores to the total income returned by the assessee. The A. O. placed his reliance on the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. (345 ITR 494) and Synopsis International Old Limited (ITA Nos. 11- 15/ 2008). The Ld. CIT(A) also confirmed the addition. and hence the assessee has filed this appeal before us. 6. The Ld. A.R. submitted that the assessee has sold only licenses to use the software and it did not part with any of its right over the products within the meaning of Copy right Act. He furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r'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 herein is a Singapore resident governed by the DTAA entered between India and Singapore. On the examination of very same DTAA provisions, the Hon'ble Supreme Court has held that the payments given by the distributors/ end users to the assessee are not "royalty" within the meaning of provisions of DTAA and hence there was no liability to deduct tax at source from those payments u/s 195 of the Act, since no income is chargeable to tax in India. In the instant case, the AO has assessed the sale proceeds received on sale of licenses as "royalty". In view of the above cited decision of Hon'ble Supreme Court, the sale proceeds received on sale of software licenses cannot be assessed as "royalty". Accordingly, the Ld.AR submitted that the impugned addition made by the AO and confirmed by Ld CIT(A) is liable to be deleted. 10. The Ld. D.R. on the contrary, placed his reliance on the decision rendered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the product at all. 46. When it comes to art end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. 47. In all these cases, the "license" that is granted vide the EULA, is not a license in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "license" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referrable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting art interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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/ 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 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment." 14. We also notice that the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) has been reversed by Hon'ble Supreme Court in paragraph 101-102 of its order. Similarly, the decision rendered in the case of Synopsis International Old Ltd. (supra) Ltd (supra) by Hon'ble Karnataka High Court has been reversed in paragraph 103 - 109 of its order. Before us, the Ld. A.R. submitted that the terms of agreements remain the same during the year under consideration also. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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