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TMI Blog2024 (11) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... tances, supply of software sale made by the assessee to M/s.L T Ltd, of India cannot be treated as royalty u/s. 9(1)(vi) of the Act and hence, the action of the Assessing Officer cannot be accepted. Further, the assessee s claim of software is only a sale of software but not the copyright of the software and treated as royalty by relying on decision in the case of Engineering Analysis and Centre of Excellence Pvt. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT ] Further, the decision of Hon ble Supreme Court is considered in the case of CIT vs. Microsoft Corporation [ 2022 (5) TMI 1070 - DELHI HIGH COURT ] and also in EY Global Services Ltd. [ 2021 (12) TMI 571 - DELHI HIGH COURT ] and held that mere supply of software without a sale of copyright cannot be treated as royalty to bring it to tax u/s. 9(1)(vi) of the Act. The same analogy has been following with reference to India-Singapore DTAA in the following cases and decided in favour of the assessee by excluding the supply of software without any copyright as non-taxable under Income-tax Act, 1961. Thus, the supply of software by the assessee cannot be brought to tax either u/s. 9(1)(vi) of the Act or under the India-Singapore DTAA and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng two distinct DINs. 5. The Ld. AO has erred by ignoring and/or not dealing with the Appellant's challenge to the Ld. AO's jurisdiction, and the purported transfer thereof. This is further exacerbated by the Ld. AO blindly acceding to the flawed reasoning of the Hon'ble DRP in dismissing ground numbers 3-6 raised by the Appellant before the Hon'ble DRP, especially in view of the fact that the said grounds do not even pertain to a jurisdictional challenge. 6. The Ld. AO has grossly erred in passing the Impugned Order without issuance of notice under section 143(2) of the Act, thereby rendering the impugned 'order non est, invalid and void ab initio as held by the Hon'ble Supreme Court in the case of ACIT v. Hotel Blue Moon [2010] 321 ITR 362. 7. Based on facts and circumstances of the case and in law, the Ld. AO has erred in concluding the reassessment under section 144 of the Act, without appreciating that none of the conditions under section 144 of the Act were satisfied, which is evidenced by the self-contradictory observations rendered by the Ld. AO in the Impugned Order, whereby the Ld. AO on one hand acknowledges that the Appellant has inter alia submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, and such arrangement does not involve granting of any rights in the 'copyright' itself, as has been categorically held the case of Engineering Analysis (supra) 9.4. The Ld. AO has incorrectly and without any basis concluded that the Appellant modified the software as per requirements of the end-user. Without prejudice, the Ld. AO has failed to appreciate that in the case of Engineering Analysis (supra), the Hon'ble Supreme Court has held that modifying/ customizing the software as per the specifications of the end-user does not create any interest or right in such end-user, which would amount to the use of or right to use any copyright, and thus, the payment received from licensing of such customized software will not be royalty under the DTAA. 10. Without prejudice to the above, even if the income is held to be chargeable under the Act read with the DTAA, the Ld. AO has erred in applying surcharge and cess over and above the prescribed tax rate under the DTAA. 11. The Ld. AO has erred in facts and in law in initiating penalty proceedings against the Appellant under section 274 read with section 270A of the Act. 3. The brief facts of the case are that the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following are components of the work. S.No. Description Price in USD 1 Supply of Software 215,492 2 Software installation, testing and training 23,940 3 AMC/Support 45,568 Total 285,000 The Supply of software consists of supply of Video Management Software (VMS) and Video Analytics Software (VA). The further details of these software is mentioned in Letter of Intent. In words, it is supply of Software license for life time and software can be used only for Vizag Smart City Project M/s QognifyPte Limited supplied the Video Management Software (VMS) and Video Analytics Software (V ) through the Tax Invoice number - INVSG10256 dated 30.09.2017 and value of tax invoice was USD 215,492/- against which the they received the payment of Rs. 1,38,85,200/- from Larsen Toubro Limited. Copy of Tax Invoice number -INVSG10256 is attached as Annexure-2. VMS software allows you to manage camera and recording settings, view multiple camera feeds, and set alerts for tampering and motion detection. Video management software can also review and analyse your recorded video, giving you important information. Video Analytics software use advanced algorithms and machine learning to monitor, analyse an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NT SIGNED BETWEEN QOGNIFY AND YOU, THE TERMS OF SUCH SEP ARA TE AGREEMENT SHALL GOVERN YOUR USE OF THIS SOFTWARE. FOR THE PURPOSE OF nus EULA, USING SHALL INCLUDE, WITHOUT LIMITATION, OPERA TING, COPYING, INSTALLING AND UTILIZING (EACH AS PERMITTED HEREUNDER) THE SOFTWARE IN OBJECT CODE FORM. IF YOU DO NOT AGREE TO THE TERMS OF THIS LICENSE, DO NOT USE THE SOFTWARE. QOGNIFY WILL NOT LICENSE THE SOFTWARE AND DOCUMENTATION TO YOU IF YOU DO NOT AGREE TO THE TERMS OF THIS LICENSE, IN WHICH CASE, YOU MUST IMMEDIATELY CEASE ANY USE OF THE SOFTWARE AND, WHERE APPLICABLE, RETURN THE SOFTWARE TO QOGNIFY. Software License Terms. (a) QOGNIFY grants to you a non-exclusive, nontransferable license to use this Software (in object code form only), together with the specifications and user documentation that accompany this Software (collectively Software Documentation ), for the total number of licenses you have purchased from QOGNIFY or a QOGNIFY-authorized reseller or distributor. Such use shall be in accordance with and subject to the terms and conditions set forth herein. (b) No title or ownership of the Software or Software Documentation is transferred to you by way of this EULA.- Ownership o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty provided in this Section does not include damage to Software resulting from a cause other than a defect or malfunction, including: (i) installation, maintenance, servicing or modification of the Software or part thereof by anyone other than QOGNIFY or a QOGNlFY-authorized technician; or (ii) use of the Software other than in accordance with the Software Documentation. (f) EXCEPT AS SET FORTH IN SECTION l(e) ABOVE, QOGNIFY MAKES NO WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED. WITHOUT LIMITING THE FOREGOING, QOGNIFY DOES NOT WARRANT THAT THE SOFTWARE IS OR WILL BE A CCU RA TE, ERRORFREE OR UNINTERRUPTED OR MEET OR WILL MEET YOUR REQUIREMENTS. QOGNIFY MAKES NO IMPLIED WARRANTY OF i\1ERCHANTABILITY OR QUALITY OR IMPLIED WARRANTY OF FITNESS FOR ANY PARTICULAR PURPOSE, AND NO IMPLIED WARRANTY ARISING BY USAGE OF TRADE, COURSE OF DEALING OR COURSE OF PERFORMANCE. ACCORDINGLY QOGNIFY DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO SUCH EVENTS. THE SOFTWARE MAY CAUSE YOUR COMPUTER TO AUTOMATICALLY CONNECT TO THE INTERNET. THE SOFTWARE MAY ALSO REQUIRE ACTIVATION OR REGISTRATION. 5. On perusal of EULA, the ld.AR stated that it clearly states that no title or ownership of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of granting an interest in any of the rights mentioned in Sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. 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 ..... Our answer lo 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/distribution agreements, is not the payment of royalty Jot the use of cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eering Analysis (Supra), said payment did not amount to royalty for use of copyright in computer software, and same did not give rise to any income taxable in India. CIT, International Taxation-2 vs. Microsoft Corporation [2022] 445 ITR 6 (Delhi) EY Global Services Ltd vs. ACIT [2021] 441 ITR 54 (Delhi) 8. The ld. AR brought to our notice that, following the decision of Hon ble Supreme Court with a specific reference to the provisions of India-Singapore DTAA the following cases also have been decided in favour of the assessee: Symantec Asia Pacific Pte. Ltd. Vs. DCIT ITA No. 2013/Del/2017 M/s. Salesforce.com Singapore Pte ltd. Vs. Dy.DIT ITA No. 4915/Del/2016 Micron strategy Singapore Pte Ltd. vs. ACIT (International Taxation) ITA No. 2686/Del/2018 9. Further, the ld.AR stated that the payments received by the assessee from the Indian entity M/s. L T Ltd will not amount to royalty u/s. 9(1)(vi) of the Act. He further stated as below: Section 9(1)(vi) of the Act inter alia provides that income by way of royalty payable by an Indian resident would be deemed to accrue or arise in India, if the royalty is for the purpose of earning any income from any source in India. Explanation 2 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aty is narrower and more beneficial. In terms of Article 12 of the relevant Tax Treaties, the payments made by resident Indian end-users/distributors to non-resident computer software suppliers, as consideration for the own use of the computer software, does not constitute royalty since the payment is not for the use of or the right to use copyright in the computer software. It is hereby concluded that the receipt of Rs. 1,38,85,200/- is not characterized as royalty, hence it is not deemed to accrue or arise in India under section 9(1)(vi) of the Income tax Act, 1961. Hence consideration received for sale of software, is not taxable as royalty under the Act read with the relevant tax treaty. 10. In light of the above arguments the ld.AR stated that the payment received by the assessee is taxable in India and hence prayed for setting aside the order of the Assessing Officer/DRP by allowing the appeal of the assessee. 11. Per contra, the ld.DR asserting the action of the Assessing Officer/DRP stated that the issue has been discussed in detail by the Assessing Officer which has been supported by the ld.DRP and hence prayed for confirming the order of the Assessing Officer. 12. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights not expressly granted to you herein are reserved to QOGNIFY and its Ii censors. You shall not remove any proprietary notice of QOGNIFY and its licensors from the Software or Software Documentation. You may make a reasonable number of copies of the Software Documentation, provided such reproductions shall include any copyright or proprietary labels, legends or notices placed upon or included in the Software Documentation by QOGNIFY. You may make one (1) back-up archival copy of the Software, provided you reproduce all confidentiality and proprietary notices on such copy. (d)You shall not publish disclose, rent lease modify, loan, distribute alter or create derivative works of an kind based on the Software, Software Documentation or any part thereof. You shall not reverse engineer, decompile, unbundle, translate, adapt, or disassemble the Software, nor shall you attempt to create the source code from the object code for the Software. 14. Considering the present facts and circumstances, supply of software sale made by the assessee to M/s.L T Ltd, of India cannot be treated as royalty u/s. 9(1)(vi) of the Act and hence, the action of the Assessing Officer cannot be accepted. 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