2021 (5) TMI 877 - HC - Income Tax

High Court rules software sale proceeds not taxable as royalty under Income Tax Act or India-Israel DTAA.

Nice Ltd., (Formerly called Nice Systems Ltd.) C/o: Nice Interactive Solutions Pvt. Ltd., Versus Assistant Commissioner of Income-tax, (International Taxation), Circle - 1 (1), Bangalore. (Formerly Assistant Director of Income-tax, (International Taxation), Circle-1 (1), Bangalore), Principal Commissioner of Income-tax, (International Taxation), Bangalore

The High Court, following the Supreme Court's precedent, ruled in favor of the appellant, determining that the proceeds from the sale of software were not ... Income chargeable to tax in India - Amount received by the Assessee for sale of software amounted to royalty as defined under Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961 and under Section 12 of the India-Israel (DTAA) - HELD THAT:- As decided in the case of ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED [2021 (3) TMI 138 - SUPREME 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. Issues:Interpretation of whether the amount received by the Assessee for the sale of software constituted royalty under the Income Tax Act and the India-Israel Double Taxation Avoidance Agreement.Analysis:1. The appellant, a nonresident company from Israel, sold commercial off-the-shelf software to customers in India through business partners and end-users. The software was provided with a link for download and a license key for activation. The customers were restricted from altering or commercially exploiting the software, with all rights remaining with the appellant. The appellant believed the consideration received was not taxable in India as royalty under Section 9 of the Act or Article 12 of the India-Israel DTAA.2. The Assistant Commissioner of Income Tax treated the software sale proceeds as royalty under Section 9(1)(vi) of the Income Tax Act. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this decision, leading to the present appeal. The central question was whether the Tribunal was justified in confirming the assessment that the software sale proceeds amounted to royalty, thus being taxable in India.3. The High Court noted the judgment of the Supreme Court in a relevant case, emphasizing that the distribution agreements and End User License Agreements (EULAs) did not create any interest or right amounting to the use of copyright. The Court clarified that the payments made by Indian end-users/distributors to non-resident software suppliers did not constitute royalty for the use of copyright, hence not giving rise to taxable income in India.4. The Supreme Court's ruling established that the transactions involving the sale of software were essentially the sale of physical goods containing embedded computer programs, not royalty. The Court highlighted that the EULAs did not grant any rights to reproduce the software, distinguishing them from licenses under the Copyright Act. Consequently, the provisions of the Income Tax Act related to royalty were deemed inapplicable to the cases at hand.5. The Court's decision favored the assessee, holding that the amounts paid by Indian end-users/distributors to non-resident software suppliers were not taxable as royalty under the Income Tax Act. The ruling provided clarity on the taxation of software sales and emphasized the distinction between royalty payments and the sale of physical goods containing software.Conclusion:The High Court, guided by the Supreme Court's judgment, ruled in favor of the assessee, determining that the software sale proceeds were not taxable as royalty under the Income Tax Act or the India-Israel DTAA. The judgment provided a comprehensive analysis of the nature of software transactions and clarified the tax implications, ensuring a fair and legally sound decision in the present appeal.