2022 (3) TMI 482 - HC - Income Tax

Tax Court Rules Indian Distributors' Payments to Non-Resident Software Suppliers Not Royalty

Commissioner of Income Tax (International Taxation) - Versus Gracemac Corporation

The High Court dismissed the appeals challenging the taxation of software licensing as royalty under the Income Tax Act and relevant DTAA provisions. The ... Income deemed to accrue or arise in India - licensing of software products of Microsoft in the Territory of India by the Respondent - whether taxable in India as Royalty under Section 9(1)(vi) of the Act read with Article 12 of the Indo US DTAA? - HELD THAT:- The issue raised in the present appeals is no longer res integra as the Supreme Court in Engineering Analysis Centre of Excellence Private Limited [2021 (3) TMI 138 - SUPREME COURT] as held that amounts paid by resident Indian end-users/distributors to nonresident 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. - Decided in favour of assessee. Issues:Challenging ITAT judgment on taxation of software licensing as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of the Indo US DTAA.Analysis:Issue 1: Taxability of software licensing as royaltyThe appellant challenged the ITAT judgment arguing that the licensing of software products in India by the respondent should be taxable as royalty. The Tribunal was criticized for not recognizing the transfer of copyright in the distribution model involving multiple software copies. However, the High Court referred to the Supreme Court's ruling in Engineering Analysis Centre of Excellence case, categorizing scenarios involving software transactions. The Court emphasized that the mere grant of a license does not necessarily imply a transfer of copyright. The Court rejected the AAR's interpretation that a license automatically involves the transfer of copyright. It was clarified that under a non-exclusive license, the end-user only receives the right to use the software and not the actual copyright. The Court held that payments made by Indian distributors to non-resident software suppliers do not constitute royalty under the Income Tax Act, and thus, no TDS liability arises under Section 195.Issue 2: Precedent and Similar CasesThe High Court cited the case of EY Global Services Limited where a similar issue was addressed. The Court reiterated that for a payment to be taxed as royalty, there must be a transfer of copyright, and a mere license without proprietary interest does not amount to parting with copyright. The Court emphasized the importance of the specific agreement between parties in determining the taxability of payments. The Court also highlighted that the AAR's reliance on previous rulings was deemed incorrect by the Supreme Court. The judgment in Engineering Analysis Centre was deemed applicable beyond the specific categories mentioned, providing a general legal framework.ConclusionGiven the conclusive decision by the Supreme Court and the absence of any substantial legal question, the High Court dismissed the appeals challenging the taxation of software licensing as royalty. The Court also directed the listing of connected appeals for further consideration. The judgment provides clarity on the tax treatment of software transactions and emphasizes the need for a transfer of copyright to establish royalty liability under the Income Tax Act and relevant DTAA provisions.