2024 (4) TMI 591 - AT - Income Tax

Software license sale proceeds to associated enterprises and Indian customers not royalty under DTAA provisions

M/s. IBM Singapore Pte Ltd. Versus The Assistant Commissioner of Income Tax, Circle International Tax – 1 (2), Bangalore.

ITAT Bangalore held that sale proceeds from software licenses to associated enterprises and Indian customers cannot be categorized as royalty under DTAA ... Royalty receipts - income deemed to accrue or arise in India - assessee had sold software licenses to its associated enterprises and to other Indian customers - HELD THAT:- As decided in assessee own case [2021 (9) TMI 1542 - KARNATAKA HIGH COURT] relying on the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (2021 (3) TMI 138 - SUPREME COURT] sale proceeds received by the assessee on sale of software licenses cannot be categorized as 'Royalty' within the meaning of provisions of DTAA. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete the addition made as 'royalty' income - Decided in favour of assessee. Issues Involved:1. Taxability of sale of software as royalty.2. Treatment of consideration received from IBM India and other Non-Associated Enterprises.3. Disregard of Supreme Court's observations in Engineering Analysis Centre of Excellence (P.) Ltd.4. Previous judgments by Karnataka High Court and ITAT on similar transactions.5. Interpretation of End User License Agreement (EULA).6. Misinterpretation of products and services under the Copyright Act.7. Classification of offerings as fees for technical services.8. Classification of cloud-based services as royalty income.9. Application of Supreme Court principles to cloud-based services.10. Nature of payments received for software sales.11. Relevance of OECD commentary on Article 12 of the DTAA.12. Analysis of related party agreements.13. Denial of TDS credit on receipts from Vodafone Idea Limited.14. Computation of interest u/s 234A and 234B of the IT Act.Summary:1. Taxability of Sale of Software as Royalty:The assessee contested the final assessment order treating the sale of software as royalty income. The ITAT Bangalore examined whether the sale proceeds from software licenses should be categorized as 'royalty' under the Income-tax Act and the India-Singapore DTAA.2. Treatment of Consideration Received:The assessee received Rs. 448,64,08,844/- from IBM India and Rs. 34,76,97,304/- from Non-Associated Enterprises. The AO treated these amounts as royalty payments under both the Act and the DTAA.3. Disregard of Supreme Court's Observations:The assessee argued that the AO and DRP disregarded the Supreme Court's decision in Engineering Analysis Centre of Excellence (P.) Ltd., which had ruled that similar transactions did not constitute royalty.4. Previous Judgments:The assessee highlighted past judgments by the Karnataka High Court and ITAT, which concluded that similar transactions were not royalty and hence, not taxable in India.5. Interpretation of EULA:The AO and DRP were criticized for misinterpreting the EULA, concluding that it allowed end-users to multiply software copies, leading to the transfer of source code. The Supreme Court had previously analyzed the same EULA and found no transfer of rights listed in section 14(a)/14(b) of the Copyright Act.6. Misinterpretation of Products and Services:The AO and DRP were alleged to have misinterpreted the nature of the appellant's products and services, incorrectly classifying them under section 14(a)/14(b) of the Copyright Act.7. Classification as Fees for Technical Services:The AO and DRP erroneously concluded that the offerings fell within the ambit of fees for technical services, besides being classified as royalty.8. Cloud-Based Services:The AO and DRP incorrectly classified cloud-based services as royalty income, despite the appellant's submission that no rights were granted to commercially exploit the software.9. Application to Cloud-Based Services:Although the mechanics of software sales under cloud-based services were acknowledged, the AO and DRP failed to apply the Supreme Court's principles from Engineering Analysis to these services.10. Nature of Payments:The AO and DRP erroneously held that the appellant received payments for the transfer of rights in the software, contrary to the Distribution Agreement, which indicated sales for further distribution.11. OECD Commentary:The AO and DRP overrode the Supreme Court's decision by dismissing the relevance of the OECD commentary on Article 12 of the DTAA concerning royalty taxability.12. Related Party Agreements:The AO and DRP's analysis of related party agreements between IBM India and the appellant was challenged, asserting that even if the AO's analysis was correct, it would only apply to Non-AEs.13. Denial of TDS Credit:The AO erred in not granting TDS credit on receipts from Vodafone Idea Limited, despite the appellant furnishing TDS certificates.14. Computation of Interest:The AO erroneously computed interest u/s 234A and 234B of the IT Act.Judgment:The ITAT Bangalore allowed the appeal, directing the AO to delete the addition made as royalty income, following the Supreme Court's ruling in Engineering Analysis Centre of Excellence (P.) Ltd. The Tribunal found no infirmity in the AO's order for the year under consideration and upheld the appellant's grounds.