Danish tax resident's Microsoft software license reimbursements from Indian entity not taxable as royalty under section 9(1)(vi)

ITAT Delhi held that software license expense reimbursements received by Danish tax resident from Indian group entity were not taxable as royalty under section 9(1)(vi). The tribunal found that Microsoft software licenses were non-exclusive, non-sublicensable, non-transferable, and revocable, conferring no proprietary interest or copyright transfer rights. Following SC precedent in Engineering Analysis Centre and Delhi HC in EY Global Services, the tribunal ruled that without copyright transfer enabling acts under Copyright Act 1957, payments cannot constitute royalty. The assessee's appeal was allowed.

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Issues Involved:
1. Taxability of reimbursement of software license expenses as royalty.
2. Applicability of the Supreme Court decision in M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT.
3. Allegation of maintaining IT infrastructure for providing third party software.
4. Disregard of directions by the Hon'ble DRP.
5. Examination of relevant facts and documents regarding IT infrastructure.

Issue-wise Detailed Analysis:

1. Taxability of reimbursement of software license expenses as royalty:
The assessee contended that the amount received from its group entity SGIPL as reimbursement for software license expenses should not be treated as taxable income in India. The Assessing Officer (AO) had considered these receipts as royalty for the use of equipment. The assessee argued that the reimbursement per se does not constitute taxable income and that it only purchases software for its own use and for group concerns, without maintaining any IT infrastructure.

2. Applicability of the Supreme Court decision in M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT:
The assessee argued that the principles laid down by the Supreme Court in the case of M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT should apply to its case. The AO, however, held that the Supreme Court decision was not applicable as the transaction involved the use of industrial, commercial, or scientific equipment, rather than standard software.

3. Allegation of maintaining IT infrastructure for providing third party software:
The AO alleged that the assessee maintained IT infrastructure and provided third-party software through enterprise applications and servers, thus charging group concerns for the use of this IT infrastructure. The assessee countered that the software in question were standard offerings of third-party vendors and any IT infrastructure was maintained by these vendors, not by the assessee.

4. Disregard of directions by the Hon'ble DRP:
The assessee claimed that the AO disregarded the directions of the Hon'ble Dispute Resolution Panel (DRP) to factually verify the submissions made by the assessee and to pass a reasoned order. The DRP had directed the AO to consider the assessee's submission dated 03.04.2023 and verify the facts based on available documents without conducting any fresh inquiry.

5. Examination of relevant facts and documents regarding IT infrastructure:
The DRP noted that the AO did not record any observations regarding the examination of relevant facts and documents. The DRP emphasized that the AO should verify the assessee's submission that the IT infrastructure was maintained by Microsoft and not by the assessee. The DRP also highlighted that the cost-to-cost reimbursement does not have any income element and thus cannot be brought to tax.

Conclusion:
The Tribunal concluded that the software used by SGIPL and the amount cross-charged by the assessee did not pertain to any use or right to use of any copyright. The software licenses were granted under a non-exclusive, non-sublicensable, non-transferable, revocable license solely for internal business purposes. The Tribunal relied on the judgments of EY Global Services Ltd. Vs. ACIT and Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, which clarified that a non-exclusive, non-transferable license enabling the use of a copyrighted product does not entail parting with the copyright and cannot be construed as royalty.

In view of the factual position and judicial pronouncements, the Tribunal held that no liability arises on the assessee. The mere fact that tax has been deducted does not automatically make the receipt taxable as royalty. Consequently, the appeal of the assessee was allowed.

Order Pronounced in the Open Court on 16/04/2024.

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