TaxTMI 
TaxTMI 
2021 (10) TMI 655
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....sessee is engaged in business of selling software. The sales proceeds received by the assessee was Rs. 1132.10 crores. The A.O. held that the above said sale proceeds constitute royalty both u/s. 9(1)(vi) of the Act and under DTAA entered between India and Netherlands. Accordingly the A.O. passed the draft assessment order proposing to assess Rs. 1132.10 crores as royalty income in the hands of the assessee. The assessee objected the same by filing its objections before Ld. DRP. However, the Ld. DRP noticed that it has affirmed the view taken by the A.O. in the assessment year 2014-15 by following the decision rendered by Hon'ble High Court of Karnataka in the case of Samsung Electronics Ltd. (345 ITR 494) and certain other decisions. Accordingly, the Ld. DRP rejected the objections filed by the assessee. Accordingly, the A.O. passed the final assessment order determining the income of the assessee at Rs. 1132.10 cores. 3. The Ld. A.R. submitted that the A.O. has assessed the sale proceeds of software as royalty in assessment year 2014-15 and 2015-16 also. The assessee has challenged the said decision by filing appeal before ITAT. He submitted that the ITAT has since dispose....
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....e and hence the sale consideration received by the assessee on sale of software licenses shall not become royalty within the meaning of DTAA entered between India and Netherlands. 6. We heard the rival contentions and perused the record. We notice that the assessee is entering into two types of agreement with its customers namely "Systems integrated agreement" and "Software license agreement". We notice that the A.O. has extracted relevant clauses from both the agreements in the assessment order. For the sake of convenience, we extract below the relevant portion of the assessment order. "6. The relevant portions from the Systems Integrator Agreement are reproduced below: 9.0 INTELLECTUAL PROPERTY RIGHTS AND SOFTWARE LICENSING: 9.1 Subject to the terms and conditions of the Agreement, Cisco grants to Integrator a non-exclusive, non-transferable license. (a) to use the Software and Documentation for Integrator's Internal Use under the terms as set out in Exhibit C; and, (b) during the term of this Agreement to market and Resell the Software (including related Documentation) directly to End Users, solely as permitted by this Section of this Agreement,....
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....nse Terms on a temporary basis while Service Provider is providing call centre services via the CISCO NAM Software to such End User. Service Provider's license to such End User must be via a Sublicense between Service Provider and End User where this Sublicense meets the requirements set forth in the Agreement to which this Exhibit is attached. Integrator shall ensure that Service Provider is bound and will abide by the Special License Terms for CISCO NAM Software. 9. The relevant portion relating to the Integrator Rights and obligations are shown below: 3. INTEGRATOR RIGHTS AND OBLIGATIONS. 3.1 Resale of Services, Integrator is authorized on a non-exclusive basis, to resell Services to End Users pursuant to the provisions of this Appendix C. Accordingly, upon such resale of any such Services, Integrator shall provide to End User a copy of the corresponding Program Description for each Service resold by Integrator to each End User. 10. The assessee has claimed that the entire receipts pertained to service fees charged by the assessee to its customers in India for networking domain, relation configuration support etc. It is evident from the ag....
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...., Cisco will provide new Software to Integrator to correct a problem, or provide a network-bootable Software image, as Integrator and Cisco agree. 3.3 Hardware support. Cisco will provide Advance Replacement service for Hardware as follows: 3.3.1 Cisco shall provide Advance Replacement service as follows: Cisco will ship the replacement non-configured Service Part the same business day providing the request for shipment is made prior to 3.00 PM Pacific Standard Time, Monday through Friday, excluding Cisco-observed holidays. For requests after 3.00 PM Pacific Standard Time, the Advance Replacement will be shipped the following Cisco business day. 3.3.2 All replacements are shipped using Cisco's preferred carrier, freight prepaid by Cisco. 3.3.3 Product used for replacement may be new or equivalent to new, at Cisco's discretion. 3.3.4 The Advance Replacement Service described in Section 3.3.1 for Product supported by Integrator which was purchased prior to the Effective Date of this Exhibit will take effect thirty (30) days after the Effective Date, provided that Cisco may refuse to provide such service for any Product where Cisco ....
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.... identical issue of granting license to use software was examined in the context of its taxability as royalty by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra). The Hon'ble Supreme Court examined this question considering four types of situations, which has been narrated as under:- "4. The appeals before us may be grouped into four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. (iii) The third category concerns cases wherein the distributor happens to be a foreign, indent vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. (iv) The fourth category includes cases wherein computer software is affixed onto hardware an....
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.... 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. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of license or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of license or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the excl....