TaxTMI 
TaxTMI 
TaxTMI 
2021 (10) TMI 655
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....ware. 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 disposed the appeals vide its orders dated 2.7.2021 pa....
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....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, in the Territory, or, in the case of Special License Software, to grant t....
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....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 agreement that the services are merely incidental to the actual sale of software and grant of remarketing of software. The relevant portion relating to t....
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....ollows: 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 in its sole discretion is not satisfied that all required support fees with respect to such Product have been paid. 11. The relevant portion highlighting that the Indian party is licensed to distribute software is shown below: 9.0 SOFTWARE LICENSE: Integrator acknow....
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.... 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 and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users. 9. The Hon'ble Supreme Court analysed sample agreements in respect of all the four categories and gave the following finding:- "45. A reading of the aforesaid distribution agreement would show that wh....
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....opies 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 exclusive right to reproduce the book in the territory mentioned by the license. 10. After analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with non-resident software suppliers, provisions of Copy right Acts, the circulars issued by CBDT, various case laws relied upon by the parties, the Hon....