TaxTMI 
TaxTMI 
2022 (9) TMI 525
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.... to decide the appeals under consideration simultaneously by this composite order and for brevity shall quote the facts and issues involved in ITA No. 2674 (AY 2005-06) as a lead case and the result of the same shall apply mutatis mutandis to all the appeals. 3. Brief facts of the case are as under:- "The Assessee is an Indian company incorporated in the year 2004 in Karnataka and has entered into International Distribution Agreement ('distribution agreement') with Mentor Graphics (Ireland) Limited ('MGI') on 1st Sept 2005 for the purpose of marketing and distribution in India of certain software products developed by MGI. Mentor Graphics Corporation is a world leader in Electronic Design Automation (EDA) Tools business, having annual sales of about $800 Million and is headquartered in the USA. Mentor Graphics provides software and hardware design solutions that enable companies to develop better electronic products faster and more cost-effectively. Under the distribution agreement the Assessee Company undertakes direct sales of products purchased from MGI to customers in India. The Assessee Company is also engaged in marketing and sales support services including product ma....
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....Y' in nature and therefore subjected to deduction of tax u/s 195 of the Act and consequently added the amount of Rs 97,01,358/- for the AY 200506 u/s 201 of the Act, in the income of the Assessee. Concluding part of the order u/s 201 of the Act passed by the Ld. AO is reproduced hereunder. From the above discussion, it is proved that the payments made by the Assessee to MGI during the F.Y.s 05-06 and FYs 08-09 to 11-12 in terms of the Distribution Agreement entered into by it with MGI, constitute Royalty, both under Sec.9(l)(vi) of the Income Tax Act, 1961, and under the Double Taxation Avoidance Agreement between India and Ireland, and is chargeable to tax in India. As per Sec. 195 of the Income Tax Act, the Assessee was liable to deduct tax at source on the royalty payments to MGI. But no tax had been deducted by the Assessee thereon either at the time of crediting or subsequently. As the Assessee has failed to discharge its obligation to deduct tax at source as stipulated u/s. 195 of the Income Tax Act, 1961, as per the provisions of See.201(l) of the Income Tax Act, 1961, for the asst, years 06-07, 09-10 to 12-13, M.GSS is held to be an Assessee as Assessee in default in r....
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....ad in law. 2. That on facts and in law the CIT(A) erred in not appreciating that the order read with section 154 of the Income Tax Act, 1961 dated 30th November passed by the AO for financial year 2005-06 pursuant to issue of show cause not 20th June 2011 is barred by limitation. 3. That on facts and in law the CIT(A) erred in upholding the action of AO in g the appellant as an "assesse in default" u/s 201(1) r.w section 195 of the Act for non-deduction of tax on payments of Rs 97,01,538/- made to M/s Mentor Graphics (Ireland) Limited (MGI). 3.1 That on facts and in law the CIT(A) erred in holding that payments made to MGI is taxable in India as income from "Royalty" as defined under the provisions of the Income Tax Act and the Agreement for Avoidance of Double Taxation (AADT). 4. That on facts and in law the CIT(A) erred in holding / observing that: a) From the perspective of customer, the appellant is the owner of copyright of the software. b) The appellant has been authorized by MGI to issue copies of software. c) The activities by the appellant fall within the scope of section 14 of the Copyright Act, 1957. d) That copyright in software has been transfer....
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....rnataka to decide the same question in favour of the Revenue. 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, nonresident 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, non-resident vendor, who, after purchasing software from a foreign, nonresident 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. 27. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provisio ncontainedinSection9readwithSection 4 of the Inco....
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....r sells 2000copies 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 licence 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 licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 53. There can be no doubt as to the real nature of the transactions in the appeals before us. What is "licensed" by the foreign, non-resident supplier to the Distributor and resold to the resident end user, or directly supplied to the resident end-user, is infa....
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.... facts of these cases. 173. Our answer to the question posed before us, is that the amounts paid by resident Indian end users/ distributors to non resident computer software manufacture/ suppliers, as consideration for there sale/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. The answer to this question will apply to all four categories of cases enumerated by us in paragraph-4 of this judgment. 174. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed." 10. As per International Distribution Agreement between Assessee and Mentor Graphics (Sales and Services) Private Limited, the Assessee was appointed as distributor on the following t....
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....ty to make or give any agreement, statement, responsibilities, warranty or other commitment on behalf of MGI, or to enter into any contract or otherwise incur any liability or obligation, express or implied, on behalf of MGI, or to transfer, release or waive any right, title or interest of MGI. 2.4 Reservation of Rights. MGI hereby reserves all right to the Products. Confidential information, Intellectual Property Rights and to any other technology owned by or licensed to the MGI that are not specifically granted to the MGSS hereunder. MGSS specifically acknowledges that (i) no right granted by MGI under this Agreement shall entitle MGSS to sublicense to any other Person the Confidential information, Intellectual Property Rights and any other technology owned by or licensed to MGI; (ii) MGI may discontinue developing, producing or providing any or all Products at its discretion at any time; and (ii) MGI reserves all rights to prosecute infringement actions in the PacRim. 7.1 Notices, Marks, Legends and Name. MGSS shall not alter, deface, remove, cover, mutilate, or add to. in any manner whatsoever, any patent notice, copyright notice, trademark, trade name, serial number, model....
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....s distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian endusers. (c) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. (d) 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. 11.1 The Hon'ble Apex Court in in para no. 173 of its judgment finally held the persons of all four categories, referred to in Section 195of the Income Tax Act were not liable to deduct any TD Sunder Section 195 of the Income Tax Act. For ready reference the conclusion is again reproduced below: 'That the amounts paid by resident Indian endusers/ distributors to non resident computer software manufacture/ 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 ....