TaxTMI 
TaxTMI 
2024 (4) TMI 591
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....vate Limited ("IBM India") and other Non-Associated Enterprises ("Non-AEs") of the Appellant towards sale of software, as royalty income under Article 12 of the Double Taxation Avoidance Agreement ("DTAA" or "tax treaty"). 3. The Ld. AO and the Hon'ble DRP have erred in disregarding the observations and the interpretations made by the Hon'ble Supreme Court ("SC") in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [Civil appeal nos. 8733 - 8734 of 2018 and others] wherein IBM India, being the Appellant's distributor in India was a party to the said decision of the Hon'ble SC and the payments in question were the same as in the subject year. Further the Hon'ble SC in deciding the issue in favor of the taxpayers has considered the same Software Remarketer Agreement dated 1 October 2004 between IBM India and the Appellant (para 44(ii) of the Sit judgement), and also the End User License Agreement ("EULA") issued by IBM to end-users (para 44(iii) of the SC judgement). 4. The Ld. AO and the Hon'ble DRP have erred in disregarding the fact that the Hon'ble Karnataka High Court ("KHC") in the case of the Appellant for th....
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....he Ld. AO and the Hon'ble DRP have appreciated the change in mechanics of sale of software under cloud-based service, however, the Ld. AO and the Hon'ble DRP have erred in still not applying the principle of the Hon'ble SC in Engineering Analysis (supra) to such cloud-based services and subjecting the same to tax as royalty income. 10. The Ld. AO and the Hon'ble DRP have grossly erred in denying the fact that the Appellant has not received any payments for the transfer of all or any rights in respect of the copyright in the software product and is merely towards sale of software for the purpose of making further sales as stated in the Distribution Agreement. 11. The Ld. AO and the Hon'ble DRP erred in overriding the decision of the Hon'ble SC in Engineering Analysis (supra) and holding that Organization for Economic Co-operation and Development ("OECD") commentary on Article 12 of the DTAA is unbefitting with respect to taxability of royalty and the provisions of the Act shall apply. 12. The Ld. AO and the Hon'ble DRP have erred in overriding the decision of the Hon'ble SC in Engineering Analysis (supra) in stating that rel....
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....u/s 9(1)(vi), as far as the users are concerned. * Explanation 4 to section 9 (1)(vi) which was inserted by the Finance Act, 2012 w.e.f. 1.4.1976, clarified that consideration for use or the right to use computer software is royalty. In particular, the Memorandum to the Finance Bill, 2012, clarified the legislative intent behind taxing the sale of software as royalty. * Since the DTAA had been entered into force after 7th Sept, 1990, this position of the Indian Government that use of software under license amours to royalty, was already known to other treaty partners, at the time of entering to DTAA, hence it was wrong on the part of the assessee to plead that the Explanation 4 was unilaterally overriding the DTAA. * As per Article 12 of the DTAA payment for the use of, or the right to use any copyright of literary work, including, consideration for alienation of such right, is royalty. Since a computer programme is a literary work, payment for the use of or the right to use of copyright in it (computer programme), including consideration for alienation of copyright right in it, is royalty under the DTAA also. * The software is an embodiment of t....
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....estion, and the software is not sold to it, the consideration paid by IBM India to the assessee is for granting of license (authorization) to use the copyright in the software as specified in Sec.14(b)(ii) and not for the sale of such software. * There is a transfer of copyright right, though nonexclusive, between the assessee and IBM India and not sale of software as claimed by the assessee. The legal title of the computer program is not transferred to IBM India & others. It still lies with the supplier only i.e. the assessee. * The transaction by which the end user is authorized to store the software is in terms of an agreement between the end user and IBM Singapore which is called Software License Agreement. * The license is granted to the end user by the copyright holder in respect of copyright mentioned in Sec.14(a)(i). That means the programme is licensed to the end user, not sold. Neither the agreement nor the invoices consider the transaction concerned as 'Sale'. * Since the software in question is only licensed and not sold as per the Software License and Maintenance Agreement, any transaction in terms of this agreement through w....
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....utor of software licenses sold by the assessee. In respect of sales made to Non-Associated enterprises, the 14 A.R submitted that majority of sales were made to "other distributors" and in few eases, it was sold to End users also. The details of sales effected by the assessee during the year under consideration in India are tabulated as under by the A.O. Sl.No. Name of the Party Sale value (in Rs. ) Offered for taxation or not 1. IBM India Pvt. Ltd. 416,00,24,726 No 2. Non Associated Enterprises 25,94,40,459 No Total 441,94,65,185 5. The A.O. took the view that the above said aggregate sale consideration of Rs. 441.94 Crores constitute "royalty" in the hands of the assessee both under section 9(1)(vi) of the Income-tax Act, 1961 ['the Act' for short] and under Double Taxation Avoidance Agreement (DTAA) entered between. India and Singapore. Accordingly, he made addition of Rs. 441.94 crores to the total income returned by the assessee. The A. O. placed his reliance on the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. (345 ITR 494) and Synopsis Intern....
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.... the payments made by the distributors and end-users to the non-resident software supplier placed in Singapore,-is not "royalty" within the meaning of the provisions of DTAA and hence the distributors/ end users are not liable to deduct tax at source u/s 195 of the Act from the payments made to the non-resident software supplier located in Singapore on the reasoning that the distributor's agreement and end-user's license agreement in the facts of cases before Hon'ble Supreme Court do not create any interest or right in such distributors/end-users, which would amount to use or right to use any copy right. 9. The Ld A.R submitted that the assessee herein is a Singapore resident governed by the DTAA entered between India and Singapore. On the examination of very same DTAA provisions, the Hon'ble Supreme Court has held that the payments given by the distributors/ end users to the assessee are not "royalty" within the meaning of provisions of DTAA and hence there was no liability to deduct tax at source from those payments u/s 195 of the Act, since no income is chargeable to tax in India. In the instant case, the AO has assessed the sale proceeds receiv....
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....use the computer programme by the end-user himself, there is no further right to sublicense or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all. 46. When it comes to art end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. 47. In all these cases, the "license" that is granted vide the EULA, is not a license in terms of section 30 of the Copyright Act, which transfers an interest in all or any ....
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....ax Act to deduct tax at source, as the distribution agreements/ EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end users/distributors to non-resident computer software manufacturers/ 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 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." 14. We also notice t....