B.R. Baskaran ORDER
George George K., Member (J)
1. This appeal at the instance of the assessee is directed against final assessment order dated 01.03.2019 passed u/s. 143(3) r.w.s. 147 r.w.s. 144C of the I.T. Act. The relevant assessment year is 2010-2011.
2. The solitary issue raised is whether the amounts received by the assessee on account of sale of software and other incidental receipts would constitute royalty within the meaning of section 9(1)(vi) of the I.T. Act and Article 12 of the DTAA between India and Australia.
3. The brief facts of the case are as follow:
The assessee is a foreign company. It is engaged in the business of development and licencing of software products. During the relevant assessment year, it had sold software to various Indian customers. It was noticed by the Department that the amounts received by assessee for the sale of software/licences is in the nature of royalty in view of the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Limited reported in MANU/KA/0605/2009 : 320 ITR 209. Since the assessee did not file return of income for the relevant assessment year, notice was issued u/s. 148 of the I.T. Act. In response to the notice issued u/s. 148, the assessee filed return of income for assessment year 2010-2011 on 02.08.2017. During the course of assessment proceedings, it was seen that the assessee had received total amount of Rs. 1,15,40,710 on account of sale of software licences and provision of software maintenance and related training services. The assessee submitted that the sale of software and maintenance software services ought not have been considered as royalty and be brought to tax in India for the following reasons:-
• The payment is for use of a copyrighted article and not use of copyright;
• Distributors do not have the right to copy/reproduce the software;
• Distributors/Customers do not own any of the IPR in and to the Software;
• Payments is not for the rendering of any service that makes available any technical knowledge, experience, skill, know how;
• Income from sale of Software would not qualify as Royalty income as per Article 12 of the treaty.
4. The Assessing Officer, however, rejected the contentions of the assessee and passed draft assessment order by bringing to tax an amount of Rs. 1,15,40,710 received by the assessee on account of sale of software licences and other incidental receipts. The AO/TPO held the receipts constituted 'royalty' as defined in section 9(1)(vi) of the I.T. Act and Article 12 of the DTAA between India and Australia. The AO also placed reliance on the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Limited (supra).
5. Assessee filed objections before the DRP. The DRP vide its order dated 08.02.2019 confirmed the view of the A.O. in the draft assessment order. Consequent to the DRP's direction, the final assessment order was passed on 01.03.2019.
6. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The learned AR submitted that the issue in question is squarely covered in favour of the assessee by the judgment of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence P. Ltd. v. CIT reported in MANU/SC/0137/2021 : [2021] 432 ITR 471 (SC).
7. The learned Departmental Representative supported the orders of the Income Tax Authorities.
8. We have heard rival submissions and perused the material on record. The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. v. CIT (supra), had grouped the cases considered by it into four categories. The four categories of cases grouped by the Hon'ble Apex Court are as follows:-
(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 manufacture.
(ii) The second category of cases deals with resident Indian companies that act as distributors or reseller, 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, non-resident 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.
8.1. The Hon'ble Supreme Court after considering the end-users agreement, categorically held that in all the above four situations that sale of software would not constitute royalty within the provisions of section 9(1)(vi) of the I.T. Act and Article 12 of the treaty. In the instant case, the assessee is a foreign company, which sells software licences to the end- users in India. Therefore, this case falls within the first category grouped by the Hon'ble Apex Court. The Assessing Officer in this case had elaborately examined the end-users licence agreement entered between the assessee and the Indian customers. The relevant portion of the end-users licence agreement considered by the A.O. in the final assessment order are extracted from pages 16 to 18 of the assessment order, hence, the same is not reproduced below. On perusal of the end-users licence agreement, it is seen that the end-users licence agreement considered by the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) is identical to the end users licence agreement in the instant case. On perusal of the end-users licence agreement, it is clear even in cases where some element of source code were made available to the end-users i.e. the Indian customers, it is only for the purpose of fixing the bugs, customizations etc. Under no circumstances we noticed there is a transfer of copy right in the software. In the facts of the instant case, it is clear the amounts received by the assessee is on account of sale of copyrighted software and not transfer of copyright in a software. In such circumstances, we are of the view that the instant case is identical to the case considered by the Hon'ble Apex Court. Accordingly, by following the principles laid down in the judgment of the Hon'ble Apex Court, we hold that the receipts on account of sale of software licences and other incidental receipts such as provision for software maintenance and related training services would not constitute royalty within the meaning of DTAA between India and Australia and provisions of section 9(1)(vi) of the I.T. Act. It is ordered accordingly.
9. In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 25th day of August, 2021.
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