ARISTA NETWORKS LIMITED ,IRELAND V. DEPUTY COMMISSIONER OF INCOME TAX, (INTERNATIONAL TAX), CIRCLE-1(1), BANGALORE

ITITA 1159/BANG/2023

AI Insights

Arista Networks Limited, an Irish company, appealed against the assessment order by the Deputy Commissioner of Income Tax, which had treated their income from various streams as royalty, taxable in India. The main contention was whether the income from software licenses, software embedded in hardware, and related services should be considered as royalty or business income. The Tribunal examined the nature of the transactions and the rights granted under the agreements, referencing the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, which clarified the taxability of similar income streams under the India-Ireland DTAA. The Tribunal found that the income in question did not meet the criteria for royalty as it involved the sale of copyrighted articles and not the transfer of copyright itself.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 668732 (ITAT-BANGALORE)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 23-06-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2021-2022
• Other Referred Cases: Engineering Analysis Centre of Excellence Private Limited v. CIT
• Laws Referred To: Income-tax Act, 1961, India-Ireland Double Taxation Avoidance Agreement
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T. SURYANARAYANA
• Keywords: Set aside; Business income; Additional evidence; Revised return; Double taxation relief; Permanent establishment; FORM 26AS
• Section: 143(3); 234B; 15

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(IT)A No.1159/Bang/2023 Assessment year: 2021-22 Arista Networks Limited, 70, Sir Rogersons Quay, Dublin, Ireland. PAN: AARCA 0999A Vs. The Deputy Commissioner of Income Tax (International Taxation), Circle 1(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri T. Suryanarayana, Sr. Advocate Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. Date of hearing : 21.04.2025 Date of Pronouncement : 23.06.2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Arista Networks Limited (the assessee/appellant) , resident of Ireland, for the assessment year 2021-22 against the assessment order passed by the DCIT, International Taxation, Circle 1(1), Bangalore u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 29.10.2023 wherein the total income of the IT(IT)A No.1159/Bang/2023 Page 2 of 25 assessee is assessed at Rs.39,48,95,582 against the revised return filed by the assessee on 27.6.2022 at Rs.3,65,76,506. 2. The assessee has raised the following grounds of appeal :- “The grounds mentioned herein are without prejudice to one another: 1. That the order of the Respondent/Assessing Officer (AO' for short) dated 29.10.2023, passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (`the Act' for short), pursuant to the directions of the learned Dispute Resolution Panel (`the DRP' for short), is bad in law, contrary to the facts and circumstances of the case and is liable to be set aside. 2. That on the facts of the case and in law, the AO erred in making an addition of Rs. 35,83,19,076/- to the total income of the Appellant for assessment year 2021-22. 3. That the AO and the DRP erred on facts and in law in treating the consideration received by the Appellant towards software license, software embedded in hardware and hardware replacement to be in the nature of 'royalty' under the Act and also under the India- Ireland Double Taxation Avoidance Agreement (`the DTAA' for short). 4. That the AO and the DRP erred on facts and in law in not appreciating that the transactions in respect of software license, software embedded in hardware and hardware replacement services are in the nature of 'sale' and not in the nature of 'royalty'. 5. That the AO and the DRP erred in not appreciating that the transaction in respect of software license, software embedded in hardware and hardware replacement is a sale of 'copyrighted article' and not 'copyright' and therefore, the income earned is in the nature of business income, which in any event is not taxable in India in the absence of a Permanent Establishment in terms of Article 7 of the DTAA. 6. That the AO and the DRP failed to appreciate that the software license and software which are embedded in the hardware are IT(IT)A No.1159/Bang/2023 Page 3 of 25 standardized and not customizable and that the distributor/customer does not have the right to copy, modify, reverse compile, reverse assemble any portion of the software and do not have any unrestricted rights in the software, including the source code, and therefore, income earned cannot be treated as royalty income. 7. That the AO and DRP erred in holding that the consideration received by the Appellant ought to be treated as royalty on account of supply of scientific, technical, industrial or commercial knowledge/information/experience. 8. That the DRP erred in holding that the system integrators customize the products for the end-user, and the customization is the license right of the Appellant to modify the products, without appreciating that the distributors merely purchase the products from the Appellant, after the same are developed by the Appellant as per the requirements of the end-user, and the distributors in no manner modify the products. 9. The AO erred in holding that the income from post sales services, AMC services etc. are in the nature of 'fees for technical services' (\"FTS\") under the Act and the DTAA. 10. The AO erred in not appreciating that the support services provided in relation to hardware replacement are merely ancillary in nature and does not involve any complex or technical process and therefore, does not constitute technical services under the Act and the DTAA. 11. The AO and the DRP erred in holding that the payments received by the Appellant would constitute 'royalty' without appreciating the settled principles laid down by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT and another, (2021) 125 taxmann.com 42 (SC). 12. That the purported Document Identification Number allotted to the directions dated 27.09.2023 issued by the DRP cannot be authenticated on the e-portal of the income-tax department, and therefore the directions issued are not in line with the Circular No.19/2019 dated 14.08.2019 issued by the Central Board of Direct Taxes, thus rendering the directions invalid and IT(IT)A No.1159/Bang/2023 Page 4 of 25 consequently the final assessment order passed by the AO is bad in law. 13. That the AO erred in treating an amount of Rs. 3,59,83,135/- as being refunded to the Appellant, which is contrary to the facts of the case. 14. That on the facts and circumstances of the case and in law, the AO erred in levying interest under Section 234A and 234B of the Act. 15. The AO erred in initiating penalty proceedings under Section 270A of the Act. 16. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. Relief 17. The Appellant prays that the appeal may be allowed, and the impugned final assessment order be set aside in the justice and equity.” 3. The assessee at the time of hearing submitted that ground nos. 1 & 2 are general in nature, ground no.12 is not pressed and ground nos. 13 & 14 are consequential in nature or are premature. Thus, these grounds are dismissed. This leaves us to decide ground no 3 to 11 of the appeal. 4. Brief facts of the case show that assessee is engaged in delivering software-driven cloud networking solutions for large datacentre storage and computer environments. It also sells its products and services through distributor channel as well as directly to third party customers. It has receipts from India in the form of sale of standardized software, sale of software embedded in hardware, hardware replacement and IT(IT)A No.1159/Bang/2023 Page 5 of 25 support services as well as training. Return of income was picked up for scrutiny. 5. The dispute in this appeal is with respect to following 3 streams of income:- (i) Assessee has earned an income of Rs.9,40,31,793 on sale of software licences i.e., software products. The claim of the assessee is that software licences are sold by the assessee are standardized product which does not qualify as royalty and this income stream is covered by the decision of the Hon’ble Supreme Court wherein it was held that mere right to resale shrink wrapped software i.e., copyrighted software would not result into royalty taxation as per Double Tax Agreement and accordingly the same does not have tax liability in India. (ii) The second stream of income of Rs.3,30,58,672 being sale of software embedded in hardware. The claim of assessee is that software licenses are embedded in switches and such software does not have a separate existence than the switches and therefore it is a software which is bundled with the hardware product and accordingly the transaction is of a sale. In the absence of permanent establishment it cannot be taxed in India. The asse also stated that the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) has also considered that software bundled with the hardware do not IT(IT)A No.1159/Bang/2023 Page 6 of 25 fall under the purview of royalty taxation. Accordingly the above sum is not chargeable to tax in India. (iii) The third stream of income is hardware replacement and support services of Rs.2,53,36,904 which is stated to be software embedded in the hardware. The nature of services is that the assessee replaced the end user’s products as new or modified one’s based on the requirement of the customer. This hardware switches replaced has also software which is embedded in those switches. Each component has no independent existence. The assessee also provided maintenance and support services. Therefore for the similar reason as it is software embedded in hardware, same is not chargeable to tax in India. 6. Thus the total income as per Form 26AS of Rs.35,83,19,076 was stated to be not chargeable to tax in India. The ld. AO examined the claim of assessee and held that this sum of Rs.35,83,19,076 is taxable as royalty in India and is not covered by the decision of Hon’ble Supreme Court. The reasons given by the AO are at para 12.1 of the draft assessment order as under:- “12.1 The submission of the assessee was carefully perused and the same is not acceptable as the assessee has not commented on the issue of \"confidential information' containing Intellectual Property being accessed by the Distributors. It is significant to note that the assessee has not categorically denied that there has been no instance where the confidential information was shared during the software distribution process. This demonstrates that in case there is a requirement, the assessee can share the confidential information for the effective usage of software. For instance- a glitch during installation of the software or IT(IT)A No.1159/Bang/2023 Page 7 of 25 the hardware embedded with software, the distributor might require deeper access of the software to trouble shoot the issue being faced. It is not the case that the source code will be used to manipulate the software, but such access is available in case there is an issue to be resolved. Further, as much as the language in the Distribution agreement referred to above, may be couched in legal terms, the confidentiality clause provides an opportunity to the distributor to use all the proprietary information including the source code for the business purpose of the distributor. As much as this clause may be stated to be precautionary, it's still providing the right to access the source code and other proprietary information. This right is clearly a right under section 14 of the Copyright Act. Further, the distributor is responsible for the correct installation, initial updates of the software. The distributor is liable to provide the services in, case of any malfunction of the software during installation or otherwise, the distributor therefore has access to the proprietary information. This is just an illustration. The question isn't whether or for what reason the access is available. The fact is that such rights are parted with to the distributor is enough to distinguish the facts of the case from what was presented as mere shrink-wrapped software. The question of why such back-door access is provided and how that is exploited is a technical question. The mere fact that such opportunity and right exists is sufficient enough to consider that the case falls into the basket of taxation of royalty under the Income tax act provisions and as per the provisions of the DTAA.” 7. The AO held that income is chargeable to tax as per the provisions of the Act as well as the provisions of DTAA. Alternatively, he further held support and maintenance service income is also chargeable to tax as Fees for Technical Services. Accordingly draft assessment order was passed on 26.12.2022 on a total income of Rs.39,48,98,582. IT(IT)A No.1159/Bang/2023 Page 8 of 25 8. The assessee approached the DRP by filing objections, who passed the directions on 27.9.2023. The DRP with respect to taxability stated that the issue in the objections of the assessee in this year are identical to the objections for AY 2020-21. For AY 2020-21 the DRP has rejected the objections and accordingly the same were also rejected for this year. Based on this, the ld. AO has passed final assessment order on 29.10.2023 assessing income of the assessee at Rs.39,48,98,582. The assessee is in appeal before us. 9. Thus, grounds Nos. 3 to 11 are only required to be adjudicated in this appeal. The assessee submits that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (2021) 125 taxmann.com 42 (SC). The Ld AR also puts written submissions on record and also placed Direction of DRP for AY 2020-21 which was followed by the ld DRP for this year also. 10. We have carefully considered the rival contentions and perused the orders of ld. lower authorities. The only issue involved in this appeal is about the taxability of a sum of Rs.35,83,19,076 in the nature of royalty under the provisions of the Income-tax Act as well as the DTAA between India & Ireland. 11. Facts clearly show that assessee has earned 3 streams of income:- (i) Software licence wherein software licences are sold by the assessee as standardised non-customisable without a right of copy, modify any IT(IT)A No.1159/Bang/2023 Page 9 of 25 portion of the software. The claim of the assessee is that the above sum would not qualify as royalty since the assessee is providing distribution with a right to distribute the software without providing any right in the copyright of the software and the issue is squarely covered in favour of assessee by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited. (ii) The second stream of income is software embedded in the hardware wherein the software licences are embedded in switches. Therefore the software are embedded in a hardware and both these are inter-dependent and does not have a separate existence. Further the software embedded in the hardware is also a standardised software. Therefore the contention of the assessee is that what is being old is a combined product of switches embedded with software which does not have independent existence of switches or the software. Therefore it is a transaction of sale. In absence of any Permanent Establish (PE) of assessee in India, it cannot be taxed as business income. Further it is claimed that the issue is also covered by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) wherein it is held that there is a difference between the ownership of a physical item (switches) in which software is embedded and ownership of copyright. Therefore it also does not become a royalty. (iii) The 3rd revenue stream is that where the assessee replaces end users product with new product based on the requirement, assessee IT(IT)A No.1159/Bang/2023 Page 10 of 25 replaces those hardware which also have embedded software therein and therefore it is software embedded hardware only and not chargeable to tax. The reason of the assessee is similar to sale of software embedded in hardware. It was stated that sale of hardware does not qualify either as royalty or as fees for technical services. It is also pleaded that same is also not chargeable to tax in India as it is sale of goods and there was no PE in India. 12. It is the claim of the assessee that income earned by the assessee is not in the nature of royalty as defined under Article 12 of the India-Ireland DTAA and Therefore same is not chargeable to tax in India. 13. The ld. AO examined the argument of the assessee and held that the software royalty revenue is not fitting into the 4 categories as decided by the Hon’ble Supreme Court. The AO was of the view that the access of source code amounts to royalty even under the OECD commentary on Article 12 relying on para 14.3of the Commentary. The ld. AO was also of the view that by getting access to the source code also gives information concerning industrial, commercial or scientific expertise and same is also royalty as per para 11.5 of the Commentary on Article 12. Thus by giving the source code, the logic, algorithm or programming language and technique are also shared and therefore it is royalty on account of supply of scientific, technical, industrial or commercial knowledge. Thus, there is royalty on account of copyright as well as royalty on account of scientific, technical, industrial or commercial knowledge. The ld. AO also referred to the IT(IT)A No.1159/Bang/2023 Page 11 of 25 End user licence agreement [ EULA] between the assessee and the customer. He referred to para 18 of the EULA regarding confidentiality and found that in the confidentiality clause it is clearly stated that the parent company can share software source code, trade secret, know-how, inventions, development, etc. and therefore there is transfer of right to use of the patents and copyrights. The ld. AO further referred to para 45 of the decision of the Hon’ble Supreme Court and held that it is clear from the confidentiality clause that the distributor agreement does fall into the ambit of the judgment of Hon’ble Supreme Court. Accordingly a show-cause notice was issued and same was replied. 14. The assessee gave submission that the decision of Hon’ble Supreme Court applies in all the 3 revenue segments stated above. The ld. AO considered the explanation of the assessee and held that confidentiality clause clearly provides that assessee can share the confidential information for the effective use of the software. He further held that confidentiality clause provides an opportunity to the distributor to use all the proprietary information including the source code for the business purpose of the distributor. The ld. AO further admitted that this clause may be precautionary, but it is still providing a right to access the source code and other proprietary information. Therefore, this right is clearly a right u/s. 14 of the Copyright Act. The ld. AO further held that distributor is responsible for the correct installation and update of the software, therefore he is liable to provide the services in case of malfunction of the software and therefore he has an access to IT(IT)A No.1159/Bang/2023 Page 12 of 25 the proprietary information, thus this distinguishes the facts of the case compare to shrink wrapped software. The AO further examined the applicability of fees for technical services clause and held that maintenance and support services falls in the definition of fees for technical services as it also involves human intervention. He further held that there is no make available clause in the India-Ireland Treaty. He further stated that the claim of the assessee that as there is no human element involved in the provision of the services, but as the customer also can on his own install the hardware is self-contradictory situation. It is also the claim of the assessee that the ld. AO that there is a maintenance and support services which itself shows that human element is involved. Accordingly the AO held it to be taxable as royalty and charged 10% rate of tax thereon. 15. Before the ld DRP assessee furnished additional evidence and submitted the invoices of maintenance and support services which shows that switches embed with software are replaced which is considered as sale of goods and it does not involve any human intervention. Therefore, it does not satisfy criteria laid down for FTS as per DTAA. All other two streams are squarely covered by the decision of the Honourable supreme court in case of Engineering Analysis Services (Supra). The ld. DRP following its own direction for AY 2020. confirmed the action of the AO. We have carefully pursued the direction of the ld DRP for AY 2020-21 . Assessee has also filed appeal for AY 2020-21 before ITAT, however, hearing for the same is not conducted by the Ld. DR for the reason that one of the grounds IT(IT)A No.1159/Bang/2023 Page 13 of 25 raised by the assessee in appeal of that year is related to orders/ directions passed without DIN. 16. Honorable Supreme court in Engineering Analysis Center of excellence ( P ) Ltd v CIT 125 taxmann.com 42 (sc) Neutral Citation: 2021 INSC 137 [MANU/SC/0137/2021] has considered the provision of the Copyright Act ,1957 and has held as under :- \"34. A reading of the aforesaid provisions leads to the following conclusions. Under Section 2(o) of the Copyright Act, a literary work includes a computer programme and a computer programme has been defined Under Section 2(ffc) of the Copyright Act to mean a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result. 35. Though the expression \"copyright\" has not been defined separately in the \"definitions\" Section of the Copyright Act, yet, Section 14 makes it clear that \"copyright\" means the \"exclusive right\", subject to the provisions of the Act, to do or authorise the doing of certain acts \"in respect of a work\". When an \"author\" in relation to a \"literary work\" which includes a \"computer programme\", creates such work, such author has the exclusive right, subject to the provisions of the Copyright Act, to do or authorise the doing of several acts in respect of such work or any substantial part thereof. In the case of a computer programme, Section 14(b) specifically speaks of two sets of acts - the seven IT(IT)A No.1159/Bang/2023 Page 14 of 25 acts enumerated in Sub-clause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. Insofar as the seven acts that are set out in Sub-clause (a) are concerned, they all delineate how the exclusive right that is with the owner of the copyright may be parted with, i.e., if there is any parting with the right to reproduce the work in any material form; the right to issue copies of the work to the public, not being copies already in circulation; the right to perform the work in public or communicate it to the public; the right to make any cinematograph film or sound recording in respect of the work; the right to make any translation of the work; the right to make any adaptation of the work; or the right to do any of the specified acts in relation to a translation or an adaptation. 36. In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work. This is made even clearer by the definition of an \"infringing copy\" contained in Section 2(m) of the Copyright Act, which in relation to a computer programme, i.e., a literary work, means reproduction of the said work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc. is at the heart of the said exclusive right. IT(IT)A No.1159/Bang/2023 Page 15 of 25 37. Section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. Prior to the 1999 Amendment, Section 14(b)(ii) of the Copyright Act read as follows: (ii) to sell or give on hire, or offer for sale or hire any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions; What is conspicuous by its absence is the phrase \"regardless of whether such copy has been sold or given on hire on earlier occasions\". 38. Importantly, no copyright exists in India outside the provisions of the Copyright Act or any other special law for the time being in force, vide Section 16 of the Copyright Act. When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in Section 14(a) and (b) of the Copyright Act, in the said work for a consideration, the assignee of such right becomes entitled to all such rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him (see Section 18(2) read with Section 19(3) of the Copyright Act). Also, Under Section 30 of the Copyright Act, the owner of the copyright in any literary work may grant any interest in any right mentioned in Section 14(a) of the Copyright Act by licence in writing by him to the licensee, under which, for parting with such interest, royalty may become payable (see IT(IT)A No.1159/Bang/2023 Page 16 of 25 Section 30A of the Copyright Act). When such licence is granted, copyright is infringed when any use, relatable to the said interest/right that is licensed, is contrary to the conditions of the licence so granted. Infringement of copyright takes place when a person \"makes for sale or hire or sells or lets for hire\" or \"offers for sale or hire\" or \"distributes...so as to affect prejudicially the owner of the copyright\", vide Section 51(b) of the Copyright Act. Importantly, the making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was supplied, or to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright Under Section 52(1)(aa) of the Copyright Act. In short, what is referred to in Section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright. 39. Section 52(1)(ad) is independent of Section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non- commercial personal use would not amount to an infringement of copyright. However, it is not possible to deduce from this what is sought to be deduced by the learned Additional Solicitor General, namely, that if personally legally obtained copies of a computer programme are to be exploited for commercial use, it would IT(IT)A No.1159/Bang/2023 Page 17 of 25 necessarily amount to an infringement of copyright. Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of Section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in Section 52(1)(aa) of the Copyright Act.\" 17. Honourable Supreme Court in para no. 40 was also concerned with DTAA between India and Ireland, which is also the case before us. The DTAA defines royalty and FTS as under :- 3. ( a) The term \"royalties\" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience; (b) The term \"fees for technical services\" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. IT(IT)A No.1159/Bang/2023 Page 18 of 25 18. Honourable SC also considered in para no. 45 to 47 the distribution agreement involved in case before it , which are also similar to agreement before us, as under :- \"45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non-exclusive, non- transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence 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 an end-user who is directly sold the computer programme, such end-user can only use it by installing IT(IT)A No.1159/Bang/2023 Page 19 of 25 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 \"licence\" that is granted vide the EULA, is not a licence in terms of Section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in Sections 14(a) and 14(b) of the Copyright Act, but is a \"licence\" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to Section 30 of the Copyright Act, inasmuch as Section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in Sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a 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 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 IT(IT)A No.1159/Bang/2023 Page 20 of 25 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 characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence.\" 19. On considering the agreement with the distributors and reading clause 3.1, it is provided that assessee grants distributor a limited, non- exclusive, non-transferable, revocable right to receive from assessee and to sub-licence the resale of software in object code form only subject to terms of end user licence agreement. In clause 3.3 it also provides that the distributor will not copy, duplicate, translate, reverse engineer, decompile or disassemble the software or attempt to discover any source code or underlying algorithms of the software by any means. It further provides that the distributor will inform the assessee any unauthorised activity by the third party in the territory of the distributor. Thus from the above, it is clear that it is only in the object code form licence to use the software is provided. Thus there is no evidence that assessee also provides source code to the end user or to the distributor. Thus, the observation of the ld. AO is devoid of any merit that assessee has or will part with the source code to the distributor or to end users. IT(IT)A No.1159/Bang/2023 Page 21 of 25 20. Further with respect to the software embedded in hardware, the Hon’ble Supreme Court has also confirmed the decision of the Hon’ble Delhi High Court in 344 ITR 470 that software which is embedded in the hardware is a transaction of sale and not a royalty. Further admittedly there is no allegation that assessee has any PE in India. Therefore, the income earned from this stream is not chargeable to tax and covered in favour of the assessee by the decision of Hon’ble Supreme Court. 21. Coming to the confidentiality clause in the agreement, it provides that during the course of business, if the distributor or other party obtains information about the confidential or proprietary nature, it shall maintain it with strict confidence and trust and should be disclosed only to employees on need to know basis and not to disclose to any other person. On looking at this confidentiality clause, it neither speaks of giving any right to the distributor or to the other party, but it preserves and protects its own right. Therefore the confidentiality clause does not provide for exceeding access to any other information including for the software, it preserves and protects right of the assessee, if accidentally it comes into the hands of the distributors or others. Thus, it does not help the case of the AO to charge the above sum as royalty. Confidentiality clause in fact protects the right of Copyright owner and does not give any further right to the user/ distributor. 22. The ld. CIT(DR) in her written submissions states that the case of the assessee is not covered by the decision of Hon’ble Supreme Court as IT(IT)A No.1159/Bang/2023 Page 22 of 25 the revenue streams of the assessee does not fall into any of the 4 categories of the cases on which the Hon’ble Supreme Court has given its decision. Therefore the reliance placed by the assessee on this decision is not correct. Regarding the applicability of the decision of the Hon’ble Supreme court, the facts show that assessee is original equipment manufacturer and manufactures network based solutions such as switches, routers, etc. These products are available with limited features and functionality, without installing any additional software licences and are being sold to the Indian customers through third party channel partners. The assessee provides software licences and can also be purchased separately on need basis. These software are licenced products are standard in nature and the customers do not have any right and option to modify customised software licences. Further the distributors are not permitted to copy or modify the software. This is evident in clause 3 of the distributors resale rights of the agreement. The distributor agreement has also the licence restrictions and conditions by which the copy, etc. is strictly prohibited. Thus the assessee is providing distributors a right to distribute software without providing any right in the Copyright of the software. The distributors are also given non-exclusive non-transferable licence to resell the software products and was not permitted to copy, modify the software, reverse compile, reverse assemble any portion of the software. Further the confidentiality clause also do not provide any right in the Copyright of the software to the distributors and end users, but facilitates protection of the right of the assessee. Similarly, the assessee also IT(IT)A No.1159/Bang/2023 Page 23 of 25 provides the hardware products which are preloaded with software licences, which is also sale of software embedded in the hardware component. 23. Both the above streams are covered by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) . 24. With respect to the hardware replacement and support services treated by the ld. AO as fees for technical services wherein assessee replaces the damaged faulty hardware products with new product and therefore it is hardware replacement and support services where assessee provides only hardware product. This is also evident from the invoices wherein it is mentioned as hardware replacement and corresponding quantities. Therefore, it is not fees for technical services, but it is sale of embedded software in the hardware product. Therefore the same cannot be considered as fees for technical services. 25. We have also been shown the decision of Honourable supreme court in case of Microsoft Regional Sales Pte Limited [2024] 167 taxmann.com 45 (SC)/ [2024] 301 Taxman 402 (SC) where in assessment years involved is Assessment years 2010-11 to 2017-18 [ post amendment] where in on merit also honourable supreme court has held that: - “3. Even otherwise, the special leave petition is covered on merits by virtue of the judgment of this Court in the case Engineering Analysis centre of Excellence Private Limited v. CIT [2021] 125 taxmann.com IT(IT)A No.1159/Bang/2023 Page 24 of 25 42/281 Taxman 19/432 ITR 471/(2022) 3 SCC 321 , which judgment has also been sustained in the review petition filed by the petitioner by a three-Judge Bench of this Court.” 26. We have also been shown the decision of Honourable supreme court in case of MOL Corporation [2024] 162 taxmann.com 198 (SC)/ [2024] 299 Taxman 506 (SC) [2024] 167 taxmann.com 45 (SC)/ [2024] 301 Taxman 402 (SC) where in assessment years involved is Assessment years 2013-14 [ post amendment] where in on merit also honourable supreme court has held that: - “3. In the circumstances, following the earlier order dated 11.03.2024 passed in CIT (International Taxation) v. Mol Corporation [SLP (C) Diary No(s). 5669 of 2024], we condone the delay and dismiss the special leave petitions on the basis of the earlier judgment of this Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42/281 Taxman 19/432 ITR 471 (SC)/[2022] 3 SCC 321 and by following order dated 11.03.2024 passed in the aforementioned special leave petition.” 27. Thus, according to us, in view of the decision of honourable supreme court, even post amendment, we hold that income earned by the assessee of Rs 35,83,19,076/- comprising of Sale of Software products as Software license of Rs. 94031793/-, Sale of Software embedded in hardware of Rs 33058672/- and hardware replacement and support services also in the nature of software embedded in hardware of Rs. IT(IT)A No.1159/Bang/2023 Page 25 of 25 22,53,36,904/- is not ‘royalty’ within the meaning of Article 12 of India Ireland DTAA. 28. In view of the above facts, ground Nos.3 to 11 of the appeal are allowed and appeal of assessee is partly allowed. Pronounced in the open court on this 23rd day of June, 2025. Sd/- Sd/- ( SOUNDARARAJAN K. ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 23rd June 2025. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. "