M/s Citrix Systems Asia Pacific Proprietary limited , Bangalore V. Income Tax Officer (International Taxation) Ward-1(1), Bangalore

ITA 2431/BANG/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 0967 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 26-04-2021
• Assessment Year: 2013-2014
• Appeal Filed On: 24-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR CIT BENGALURU
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Double taxation relief; Retrospective amendment; Advance ruling; TDS; Set aside
• Section: 234B; 195; 201; 9(1); 9(1); 9(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER IT A NO S . 2431 & 2432/BANG/2018 ASSESSMENT YEAR S : 2013 - 14 & 2014 - 15 CITRIX SYSTEMS ASIA PACIFIC PROPRIETARY LIMITED, [ LEVEL 5, 66 WATERLOO ROAD, MACQUARIE PARK, NSW 2113, AUSTRALIA ] C/O. CITRIX R&D INDIA PVT. LTD., 2 ND & 3 RD FLOOR, CHERRY HILLS, 8/2B-9, INTERMEDIATE RING ROAD, EMBASSY GOLF LINKS BUSINESS PARK, DOMLUR, BANGALORE 560 071. PAN: AADCC 8874E VS. THE INCOME TAX OFFICER, WARD 1(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI T. SURYANARAYANA, ADVOCATE RESPONDENT BY : SHRI PRADEEP KUMAR, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 05.07 .2021 DATE OF PRONOUNCEME NT : 12 .0 7 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE APPEALS ARE DIRECTED AGAINST THE SEPARATE ORDERS DATED 15.6.2018 OF THE CIT(APPEALS)-12, BENGALURU FOR THE ASSESSMENT YEARS 2013-14 & 2014-15. 2. THE COMMON GROUNDS OF APPEAL RAISED BY THE ASS ESSEE IN THESE APPEALS ARE AS FOLLOWS:- ITA NOS.2431 & 2432/BANG/2018 PAGE 2 OF 7 1. THAT THE IMPUGNED ORDER PASSED BY THE CIT(A), TO THE EXTENT QUESTIONED HEREIN, IS BAD IN LAW AND ON FACT S AND IS, THEREFORE, LIABLE TO BE SET ASIDE BY THIS HON'BLE T RIBUNAL. 2. THAT THE CIT(A) FAILED TO APPRECIATE THAT THE P AYMENTS RECEIVED BY THE APPELLANT DO NOT QUALIFY AS 'ROYALT Y' UNDER THE INDIA-AUSTRALIA DOUBLE TAXATION AVOIDANCE AGREEMENT (`THE DTAA'). 3. THAT THE CIT(A) ERRED IN FAILING TO APPRECIATE THAT NOTWITHSTANDING THE RETROSPECTIVE AMENDMENT MADE TO SECTION 9(1)(VI) OF THE ACT VIDE THE FINANCE ACT, 2012, THE DEFINITION OF 'ROYALTY' UNDER THE DTAA HAS NOT UNDERGONE ANY CHAN GE. 4. THAT THE CIT(A) ERRED IN DISMISSING THE APPELLA NT'S APPEAL BY MERELY FOLLOWING THE JUDGMENT GATED 15 OCTOBER 2 011 PASSED BY THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF SAMSUNG ELECTRONICS CO. LIMITED, DESPITE THE SAID JUDGMENT BEING UNDER CHALLENGE BEFORE THE HON'BLE SUPREME COURT IN C.A. NO. 10109/2013. 5. THAT THE CIT(A) ERRED IN DISMISSING THE APPELLA NT'S APPEAL BY MERELY FOLLOWING THE RULING DATED FEBRUARY 2012 PASSED BY THE AUTHORITY FOR ADVANCE RULINGS IN THE APPELLANT' S OWN CASE, DESPITE THE SAID RULING BEING UNDER CHALLENGE BEFOR E THE HON'BLE SUPREME COURT IN SLP(C) NO. 1-8115/2012. 6. THAT THE CIT(A) OUGHT TO HAVE INSTEAD FOLLOWED CERTAIN DECISIONS DELIVERED BY THE HON'BLE HIGH COURTS, THE AUTHORITY FOR ADVANCE RULINGS AND VARIOUS BENCHES OF THE HON'BLE TRIBUNAL ON THE SAME ISSUE THAT ARISES IN THE APPELLANT'S CASE. 7. THAT THE CIT(A) FAILED TO APPRECIATE THAT THE A PPELLANT SOLD SOFTWARE TO DISTRIBUTORS WHO, IN TURN, SOLD TH E SOFTWARE TO END-USERS AND THAT, THEREFORE, THERE WAS NO GRANT O F ANY RIGHT IN RESPECT OF THE COPYRIGHT IN THE SOFTWARE FROM THE A PPELLANT TO ITS DISTRIBUTORS IN INDIA. 8. THAT THE CIT(A) FAILED TO APPRECIATE THAT THE C ONSIDERATION RECEIVED BY THE APPELLANT WAS NOT TRANSFER OF COPYR IGHT IN THE SOFTWARE TO THE DISTRIBUTORS/ END USERS BUT FOR SAL E OF COPYRIGHTED SOFTWARE. ITA NOS.2431 & 2432/BANG/2018 PAGE 3 OF 7 9. THAT, IN DOING SO, THE CIT(A) OVERLOOKED THE DI FFERENCE BETWEEN THE RIGHT TO USE A COPYRIGHTED ARTICLE AS A GAINST THE TRANSFER OF COPYRIGHT ITSELF AND THAT IN THE CASE OF THE APPELLANT, IT IS THE FORMER THAT HAS TAKEN PLACE. 10. THAT THE CIT(A) FAILED TO APPRECIATE THAT ACCE SS TO SOFTWARE WHEREIN A SUBJECT MATTER OF COPYRIGHT IS E MBEDDED, WITHOUT THE RIGHT TO EXPLOIT THE COPYRIGHT, DOES NO T AMOUNT TO USE OR RIGHT TO USE THE COPYRIGHT IN THE COPYRIGHTED WO RK. 11. THAT THE CIT(A) FAILED TO APPRECIATE THAT SINCE THE PAYMENT RECEIVED BY THE APPELLANT FROM ITS CUSTOMER S WAS NOT TO BE MEASURED WITH REFERENCE TO THE PRODUCTIVITY OR U SE OF THE SOFTWARE, IT COULD, THEREFORE, NOT BE CONSTRUED AS 'ROYALTY'. 12. THAT, WITHOUT PREJUDICE AND IN ANY EVENT, THE CIT(A) ERRED IN AFFIRMING THE INTEREST CHARGED UNDER SECTION 234 A & 234B OF THE ACT. 13. THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. THE APPELLANT DESIRES LEAVE TO ADD TO OR ALTER, BY DELETION, SUBSTITUTION OR OTHERWISE, ANY OR ALL OF THE ABOVE GROUNDS, AT ANY TIME BEFORE OR DURING THE HEARING OF THE APPEAL. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS ARE IN DEPENDENT OF, AND WITHOUT PREJUDICE, TO ONE ANOTHER. 3. THE ASSESSEE COMPANY IS INCORPORATED IN AUSTRALI A AND ENGAGED IN THE DISTRIBUTION AND SALE OF ITS SOFTWARE AND HARDW ARE PRODUCTS TO ITS CUSTOMERS IN INDIA. THE ASSESSEE FILED NIL RETURN OF INCOME, BUT IN THE COMPUTATION OF TOTAL INCOME THE ASSESSEE HAD OFFERE D TO TAX THE TOTAL CONSIDERATION RECEIVED FROM THE INDIAN DISTRIBUTORS ON SALE OF SOFTWARE AMOUNTING TO RS.69,25,84,009. THE AO TREATED THIS INCOME AS ROYALTY. THE CIT(APPEALS) CONFIRMED THE ORDER OF AO. ITA NOS.2431 & 2432/BANG/2018 PAGE 4 OF 7 4. AT THE TIME OF HEARING, THE ARGUMENT OF THE LD. AR IS THAT THE AO HAS NOT EXAMINED THE AGREEMENT ENTERED INTO BY THE ASSE SSEE AND HENCE THE ISSUE MAY BE REMITTED BACK TO THE AO FOR FRESH EXAM INATION. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED BY THE JUDG MENT OF HONBLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE FO R EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOM E TAX & ANOTHER AIR 2021 SC 124 / 432 ITR 471 (SC). THE APEX COURT IN THE AFORESAID CASE HAS HELD IN PARAGRAPHS 27, 47, 5 2, 168 & 169 AS UNDER: 27. THE MACHINERY PROVISION CONTAINED IN SECTION 1 95 OF THE INCOME TAX ACT IS INEXTRICABLY LINKED WITH THE CHARGING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE INCOME TAX ACT, AS A RESULT OF WHI CH, A PERSON RESIDENT IN INDIA, RESPONSIBLE FOR PAYING A SUM OF MONEY, CHARGEABLE UNDER THE PROVISIONS OF [THE] AC T, TO A NON-RESIDENT, SHALL AT THE TIME OF CREDIT OF SUCH AMOUNT TO THE ACCOUNT OF THE PAYEE IN ANY MODE, DEDUCT TAX AT SOURCE AT THE RATE IN FORCE WHICH, UNDER SECTION 2( 37A)(III) OF THE INCOME TAX ACT, IS THE RATE IN FORCE PRESCRI BED BY THE DTAA. IMPORTANTLY, SUCH DEDUCTION IS ONLY TO BE MADE IF THE NON-RESIDENT IS LIABLE TO PAY TAX UNDER THE CHARGING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE INCOME TAX ACT, READ WITH THE DTAA. THUS, IT IS ONL Y WHEN THE NON-RESIDENT IS LIABLE TO PAY INCOME TAX I N INDIA ON INCOME DEEMED TO ARISE IN INDIA AND NO DEDUCTION OF TDS IS MADE UNDER SECTION 195(1) OF THE INCOME TAX ACT, OR SUCH PERSON HAS, AFTER APPLYING SECTION 195(2) O F THE INCOME TAX ACT, NOT DEDUCTED SUCH PROPORTION OF TAX AS IS REQUIRED, THAT THE CONSEQUENCES OF A FAILURE TO DED UCT AND PAY, REFLECTED IN SECTION 201 OF THE INCOME TAX ACT , FOLLOW, BY VIRTUE OF WHICH THE RESIDENT-PAYEE IS DEEMED AN ASSESSEE IN DEFAULT, AND THUS, IS MADE LIABLE TO PAY TAX, INTEREST AND PENALTY THEREON. THIS POSITION IS ALSO MADE AMPLY CLEAR BY THE REFERRAL ORDER IN THE CONCERNED APPEALS FROM THE HIGH COURT OF KARNATAKA, NAMELY, THE JUDGM ENT OF THIS COURT IN GE TECHNOLOGY (SUPRA). 47. IN ALL THESE CASES, THE LICENCE THAT IS G RANTED VIDE THE EULA, IS NOT A LICENCE IN TERMS OF SECTION 30 O F THE COPYRIGHT ACT, WHICH TRANSFERS AN INTEREST IN ALL O R ANY OF THE RIGHTS CONTAINED IN SECTIONS 14(A) AND 14(B) OF THE ITA NOS.2431 & 2432/BANG/2018 PAGE 5 OF 7 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 E ULAS THAT WE ARE CONCERNED WITH ARE REFERRED 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 POI NT OF FACT, SUCH REPRODUCTION IS EXPRESSLY INTERDICTED, A ND IT IS ALSO EXPRESSLY STATED THAT NO VESTIGE OF COPYRIGHT IS AT ALL TRANSFERRED, EITHER TO THE DISTRIBUTOR OR TO THE EN D-USER. A SIMPLE ILLUSTRATION TO EXPLAIN THE AFORESAID POSITI ON 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 WA Y OF LICENCE OR OTHERWISE, INASMUCH AS THE INDIAN DISTRI BUTOR ONLY MAKES A PROFIT ON THE SALE OF EACH BOOK. IMPOR TANTLY, THERE IS NO RIGHT IN THE INDIAN DISTRIBUTOR TO REPR ODUCE THE AFORESAID BOOK AND THEN SELL COPIES OF THE SAME. ON THE OTHER HAND, IF AN ENGLISH PUBLISHER WERE TO SELL TH E SAME BOOK TO AN INDIAN PUBLISHER, THIS TIME WITH THE RIG HT TO REPRODUCE AND MAKE COPIES OF THE AFORESAID BOOK WIT H THE PERMISSION OF THE AUTHOR IT CAN BE SAID THAT COPYRI GHT IN THE BOOK HAS BEEN TRANSFERRED BY WAY OF LICENCE OR OTHERWISE, AND WHAT THE INDIAN PUBLISHER WILL PAY F OR, 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 TH E LICENCE. 52. THERE CAN BE NO DOUBT AS TO THE REAL NATURE OF THE TRANSACTIONS IN THE APPEALS BEFORE US. WHAT IS LIC ENSED BY THE FOREIGN, NON-RESIDENT SUPPLIER TO THE DISTRI BUTOR AND RESOLD TO THE RESIDENT END-USER, OR DIRECTLY SU PPLIED TO THE RESIDENT END-USER, IS IN FACT THE SALE OF A PHY SICAL OBJECT WHICH CONTAINS AN EMBEDDED COMPUTER PROGRAMME, AND IS THEREFORE, A SALE OF GOODS, WHICH , AS HAS BEEN CORRECTLY POINTED OUT BY THE LEARNED COUNS EL FOR THE ASSESSEES, IS THE LAW DECLARED BY THIS COURT IN THE CONTEXT OF A SALES TAX STATUTE IN TATA CONSULTANCY SERVICES V. STATE OF A.P., 2005(1) SCC 308 (SEE PARAGRAPH 27 ). ITA NOS.2431 & 2432/BANG/2018 PAGE 6 OF 7 168. GIVEN THE DEFINITION OF ROYALTIES CONTAINED IN ARTICLE 12 OF THE DTAAS MENTIONED IN PARAGRAPH 41 O F THIS JUDGMENT, IT IS CLEAR THAT THERE IS NO OBLIGATION O N THE PERSONS MENTIONED IN S.195 OF THE INCOME TAX ACT TO DEDUCT TAX AT SOURCE, AS THE DISTRIBUTION AGREEMENT S/ EULAS IN THE FACTS OF THESE CASES DO NOT CREATE ANY INTEREST OR RIGHT IN SUCH DISTRIBUTORS/END-USERS, W HICH WOULD AMOUNT TO THE USE OF OR RIGHT TO USE ANY COPY RIGHT. THE PROVISIONS CONTAINED IN THE INCOME TAX ACT (S. 9(1) (VI), ALONG WITH EXPLANATIONS 2 AND 4 THEREOF), WHI CH DEAL WITH ROYALTY, NOT BEING MORE BENEFICIAL TO THE ASSE SSEES, 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 SOFTWAR E MANUFACTURE/SUPPLIERS, AS CONSIDERATION FOR THE RESALE/USE OF THE COMPUTER SOFTWARE THROUGH EULAS/ DISTRIBUTION AGREEMENTS, IS NOT THE PAYMENT OF ROYA LTY FOR THE USE OF COPYRIGHT IN THE COMPUTER SOFTWARE, AND THAT THE SAME DOES NOT GIVE RISE TO ANY INCOME TAXABLE I N INDIA, AS A RESULT OF WHICH THE PERSONS REFERRED TO IN SEC TION 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. 170. THE APPEALS FROM THE IMPUGNED JUDGMENTS OF THE HIGH COURT OF KARNATAKA ARE ALLOWED, AND THE AFORES AID JUDGMENTS ARE SET ASIDE. THE RULING OF THE AAR IN C ITRIX SYSTEMS (AAR) (SUPRA) IS SET ASIDE. THE APPEALS FRO M THE IMPUGNED JUDGMENTS OF THE HIGH COURT OF DELHI ARE DISMISSED. 5. BEING SO, THE ISSUE IS SQUARELY COVERED BY THE A BOVE JUDGMENT OF HONBLE SUPREME COURT AND DOES NOT REQUIRE ANY FURT HER ADJUDICATION SINCE THE ANCILLARY SUPPORT SERVICES ARE ALSO COVERED IN THE SOFTWARE SERVICES. ITA NOS.2431 & 2432/BANG/2018 PAGE 7 OF 7 6. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE A LLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF JULY, 2021. SD/- SD/- ( N V VASUDEV AN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNT ANT MEMBER BANGALORE, DATED, THE 12 TH JULY, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.