M/s Kaseya Software India Private Limited, Bangalore V. Deputy Commissioner of Income Tax Circle-4(1)(1), Bangalore

MA 51/BANG/2021

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5522 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 15 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 27-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 11-04-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRIT RAJ SINGH
• Keywords: Double taxation relief; TDS
• Section: 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER M.P. No. 51/Bang/2021 (in ITA No. 1304/Bang/2018) Assessment Year : 2013-14 M/s. Kaseya Software India Pvt. Ltd., C/o M/s Suresh & Co., Chartered Accountants, #43/16, ‘Srinidhi’, 1 st Floor, Surveyor Street, Basvangudi, Bangalore – 560 004. PAN: AADCK3905A Vs. The Deputy Commissioner of Income Tax, Circle – 4(1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Kaushik, Advocate Revenue by : Shri Amrit Raj Singh, JCIT (DR) Date of Hearing : 22-10-2021 Date of Pronouncement : 28-12-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER The present Miscellaneous Petition filed by assessee arises out of the order passed by this Tribunal for year under consideration on 27.10.2020. 2. Brief facts of the case are as under: The Petitioner/assessee debited the following two amounts in the profit & loss account which is aggregating to Rs. 2,13,03,772: a) Virtual System Administrative / VSA : Rs. 1,61,20,135 b) Subscription XSP : Rs. 51,83,637 Page 2 of 6 M.P. No. 51/Bang/2021 (in ITA No. 1304/Bang/2018) The Ld.AR submitted that the decision relied by the Department in deciding the issue against the assessee/petitioner is the judgment of the Jurisdictional High Court in the case of CIT vs M/s Samsung Electronics Co P Ltd reported in 345 ITR 494 which was followed by this Hon’ble Bench while passing the order sought to be rectified. 2.1 It is submitted that this Tribunal upheld the view taken by the Ld.CIT(A) by placing reliance on the decision of Hon’ble Karnataka High Court in case of CIT vs M/s Samsung Electronics Co P Ltd. (supra). 3. The Ld A.R at the outset submitted that the issue contested in the appeal is now covered by the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd Vs. CIT reported in (2021) 125 taxmann.com 432. The issue to be considered is whether the payments made to various nonresident persons are for the right to use any copyright and whether such payments fall under the category of “royalty”, requiring He submitted that the above said issue now stands covered by the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd Vs. CIT, wherein the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd reported in 16 taxmann.com 141)) was reversed. He submitted that the Ld CIT(A) had followed the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) to decide the issue against the assessee. In view of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra), the decision rendered by Ld CIT(A) needs to be reversed. 4. The Ld.DR submitted that the Tribunal has passed detailed order following the decision rendered by jurisdictional Hon’ble Karnataka High Court. Hence, there is no mistake apparent from record in the Page 3 of 6 M.P. No. 51/Bang/2021 (in ITA No. 1304/Bang/2018) order passed by the Tribunal. However, the Ld.DR submitted that the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra) cannot be blindly followed. It is submitted that each payment made by the assessee needs to be examined on the basis of the agreement entered between the assessee and the suppliers of software in order to find out whether there was transfer of copy right or not. Accordingly, the Ld.DR submitted that the entire issues may be restored to the file of the Ld.AO for examining it afresh and assessee may be directed to furnish the agreements/ other information and explanations that may be called for by the Ld.AO. 5. We heard the parties. We notice that the Ld CIT(A) has followed the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd (supra) to decide the issues against the assessee. However the above said decision has since been reversed by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). The issue of granting license to use software was examined in the context of its taxability as royalty by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra). The Hon'ble Supreme Court examined this question considering four types of situations, which has been narrated as under:- 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, 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. Page 4 of 6 M.P. No. 51/Bang/2021 (in ITA No. 1304/Bang/2018) (iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, nonresident suppliers to resident Indian distributors or end- users. The Hon’ble Supreme Court analysed the agreements entered in respect of all the four categories mentioned above and gave following finding:- 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 enduser 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 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 Page 5 of 6 M.P. No. 51/Bang/2021 (in ITA No. 1304/Bang/2018) 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 characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 6. After analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with nonresident software suppliers, provisions of Copy right Acts, the circulars issued by CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court concluded as under:- “CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax 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/endusers, 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.” 7. We notice that the Ld CIT(A) has also referred to Copy right Act in his order. It is also pertinent to mention that the Hon’ble Supreme Court has analysed the provisions of Copy right Act and their applicability to the payments made for use of software. We also notice that the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) has been reversed by Hon’ble Supreme Court in paragraph 101-102 of its order. Similarly, the decision rendered in the case of Synopsis International Old Ltd Page 6 of 6 M.P. No. 51/Bang/2021 (in ITA No. 1304/Bang/2018) (supra) by Hon’ble Karnataka High Court has been reversed in paragraph 103 – 109 of its order. 8. However, as rightly pointed out by Ld D.R, we are of the view that the issues contested in all these appeals require fresh examination at the end of Ld CIT(A) applying the ratio of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). Accordingly, we set aside the orders passed by Ld CIT(A) in all these appeals and restore all the issues to his file for examining them afresh applying the ratio of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). In the result, the miscellaneous petition filed by the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on 28 th December, 2021. Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 28 th December, 2021. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore