Amounts paid to foreign suppliers for use of computer software through distribution agreement is not Royalty

DCIT Vs Adobe Systems Software Ireland Ltd. (ITAT Delhi)

Conclusion: In present facts of the case, the Hon’ble ITAT by relying upon the Judgment of Hon’ble Supreme Court on the issue of Royalty observed 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 are not the payment of Royalty for the purpose of copyright in the computer software, and the same do not give rise to any income taxable in India.

Facts: Adobe Systems Software Ireland Limited is a company incorporated under the laws of Ireland and is a tax resident of Ireland in accordance with Double Taxation Avoidance Agreemen between India and Ireland. Therefore, it is entitled to the beneficial provisions of the India Ireland DTAA. ADIR is a wholly owned subsidiary of Adobe Software Trading Company Limited, Adobe Systems Incorporated is the ultimate parent company of ADIR. Adobe USA has a subsidiary in India known as Adobe Systems India Pvt. Ltd. (‘Adobe India’) that provides marketing support services to ADIR. The assessee is engaged in the distribution of shrink-wrapped/off the shelf/electronic download computer software (‘Adobe Products’) outside of North America including India and it supplies the Adobe Products to its non-exclusive Indian distributors on a principal to principal basis. As per the submission of the assessee, it purchases the software built by the third party turnkey manufacturers. No further customization or modification takes place by the assessee. The assessee itself does not undertake any R & D, development and manufacturing of software. The distributors act as the supplier of the assessee in India for selling the Adobe products in India. The AO treated the amount received by ADIR from sale of software to Indian distributors as royalty income u/s 9(1)(vi) of the Act as well as under Article 12(3) of India Ireland tax treaty and taxed the same at the rates applicable with receipt as royalty income.

In the alternate, the AO also held Adobe India is working for the assessee as an agent. He observed that the assessee was having fixed place PE/dependent agent PE. On this basis, he attributed certain profit as revenue receipt from India as business profit taxable in India in the hands of the assessee.

The Hon’ble Tribunal on the issue of Royalty, observed that in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos.8733-8734 of 2018), wherein, it has been held 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 are not the payment of royalty for the purpose of copyright in the computer software, and the same do not give rise to any income taxable in India. Therefore, the said issue was decided in favor of the assessee.

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