ITAT held that income earned by the assessee from sale of software, either directly to the customers in India or through distributors or resellers constitutes its business income and not the Royalty income and as such business income is not taxable in India as the assessee did not have any Permanent Establishment in India.
FULL TEXT OF THE ITAT JUDGEMENT
Both the appeals by the assessee filed against the common final assessment order dated 17-06-2020 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 147 r.w.s. 144C(1) of the Act for assessment years 2012-13 and 2017-18.
2. We find that the issues raised in both appeals are similar, based on same identical facts. Upon hearing both the parties, we proceed to hear both the appeals together and to pass a consolidated order for the sake of
3. First, we shall take up the appeal in ITA No. 505/PUN/2020 for A.Y. 20 12-13.
4. The assessee raised ground No. 1(a) challenging the action of AO/TPO for treating the consideration received for sale of software products as Royalty and taxable in the hands of assessee in India.
5. The brief facts of the case are that the assessee is a company incorporated under the law of USA and is a non-resident from the Indian Income Tax perspectives. During the year under consideration, the assessee earned income from sale of software licenses to third party customers in India. The assessee filed return of income on 27-06-2019 declaring a total income at Nil in response to the notice u/s. 148 of the Act. We note that the assessee being a resident of USA adopted the beneficial provisions of India-USA tax treaty. In 148 proceedings, the AO requested the assessee to furnish details of software products sold by the assessee to Indian customers and asked to submit why the receipts from sale of software licenses in India should not be taxable as Royalty. It was explained that the assessee has received amounts to an extent of 19,69,76,597/- from sale of software licenses to its end user customers in India either directly or indirectly through authorized distributors, reseller or service provider. Further, it was stated no customization of assessee’s software has been done at the customer’s end except for integrating the software with existing system. Every end user of assessee software has to accept and abide by the End User License Agreement. The End User License Agreements specifically prohibit the end user to do modify, copy, sublicense, rent, lease or transfer any portion of the software. Further, it was contended the said license agreements prohibit the end user to do reverse engineer, decompile, disassemble, modify, translate, make any attempt to discover the source code of the software to create derivative work of the licensed software except permitted by the applicable laws.
6. Apart from the above, it was specifically brought to the notice of AO in 148 proceedings that the issue of chargeability of tax in respect of consideration received from sale of software licenses is held to be not chargeable as Royalty by the Pune Bench of Tribunal in assessee’s own case for A.Y. 2013-14 in ITA No. 387/PUN/2017 but, however, the AO in pursuance of directions of DRP held the said consideration from sale of software licenses as taxable as Royalty in India.
7. Before us, the ld. AR, Shri Nageswar Rao submits that the issue raised in ground No. 1 is similar to the ground raised in ITA No. 2452/PUN/2017 in assessee’s own case for A.Y. 2014-15. The ld. AR in support of his contentions drew our attention to the grounds raised in Form No. 36 and the finding rendered by this Tribunal vide its order dated 11-01-2021 is squarely applicable to the issue raised in ground No. 1.
8. The ld. DR, Smt. Amrita Misra fairly conceded that the issue raised before this Tribunal is similar and based on identical facts as that of in assessee’s own case for A.Y. 20 14-15.
9. Having heard both the parties and on perusal of order of Tribunal in assessee’s own case for A.Y. 2014-15 in ITA No. 2452/PUN/2017, order dated 11-01-2021 we note that the assessee claimed revenue from sale of software licenses in India as not chargeable to tax in the absence of it having any permanent establishment in India. Further, it was explained that the software licenses sold by it were meant for internal business purpose of the users and not for commercial exploitation and the assessee did not transfer any right in respect of the copyright in the said software and only right to use the software was transferred, also referred the decision of Co-ordinate Bench in assessee’s own case for A.Y. 20 13-14 which held the sale of computer software is sale of copyrighted article and not transfer of copyright in the software and held the same as business income and not Royalty in respect of sale of software licenses to end users.
10. We note that the ld. DR therein highlighted the assessee’s acceptance of sale of software licenses to distributors and the resellers. The Tribunal considered the same and rejected the contention of Revenue that the resellers have been given a license by the assessee for consideration to commercially exploit such license at their end. The relevant portion has been discussed in paras 11 to 13.
11. This Tribunal in A.Y. 20 14-15 also discussed the transactions between the assessee and its distributors, which has also been claimed by the ld. DR to be in the nature of Royalty. On an examination of distributors agreement held the distributors, except for passing over the assessee products as acquired by them from the assessee, do not acquire any right or title in the intellectual property used in the software which always remains with the assessee and at no stage the right to use the copyright in the software is licensed either to the distributor or the reseller. Thereby this Tribunal held the income earned by the assessee from sale of software, either directly to the customers in India or through distributors or resellers constitutes its business income and not the Royalty income and as such business income is not taxable in India as the assessee did not have any Permanent Establishment in India. The relevant portion of the order is reproduced here-in-below for ready reference :
“11. Article 12(3) of the DTAA between India and the USA defines the term Royalties to mean:
“(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and
(b) payment of any kind received as consideration for the use of, or the right to use, the industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8.”
12. On going through the language of Article 12 defining the term `Royalties‟, it is palpable that the same means a consideration for the use of, or the right to use, any copyright of a literary work etc. Selling or sub-licensing or transferring Copyright means assigning a right to copy the `work‟ for commercial exploitation and not simply using the work for self consumption. Assigning a right to copy for commercial exploitation is different from the right to use the copy of the work for self purpose. Ex consequenti, giving a right to copy is a salient feature of the term `Royalties‟ under the DTAA, which means that the licensee must acquire a right to copy the work or the intellectual property so acquired on the goods sold or services rendered by him during the course of his business. But where the intellectual property or work is simply used by the licensee for his internal use and not for exploiting it commercially for earning income directly, the consideration paid by him ceases to be a royalty income in the hands of the licensor. Simply allowing one-to-one user of the intellectual property or a product using intellectual property is not the same thing as the other person commercially exploiting such a right in his business for selling the work as it is or selling products or services using the intellectual property. It is only when the licensee gets a right to copy the intellectual property either on the goods/services sold by him to customers or to sub-license the same to third persons for commercial exploitation, that the consideration amounts to royalty in the hands of the licensor.
13. Reverting to the factual panorama, it is seen that Resellers have not been conferred with any right to copy the software for further sale by them. They just purchase the Symantec Products as such for resale to the end customers in Each item of Symantec product is to be separately purchased by them for resale. The position would have been otherwise, if the assessee, instead of selling Symantec Products to the Resellers, would have licensed them the right to copy it for their commercial exploitation, which would have merited consideration of the matter from a different perspective. In our considered opinion, the position qua the sale to Resellers is no different from the direct sales made by the assessee to its end customers in India. Thus the essential ingredient of the Royalty, being, granting of use or right to use the copyright is lacking insofar as sale to Resellers is concerned.
14. Now we move forward to examine the nature of transactions between the assessee and its Distributors, which has also been claimed by the ld. DR to be in the nature of Royalty. For this purpose, we have perused the Distributors Agreement, whose copy has been placed at page 71 onwards of the paper book. Para 1(b) of the Agreement states that the: `Distributor‟s appointment is limited to distribution of Symantec Products to resellers and specifically excludes resale of the Symantec Products to end-users. Symantec grants the distributors the nonexclusive, non-transferable right during the Term to acquire and distribute Symantec Products to Resellers in the territory to allow such resellers to distribute Symantec Products to end-users”. Para 1(c) of the Agreement further states that the: „Distributor‟s appointment only grants to Distributor a license to transfer such Symantec Products to Distributor‟s customers, and does not transfer any right, title or interest in any such software to Distributor‟. Clause 2 of the Agreement enumerates “Obligations of Distributor”. Para 2(g) states that: `Distributor will distribute Symantec Product to resellers only under the terms of the end-user license agreement‟. Para 5 of the Agreement deals with `Prices, Per Copy License Fees and Payment‟. It states that Symantec will invoice distributors on the basis of the Symantec buy price list for the Symantec Products. Para 5(g) deals with `Appliances Return or Exchange‟. It states that the: `Distributor may exchange to Symantec a portion of the Appliance(s) which were shipped to Distributor hereunder during any calendar quarter during the term of this Agreement to the extent that Distributor has more than four (4) weeks of inventory of such Appliance(s)‟. Clause 8 of the Agreement, which is relevant for our purpose, deals with `Trademarks, Trade Names and Copyrights‟. Para 8(a) states that: `During the term of this Agreement, Distributor is authorized by Symantec to use the trademark “Symantec”, the Symantec logos for Symantec Products and the designation “Authorized Symantec Distributor” in connection with Distributor‟s advertisement, promotion and distribution of Symantec Products. Distributor‟s use of such trademark, logos and designation will be in accordance with Symantec‟s policies in effect from time to time.‟ Para 8(b) states that: `Distributor agrees not to alter, erase, deface or overprint any notice on anything provided by Symantec‟. Clause (c) of para 8 has caption – `No Distributor Rights in Trademarks or Copyrights‟. Clause (e) or para 8 states that: `Distributor will not alter, reverse engineer, decompile, disassemble, rent, electronically distribute or market by interactive cable, remote processing services Symantec Products.‟
15. On going through the above clauses of the Distributor Agreement, it becomes immensely clear that the Distributors have been appointed by the assessee in India to serve a link with Resellers. The Distributors simply acquire the Symantec Products which they specifically sell to the Resellers. Trademarks, Trade Name and Copyrights in Symantec Products remain with the assessee and the Distributor cannot make any deviation in the Symantec products in any manner. Thus, it is overt that the assessee has appointed Distributors in India to facilitate sale of Symantec Products. The Symantec products sold as such to the Distributors do not confer any right on them to copy the software license. The Distributors, except for passing over the Symantec products as acquired by them from the assessee company, do not acquire any right or title in the intellectual property used in the software which always remains with the assessee.
16. The above discussion boils down that be it a case of sale to the Resellers or the Distributors, the assessee only transfers Symantec Products to them. It is not as if the Distributors or the Resellers acquire any right from the assessee to copy the software and then exploit it commercially. Their transactions are confined to purchasing specific Symantec Products from the assessee and then eventually selling the same to the end customers in India. There is no qualitative difference between the direct sales made by the assessee to its customers in India, which have already passed the scrutiny by the Tribunal in assessee‟s own case for earlier year and the sales made by the assessee through the Distributors or the Resellers. In both the sets of circumstances, it is only one-to-one sale of the Symantec Products by the assessee and at no stage the right to use the copyright in the software is licensed either to the Distributor or the Reseller. Thus, the decision taken by the Tribunal in the context of direct sales made by the assessee to end customers in India applies with full force insofar as the sales through Distributors and Resellers are concerned. That being the position, we hold that the income earned by the assessee from sale of software, either directly to the customers in India or through Distributors or Resellers constitutes its business income and not the Royalty income. As admittedly the assessee did not have any Permanent Establishment in India, such income will not magnetize Indian taxation. We, therefore, overturn the impugned order.”
12. In the light of the above, we hold the sale consideration received for sale of software products from the end users, distributors or resellers is business income and not Royalty income and as such it is not taxable in Thus, the final assessment order passed by the AO is set aside and ground No. 1(a) raised by the assessee is allowed.
13. Ground No. 1(b) raised by the assessee requires no adjudication in view of our decision in ground No. 1(a) here-in-above. Thus, ground No. 1(b) raised by the assessee is dismissed as infructuous.
14. In the result, the appeal of assessee in ITA No. 505/PUN/2020 is
15. Both sides are unanimous in stating that the issues raised in the appeal and the facts in ITA No. 506/PUN/2020 are identical to ITA No. 505/PUN/2020. Since, the facts in ITA No. 506/PUN/2020 are similar to ITA No. 505/PUN/2020, the findings given by us while deciding the appeal of assessee in ITA No. 505/PUN/2020 would mutatis mutandis apply to ITA No. 506/PUN/2020, as well. The appeal of assessee is allowed, accordingly.
16. To sum up, both the appeals of assessee are allowed.
Order pronounced in the open court on 05th February, 2021.