DCIT Vs Software One Pte Ltd. (ITAT Delhi)
Introduction: The case of DCIT vs. Software One Pte Ltd. (ITAT Delhi) centers around the taxation of software sales and the characterization of royalty payments. The dispute arises from the distinction between copyright ownership and distribution rights in the context of software distribution by a non-resident entity.
Analysis: The assessee, a distributor of software, purchases software from non-resident manufacturers and sells them to distributors and customers in India. The ITAT Delhi observed that the assessee is not the creator or manufacturer of the software and therefore does not own the copyright over the software. The software sold by the assessee is ready-to-use off-the-shelf copyrighted articles owned by companies like Microsoft and Adobe. As a mere trader of software, the assessee does not have ownership or domain over the software it sells.
Referring to the Supreme Court’s decision in Engineering Analysis, the ITAT Delhi categorized software sales into four distinct categories. The third category, which applies to the assessee’s case, involves a non-resident distributor purchasing software from a foreign seller and reselling it to resident Indian distributors or end-users. The Supreme Court held that payments made by resident Indian end-users or distributors to non-resident software manufacturers/suppliers, for the resale/use of the software through end-user license agreements or distribution agreements, are not considered royalty for the use of copyright in the software.
In line with the Supreme Court’s ruling, the ITAT Delhi upheld the decision of the learned Commissioner (Appeals) to delete the addition made by the Assessing Officer. The ITAT also noted that the Hon’ble Jurisdictional High Court, in the case of Microsoft Corporation vs. ADIT, had reversed the decision of the Tribunal, further supporting the assessee’s position.
Conclusion: The case of DCIT vs. Software One Pte Ltd. sheds light on the taxation of software sales and the distinction between copyright ownership and distribution rights. The Supreme Court’s ruling in the Engineering Analysis case provides clarity on the treatment of payments made for software resale/use. In this case, the ITAT Delhi upheld the decision of the learned Commissioner (Appeals) and dismissed the grounds raised by the Revenue.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeal by the Revenue arises out of order dated 18.10.2021 passed by the learned Commissioner of Income Tax (Appeals)-43, New Delhi pertaining to Assessment Year 2017-18.
2. The grievance of the Revenue is with regard to the decision of learned First Appellate Authority holding that the amount received by the assessee from sale/distribution of software is not royalty within the meaning of Article 12(3) of India – Singapore Double Taxation Avoidance Agreement (DTAA).
3. Briefly the facts are, the assessee is a non resident corporate entity incorporated under the laws of Singapore and a tax resident of Singapore. For the assessment year under dispute assessee filed its return of income on 31.03.2018 declaring total income of Rs.1,56,50,870/-. As observed by the Assessing Officer, the assessee is engaged in the business of providing end to end software and cloud technology solution to its clients. In the year under consideration the assessee entered into certain transactions in India and earned revenue as under:
