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2024 Supreme(Online)(ITAT) 1838
INCOME TAX APPELLATE TRIBUNAL (BANGALORE BENCH)
Shri Chandra Poojari, ACM, Shri Keshav Dubey, JM
M/S. ZENDESK INC. UNITED STATES OF AMERICA – Appellant
Versus
DEPUTY COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION) CIRCLE-2(2) BANGALORE – Respondent
IT(IT)A No.1079/Bang/2023
For the Appellants/Petitioners: Shri T. Suryanarayana
For the Respondents: Ms. Neera Malhotra
Payments for access to software platforms do not constitute royalty under the India-USA DTAA if no copyright or exclusive rights are transferred to the user, thus qualifying as business profits.
Headnote:(A) Income Tax Act, 1961 - Sections 143(3), 144C(13) and 9(1)(vi) - Double Taxation Avoidance Agreement (DTAA) between India and USA - Appeal against assessment order treating software income as royalty - The Assessing Officer asserted that payments for a CRM platform amounted to royalty under Section 9(1)(vi) and Article 12 of the India-USA DTAA - Court analyzed the nature of services provided under Software-as-a-Service (SaaS) model, emphasizing that customers only received access to the software without rights to the underlying copyright - The court determined that subscription payments do not constitute royalty as they do not include any rights to copyright or exclusive access - (Paras 4.1-4.10).
(B) The classification and taxation of income related to software services depend on whether customers receive significant rights to the underlying intellectual property - Mere access to a standardized platform does not qualify as a right to use copyright or intellectual property under the DTAA - Court concluded that subscription fees are for business profits instead - (Paras 6.6-6.10).
Facts of the case:
The assessee, a US-based software company, provides standard SaaS platforms for customer relationship management to Indian clients, claiming no income accrues in India as the payments do not qualify as ‘royalty’ under the DTAA (Paras 3-3.4).
Findings of Court:
The appeal was partly allowed, establishing that payments received do not qualify as royalty under the DTAA, as the company merely grants access without rights to the copyright of software (Paras 6.9-6.10).
Issues: The main issues related to the characterization of income as royalty and the appropriate taxation treatment of SaaS services provided to Indian customers.
Ratio Decidendi: The court emphasized that, under the DTAA, payments for the use of software where rights to copyright are not transferred do not constitute royalty, thereby affirming previous case law (Paras 6.7-6.10).
Result: Appeal allowed.
| Table of Content |
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| 1. context of appeal, including grounds raised. (Para 16) |
ORDER
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of DCIT (International Taxation) Circle-2(2), Bangalore passed u/s 143(3) r.w.s. 144C(13) of the Act. The assessee raised following grounds of appeal:
The grounds mentioned herein are without prejudice to one another:
1. That the order of the Respondent/Assessing Officer (‘AO’ for short) dated 16.10.2023, passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (‘the Act’), pursuant to the directions of the learned Dispute Resolution Panel (‘the DRP’ for short), is bad in law, contrary to the facts and circumstances of the case and is liable to be set aside.
2. On the facts of the case and in law, the AO erred in making an addition of Rs. 9,64,79,070/- to the total income of the Appellant for assessment year 2021-22.
3. That the DIN purportedly allotted to the directions dated 22.09.2023 issued by the DRP cannot be authenticated on the e-portal of the Income-tax Department and therefore, the directions issued contrary to the Circular No.19/2019 dated 14.08.2019 issued by the Central Board of Direct Taxes, is invalid, and consequently, the final assessment order is bad in law and liable to be quashed.
I. Taxability of amount received by the Appellant from its Indian customers for providing access to standard customer relationship management (CRM) platform as ‘royalty’.
4. That the AO and the DRP erred on facts and in law in treating the income earned by the Appellant for providing access to the CRM platform as ‘royalty’ under Section 9 (1)(vi) of the Income-tax Act, 1961 (“the Act”) and also under Article 12 of the India-USA Double Taxation Avoidance Agreement (“India-USA DTAA”).
5. That the AO and the DRP erred on facts and in law in holding that the Appellant is not providing a standard software solution which is accessible through a platform and is instead offering its customers ‘the use’ or ‘right to use’ a design, model or process and hence is liable to tax in India as per the Act as well as the India-USA DTAA, without appreciating that the sale of software as a service is a sale of ‘copyrighted article’ and not ‘copyright’ and accordingly, the revenue from sale of software as a service is in the nature of business income not taxable under the India-USA DTAA in the absence of a permanent establishment of the Appellant in India.
6. That the AO and the DRP, in placing undue reliance on the expression “for the use of”, failed to appreciate the difference between the use of a platform vis-à- vis the use of the copyright or other intellectual property in the platform.
7. That the AO and the DRP failed to appreciate the fact that the software used in each such solution offered by the Appellant is standard in nature, and not only is there no change made by the Appellant to the software code or to the engineering of the software solutions at the customers’ request, the customers of the Appellant are also not permitted to modify the software code or reverse engineer the software.
8. That the AO and the DRP erred in holding that the payment received by the Appellant from its Indian customers are for the use of the Appellant’s software and would constitute ‘royalty’ without appreciating the settled principles laid down by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT and another, [(2021) 125 taxmann.com 42 (SC)] wherein it was held that the payment towards use of non-exclusive and non-transferable software/ computer program would not be in the nature of royalty under the India-USA DTAA.
9. That the AO and the DRP erred in holding that the Master Service Agreement (‘MSA’) entered by the Appellant with its Indian Customers does not expressly prevent reverse engineering, without considering the fact that the terms of the MSA specifically provide that Appellant’s customers are not permitted to de
