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2024 Supreme(Online)(ITAT) 11
INCOME TAX APPELLATE TRIBUNAL
Shri Challa Nagendra Prasad, Dr. B. R. R. Kumar, JJ
Finastra International financial Systems PTE Ltd. Singapore – Appellant
Versus
ACIT Circle 1(3)(1) International Tax New Delhi – Respondent
ITA 915/DEL/2023
Sh. Suryanarayan, Sr. Adv., Ms. Mansa, Adv., Sh. Vizay B. Vasanta, CIT-DR
The court ruled that software distribution agreements do not transfer copyright, aligning with the Supreme Court's principles on royalty classification.
Headnote:(A) Income Tax Act, 1961 - Sections 143(3), 144C, 9(1)(vi), 9(1)(vii) - India-Singapore Double Taxation Avoidance Agreement - Appeal against assessment of income as royalty - The Assessing Officer treated receipts from software sales as royalty, contrary to the principles established in Engineering Analysis Centre of Excellence Pvt. Ltd. - The court found that the agreements did not transfer copyright, merely granting usage rights. (Paras 3, 6, 13)
(B) Appeal - The court held that the AO misinterpreted the agreements, which were consistent with the Supreme Court's ruling, and thus the appeal was allowed. (Paras 13, 14)
Facts of the case:
The assessee, a Singapore entity, contested the AO's assessment of its income from software sales as royalty, arguing that it merely distributed software without transferring copyright. (Paras 3, 4)
Findings of Court:
The court concluded that the AO's interpretation of the agreements was incorrect and aligned with the Supreme Court's judgment. (Paras 13, 14)
Issues: The main issues included whether the receipts from software sales constituted royalty and the interpretation of the agreements between the parties. (Paras 6, 13)
Ratio Decidendi: The court reaffirmed that the agreements did not transfer copyright and were consistent with the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. (Paras 13)
Result: Appeal allowed.
ORDER
Per Dr. B. R. R. Kumar:-
The present appeal has been filed by the assessee against the order of Assessing Officer dated 30.01.2023 for the A.Y. 2020-21.
2. The assessee has raised the following grounds of appeal are as under:-
“1. That the order of the Respondent/Assessing Officer ('AO' for short) dated 30.01.2023, passed under section 143(3) read with Section 144C 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, provisions of the Act and the India-Singapore Double Taxation Avoidance Agreement ("the DTAA"), and is liable to be set aside.
2. That the AO, contrary to the facts of the case and material on record, erred in assessing the income of the Appellant at Rs. 23,21,52,964/-, by treating the receipts to be in the nature of 'royalty' under Section 9(1) (vi) of the Act as well as Article 12(3) of the DAA.
3. That the AO erred on facts and in law in treating the receipts from sale/distribution of software in the hands of the Appellant as '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), which is squarely applicable to the present case
4. That the AO failed to appreciate that the Appellant is a mere distributor of the software and that ownership of the copyright continues to remain with the original owner of the software, throughout the term of the agreement. Therefore, the Appellant grants only the use of the software with limited, non-exclusive and non-transferable right to third party and thus, involves only the sale of the copyrighted article.
5. That the AO, contrary to the facts of the case and material on record, grossly erred in holding that the Indian Associated Enterprise ('AE' for short) has the authority to reproduce the software and has therefore received the source code, when in fact, no right in the software, much less the source code was parted with the Indian distributor.
6. That the AO ought to have appreciated that the right to "reproduce" merely pertains to duplication of software and does not lead to the conclusion that source code in the software is parted with.
7. That the AO ought to have appreciated that the Appellant is merely the sub-licensor of the software and does confer the AE/third party any rights on the source code.
8.That in any event, the AO erred in misinterpreting the agreement between the Appellant and its AE by misconstruing the AE to be a sub-licensor, when in fact, the Appellant is the sub-licensor and AE is the distributor.
9. That therefore, proceeding on the above erroneous footing, the AO erred in holding that (i) the AE is permitted development on the software for further sale, thereby excluding it from the definition of shrink wrapped software; (ii) the AE is rendering reverse training and associated services, and consequently arrived at incorrect conclusions.
10. That the AO grossly erred in misinterpreting clause 12 of the agreement between the Appellant and its AE and alleging that the clause mentions the copies of the software for onward sale, without appreciating that the clause does not confer any right to make copies and explicitly states that the ownership remains with the licensor.
11. That the AO grossly erred in misinterpreting the facts of this case and concluding that the Appellant's case is not covered by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis (supra).
12. That the AO, by referring to the features of the software, grossly erred in concluding that the software distributed by the Appellant is not a shrink-wrapped software, without appreciating that the features or applications of the software have no bearing on whether the receipts are in the nature of 'royalty'.
13. That the AO grossly erred in misinterpreting clauses of the agre
