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2022 (6) TMI 510 - AT - Income TaxIncome accrued in India - royalty receipt - payments received by the Appellant on sale of software to Indian resellers/distributors - chargeable to tax under Section 9(1)(vi) of the Income-tax Act, 1961 and under Article 12 of the India- USA DTAA") - whether payments in different cross-border software transactions, i.e. payments made by end users or distributors (resident as well as non-resident) of software and payments made in respect of software embedded in the hardware, qualify as "royalty" under the Income Tax Act (ITA) as well as various Double Taxation Avoidance Agreements (DTAAs)? - HELD THAT:- The issue is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT] answered in terms of following the Hon'ble Supreme Court referred to the terms of the agreements entered into with various parties for the use of software and noted that distributors were granted a non-exclusive and non-transferable license to resell the software. Furthermore, end users were granted a limited right to use the software without any right to sub-license, transfer, reverse engineer, modify or reproduce the software, in this light, the Hon'ble Supreme Court examined various provisions of the Copyright Act, 1957 in force in India (ICA) and held that a limited right to use the software, make copies of the software for the purpose for which it was granted and without grant of rights of the copyright owner (such as reproduction, issuing copies, commercial exploitation), does not qualify as grant of a copyright under the ICA. As noted that the definition of royalty under the ITA, prior to amendment in 2012, as well as the DTAAs under consideration [which are similar/identical to the OECD Model Convention (MC)], necessarily requires grant of a copyright in software to the licensee for the payment to qualify as royalty. Since the payment made by end users and distributors did not involve payment for grant of any right specified under the ICA, payments made by the distributors and end users do not qualify as royalty under the DTAA, as well as the pre-amended provisions of the ITA. Such payments qualify as business income not taxable in India under the DTAA. The machinery provisions of withholding under the ITA in respect of payment made to non-resident (NR) taxpayers is triggered only in respect of payments chargeable to tax in India after considering the provisions of the ITA as well as the DTAA. In case where a payment is not chargeable to tax in India under the DTAA, then no withholding is required on such payments. In doing so, the Hon'ble Supreme Court distinguished its earlier decision in the case of PILCOM on the grounds that in that ruling, the SC was concerned with payments to NR sportspersons and the withholding provisions in respect of such persons were governed by different provisions of the ITA which were not linked to the chargeability of income. Accordingly, respectfully following the precedent from the Hon'ble Supreme Court as above, we set-aside the orders of the authorities below and decide the issue in favour of the assessee.
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