TMI Blog2022 (9) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... rial with it, goes to show that the transaction between the Assessee and the MGI cannot be termed as ROYALTY but in fact the same amounts to sale of goods only on the basis of distributorship/license. Applicability of provisions of the Act u/s 195 qua payments made by the Assessee to the MGI (foreign company) having no PE in India and therefore not assessable to income tax in India - In the instant case admittedly the Assessee dealt with the MGI which is admittedly a foreign company and having no PE in India and thus the case of the Assessee falls under 2nd category of cases which deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users and as per dictum of the Hon ble Apex Court, the Assessee was not liable to deduct any TD Sunder Section 195 of the Income Tax Act, hence respectfully following the dictum of the Hon ble Apex Court in Engineering Analysis Centre for Excellence Private Limited [ 2021 (3) TMI 138 - SUPREME COURT] , we are inclined to delete the addition made by the Ld. AO and sustained by the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport sales with respect to the software products developed by MGI. Under the direct sales model MGSS undertakes purchase of products from MGI and resells these products to customers in India. MGSS enters into product sale and support agreement with customers in India. Under the distribution agreement, MGSS had made payment of Rs.95,222,391 in the month of March 2011 to MGI for purchase of software products for distribution to end customers in India. The payment for purchase of software products was made without deduction of tax at source. 3.1 The Ld. AO considering the facts to the effect that the payment for purchase of software products was made without deduction of tax at source and the Assessee has not complied with the provisions of section 195 of the Act, initiated the proceedings u/s 201(1) of the Act by issuing a notice dated 20.06.2011 asking the Assessee to show cause as to why it should not be treated as an Assessee in default qua tax not deducted at source in respect of payment of Rs. 95,222,391/-. 3.2 Against the said show cause notice, the Assessee vide submission dated 01.07.2011 claimed that the MGI has appointed the Assessee as distributor with non-exclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y payments to MGL It is liable to pay the tax deductible in this regard along with the interest u/s. 201(1A). 5- Tax Liability of the Assessee; The total payments made by the Assessee to MGI towards purchase of software since its inception, without deducting the tax at source as per the provisions of Sec. 1.95, are as under: Financial year Payment in Rs. 2005-06 97,01,358 2008-09 7,03,21,114 2009-10 T51,99,739 2010-11 11,08,70,755 2011-12 10,96,93,365 Total 31,57,86,331 The tax liability of the Assessee, MGSS, u/s.201(1) 201(1A) for the above financial years is determined as under: Financial year Asst. Year Tax u/s.201(l) Tax u/s.201(lA) Total 2005-06 2006-07 970154 6807065 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law the CIT(A) erred in upholding the action of AO in g the appellant as an assesse in default u/s 201(1) r.w section 195 of the Act for non-deduction of tax on payments of Rs 97,01,538/- made to M/s Mentor Graphics (Ireland) Limited (MGI). 3.1 That on facts and in law the CIT(A) erred in holding that payments made to MGI is taxable in India as income from Royalty as defined under the provisions of the Income Tax Act and the Agreement for Avoidance of Double Taxation (AADT). 4. That on facts and in law the CIT(A) erred in holding / observing that: a) From the perspective of customer, the appellant is the owner of copyright of the software. b) The appellant has been authorized by MGI to issue copies of software. c) The activities by the appellant fall within the scope of section 14 of the Copyright Act, 1957. d) That copyright in software has been transferred by MGI to the appellant for the purposes of commercial exploitation. 6.1 The Assessee has submitted that payments made to MGI cannot be determined as Royalty as defined under the provisions of the Income Tax Act and the Agreement for Avoidance of Double Taxation (AADT) and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign, non-resident supplier or manufacturer. ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, nonresident suppliers or manufacturers and then reselling the same to resident Indian end-users. iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, nonresident seller, resells the same to resident Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users. 27. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provisio ncontainedinSection9readwithSection 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, chargeable under the provisions of [the] Act , to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 53. There can be no doubt as to the real nature of the transactions in the appeals before us. What is licensed by the foreign, non-resident supplier to the Distributor and resold to the resident end user, or directly supplied to the resident end-user, is infact the sale of a Physical object which contains an embedded computer programme , and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assesses , is the law declared by this Court in the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in Section 195 of the Income Tax Act were not liable to deduct any TDS under Section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph-4 of this judgment. 174. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed. 10. As per International Distribution Agreement between Assessee and Mentor Graphics (Sales and Services) Private Limited, the Assessee was appointed as distributor on the following terms and conditions, we are reproducing relevant part only: 2. 1 Appointment as Distributor . MGI hereby appoints MGSS as its Distributor with the nonexclusive right to market the Products in the Indian region, subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, on behalf of MGI, or to transfer, release or waive any right, title or interest of MGI. 2.4 Reservation of Rights . MGI hereby reserves all right to the Products. Confidential information, Intellectual Property Rights and to any other technology owned by or licensed to the MGI that are not specifically granted to the MGSS hereunder. MGSS specifically acknowledges that (i) no right granted by MGI under this Agreement shall entitle MGSS to sublicense to any other Person the Confidential information, Intellectual Property Rights and any other technology owned by or licensed to MGI; (ii) MGI may discontinue developing, producing or providing any or all Products at its discretion at any time; and (ii) MGI reserves all rights to prosecute infringement actions in the PacRim. 7.1 Notices, Marks, Legends and Name. MGSS shall not alter, deface, remove, cover, mutilate, or add to. in any manner whatsoever, any patent notice, copyright notice, trademark, trade name, serial number, model number or brand name that MGI may attach or affix to the Products, except to translate them into another language for the better protection of MGI's Intellectual Property Rights. 10.1 Fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. (d) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users. 11.1 The Hon ble Apex Court in in para no. 173 of its judgment finally held the persons of all four categories, referred to in Section 195of the Income Tax Act were not liable to deduct any TD Sunder Section 195 of the Income Tax Act. For ready reference the conclusion is again reproduced below: That the amounts paid by resident Indian endusers/ distributors to non resident computer software manufacture/ Suppliers as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India as a result of which the persons referred to in Section 195of the Inc ..... 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