Computer software affixed onto hardware and sold as an integrated unit/equipment cannot be regarded as royalty

Wherein computer software is affixed onto hardware and is sold as an integrated unit/ equipment cannot be regarded as royalty

M/s. Autodesk Asia Pte. Ltd. Vs ACIT (International Taxation) (ITAT Bangalore)

• IT(IT)A No.1274/Bang/2019
• Assessment year: 2016-17
• Date of Judgement/Order: 09/08/2021

Facts of the Case

The assessee is a company incorporated in Singapore and is a tax resident of Singapore. The assessee is engaged in the business of distribution of computer software and providing ancillary services in the Asia Pacific region. During the relevant previous year, the assessee sold software and provided certain ancillary services to its Indian distributors/customers. In certain cases, the assessee sold hardware together with embedded software to Indian parties. The AO treated the money received by the assessee on sale of software licence along with associated hardwires to the Indian customers as in the nature of royalty and brought the same to tax. The assessee filed the objections before the Dispute Resolution Panel (DRP) against the action of the AO but the DRP confirmed the order of the AO.

Similar issue in assessee’s own case for Assessment Year 2010-11 to 2013- 14, on this tribunal order held that the amount received by the assessee cannot be regarded as royalty and therefore the same cannot be brought to tax.

ITAT held that

The issue involved in present appeals has been set at rest by the decision of Hon'ble Supreme Court in a recent case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT reported in 2021 SCC online SC 159. Hon'ble Supreme Court while considering the issue of royalty on the sale of software have considered the decision of Hon'ble Karnataka High Court in the case of CIT vs Samsung Electronics Co Ltd (2012) 345 ITR 494 and various other decisions.

On the basis of that, the case may be grouped into four categories

1. The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer.
2. The second category of cases 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.
3. The 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.
4. The fourth category includes cases wherein computer software is affixed to hardware and is sold as an integrated unit/ equipment.

It is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright.

Conclusion

Assessee falls within the second and fourth category analysed by the Hon'ble Supreme Court. Respectfully following the above view by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (Supra). Tribunal held that purchase of software in the present facts does not amount to give rise to any taxable income in India as a result of which provisions of sec.195 of the Act are not attracted and hold that consideration received for the sale of software with associated hardware cannot be regarded as royalty and cannot be brought to tax in India.