The Income Tax Appellate Tribunal ( ITAT ), Hyderabad Bench has recently, in an appeal filed before it, while granting relief to S & P Global India, held that payment for the use of shrink wrap computer software is not royalty.
The aforesaid observation was made by the Hyderabad ITAT, when an appeal was preferred before it by the assessee, as against the order dated 25/07/2022, passed by the Commissioner of Income Tax (Appeals), Hyderabad (CIT(A)), in the case of M/s. S&P Capital IQ (India) Private Limited, the assessee, for the assessment year 2014-15.
Briefly stated, the relevant facts of the case were that the assessee Company was engaged in the business of providing Information Technology Enabled Services (ITES) to its parent company S&P Global Market Intelligence LLC, USA (earlier known as Capital IQ Inc., USA), and during the year under consideration, the assessee had made certain remittances aggregating to Rs. 14,95,53,994/- to S&P Global Inc. (formerly known as McGraw Hill Financial Inc.) towards the reimbursement for software licenses.
Thereafter, on completion of the proceedings, the Assessing Officer passed an order under section 201(1)/(1A) of the Income Tax Act, on June 15, 2018, treating the said remittances to be liable to a tax deduction as ‘Royalty payments’ and thereby raising a demand of Rs.4,66,60,846/-. And, subsequently, he made an addition of Rs. 2,99,10,799/- towards the 20% of TDS on the software license payment in the nature of royalty, and also charged interest of Rs. 1,67,50,047/- under section 201(1A) of the Income Tax Act.
Aggrieved by such an action of the Assessing Officer, the assessee preferred an appeal before the CIT(A) and submitted that the matter is squarely covered by the decision of the Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited. However, the CIT(A) recorded that the assessee did not produce the agreement/terms of usage of software, the restrictions and rights granted under the Copy Rights Act.
He further found that the invoices submitted by the assessee do not specify whether the licenses are in the nature of end user license, enterprise license, distributable or commercially exploitable license, and hence that in the absence of undertaking any detailed examination on this aspect, it would be difficult to say whether or not the decision of the Apex Court is applicable to the facts of the case. And, it is being aggrieved by the same, that the assessee has preferred the instant appeal before the Hyderabad ITAT.
In the appeal, it was stated by Shri K.C Devdas, the AR for the assessee that the Assessing Officer himself recorded that the licenses obtained by the parent company from Microsoft could have directly been obtained by the licensee himself and, therefore that there is no role for the parent company in the entire exercise, except holding license in its own name and facilitating the assessee to use the same, and, therefore that , there is absolutely no need to look into the agreement between the assessee and the parent company.
He further submitted that the invoices submitted by the assessee clearly establish that it is only a matter of reimbursement and further that the assessee is bound by the terms of license granted by Microsoft and Dell, irrespective of the nature of the task performed on this software, and therefore that, the decision of the Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited, is thus applicable to the facts of the present case.
However, per contra, Shri Rajendra Kumar, the CIT-DR, on the other hand, heavily relied upon the decision of the authorities below, thereby submitting that unless the facts are verified, the applicability of the decision cannot be decided.
Hearing the opposing contentions of either side and thereby perusing the materials available on record, the Hyderabad ITAT observed:
“We have gone through the record in light of the submissions made on either side. It is a fact that the learned Assessing Officer herself recorded that though the license agreement was entered into by the parent entity of the assessee with Microsoft and Dell and the assessee is provided with the same for its use, the invoices issued by Microsoft specifying the various usages by the users, clearly show that the assessee could have directly accessed the software under the license from the Microsoft and Dell. She further recorded that the parent company in fact has no role in the entire exercise except holding the license on its name but as a matter of fact irrespective of the nature of the task performed on this softwares, it is the assessee who is using it, is bound by the terms of license issued by the Microsoft and Dell. She further held that the payments made by the assessee to the parent company for the use of the software licenses are in substance the payments made to Microsoft and Dell for the use of their software.”
“The findings recorded by the learned Assessing Officer very clearly establish that there is no income component to the parent company in the payments made by the assessee to it towards software license. It shows that the parent company is only a pass-through entity insofar as the software payment license is concerned. There is no doubt that the software in question is used by the assessee in rendering their services to the parent company itself and by nature, it is shrink wrap computer software. In these circumstances, when the learned Assessing Officer herself recorded that the parent entity has no role to play in the transaction of the assessee’s access to the software, the agreement between the parent entity and Microsoft and Dell does not appear to be much relevant. Suffice to say that through the invoices produced by the assessee and as found by the learned Assessing Officer, there is no component of income involved in this license transaction accruing to the parent entity”, the ITAT commented.
And adding to its comment, a coram consisting of Rama Kanta Panda, the Accountant Member, along with K Narasimha Chary, the Judicial member, noted:
“In view of the fact that the payments made by the assessee were essentially for making use of the shrink wrap computer software wherein the assessee has a non-exclusive and non-transferable license enabling the use of the programme in the copyrighted product, there is no transfer of any copyright in the product nor the assessee was granted any commercial right to exploit it other than for permissible usage. The matter is covered by the decision of the Engineering Analysis Centre of Excellence Private Limited (supra), respectfully following the same, we hold that the impugned payments made by the assessee do not fall in the definition of royalty and consequently, do not attract any addition on that score.”
Thus, allowing the assessee’s appeal, the Hyderabad ITAT held:
“With this view of the matter, we direct the learned Assessing Officer to delete the same. Grounds raised by the assessee are allowed accordingly. In the result, the appeal of the assessee is allowed.”
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