The Commissioner Of Income Tax, Chennai v. M/S.dassault Systems Simulia Corporation (Formerly Known As Abaqus Inc) Rising Sun Mills

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 07.04.2021 CORAM THE HON'BLE MR.JUSTICE M. DURAISWAMYANDTHE HON'BLE MRS.JUSTICE R.HEMALATHA Tax Case Appeal Nos.1061 to 1065 of 2015 The Commissioner of Income Tax,Chennai. ... Appellant in all 5 TCAsVs. M/s.Dassault Systems Simulia Corporation(formerly known as Abaqus Inc)Rising Sun Mills, 166, Valley Street,Providence, USA. ... Respondent in TCA.Nos.1061 to 1064/2015 M/s.Dassault Systems Simulia P. Ltd.,10[th] Floor, ASVN Ramana Rower,37 & 38, Venkatnarayana Road,T.Nagar,Chennai – 600 017. ... Respondent in T.C.A.No.1065/2015 Prayer : Tax Case Appeals filed under Section 260A of the IncomeTax Act, 1961 against the orders of the Income Tax AppellateTribunal, Madras "C" Bench, dated 09.01.2014 passed inI.T.A.Nos.1024 to 1027 & 1177/ Mds/2013 for the assessment year2003-04, 2004-05, 2005-06, 2006-07 and 2009-10. Preferred against the order of the office of theCommissioner of Income Tax (Appeals)-IX, No.121, Mahatma GandhiRoad, Chennai-600 034, ITA No.305/11-12 dated 22/02/2013, GIRNo./PAN : , and year of Assessment : 2009-10 and against the order of the office of the Commissioner ofIncome Tax (Appeals)-IV, No.121, Mahatma Gandhi Road,Nungambakkam, Chennai-600 034, ITA Nos.5,6,7 & 8/2011-12, dateof order : 07/02/2013, G.I.No./P.A.No : AADCD 3705D and year ofAssessment : 2003-04, 2004-05, 2005-06 & 2006-07. https://hcservices.ecourts.gov.in/hcservices/ and against the order of the Deputy Director of Income Tax(International Tanation), Chennai, PAN : AADCD 3705D Circle :DDIT International Tanation), Chennai, Status Foreign Company,Assessment year : 2006-07 and Date of order : 24/02/2011. and against the order of the Deputy Director of Income Tax(International Tanation), Chennai-34, PAN : AADCD 3705D Circle :DDIT International Tanation), Chennai, Status Foreign Company,Assessment year : 2005-06 and Date of order : 24/02/2011. against the order of the Deputy Director of Income Tax(International Tanation), Chennai, PAN : AADCD 3705D, Circle :DDIT International Tanation), Chennai, Status Foreign Company,Assessment year : 2004-05 and Date of order : 24/02/2011. and against the order of the Deputy Director of Income Tax(International Tanation), Chennai, PAN : AADCD 3705D Circle :DDIT International Tanation), Chennai, Status Foreign Company,Assessment year : 2003-04 and Date of order : 24/02/2011. against the order of the Assistant Commissioner of IncomeTax, Company Circle I(4), Chennai, P.A/G.I.R.No :AAACF4457B,Ward/Circle : Company Circle I(4), Chennai, Status : Company,Assessment year : 2009-10 and Date of order : 19/12/2011. Challenging the orders passed in I.T.A.Nos.1024 to 1027 &1177/ Mds/2013 in respect of the Assessment Year 2003-04, 2004-05, 2005-06, 2006-07 and 2009-10 on the file of the Income TaxAppellate Tribunal, Madras "C" Bench, Chennai, the Revenue hasfiled the above appeals. https://hcservices.ecourts.gov.in/hcservices/ 2.The appeals in T.C.A.Nos.1061 to 1064 of 2015 wereadmitted on the following substantial questions of law: “1)Whether on the facts and in the circumstancesof the case, the Tribunal was right in deleting theadditions made on account of royalty income which istaxable in terms of Section 9(1)(vi) of the Income TaxAct? 2)Is not the finding of the Tribunal badespecially as per Explanation (iv) was introduced byFinance Act, 2012 with retrospective effect from01.04.1976 clearly provided that all types oftransactions in software amounted to “royalty” for thepurpose of Section 9(1)(vi) of the Income Tax Act andtherefore taxable? 3)Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe disallowance made under Section 40(a)(ia) for nondeduction of tax at source on payments effected by theassessee is not taxable under Section 9(1)(vi) of theIncome Tax Act?” “1)Whether on the facts and in the circumstancesof the case, the Tribunal was right in deleting theadditions made on account of royalty income which istaxable in terms of Section 9(1)(vi) of the Income TaxAct? 2)Is not the finding of the Tribunal badespecially as per Explanation (iv) was introduced byFinance Act, 2012 with retrospective effect from01.04.1976 clearly provided that all types oftransactions in software amounted to “royalty” for thepurpose of Section 9(1)(vi) of the Income Tax Act andtherefore taxable? 3)Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe disallowance made under Section 40(a)(ia) for nondeduction of tax at source on payments effected by theassessee is not taxable under Section 9(1)(vi) of theIncome Tax Act?” 3.The appeal in T.C.A.No.1065 of 2015 was admitted on thefollowing substantial questions of law: “1)Whether on the facts and in the circumstancesof the case, the Tribunal was right in deleting thedisalllowance made under Section 40(a)(ia) for nondeduction of tax at source on payments made by theassessee? 2)Is not the finding of the Tribunal bad since asper clauses 3D, 5B, 8A and 8B of the agreement enteredbetween the assessee company and Abaques Inc USAclearly indicate that it was royalty as per definitionin Article 12(3) of DTAA between India and USA? 3)Whether the finding of the Tribunal is correctespecially when the payments made by the assessee fallunder the category of royalty since what was sold bythe assessee was copyright/licence only? 4)Whether on the facts and in the circumstancesof the case, the Tribunal was right in not consideringthe fact that the consideration received would be inthe nature of royalty in respect of transfer of all orany right including grant of licence falling underClause (v) of Explanation 2 to Section 9(1)(vi)?” 4.We have heard Mr.Karthick Ranganathan, learned seniorstanding counsel appearing for the appellant - Revenue andMr.Sandeep Bagmar.R, learned counsel appearing for therespondent – assessee. 5.Mr.Karthick Ranganathan, learned Senior Standing Counselappearing for the appellant fairly submitted that the questionsof law involved in the above appeals were already decided by theHon'ble Supreme Court of India against the revenue and infavour of the assessee in the judgment reported in 2021 SCCOnLine SC 159 [Engineering Analysis Centre of Excellence PrivateLimited v. Commissioner of Income Tax and Another], wherein theHon'ble Supreme Court held as follows: " ............... 4. The appeals before us maybe grouped into four categories:i) The first category deals with cases inwhich computer software is purchased directlyby an end-user, resident in India, from aforeign,non-residentsupplierormanufacturer. ii) The second category of cases dealswith resident Indian companies that act asdistributors or resellers, by purchasingcomputer software from foreign, nonresidentsuppliers or manufacturers and then resellingthe same to resident Indian end-users. iii) The third category concerns caseswherein the distributor happens to be aforeign, non-resident vendor, who, afterpurchasingsoftwarefromaforeign,nonresident seller, resells the same toresident Indian distributors or end-users. iv) The fourth category includes caseswherein computer software is affixed ontohardware and is sold as an integratedunit/equipment by foreign, non-residentsuppliers to resident Indian distributors orend-users. ii) The second category of cases dealswith resident Indian companies that act asdistributors or resellers, by purchasingcomputer software from foreign, nonresidentsuppliers or manufacturers and then resellingthe same to resident Indian end-users. iii) The third category concerns caseswherein the distributor happens to be aforeign, non-resident vendor, who, afterpurchasingsoftwarefromaforeign,nonresident seller, resells the same toresident Indian distributors or end-users. iv) The fourth category includes caseswherein computer software is affixed ontohardware and is sold as an integratedunit/equipment by foreign, non-residentsuppliers to resident Indian distributors orend-users. 7. An appeal was made from the order of theITAT to the High Court of Karnataka by the Revenue.The Division Bench of the High Court of Karnatakaheard a batch of appeals and framed nine questions,of which question nos. 8 and 9 are important and areset out as follows:“8. Whether the Tribunal was correct inholding that since the assessee hadpurchased only a right to use the copyrighti.e. the software and not the entirecopyright itself, the payment cannot betreated as Royalty as per the Double TaxationAvoidance Agreement and Treaties, which [are] https://hcservices.ecourts.gov.in/hcservices/ beneficial to the assessee and consequentlysection 9 of the Act should not take intoconsideration. ........................ 171. The Revenue, therefore, when referring to“royalties” under the DTAA, makes a distinctionbetween such royalties, no doubt in the context oftechnical services, and remittances for supply ofcomputer software, which is then treated as businessprofits, taxable under the relevant DTAA dependingupon whether there is a PE through which theassessee operates in India. This is one morecircumstance to show that the Revenue has itselfappreciated the difference between the payment ofroyalty and the supply/use of computer software inthe form of goods, which is then treated as businessincome of the assessee taxable in India if it has aPE in India. CONCLUSION 172. Given the definition of royaltiescontained in Article 12 of the DTAAs mentioned inparagraph 41 of this judgment, it is clear thatthere is no obligation on the persons mentioned insection 195 of the Income Tax Act to deduct tax atsource, as the distribution agreements/EULAs in thefacts of these cases do not create any interest orright in such distributors/end-users, which wouldamount to the use of or right to use any copyright.The provisions contained in the Income Tax Act(section 9 (1)(vi), along with explanations 2 and 4thereof), which deal with royalty, not being morebeneficial to the assessees, have no application inthe facts of these cases. 173. Our answer to the question posed beforeus, is that the amounts paid by resident Indianend-users/distributors to non-resident computersoftware manufacturers/suppliers, as considerationfor the resale/use of the computer software throughEULAs/distribution agreements, is not the payment ofroyalty for the use of copyright in the computersoftware, and that the same does not give rise toany income taxable in India, as a result of whichthe persons referred to in section 195 of theIncome Tax Act were not liable to deduct any TDSunder section 195 of the Income Tax Act. The answerto this question will apply to all four categoriesof cases enumerated by us in paragraph 4 of thisjudgment. 174. The appeals from the impugned judgments ofthe High Court of Karnataka are allowed, and theaforesaid judgments are set aside. The ruling of theAAR in Citrix Systems (AAR) (supra) is set aside.The appeals from the impugned judgments of the HighCourt of Delhi are dismissed." 174. The appeals from the impugned judgments ofthe High Court of Karnataka are allowed, and theaforesaid judgments are set aside. The ruling of theAAR in Citrix Systems (AAR) (supra) is set aside.The appeals from the impugned judgments of the HighCourt of Delhi are dismissed." 6.Mr.Sandeep Bagmar.R, learned counsel appearing for therespondents submitted that in view of the ratio laid down by theHon'ble Supreme Court in the judgment reported in 2021 SCCOnLine SC 159 (cited supra) the questions of law may be decidedagainst the revenue and in favour of the assessee. 7.On a reading of the judgment of the Hon'ble Supreme Court,it is clear that the substantial questions of law, which areraised in the present appeals, were already decided by theHon'ble Supreme Court against the revenue. 8.Following the ratio laid down by the Hon'ble Supreme Courtin the judgment reported in 2021 SCC OnLine SC 159 [citedsupra], this Court, in the appeals in T.C.A.Nos.758 of 2013 [TheCommissioner of Income Tax, Chennai Vs. M/s. Dasault SystemsSumulia Pvt. Ltd., 10th Floor, ASV N Ramana Tower, 37 & 38Venkatnarayana Road, T. Nagar, Chennai - 600 017] andT.C.A.No.443 of 2017 [The Commissioner of Income Tax, ChennaiVs. M/s. Dasault Systems Sumulia Pvt. Ltd., (Formerly known asABAQUS INC), Rising Sun Mills, 166, Vally Street, Providence,USA], by a common judgment dated 30.03.2021, decided thequestions of law against the revenue and in favour of theassessee. 9.Following the ratio laid down by the Hon'ble Supreme Courtin the judgment reported in 2021 SCC OnLine SC 159 [cited supra]and the common judgment of this Court dated 30.03.2021 made inT.C.A.Nos.758 of 2013 & 443 of 2017, the questions of law aredecided against the revenue and in favour of the assessee. Inview of the same, the Tax Case Appeals preferred by theappellant are liable to be dismissed. Accordingly, the Tax CaseAppeals are dismissed. No costs. Sd/-Assistant Registrar //True Copy// Sub Assistant Registrar VA https://hcservices.ecourts.gov.in/hcservices/ To 1. The Income Tax Appellate Tribunal, Madras "C" Bench. Madras "C" Bench. 2. The Commissioner of Income Tax, Chennai. 3. The Commissioner of Income Tax (Appeals)IV, Chennai-34. 4. The Deputy Director and Income Tax, Chennai-34. +1 cc to Mr.Sandeep Bagmar, Advocate, SR.No.22137 Tax Case Appeal Nos.1061 to 1065 of 2015 JP-II(CO)TE (30/04/2021)