The Commissioner Of Income Tax - Internationaltaxation -2 v. Microsoft Corporation

$~23-25 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 940/2019 THE COMMISSIONER OF INCOME TAX - INTERNATIONALTAXATION -2..... Appellant ..... Appellant Through:Mr. Kunal Sharma, Advocate. versus MICROSOFT CORPORATION ..... Respondent Through:Mr. Nageswar Rao and Ms. DeepikaAgarwal, Advocates.Agarwal, Advocates. 24 +ITA 942/2019 THE COMMISSIONER OF INCOME TAX - INTERNATIONALTAXATION -2..... Appellant Through:Mr. Ruchir Bhatia and Ms. MansieJain, Advocates.Jain, Advocates. versus MICROSOFT CORPORATION ..... Respondent Through:Mr. Nageswar Rao and Ms. DeepikaAgarwal, Advocates. 25 +ITA 943/2019 THE COMMISSIONER OF INCOME TAX - INTERNATIONALTAXATION -2..... AppellantTAXATION -2..... Appellant ..... Appellant Through:Mr. Ruchir Bhatia and Ms. MansieJain, Advocates.Jain, Advocates. versus MICROSOFT CORPORATION ..... Respondent Through:Mr. Nageswar Rao and Ms. DeepikaAgarwal, Advocates. % Date of Decision: 19[th]May, 2022 CORAM: HON’BLE MR. JUSTICE MANMOHANHON’BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J (Oral): 1.Present appeals have been filed under Section 260A of the IncomeTax Act, 1961 [for short ‘Act’] challenging the judgment and order passedby ITAT on 13[th]May, 2019 for the Assessment Years 1997-98 and 1999-2000. 2.Learned counsel for the appellant-Revenue submits that ITAT haserred in holding that licensing of software products of Microsoft in theTerritory of India by the Respondent was not taxable in India as Royaltyunder Section 9(1)(vi) of the Act read with Article 12 of the Indo USDTAA. 3.He states that the Tribunal has failed to appreciate that the distributionmodel in the case of the respondent-assessee involved making of multiplecopies of the software clearly indicating transfer of copyright. 4.Having heard learned counsel for the appellant, this Court finds thatthe issue raised in the present appeals is no longer res integra as theSupreme Court in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax and Anr., (2021) SCCOnLineSC 159 has held has under:- “…4. The appeals before us may be grouped into four categories: i) The first category deals with cases in which computer softwareis purchased directly by an end-user, resident in India, from aforeign, non-resident supplier or manufacturer. ii) The second category of cases deals with resident Indiancompanies that act as distributors or resellers, by purchasingcomputersoftware from foreign,non-resident suppliers ormanufacturers and then reselling the same to resident Indian end-users. iii) The third category concerns cases wherein the distributorhappens to be a foreign, non-resident vendor, who, afterpurchasing software from a foreign, non-resident seller, resellsthe same to resident Indian distributors or end-users.iv) The fourth category includes cases wherein computer softwareisaffixedontohardwareandissoldasanintegratedunit/equipment by foreign, non-resident suppliers to residentIndian distributors or end-users. xxxxxxxxxxxx 97. The AAR then reasoned that the fact that a licence had beengranted would be sufficient to conclude that there was a transferof copyright, and that there was no justification for the use of thedoctrine of noscitur a sociis to confine the transfer by way of alicence to only include a licence which transferred rights inrespect of copyright, by referring to explanation 2 to section9(1)(vi) of the Income Tax Act. It then held: “Considerable arguments are raised on the so-calleddistinction between a copyright and copyrighted articles.What is a copyrighted article? It is nothing but an articlewhich incorporates the copyrightof the owner,theassignee, the exclusive licensee or the licencee. So, when acopyrighted article is permitted or licensed to be used for afee, the permission involves not only the physical orelectronic manifestation of a programme, but also the use “Considerable arguments are raised on the so-calleddistinction between a copyright and copyrighted articles.What is a copyrighted article? It is nothing but an articlewhich incorporates the copyrightof the owner,theassignee, the exclusive licensee or the licencee. So, when acopyrighted article is permitted or licensed to be used for afee, the permission involves not only the physical orelectronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. Thatapart, the Copyright Act or the Income-tax Act or theDTAC does not use the expression ‘copyrighted article’,which could have been used if the intention was as claimedby the applicant. In the circumstances, the distinctionsought to be made appears to be illusory.” 98. This ruling of the AAR flies in the face of certain principles.When, under a non-exclusive licence, an end-user gets the right touse computer software in the form of a CD, the end-user onlyreceives a right to use the software and nothing more. The end-user does not get any of the rights that the owner continues toretain under section 14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof. Thus, the conclusion that whencomputer software is licensed for use under an EULA, what isalso licensed is the right to use the copyright embedded therein, iswholly incorrect. The licence for the use of a product under anEULA cannot be construed as the licence spoken of in section 30of the Copyright Act, as such EULA only imposes restrictiveconditions upon the end-user and does not part with any interestrelatable to any rights mentioned in sections 14(a) and 14(b) ofthe Copyright Act. xxxxxxxxxxxx 101. Also, any ruling on the more expansive language containedin the explanations to section 9(1)(vi) of the Income Tax Actwould have to be ignored if it is wider and less beneficial to theassessee than the definition contained in the DTAA, as per section90(2) of the Income Tax Act read with explanation 4 thereof, andArticle 3(2) of the DTAA. Further, the expression “copyright” hasto be understood in the context of the statute which deals with it, itbeingacceptedthatmunicipallawswhichapplyintheContractingStatesmustbeappliedunlessthereisanyrepugnancy to the terms of the DTAA. For all these reasons, thedetermination of the AAR in Citrix Systems (AAR) (supra) doesnot state the law correctly and is thus set aside. xxxx xxxxxxxx 173. Our answer to the question posed before us, is that theamounts paid by resident Indian end-users/distributors to non-residentcomputersoftwaremanufacturers/suppliers,asconsideration for the resale/use of the computer software throughEULAs/distribution agreements, is not the payment of royalty forthe use of copyright in the computer software, and that the samedoes not give rise to any income taxable in India, as a result ofwhich the persons referred to in section 195 of the Income Tax Actwere not liable to deduct any TDS under section 195 of theIncome Tax Act. The answer to this question will apply to all fourcategories of cases enumerated by us in paragraph 4 of thisjudgment. 174. The appeals from the impugned judgments of the High Courtof Karnataka are allowed, and the aforesaid judgments are setaside. The ruling of the AAR in Citrix Systems (AAR) (supra) is setaside. The appeals from the impugned judgments of the HighCourt of Delhi are dismissed.” 5.Further, this Court on similar facts has allowed writ petitions filed bythe similarly placed assessee in EY Global Services Limited vs. AssistantCommissioner of Income Tax & Anr., W.P.(C) 11957/2016 and EYGBS(India) Private Limited vs. Joint Commissioner of Income Tax & Ors.,W.P.(C) 12003/2016. The relevant portion of the said judgment isreproduced hereinbelow:- 174. The appeals from the impugned judgments of the High Courtof Karnataka are allowed, and the aforesaid judgments are setaside. The ruling of the AAR in Citrix Systems (AAR) (supra) is setaside. The appeals from the impugned judgments of the HighCourt of Delhi are dismissed.” 5.Further, this Court on similar facts has allowed writ petitions filed bythe similarly placed assessee in EY Global Services Limited vs. AssistantCommissioner of Income Tax & Anr., W.P.(C) 11957/2016 and EYGBS(India) Private Limited vs. Joint Commissioner of Income Tax & Ors.,W.P.(C) 12003/2016. The relevant portion of the said judgment isreproduced hereinbelow:- “…13. A reading of the above judgment would clearly show thatfor the payment received by EYGSL (UK) from EYGBS (India) tobe taxed as ‘royalty’, it is essential to show a transfer ofcopyright in the software to do any of the acts mentioned inSection 14 of the Copyright Act, 1957. A licence conferring noproprietary interest on the licencee, does not entail parting withthe copyright. Where the core of a transaction is to authorise theend-user to have access to and make use of the licenced softwareover which the licencee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot betermed as ‘royalty’. 14. In the present case, the EYGBS (India), in terms of theService Agreement and the MOU, merely receives the right to usethe software procured by the EYGSL (UK) from third-partyvendors. The consideration paid for the use of the sametherefore, cannot be termed as ‘royalty’ as held by the SupremeCourt in Engineering Analysis Centre (supra). In determining thesame, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is theAgreement between the EYGSL (UK) and the EYGBS (India). Asthe same does not create any right to transfer the copyright in thesoftware, the same would not fall within the ambit of the term‘royalty’ as held by the Supreme Court in Engineering AnalysisCentre (supra). 15. We may also note that the learned AAR in its ImpugnedOrder has relied upon its earlier view in Citrix Systems AsiaPacific Pty Ltd., In Re., (2012) 343 ITR 1 (AAR), which has beenexpresslystatedtobebadlawin EngineeringAnalysisCentre (supra). 16. The submission of the learned counsel for the Revenue thatthe judgment of the Supreme Court in Engineering AnalysisCentre (supra) cannot be applied because it confines itself onlyto the four categories mentioned in paragraph 4, also cannot beaccepted. Though the Supreme Court was on facts consideringthe four categories of cases that arose in the appeals before it, ithas laid down the law for general application. The law, as laiddown by the Supreme Court, when applied to facts of the presentcase, squarely covers the same in favour of the petitioners. 17. The submission made by the learned counsel for the revenuerelying upon the amendment to Section 9(1)(vi) of the IncomeTax Act, 1961 has also been specifically considered and rejectedby the Supreme Court. 18. In view of the above, the Impugned Rulings dated 10.08.2016passed by the learned AAR are set aside and it is held that thepayment received by EYGSL (UK) for providing access tocomputer software to its member firms of EY Network located inIndia, that is, EYGBS (India), does not amount to ‘royalty’ liableto be taxed in India under the provisions of the Income Tax Act,1961 and the India-UK DTAA.” 6.Since, the issue of law raised in the present appeals has beenconclusively decided in the favour of the assessee by the Supreme Court, nosubstantial question of law arises for consideration in the present appeals. Itis also pertinent to mention that the appellant had admitted before the ITATthat the dispute in question had been decided in favour of the assessee by theTribunal in earlier years. Accordingly, the present appeals are dismissed. MANMOHAN, J MAY 19, 2022AS MANMEET PRITAM SINGH ARORA, J