ITAT Rules: Receipts from Sale of Software Licenses with Support Services is Not Royalty

ITAT Rules: Receipts from Sale of Software Licenses with Support Services is Not Royalty

The Income Tax Appellate Tribunal (ITAT) by its division-member bench comprising of Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) while partly allowing the appeal filed by Cisco Systems International B.V. (assessee), observed that receipts from sale of software with the support services is not in the nature of royalty.

The factual matrix of the case is that the assessee, a company incorporated in the Netherlands, was involved in the manufacturing and sale of Cisco products, along with providing related support and services.

The assessee contended that the Dispute Resolution Panel (DRP) and the Assessing Officer (AO) misinterpreted the provisions of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands. The contention of the assessee was that the receipts from the sale of software licenses and support services should not be considered as income in the nature of royalty or fees for technical services (FTS). It was argued that the receipts were for the supply of copies of the software license, not for the provision of industrial, commercial, or scientific experience.

The ITAT referred to the decision passed by the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income Tax & Another (2021), wherein it was held that the amounts paid by resident Indian end users/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 195 of the Income Tax Act were not liable to deduce any Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act.

Accordingly, the ITAT held that the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] erred in treating the receipts from sale of software with the support services as royalty.

As a result, the appeal filed by the assessee was partly allowed.