Mentor Graphics Ireland's Software Distribution Not Taxable as 'Royalty': Delhi ITAT
Mentor Graphics Ireland's Software Distribution Not Taxable as 'Royalty': Delhi ITAT
In a favourable ruling for Mentor Graphics Ireland Ltd. (assessee), the Income Tax Appellate Tribunal's Delhi bench has determined that the consideration received by the assessee for the supply and distribution of its copyrighted software products should not be subjected to taxation in India as 'Royalty' income.
The case involved Mentor Graphics Ireland Ltd., an Irish company, which argued that the payments they received for software sales, without granting any rights to use the software's copyright, should not be categorised as 'Royalty' under the Double Taxation Avoidance Agreement (DTAA) between India and Ireland.
The company contended that authorising the distributor to distribute the software in India and allowing end customers to access data or instructions within the software did not constitute the use or right to use the copyright.
However, the Assessing Officer (AO) took the position that the consideration received by the assessee from distributors should be treated as royalty, even under the DTAA, as the definition of 'Royalty' encompassed consideration received for the use of copyright.
The two-member bench consisting of N.K. Billaiya (Accountant) and C.N. Prasad (Judicial) took note of the issue settled by the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. The Commissioner of Income Tax & Anr. [LQ/SC/2021/152].
In that case, the Supreme Court had ruled that amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale or use of computer software through End User License Agreements (EULAs) or distribution agreements, should not be considered as royalty for the use of copyright in the computer software. Consequently, such payments do not give rise to any taxable income in India. Therefore, the entities mentioned in Section 195 of the Income Tax Act are not obligated to deduct any Tax Deduction at Source (TDS) under Section 195.
In light of the aforementioned ruling and interpretation of the Supreme Court, the bench directed the Assessing Officer (AO) to remove the addition made about the consideration received by the assessee.
