Mere access to use server/software to download reports cannot be regarded as transfer of copyright

While holding that the payments made for obtaining candidate reports by accessing a server located abroad are not taxable as royalty, The Delhi Bench of Income Tax Appellate Tribunal directs the assessing officer to decide the issue freshly.

A Division Bench of President G. S. Pannu and Justice Astha Chandra observed that “Assessee is not provided with access to any software of Symbiotics Ltd. UK. The candidate’s report is delivered to the assessee electronically which is in the nature of the copyrighted product and mere access to use the server/software to download the reports cannot be regarded as a transfer of any license/copyright in the software so as to fall within the definition of “royalty” under Article 13 of the India-UK DTAA.”

“The impugned payment to Symbiotics Ltd. UK is not royalty and the fact that Symbiotics Ltd. UK has no PE in India and therefore not assessed to tax in India, the assessee has no obligation to withhold tax on the impugned payment made by it to Symbiotics Ltd. UK under section 195 of the Act. It is a well-settled position of law that the tax is required to be withheld in respect of payments made to a non-resident only if such payment is chargeable to tax in India”, added the Bench. 

Advocate Rohit Jain appeared for the Petitioner and Advocate Sanjay Kumar appeared for the Respondent. 

The brief facts of the case were that Assessee-Company is engaged in the business of training pilots and also providing services in relation to the assessment of pilot candidates for its customers. During AY 2017-18, the Assessee entered into an agreement with Symbiotics UK for the purpose of evaluating and profiling candidates being trained by the Assessee and providing desirable reports. Symbiotics UK provided candidate profiling services from their office in the UK, by utilizing their UK-developed and maintained software, ‘Adapt’ which accessed UK-located file servers to collect information from wherever the candidate is being tested, analyze the said information, and deliver the “candidate written report” to the Assessee.

Consequently, Assessee made a payment of Rs. 16.08 Cr which was disallowed by Revenue under Section 40(a)(i) due to non-deduction of tax at source under Section 195 on the premise that the payments made to non-resident entity were in the nature of ‘royalty’ in terms of Section 9 of the Act as well as Article 13 of India-UK DTAA. The assessee challenged it, but CIT(A) dismissed the Assessee’s appeal. Hence, the assessee brought this case before the Delhi Income Tax Appellate Tribunal.

After considering the submission, the Bench noted that the Assessee does not get any right to use the copyright in the software as it merely has access to the information/data processed by the software/application which is owned and executed by Symbiotics Ltd. UK in its server located in the UK.

The Bench stated that there is no grant of license to the Assessee for any software that allows it to modify the source code.

Referring to the case Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT 125 taxmann.com 42 (SC), the Bench Reiterated that “the appellant gets a copyrighted article to use the product for its internal business purpose only and not any right in any copyright to exploit the same for commercial reasons so as to constitute the payment received in consideration thereof as royalty in terms of Article 13 of the India UK DTAA.”

The Bench also stated that the consideration received by a non-resident company is to be treated as business income which is not chargeable to tax in India in the absence of Permanent Establishment (PE) in terms of Article 7 of India-UK DTAA.

“Accordingly, liability to deduct tax at source under Section 195 does not exist and disallowance under Section 40(a)(i) is liable to be deleted”, added the Bench. 

The Court opines that adapt software is being used to generate the required report after conducting an evaluation on the basis of criteria provided by the Assessee and does not tantamount to the grant of software license and the right to use the Intellectual Property (IP) of the non-resident company.

The Bench also noted that the Assessee has not been granted the right of commercial exploitation of the IT/software and the infrastructure/software used for preparing the reports is located or managed by a non-resident company.

Hence, relying on the Supreme Court Judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT 125 taxmann.com 42 (SC), the Bench allowed the Assessee’s appeal by concluding that since the payment is not chargeable to tax in India, the Assessee has no obligation to withhold tax under Section 195 of the Act.

Cause Title: CAE Simulation Training P. Ltd. Vs. DCIT [ITA No. 2573/Del/2022 / 2023-Enterslice-31-ITAT-Del]

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