TDS is not deducted from payments made for using shrink wrap software

Fact and issue of the case

Aggrieved by the order dated 25/07/2022 passed by the learned Commissioner of Income Tax (Appeals)-10, Hyderabad (“Ld. CIT(A)”), in the case of M/s. S&P Capital IQ (India) Private Limited (“the assessee”) for the assessment year 2014-15, assessee preferred this appeal.

Briefly stated relevant facts are that the assessee Company is engaged in the business of providing Information Technology Enabled Services (ITES) to its parent company S&P Global Market Intelligence LLC, USA (earlier known as Capital IQ Inc., USA). During the year under consideration, the assessee had made certain remittances aggregating to 14,95,53,994/- to S&P Global Inc. (formerly known as McGraw Hill Financial Inc.) towards reimbursement for software licenses. On completion of proceedings, the learned Assessing Officer passed an order under section 201(1)/(1A) of the Act on June 15, 2018, treating the said remittances liable to tax deduction as ‘Royalty payments’ and thereby raising a demand of Rs.4,66,60,846/-. Learned Assessing Officer made addition of Rs. 2,99,10,799/- towards the 20% of TDS on the software license payment in the nature of royalty and also charged interest of Rs. 1,67,50,047/- under section 201(1A) of the Act.

Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal before the learned CIT(A) and submitted that the matter is squarely covered by the decision of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited (TS106-SC-2021). Learned CIT(A), however, recorded that the assessee did not produce the agreement/terms of usage of software, the restrictions and rights granted under the Copy Rights Act. He further found that the invoices submitted by the assessee do not specify whether the liceses are in the nature of end user license, enterprise license, distributable or commercially exploitable license and in the absence of undertaking any detailed examination on this aspect, it would be difficult to say whether or not the decision of the Hon’ble Apex Court is applicable to the facts of the

Assessee is, therefore, before us in this appeal, stating that the learned Assessing Officer himself recorded that the licenses obtained by the parent company from the Microsoft could have directly been obtained by the licensee himself and, therefore, there is no role for the parent company in the entire exercise except holding license in its own name and facilitating the assessee to use the same, and, therefore, absolutely there is no need to look into the agreement between the assessee and the parent company. He further submitted that the invoices submitted by the assessee clearly establish that it is only a matter of reimbursement and the assessee is bound by the terms of license granted by the Microsoft and Dell, irrespective of the nature of task performed on these softwares. He, therefore, submits that the decision of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra) is applicable to the facts of the case.

Observation of the court

We have gone through the record in the light of the submissions made on either side. It is a fact that the learned Assessing Officer herself recorded that though the license agreement was entered into by the parent entity of the assessee with Microsoft and Dell and the assessee is provided with the same for its use, the invoices issued by the Microsoft specifying the various usages by the users, clearly show that the assessee could have directly accessed the software under the license from the Microsoft and Dell. She further recorded that the parent company infact has no role in the entire exercise except holding the license on its name but as a matter of fact irrespect of the nature of task performed on these softwares, it is the assessee who is using it, is bound by the terms of license issued by the Microsoft and Dell. She further held that the payments made by the assessee to the parent company for the use of the software licenses are in substance the payments made to the Microsoft and Dell for the use of their software.

In view of the fact that the payments made by the assessee were essentially for making use of the shrink wrap computer software wherein the assessee has non-exclusive and non-transferrable license enabling use of the programme in the copyrighted product, there is no transfer of any copyright in the product nor the assessee was granted any commercial right to exploit it other than for permissible usage. The matter is covered by the decision of the Engineering Analysis Centre of Excellence Private Limited (supra), respectfully following the same, we hold that the impugned payments made by the assessee do not fall in the definition of royalty and consequently, do not attract any addition on that score.

With this view of the matter, we direct the learned Assessing Officer to delete the same. Grounds raised by the assessee are allowed accordingly.

In the result, appeal of the assessee is allowed.

Order pronounced in the open court on this the 7th day of March, 2023.