The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) consisting of Chandra Mohan Garg (Judicial Member) and Shamim Yahya (Accountant Member) has held that consideration for the resale of the computer software through End User Licence Agreement (EULA)/distribution agreements is not the payment of royalty for the use of copyright in the computer software and, therefore, not taxable in India.
The assessee, M/s. Kony Inc., is in the business of being a multichannel application development platform provider with over 350 customers in 45 countries. The assessee was a developer of the Kony Mobile Application Platform (KMAP) and held the right to licence the KMAP to its customers.
KMAP is a standard application platform that enables the development of mobile applications. It provides an end-to-end integrated, cloud-based platform that enables enterprises to quickly design, build, test, deploy, and manage multi-channel app experiences. It also provides a suite of customizable, ready-to-run apps that lower costs, ensure faster time to market, and provide enterprises the flexibility to evolve at the speed of mobile technology.
The assessee company employed a specialised staff of professionals globally dedicated to the development, delivery, and support of mobile solutions and technologies. It provided software and support services to meet the demands of the ever-changing mobile landscape and provided customers with innovative solutions.
During the Financial Year 2013-14, the assessee entered into an agreement with the State Bank of India (SBI) for the sale of KMAP and received Rs. 3,30,00,000 from the sale. As per the agreement, the perpetual licence was described as standard software. Also, the end user of the licence does not have access to the source code. The user was not allowed to disassemble, decompile, or reverse engineer the software, but only had the right to use the software for business purposes.
The Assessing Officer (AO) in the draft assessment order held that the assessee’s receipt from the supply of software is taxable in India as royalty income both under section 9(1)(vi) of the Act and under Article 12(3) of the India-USA DTAA. The tax rate applicable in the assessee’s case will be 15% as in the India-USA DTAA on a gross basis and including applicable surcharge and education cess. The DRP rejected the assessee’s objections. Therefore, the assessee appealed against the order.
The ITAT relied on the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd. vs. The Commission of Income-tax in which it was held that payments made to non-resident computer software manufacturers/suppliers for the resale/use of the software are not taxable as royalty.
The ITAT allowed the appeal of the assessee.
Case Title: Kony Inc. Versus ACIT
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