Income Tax Appellate Tribunal - Bangalore
Beta Cae Systems International Ag ... vs Dcit, International Taxation, ... on 1 April, 2026
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : BANGALORE
BEFORE SHRI PRASHANT MAHARISHI, VICE - PRESIDENT
AND
SHRI SOUNDARARAJAN K., JUDICIAL MEMBER
IT(IT)A No. 548/Bang/2025
Assessment Year : 2022-23
M/s. Beta CAE Systems The Deputy
International AG, Commissioner of
D4 Business Village Luzern, Income Tax,
Platz 4 CH-6039, International
Luzern, Foreign, Taxation,
Switzerland. Vs. Circle - 1(1),
PAN: AAHCB6364Q Bengaluru.
APPELLANT RESPONDENT
Assessee by : Shri Rajgopal, CA
Revenue by : Dr. Divya K.J, CIT-DR
Date of Hearing : 13-01-2026
Date of Pronouncement : 01-04-2026
ORDER
PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the final assessment order passed by the Ld.DCIT, Intl Taxation Circle - 1(1), Bangalore dated 15/01/2025 in respect of the A.Y. 2022-23 and raised the following concise grounds of appeal:
"1. The impugned order passed by the learned Assessing Officer (Ld. AO) under section 144(3) r.w.s. 144C(13) of the Indian Income Tax Act 1961 (Act) to the extent which is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.Page 2 of 23
IT(IT)A No. 548/Bang/2025
2. The Directions of the learned Dispute Resolution Pannel (DRP) passed u/ s 144C(5) in so far as the same are prejudicial to the interest of the Appellant are not justified in law and on facts and circumstances of the case.
3. The Officers below erred, in law and in facts, by treating the supply of software license amounting to Rs.
50.93,03,724/- as royalty/ FTS ignoring the corroborative materials placed by the Appellant.
4. The Ld. Officers below failed to appreciate the binding nature of the Supreme Court's order rendered in in the case of Engineering Analysis Centre of Excellence P. Ltd. (2021) 432 ITR 472 (SC) and jurisprudence laid thereafter by various Courts.
5. The learned Officers below failed to interpret the Distribution Agreement/ End Users License agreement (EULA) as a whole, failed to appreciate that the agreement is non-exclusive, customers of the Appellant do not have any right to modify, reproduce or replicate copies of software licensed, restrictions placed, no copyright/ source code is parted to the customer/ Distributor, the software remains Appellant's proprietary technology, software licenses offered by the Appellant are the Standard facilities provided to its customers for a definite period, hence cannot be termed as "Royalty".
6. The learned Officers below failed to appreciate the use or right to use copyrighted article partakes the character of purchase/ sale of 'goods' or 'tangible property', and receipts on account of granting of license for the use or right to License the copyrighted article shall be classified as "Business Profits" under the tax treaty. Accordingly, the consideration for the software received by the Appellant cannot be regarded as 'royalty' under the Indo-Swiss DTAA.
7. The learned Officers below failed to appreciate that the Appellant only transfers the 'right to use the software' to the end customers/ Distributor's customers and does not transfer the "right to use the copyright embodied in such software", the Supply of a copyrighted article cannot be regarded as Royalty/ FTS as per the beneficial provisions of tax treaty between India and Switzerland-Article 12.
8. The learned Officers below erred in observing that the sales transactions are royalty as there is transfer of software 'for the use' without first noting that Article 12 clearly provides that such transfer for the use must be in Page 3 of 23 IT(IT)A No. 548/Bang/2025 connection with copyright embodied in such software, and mere licensing of a copyrighted article cannot be regarded as receipts towards Royalty as per the beneficial provisions of tax treaty between India and Swiss Confederation.
9. The Learned Officers below cherrypicked the General Precautions contained in Clause no. 1.25 and Clause 14 - which deals with Confidentiality which protect the trade interest of any commercial transaction, general terms of the Agreement never supersede the specific terms of the Agreement.
10. The learned Officers below erred in the order by taxing the income earned from licensing of software as Fees for Technical Services.
11. The Ld. Officers below grossly erred in interpreting the primary facts of the Appellant's case and consequentially placing reliance on the OECD commentary, incorrect interpretation of EAC's decision or the provisions of section 9(1)(vi) or DTAA is also erroneous and addition was made on hypothetical, ambiguity grounds, without definiteness, proceeded mechanically without fixing first software licensing amounts to Royalty or FTS under the Act.
12. Without prejudice to any other grounds, the Learned Officers below erred in the order by taxing the gross sales as taxable income without providing any deduction towards the cost of the sales and the Ld. DRP erred in upholding the same.
13. The learned Officers below failed to note that the gross revenue received from the Licensing of software licenses has already suffered the Equalisation levy u/s 165A of the Finance Act 2016, as Appellant is an eligible non-resident E-commerce operator, engaged in the business of online supply of software license which is a specified service as envisaged u/s section 164(i) of the Finance Act, 2016.
14. The Officers below erred in law as mere filing of Review petition does not obliterate the ratio laid down in the judgment under review.
15. Without prejudice, the tax and interest u/s 234B demanded is excessive, unreasonable and is liable to be dropped.
Page 4 of 23IT(IT)A No. 548/Bang/2025
16. Prayer:
i. The Appellant craves leave to add, alter, amend, delete or substitute any of the grounds urged above.
ii. Each ground is mutually exclusive and the appellant craves leave to add, alter, modify, delete, or substitute any or all of the grounds.
iii. For these and other grounds that may be urged at the time of hearing, the appellant prays that the Honourable Tribunal may kindly delete the addition made by treating the supply of software license as Royalty/ FTS of Rs. 50,93,03,724/- as indicated in the statement of facts and contested in the grounds of appeal. Or Grant any other relief that the Honourable Tribunal may deem fit."
2. The brief facts of the case are that the assessee is a foreign company resident of Switzerland and filed their return of income on 28/11/2022 and claimed refund of Rs. 2,22,94,950/-. The case was selected for scrutiny through CASS for the reason that there is a high ratio of refund to TDS relating to section 195 and claim of large value refund. The assessee is mainly engaged in the business of supplying software for computer aided engineering applications and during the year, the assessee had earned an income of Rs. 50,93,03,724/- as business income and claimed the said income as exempt u/s. 10(50) of the Act. The assessee supplied the software after getting the purchase orders through email directly or through its distributors. The assessee also gave the license keys with passwords through the email to access the said software content. The AO based on the response filed by the assessee to the notices issued u/s. 142(1) had concluded that the business income has to be taxed as royalty / FTS. The AO had not accepted the assessee's contention that the issue was already covered by the judgment of the Hon'ble Supreme Court reported in 432 ITR 472 in the case of Engineering Analysis Centre of Excellence Private Limited v CIT. To that effect, a draft assessment order was passed and the assessee also filed their objections before the Ld.DRP and also produced the various documents to show that the income could not be treated as royalty / FTS.
The Ld.DRP had also not accepted the objections of the assessee and confirmed the draft assessment order and issued directions to the AO to Page 5 of 23 IT(IT)A No. 548/Bang/2025 pass orders accordingly. Thereafter the AO had made the assessment and confirmed the levy by treating the said income as royalty / FTS.
3. As against the said order, the assessee has filed the present appeal before this Tribunal.
4. At the time of hearing, the Ld.AR submitted that the assessee had sold the software to its customers directly or through the distributor based on the purchase order placed by them. He further submitted that the assessee also supplied the software along with license keys and passwords. The Ld.AR further submitted that the supply of software could not be treated as royalty income or FTS when the assessee had not parted with the software once for all to the customers and also not allowed its customers to make use of the software for taking prints of the said software and therefore it could not be treated as royalty / FTS. The Ld.AR further submitted that the assessee had not sold the software for the life time but only for a limited period and thereafter the customers have to again purchase the software with license keys with passwords and therefore it could not be treated as royalty received by the assessee. The Ld.AR further submitted that the assessee had not permitted the customers / end users to install the said software in any of the systems and therefore the software could not be used by others in any other the systems and therefore the person who has purchased the said software alone could use the said software for their own purpose that too in the system in which the software was originally installed. Therefore the Ld.AR submitted that the sale of software and the income earned through the said sale could not be termed as royalty / FTS. Further, the Ld.AR submitted that the assessee had not shared the source code as seen from the various documents produced before the authorities and therefore without the source code, the customers cannot make use of the same by taking the copies of the said software and therefore it could not be termed as royalty / FTS. The Ld.AR also filed a paper book enclosing the written submissions and other documents to show that the assessee had sold the software and not received the payment for using the said software Page 6 of 23 IT(IT)A No. 548/Bang/2025 as royalty / FTS. The Ld.AR also submitted that the assessee has no permanent establishment in India and therefore income could not be subjected to tax in India. The Ld.AR also relied on the Coordinate Bench order of this Tribunal as well as the Hon'ble Pune Tribunal and submitted that the income earned by the assessee could be termed as business income and therefore the same is eligible for exemption u/s. 10(50) of the Act. The Ld.AR also filed a synopsis at the time of hearing for the better understanding of the facts. The Ld.AR also filed the copy of the order of this Tribunal in IT(IT)A No. 1159/Bang/2023 in which a similar issue was decided by this Tribunal by relying on the judgment of the Hon'ble Supreme Court cited supra.
5. The Ld.DR relied on the directions of the Ld.DRP and the detailed findings given by the AO in the final assessment order and prayed that the final assessment order made by the AO may be sustained.
6. We have heard the arguments of both sides and perused the materials available on record.
7. The assessee is a resident of Switzerland and it is also not in dispute that the assessee had no permanent establishment or any liaison office in India. They are in the business of supplying the standardised computed aided engineering application software for its end customers either directly or through the Indian distributor. From the various records including the distribution agreement and the end user license agreement, we came to now that the assessee granted the non-exclusive, non-transferable license with limited right to the subscribers i.e. the end customer could download the software through the key provided by the assessee and the embedded software runs only on the designated system and the customers are only permitted to use the software and the source code was never shared either with the distributor or the end customer. In fact, the distributor had only furnished the key provided by the assessee to the end user and not forwarded any source code. Without the source code, the distributor or the Page 7 of 23 IT(IT)A No. 548/Bang/2025 end user cannot take copy of the software or modify the software supplied by the assessee.
8. We have also perused the synopsis filed by the assessee which are extracted below for the sake of convenience.
6. "Appellant demonstrated that he was eligible for the benefit u/s 90(2): [Ground 6 and 7 ] i. Section 90(2) of Income Tax Act,1961 [Act] provides beneficial to the Assessee.
ii. India has entered into Double Taxation Avoidance Agreement [DTAA] with Swiss Confederation, hence, Appellant being tax resident of Switzerland to whom above DTA agreement applies. iii. No Permanent Establishment- TRC; Switzerland IT returns; No PE Declaration; Form 10F were furnished.
7. Corroborative materials were furnished to prove IPR and algorithm of the software was never parted with but the Ld. Officers below failed to rebut: [Ground 3] i. Master Distribution Agreement entered with M/s BETA CAE Systems India Pvt. Ltd.
ii. General End Users License Agreement (EULA) entered with the end users iii. Sample Quotation in support of the direct licensing. iv. The terms and conditions of EULA is identical to that of Agreement entered with Distributor, as Ownership of the software, restriction on usage of the software remains with the Appellant and the same is never parted as explained hereunder.
v. Clause 1.7 of the Distribution Agreement reads as under:
"Source Code means computer-programming code and related system documentation, comments and procedural code, that is not directly executable by a computer but which may be printed out or displayed in a form readable and understandable by a qualified programmer. No rights to Source Code are given to Licensee by The Agreement unless specifically stated in an Amendment."
vi. Clause 1.11 of the Agreement reads as under:
"The term License shall mean the restricted right granted by Licensor to Distributor to Sub-License the Licensed Program(s) in accordance with the terms and conditions of an End-User Sub-License Agreement pre-approved by Licensor."
vii. Clause 2 of the Agreement which deals with License provides as Page 8 of 23 IT(IT)A No. 548/Bang/2025 under:
"Licensor hereby grants to Licensee and Licensee hereby accepts a non-exclusive and non-transferable License to use the Licensed Product during the Term of The Agreement."
viii. Clause 3.2 of the Agreement - stipulates as under:
"Licensor grants to Distributor a limited, non-assignable, non-exclusive License to use the Licensed Programs provided under the agreement."
ix. Clause 8.1 of AGREEMENT provides-, All Intellectual Proprietary Rights, title, interest, and ownership of, in and to the licensed Product, and any Improvements thereof, and of all other material and information made available by licensor under the Agreement shall remain the exclusive property of Licensor.
x. Clause 8.2 of AGREEMENT provides, Licensed Product, and all material and information made available by Licensor under the Agreement, constitute exclusive Intellectual Property and valuable trade secrets, Copy right or patent belongs to Licensor.
xi. Clause 8.3 of AGREEMENT provides, contents of the Licensed Product, determined as the structures, logic, data structures, design, processes, procedures, formulas, and algorithms contained in the ordered set of instructions that together constitute the software constitutes exclusive Intellectual Property and valuable trade secrets including Copyrights or Patent belongs to Licensor.
xii. Clause 8.5 of AGREEMENT provides; Licensor owns the exclusive rights to the names and marks ANSA and µETA throughout the world.
xiii. Clause 9.1 and 9.2 of AGREEMENT provides, the use of the Licensed Program Manager/Network on any CPU other than Designated Computer System/ Network is expressly prohibited.
xiv. Clause 9.3 of AGREEMENT provides, use of the Program by any third party having full or partial access to the Designated Computer Network operated by Distributor or an End-User is expressly prohibited.
xv. Clause 9.4 of AGREEMENT provides, Any distribution, sublicensing, marketing, sale, rent, leasing, transfer or other disposition by an End-User of the Licensed Product, including any and all physical embodiments thereof, is expressly prohibited.
Page 9 of 23IT(IT)A No. 548/Bang/2025 xvi. Clause 12 of AGREEMENT provides which deals with Ownership of IPs as under:
"12.2.1. Licensee agrees that the Licensed Product, and all other material and information made available by Licensor under The Agreement, which is not already in the public domain or already lawfully in Licensee's possession, constitute exclusive Intellectual Property and valuable trade secrets of Licensor, whether or not any portion thereof is or may be the subject of a valid copyright or patent.
xvii. Clause 13 of AGREEMENT restricts the usage of software as under:
"13.1.3. Any distribution, sublicensing, marketing, sale, rent, loan, leasing, transfer, assign, or other disposition by Licensee of the Licensed Product, including any and all physical embodiments thereof, is expressly prohibited.
13.1.4. Any foregoing action by Licensee of the derivative modifications or extensions of the Licensed Product, or of any and all physical embodiments thereof, or of the result of the merging or embedding or bundling of the Licensed Program, or of any and all physical embodiments thereof, is also expressly prohibited.
xviii. Clause 17.6 of AGREEMENT provides, Distributor's relationship to Licensor is that of an independent Contractor, and neither party is an agent/partner of the other.
Thus, AGREEMENT makes it clear that- no proprietary rights, source code/ logic/algorithms/ know how/ right to use of the patents, IPR is transferred to the customer, no parting of Copyright u/s 14 of the Copy Right Act 1957 was made in the present case. But the Ld. Officer below has not placed single material to showcase section 30 of the Copy Right Act attracted.
8. Source code is not shared with customer- as the License is only for definite period, needs to be renewed upon its expiry date:
[Ground 3; 10] Customer / Quotation Ref. Duration of the Remarks License M/s Hero Motor Corp Ltd.; From 27.11.2021 to Limitation of usage Quotation no. 91-031121-1 Dt. 26.11.2022 -One Year proves the licensed 03.11.2021 program runs for a M/s Tecosim Engineering From 01.12.2021 to limited period, Services P. Ltd. Quotation No. 30.11.2022- One year source code/ 91-111121-1 Dt. 11.11.2021 algorithm of was M/s IDIADA- Quotation No. 34- From 25.02.2022 to never shared with 140322-2 Dt. 14.03.2022 31.01.2023- One year customer and there is no make Page 10 of 23 IT(IT)A No. 548/Bang/2025 available of the knowledge.
The Ld. Officers below failed to controvert that from the sample terms of licensing evidenced in the Quotation placed on record.
9. The Ld. Officers has not controverted the case is covered by the Article 12 of Indo Swiss DTAA and decision of EAC-Category no. 1 and 2:[Ground 4] i. In the Para 4 of its decision in case of EAC, the Hon'ble Supreme Court has grouped the categories of transaction as under:
Appellant 's case falls Transaction Types under The first category deals with cases in which computer software is purchased directly by an Licensing from BETA AG end-user, resident in India, from a foreign, non- to End Customer- Direct resident supplier or manufacturer Para 44i) Page Licensing no. 60.
The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from Licensing from BETA AG foreign, non-resident suppliers/ manufacturers to Distributor and then reselling the same to resident Indian end-users, Para 44ii) Page 63.
10. The Hon'ble Apex Court Tata Consultancy Services [2005 (1) SCC 308] Para 27 and held that what is "licensed" by the non-resident supplier directly to the resident end user/Distributor is, in fact, the sale of a physical object which contains an embedded computer program, such sale of goods does not involve transfer of a copyright in the software.
11. Receipt is not taxable as Royalty as per the Income Tax Act[Ground 5; 6; 8] i. The licensing of software fall under the definition of Royalty under the sub-clause (vi) to Explanation 2 to section 9(1)(vi) of IT Act 1961, but Relevant Article 12(1) and (3) of Indo Swiss DTAA overrides the provisions of IT Act by virtue of section 90(2) of the Act.
ii. The Ld. AO observation that the sales transactions are royalty under IT Act, as there is transfer of software 'for the use' without first noting that Article 12 of DTAA clearly provides that such transfer for the use must be in connection with copyright embodied in such software, and mere licensing of a copyrighted article cannot be regarded as Royalty under IT Act overriding the beneficial Indo- Swiss DTAA. There was no transfer of software for the use as there was no transfer of copyright itself and governed by DTAA provisions Page 11 of 23 IT(IT)A No. 548/Bang/2025
12. Royalty as per India - Swiss Confederation Double Taxation Avoidance Agreement ('DTAA') [Ground 7] i. The Tax Treaties entered into by India with other countries define "Royalty" to mean consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work. ii. Please note in the Tax Treaty, there is no provision like Explanation 4 to section 9(1)(vi)(b), which artificially expands the scope of the term 'Royalty' by providing that transfer of all or any rights includes transfer of all or any right for use or right to use a computer software.
iii. The Ld. Officers below have not read the Agreement as a whole- not even controverted Clause 2- which governs the "Ownership" and Clause 9- "Restriction on the usage the licensed product", relevant clause in relation to the fact pattern, for drawing reference to the definition of Royalty under India - Swiss DTAA. iv. Given the definition of royalties contained in Article 12 of the India-
Swiss DTAA, the several restrictions in the AGREEMENT do not amount to the use of or right to use any copy right u/s 9(1)(vi), along with explanations 2 and 4 thereof, not being more beneficial to the Appellant 's, have no application in present case.
13. The Ld. AO misinterpreted the Confidential Clause no. 1.25 and 14 of the Agreement: [Ground 9]
(a) The Ld. Officers below failed to appreciate that any commercial contract must facilitate protection of the right of the parties and prevent the confidentiality breaches and preserve and maintain the sanctity of the Agreement, hence general conditions has been included in the Agreement in Clause 14 as under:
(a) Clause 14.5 (a) - provides the degree of care needs to be taken by both parties of the Agreement .
(b) Clause 14.5(d)- provides for the reporting to be made in case of impermissible disclosure.
(c) Clause 14.5(f)- provides usage of information only as contemplated in the Agreement.
(d) Clause 14.6 and 14.7 - provides for responsibility and safe keeping of the information.
(e) Clause 14.9- provides for the steps to prevent further disclosure and compensation for such damage. It is pertinent to note that Appellant has not paid any such damage till date.
(f) Clause 14.10- Restricts the Distributor on usage of information which will continue for 5 years of expiration of the agreement.
(g) The Ld. Officers below failed to appreciate that none of the above general conditions override the specific terms contained in Clause no. 8 or Clause 9 of the Agreement which specifically deal with the "Ownership over the Proprietary rights of the Software" that is being licensed, the general terms of the Agreement never supersede the Page 12 of 23 IT(IT)A No. 548/Bang/2025 specific terms of the Agreement. The Ld. Officers failed to controvert the Clause 17.11 (Page 23) wherein which states that-
"17.11. In the event of conflict between the general terms and conditions set hereby and the specific terms and conditions stated of the Quotation, the specific terms and conditions stated on the Quotation should take precedence."
(h) The Ld. AO in Para 9 of the Order, failed to read the agreement as a whole, ignored the vital terms which has got direct bearing on the Proprietary Rights of the software contained in the Clause 8 and the Restrictions in use contained in Clause 9 of the Agreement, but cherrypicked the General Clauses contained in Clause 1.25 and 14.
(i) The Ld. Officers below failed to note that there is no whisper of a single sentence which mandates that the Appellant is bound to disclose the Source Code or part any Proprietary Rights to the Distributor.
(j) The Ld. Officers statement in the order is imaginary, without there being any single instance of actual sharing of the Source Code, no material was brought to record. to support the allegations, hence the order is perverse. Reliance -Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC).
(k) Citation: Purpose of Confidentiality clause is to facilitate the transaction as decided by Coordinated bench of Hon'ble Tribunal in Arista Networks Limited [TS-845-ITAT-2025(Bang)] (Para 21 and
22)- Annexure- 1.
14. As regards considering the rendering of support services income as Fees for Technical Services (FTS) [Ground 10; 11] i. The Ld. Officers below erred in taking arbitrary positions to make the addition.
ii. The Appellant has earned the income by selling the software licenses which is a goods as held Tata Consultancy Services [2005 (1) SCC 308] Para 27 and the same constitutes as Royalty income with the Indo-Swiss DTAA and the Appellant does not charge any additionally in this regard and hence has not earned any income as FTS.
iii. The Ld. Officers below has failed to appreciate that no technical knowledge, skill, knowhow or process is made available to the service recipients. This is proved by the fact that Agreements are getting renewed upon the expiry of software's license and no knowledge is made available to the customers, as submitted hereinabove.
iv. The Appellant is a tax resident of Switzerland, eligible to be taxed as per DTAA.
Page 13 of 23IT(IT)A No. 548/Bang/2025
15. Double Taxation as Receipts were subjected to Equalisation levy and hence exemption was claimed u/s 10(50): [Ground 13] Appellant furnished the details of Equalization levy paid before the Ld. Officers below and there was no issue in this regard.
16. Taxing the gross revenue without providing any deduction [Ground 12]
17. As regards addition cannot be made by merely filing a review petition in EAC: [Ground 14] Prayer:
Kindly take the above into records. We humbly request your honors to delete the additions made in scrutiny order taking the above into account. We are obliged to provide any other details upon your honors kind intimation."
9. We have also gone through the various materials furnished by the assessee to show that there is no copyright involved in these transactions in order to attract the term royalty / FTS. In fact, in the distribution agreement, it was clearly stated that the assessee had not parted with the source code to the licensee. We have also perused the purchase order placed by the customers in which it was specifically mentioned that the license to use the said software is only for a specific period and it should be renewed after the expiry of the said specific period. It shows that the source code was never shared with the customers and therefore customers would not be able to take copies of the said software to attract the provision royalty / FTS. Further, as seen from the various documents which are all mentioned in the synopsis, we find that the assessee had not transferred any technical knowhow / knowledge to the customers or their employees thereby make available the knowhow to the customers to attract the provision royalty / FTS. When there is no transfer of the technical knowhow and the assessee is not giving any such type of training to the customers on the software license granted to them, it could not be termed as FTS.
10. We have also perused Article 12 of the Indo-Switzerland DTAA in which the Article 12 dealt with the royalties and fees for technical services.
In the said Article, the term royalty was defined as payments of any kind received as consideration for the use of, or the right to use, any copyright of Page 14 of 23 IT(IT)A No. 548/Bang/2025 a literary or artistic or scientific work etc. Similarly, the fees for technical services has also been defined as payments of any kind to any person in consideration for the rendering of any managerial or technical or consultancy services including the provision of services by technical or other personnel. Considering the above said Article 12 of the said DTAA, the royalty clause would apply only for the copyright of any Article or product shared whereas in the present case, the assessee had sold the software by giving a license without providing any copyright and therefore the same would not be taxable as royalty in India.
11. Similar issue was considered by the Hon'ble Supreme Court in the Engineering Analysis judgment cited supra and the Hon'ble Supreme Court had held as follows:
"a) The amount paid by resident Indian end users/ distributors to nonresident computer software manufacturers/ suppliers, as consideration for the re-
licensing/use of computer software, cannot be characterized as `royalty' (i.e., use of copyright in the computer software) under Article 12 of the Tax Treaties (DTAA) as the same amounts to simpliciter purchase of goods and therefore, does not give rise to a liability to deduct any taxes at source (TDS), under section 195 of the Income-tax Act, 1961. (Para 45 to 52)
b) Hon'ble Supreme Court held that payments made for software are not covered under Art. 12 of DTAAs and Indian payers were not liable to withhold tax u/s 195 as no income chargeable to tax arose in India;
c) Hon'ble Court held-Distribution Agreement/ EULA did not create any interest or right in the Indian distributors or End-users which could amount to Right to use any copyright;
d) Hon'ble Supreme Court upheld that Art. 12 of DTAAs being more beneficial to apply over Explanation 2 and 4 to Sec. 9(1)(vi) of the Act which do not apply to the facts of the case;
e) Hon'ble Supreme Court relied on 'Azadi Bachao Andolan 263 ITR 706 SC (2003)' ruling and held-
"What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the Page 15 of 23 IT(IT)A No. 548/Bang/2025 extent that they are more beneficial to the Assessee and not otherwise. It has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in. the DTAA is to be looked at. It is only where there is no such definition that the definition in the ITA can then be applied";
12. If the sale of software could be treated as royalty or FTS, then the authorities have every right to tax the said income under the Act. The various documents furnished by the assessee would demonstrate that there is no transfer of right to use the product in order to term the income as royalty but only the assessee had given his license to use the software for the use by the specific customer and not by any other 3rd parties. There is no evidence to show that the assessee had also parted with the source code so that the purchasers could make use of the source code and taken any number of prints out of the said software to attract the provision royalty / FTS. The authorities had relied on some clauses in the agreements including the confidential clause which are all not of any use to term the transaction as royalty / FTS. These are all the general clauses incorporated in any of the commercial contracts to protect their rights of both the parties. When the assessee is the owner of the software, and they are giving only the license to use the said software for the customers, it could be treated only as the income earned out of such sale of software and could be treated as business income and in that circumstances, section 10(50) of the Act would apply to the assessee and the necessary benefit should be granted to them. In compliance with the provision 10(50) of the Act, the assessee had also produced the receipt for paying the equalisation levy to the department and considering the entire facts and the materials placed before us, we concluded that the income earned by the assessee out of the sale of the software is nothing but a business income not liable to be taxed as royalty / FTS.
13. This Tribunal also in a similar set of facts had given a finding in IT(IT)A No. 1159/Bang/2023 dated 23/06/2025 in the case of Arista Networks Ltd. vs. DCIT wherein this Tribunal had given the following finding:Page 16 of 23
IT(IT)A No. 548/Bang/2025 "16. Honorable Supreme court in Engineering Analysis Center of excellence ( P ) Ltd v CIT 125 taxmann.com 42 (sc) Neutral Citation: 2021 INSC 137 [MANU/SC/0137/2021] has considered the provision of the Copyright Act ,1957 and has held as under :-
"34. A reading of the aforesaid provisions leads to the following conclusions. Under Section 2(o) of the Copyright Act, a literary work includes a computer programme and a computer programme has been defined Under Section 2(ffc) of the Copyright Act to mean a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result.
35. Though the expression "copyright" has not been defined separately in the "definitions" Section of the Copyright Act, yet, Section 14 makes it clear that "copyright" means the "exclusive right", subject to the provisions of the Act, to do or authorise the doing of certain acts "in respect of a work". When an "author" in relation to a "literary work" which includes a "computer programme", creates such work, such author has the exclusive right, subject to the provisions of the Copyright Act, to do or authorise the doing of several acts in respect of such work or any substantial part thereof. In the case of a computer programme, Section 14(b) specifically speaks of two sets of acts - the seven acts enumerated in Sub-clause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. Insofar as the seven acts that are set out in Sub-clause (a) are concerned, they all delineate how the exclusive right that is with the owner of the copyright may be parted with, i.e., if there is any parting with the right to reproduce the work in any material form; the right to issue copies of the work to the public, not being copies already in circulation; the right to perform the work in public or communicate it to the public; the right to make any cinematograph film or sound recording in respect of the work; the right to make any translation of the work; the right to make any adaptation of the work; or the right to do any of the specified acts in relation to a translation or an adaptation.
36. In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work. This is made even clearer by Page 17 of 23 IT(IT)A No. 548/Bang/2025 the definition of an "infringing copy" contained in Section 2(m) of the Copyright Act, which in relation to a computer programme, i.e., a literary work, means reproduction of the said work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc. is at the heart of the said exclusive right.
37. Section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. Prior to the 1999 Amendment, Section 14(b)(ii) of the Copyright Act read as follows:
(ii) to sell or give on hire, or offer for sale or hire any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions;
What is conspicuous by its absence is the phrase "regardless of whether such copy has been sold or given on hire on earlier occasions".
38. Importantly, no copyright exists in India outside the provisions of the Copyright Act or any other special law for the time being in force, vide Section 16 of the Copyright Act. When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in Section 14(a) and (b) of the Copyright Act, in the said work for a consideration, the assignee of such right becomes entitled to all such rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him (see Section 18(2) read with Section 19(3) of the Copyright Act). Also, Under Section 30 of the Copyright Act, the owner of the copyright in any literary work may grant any interest in any right mentioned in Section 14(a) of the Copyright Act by licence in writing by him to the licensee, under which, for parting with such interest, royalty may become payable (see Section 30A of the Copyright Act). When such licence is granted, copyright is infringed when any use, relatable to the said interest/right that is licensed, is contrary to the conditions of the licence so granted. Infringement of copyright takes place when a person "makes for sale or hire or sells or lets for hire" or "offers for sale or hire" or "distributes...so as to affect prejudicially the owner of the copyright", vide Section 51(b) of the Copyright Act. Importantly, the making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was Page 18 of 23 IT(IT)A No. 548/Bang/2025 supplied, or to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright Under Section 52(1)(aa) of the Copyright Act. In short, what is referred to in Section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright.
39. Section 52(1)(ad) is independent of Section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for noncommercial personal use would not amount to an infringement of copyright. However, it is not possible to deduce from this what is sought to be deduced by the learned Additional Solicitor General, namely, that if personally legally obtained copies of a computer programme are to be exploited for commercial use, it would necessarily amount to an infringement of copyright. Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of Section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in Section 52(1)(aa) of the Copyright Act."
17. Honourable Supreme Court in para no. 40 was also concerned with DTAA between India and Ireland, which is also the case before us. The DTAA defines royalty and FTS as under :-
3. ( a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience;
(b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.
Page 19 of 23IT(IT)A No. 548/Bang/2025
18. Honourable SC also considered in para no. 45 to 47 the distribution agreement involved in case before it , which are also similar to agreement before us, as under :-
"45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non-exclusive, nontransferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non- resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all.
46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA.
47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of Section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in Sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to Section 30 of the Copyright Act, inasmuch as Section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in Sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the Page 20 of 23 IT(IT)A No. 548/Bang/2025 aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence."
19. On considering the agreement with the distributors and reading clause 3.1, it is provided that assessee grants distributor a limited, nonexclusive, non-transferable, revocable right to receive from assessee and to sub-licence the resale of software in object code form only subject to terms of end user licence agreement. In clause 3.3 it also provides that the distributor will not copy, duplicate, translate, reverse engineer, decompile or disassemble the software or attempt to discover any source code or underlying algorithms of the software by any means. It further provides that the distributor will inform the assessee any unauthorised activity by the third party in the territory of the distributor. Thus from the above, it is clear that it is only in the object code form licence to use the software is provided. Thus there is no evidence that assessee also provides source code to the end user or to the distributor. Thus, the observation of the ld. AO is devoid of any merit that assessee has or will part with the source code to the distributor or to end users.
20. Further with respect to the software embedded in hardware, the Hon'ble Supreme Court has also confirmed the decision of the Hon'ble Delhi High Court in 344 ITR 470 that software which is embedded in the hardware is a transaction of sale and not a royalty. Further admittedly there is no allegation that assessee has any PE in India. Therefore, the income earned from this stream is not chargeable to tax and covered in favour of the assessee by the decision of Hon'ble Supreme Court.
Page 21 of 23IT(IT)A No. 548/Bang/2025
21. Coming to the confidentiality clause in the agreement, it provides that during the course of business, if the distributor or other party obtains information about the confidential or proprietary nature, it shall maintain it with strict confidence and trust and should be disclosed only to employees on need to know basis and not to disclose to any other person. On looking at this confidentiality clause, it neither speaks of giving any right to the distributor or to the other party, but it preserves and protects its own right. Therefore the confidentiality clause does not provide for exceeding access to any other information including for the software, it preserves and protects right of the assessee, if accidentally it comes into the hands of the distributors or others. Thus, it does not help the case of the AO to charge the above sum as royalty. Confidentiality clause in fact protects the right of Copyright owner and does not give any further right to the user/ distributor.
22. The ld. CIT(DR) in her written submissions states that the case of the assessee is not covered by the decision of Hon'ble Supreme Court as the revenue streams of the assessee does not fall into any of the 4 categories of the cases on which the Hon'ble Supreme Court has given its decision. Therefore the reliance placed by the assessee on this decision is not correct. Regarding the applicability of the decision of the Hon'ble Supreme court, the facts show that assessee is original equipment manufacturer and manufactures network based solutions such as switches, routers, etc. These products are available with limited features and functionality, without installing any additional software licences and are being sold to the Indian customers through third party channel partners. The assessee provides software licences and can also be purchased separately on need basis. These software are licenced products are standard in nature and the customers do not have any right and option to modify customised software licences. Further the distributors are not permitted to copy or modify the software. This is evident in clause 3 of the distributors resale rights of the agreement. The distributor agreement has also the licence restrictions and conditions by which the copy, etc. is strictly prohibited. Thus the assessee is providing distributors a right to distribute software without providing any right in the Copyright of the software. The distributors are also given non-exclusive non-transferable licence to resell the software products and was not permitted to copy, modify the software, reverse compile, reverse assemble any portion of the software. Further the confidentiality clause also do not provide any right in the Copyright of the software to the distributors and end Page 22 of 23 IT(IT)A No. 548/Bang/2025 users, but facilitates protection of the right of the assessee. Similarly, the assessee also provides the hardware products which are preloaded with software licences, which is also sale of software embedded in the hardware component.
23. Both the above streams are covered by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) .
24. With respect to the hardware replacement and support services treated by the ld. AO as fees for technical services wherein assessee replaces the damaged faulty hardware products with new product and therefore it is hardware replacement and support services where assessee provides only hardware product. This is also evident from the invoices wherein it is mentioned as hardware replacement and corresponding quantities. Therefore, it is not fees for technical services, but it is sale of embedded software in the hardware product. Therefore the same cannot be considered as fees for technical services.
25. We have also been shown the decision of Honourable supreme court in case of Microsoft Regional Sales Pte Limited [2024] 167 taxmann.com 45 (SC)/ [2024] 301 Taxman 402 (SC) where in assessment years involved is Assessment years 2010-11 to 2017-18 [ post amendment] where in on merit also honourable supreme court has held that: -
"3. Even otherwise, the special leave petition is covered on merits by virtue of the judgment of this Court in the case Engineering Analysis centre of Excellence Private Limited v. CIT [2021] 125 taxmann.com 42/281 Taxman 19/432 ITR 471/(2022) 3 SCC 321 , which judgment has also been sustained in the review petition filed by the petitioner by a three-Judge Bench of this Court."
26. We have also been shown the decision of Honourable supreme court in case of MOL Corporation [2024] 162 taxmann.com 198 (SC)/ [2024] 299 Taxman 506 (SC) [2024] 167 taxmann.com 45 (SC)/ [2024] 301 Taxman 402 (SC) where in assessment years involved is Assessment years 2013-14 [ post amendment] where in on merit also honourable supreme court has held that: -
"3. In the circumstances, following the earlier order dated 11.03.2024 passed in CIT (International Taxation) v. Mol Corporation [SLP (C) Diary No(s). 5669 of 2024], we condone the delay and dismiss the special leave petitions on the basis of the earlier judgment of this Court in the case of Engineering Analysis Centre of Page 23 of 23 IT(IT)A No. 548/Bang/2025 Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42/281 Taxman 19/432 ITR 471 (SC)/[2022] 3 SCC 321 and by following order dated 11.03.2024 passed in the aforementioned special leave petition."
27. Thus, according to us, in view of the decision of honourable supreme court, even post amendment, we hold that income earned by the assessee of Rs 35,83,19,076/- comprising of Sale of Software products as Software license of Rs. 94031793/-, Sale of Software embedded in hardware of Rs 33058672/- and hardware replacement and support services also in the nature of software embedded in hardware of Rs.22,53,36,904/- is not 'royalty' within the meaning of Article 12 of India Ireland DTAA."
14. The above said findings given by this Tribunal squarely applies to the facts of the case and it approves the view taken by us that the income earned by the assessee would not be treated as royalty / FTS.
15. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 01st April, 2026.
Sd/- Sd/-
(PRASHANT MAHARISHI) (SOUNDARARAJAN K.)
Vice - President Judicial Member
Bangalore,
Dated, the 01st April, 2026.
/MS /
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file 6. CIT(A)
By order
Assistant Registrar,
ITAT, Bangalore