Income Tax Appellate Tribunal - Delhi
Saxo Bank A/S, Noida vs Acit Intl. Taxation, Gurgaon on 16 April, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Sh. C. N. Prasad, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 2010/Del/2023 : Asstt. Year : 2020-21
Saxo Bank A/S, Vs ACIT,
C/o Walker Chandiok & Co. LLP, International Taxation,
2nd Floor, Plot No. 19A, Sector-16A, Gurgaon-122001
Noida, Uttar Pradesh-201301
(APPELLANT) (RESPONDENT)
PAN No. AAWCS6369P
Assessee by : Sh. Ajay Vohra, Sr. Adv.
Revenue by : Sh. Vizay B. Vasanta, CIT DR
Date of Hearing: 01.02.2024 Date of Pronouncement: 16.04.2024
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the as sessee against the order dated 22.05.2023 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
" 1 . Th a t on th e f a c t s a n d ci r c um s t a n c e s of t h e ca s e a n d i n la w , th e L e a rn ed As s e s si ng O f fi c er ( ' Ld . A O ') ha s e r r e d b y c ons i d e ri ng th e a m ou nt o f I N R 7 ,4 1 , 25 , 4 99 r e c ei ve d b y t h e Ap p el l an t f r om it s gr ou p en ti t y , S GI PL , b ein g r e i mbu r s em en t of s oft w a r e li c en s e e x p en s e s a s i t s in c o me ch a rg ea bl e t o t a x in In dia b y h old in g t h a t s uc h r e c eipt s qu a li f y a s R o ya l t y f o r u s e o f equ ip m en t w ith ou t a pp r e cia t in g t ha t r e i mb u r sem ent p e r se d o e s n ot co n st it ut e ta xa b l e i n com e .
2 . T h at on t h e f a c t s a nd c i r cu m s ta nc e s o f th e ca s e a nd i n l a w , th e L e a rn ed As s e s si ng O f fi c er ( ' Ld . A O ') ha s e r r e d b y di s r eg a rd in g th e pr i nc ip l e s l a i d d o w n b y H on 'b l e Su p r em e C o u r t in c a s e of M / s En g i n e e rin g A n a l y si s C e nt r e o f E x c el l en c e P ri va t e Li m i t ed v s . C I T [2 0 2 1] 1 2 5 t a x ma n n . com 4 2 ( SC ) on t a x a b il it y o f sta n da rd s h r in k wr a p p e d s oft w a r e , w h i ch sq u a r e ly a p pl ie s to th e fa c t s o f t h e Ap pel la n t ' s ca se. Th e Ld . A O e r r ed in h old in g 2 ITA No. 2010/Del/2023 Saxo Bank A/s th at t h e S C d ec is i o n i s n ot a p pl i ca b l e t o t h e fa ct s o f Ap p el l a n t as th e t ra n s a c t i on i s on e f o r u s e o f i n du st ri a l , c o m m e r ci a l o r s ci ent i fi c equ ip m en t a nd n ot f o r u s e o f s t a n d a r d s o ft wa r e a s de a l t i n t h e S C d e ci s i on .
3 . Th at , on f a c ts a nd i n th e c i rc u m st a nc e s o f t h e ca s e a n d in law , t h e Ld . A O h a s e r r ed i n p a s si ng t h e fi na l a s s es s me n t o rd e r w it h a p r e- d et e r m in ed m in d s et q u otin g u n su b st a n ti a t ed , im a gi n a ry a n d fa r f et c h ed fa ct s t o c on cl ud e t ha t t h e A pp el l a n t mai nt ai n ed I T i n fr a s t ru ct u r e a n d w a s p r ovi d in g th i r d pa rt y s tan da rd s oft w a r e th r ou gh Ent e rp ri s e a pp li c a ti on s a nd En t e rp r i s e S e rv e r s b y a l l ow i ng a c c e s s to su ch I T i n f ra st ru ct u r e . Th e Ld . A O f a il ed t o a pp r eci a t e th a t th e so ft wa r e un d e r qu e s ti on ar e s t a n da r d of f e rin g s of t hi r d- p a rt y v en d o r s and IT in f ra st ru ctu r e , i f a n y i s m a in t a i n ed o n ly b y s u ch t h i r d - pa rt y v end o r a n d n ot b y A pp e ll a n t.
4 . Th at , t h e Ld . A O ha s e r r ed in fa ct s a n d in l a w by d i s re ga rd in g th e di r e cti on s of th e H on' bl e D R P t o con sid e r a n d fa ct u a ll y v er i f y th e a s s e sse e ' s su bm i ss i on d a t ed 0 3 .0 4 . 2 02 3 a n d t o pa s s s p ea k in g & r e a s on e d o r d e r w it hi n th e a m bi t of la w a n d ju d ici a l pr e ced ent s . Th e Ld . A O f a i l ed t o a pp r e ci at e a n d w a s g r o ss l y n eg l i g en t i n c on c lu din g t ha t th e d o cu m en t s s h a r e d vi a s ub mi ssi on da t e d 0 3 .0 4. 2 0 2 3 w e r e a l r ea dy a v a i l a b l e wi th t h e Ld . A O w h i l e pa s s i n g d r a ft a ss e s sm en t o rd e r f or th e c a p t ion e d y ea r.
5 . Th e L d. A O h a s e r r ed in fa c t s a n d i n la w b y n ot r e c o rdi n g a n y ob se rv a t i on r eg a rd i n g t h e ex a min a t i o n o f r el ev a n t fa c t s a n d do cu m en t s a s d i r e ct ed b y t h e H on 'b l e D R P wh il e con c lu d in g th a t th e A pp ell a n t m a i nt a in s I T in f r a s tr u ct u r e o r se r v e rs fo r pr o v i si on o f th i rd - p a rt y s o ft wa r e ."
3. The assessee is a tax resident of Denmark. The assessee company filed return of income on 29.05.2021 declaring NIL income.
4. The assessee, Saxo Bank A/S is Fin-tech specialis t that provides its partners and clients platfor m, tools and know ledge to make an impact through investment strategies . It is a global multi-asset facilitator and de livers capital market a ccess, products and services through multi asset platform to traders, inves tors and SAS (wholesale). During the year under consideration, the assessee entered into a glo bal agreement with Microsoft for procuring various shrink wrapped software 3 ITA No. 2010/Del/2023 Saxo Bank A/s user licenses such as Microsoft Visual Studios, Dynamic 365, remote desktop, office 365 etc. for entities within the Saxo Group. The assessee received payments against the above licenses from its AE, M/s Saxo Group India Private L imited (SGIPL) on which tax was withheld u/s 195 of the Act. The assessee claimed that receipts from, its AE, SGIPL was exempt which the reve nue treated as taxable.
5. The assessee alongwith its group concerns require various licensed software for carrying out the ir busine ss. Since the whole group needs same/similar software, the assessee group has procured the software centrally. Also , the group administers its Global IT policy through the assessee. During the assessment proceedings, the assessee was reque sted to provide details of software provided to its Indian AE and also provide copies of invoices raised by Microsoft. The Ass essing Officer held that the assessee was procuring various so ftwares for the whole group and mainlining an IT Infrastructure and recovered charges on usage basis from group concerns. The AO held that Saxo Group is engaged in providing various platforms for inves tment in capital markets and operates all over the world.
6. The Asse ssing Officer held that the assessee was allowing access to its IT Infrastructure and charges received against the same were chargeable to tax as royalty.
4 ITA No. 2010/Del/2023Saxo Bank A/s
7. The assessee contended that the receipts are not chargeable to tax for the following reaso ns:
(i) That the assessee only purchase s software for its own captive use and for group concerns and it does not maintain any IT infrastructure.
(ii) That the assessee cross charges the cos t of software to group concerns.
(iii) Decis ion of Ho n'ble Supreme Court in the case of M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT [2021] 125 taxmann.co m 42 (SC) is applicable to the facts of the case and receipts are not c hargeable to tax.
8. In the case of the assessee, central procurement IT department carries out the following functions in the process of procurement of license s and allocating them to various group concerns:
(i) Negotiate with Microso ft/other vendors for purc hase of licenses.
(ii) Signs enterprise licensing agreements.
(iii) Ensures distr ibution of licenses to various group concerns.
(iv) Computes and allocates cost to various group concerns on actual usage basis.
(v) Imple ment and monitor group IT Policy.
(vi) Acts as point of contact for any issues re lated to third party software .5 ITA No. 2010/Del/2023
Saxo Bank A/s
9. It is seen that the assessee procures the following licensed software:
Office365: Office 365 comprises of traditiona l Microsoft Office deskto p applications, Microsoft application services, and some new productivity services, all of which are enabled as consumable services over Microso ft's Azure cloud platform. Examples include Outloo k, Teams , OneNote etc. w hich are used in day to day operations;
Windows Remote Desktop: This is a Microsoft application used to connect a PC w ith a remote device to ha ve acces s to the data in that device on the PC connected;
Visua l Studio : This is a Microsoft application over cloud used to develo p computer progr ams for w indows, websites , web service s, web applications etc. by accessing Microsoft's so ftware de velopment platfor ms;
Microsoft Project: This is a project management software , deve loped and sold by Microsoft. It is designed to assist a proje ct manager in developing a schedule, assigning resources to tasks, tracking progress, mana ging the budget, and analyzing workloads;
Dynamics CRM: This is a set o f software solutio ns which helps in improving interactions and business with custo mers.
10. A perusal of the above reveals that the software are used by the group for carrying out its business. It is seen that same /similar software are used by the whole group concer ns. It 6 ITA No. 2010/Del/2023 Saxo Bank A/s is also seen that the above software are hosted through Enterprise applications and Enterprise Servers which provide the group to collaborate with one another.
11. The software/programs are hosted on Enterprise Servers which are computer servers that includes programs required to collectively serve the requirements of an enterprise instead of an individual user, unit or specific application. Such servers cater to needs of the whole group and are managed by the assessee ce ntrally. Such servers provide consolidated connections a choice of broadcast, TCP/IP or multicast, as well as user-defined tools for conflation and hibernatio n, resulting in impro ved network and deskto p perfor mance. The assessee's central team i.e. Infor mation Technology Department and Chief Information Officer handles the issue of procurement of licenses by signing Enterprise Licensing Agreements.
12. An enterprise license agreement (ELA) is a contract between a customer and a ve ndor that allows purchase of a software product for a company at a discounted, fixed rate for a certain time period. Enterprise license agreements benefit the custo mer in a variety of ways. It provides a common IT platform deplo yed acro ss an organization and ensures that users always have access to the latest software version. The software purchased by the assessee form a part of its IT infrastructure as discussed above and they form an integral part of IT systems owned/leased by the assessee. The assessee maintains a global IT Infrastructure which consists of owned, leas ed, supported and hosted IT systems, hardware devices, internet and intranet syste ms etc. It is not the case that the as sessee makes 7 ITA No. 2010/Del/2023 Saxo Bank A/s purchases on the reque st of its AEs. As per ELA, affiliates of the assesse can access the licensed softw are. The assessee has filed copy of intercompany services agreement which provides use o f or right to use of IT infrastructure to its AEs.
13. The as sessee hosts the software/program through enter prise applications and Enterprise servers for the benefit of whole group w hich optimizes the resources as discussed a bove. Therefore, the Assessing Officer held that it is a clear case of making available IT infrastructure and AEs ar e charged on actual usage basis.
14. The assessee argued that its case is covered by the decis ion of Hon'ble Supreme Court in the case of M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT.
15. The Assessing Officer held that the current case is regar ding taxation of equipment royalty. The Assessing Officer held that the assessee receives from its group concerns is charges for allowing use of its IT Infrastructure which co nsists of various third party software, owned/leased/supported platforms including hardware systems, hence, the receipts are taxable as royalty as per explanation 2(iva) to section 9(1)(vi) of the Act
16. The ld. DRP considered the following facts.
The assessee does not carry on any business operations in India during the year.
8 ITA No. 2010/Del/2023Saxo Bank A/s Neither the assessee undertook any business ac tivities in India , nor it is in receipt of any income from any third party in India.
During AY 2020-21, it had procured var ious licenses from 'Microsoft Denmark ApS' in shr ink-wrap form without any specific custo mization for its captive use and for use by its group entities. SGIPL is also a group entity of assessee incor porated in India and such Microsoft Licenses were provided to its employees.
In most cases the so ftware licenced from Microsoft are insta lled in the laptops/ desktops of the end users and does not require any IT Infrastructure / server to be maintained by the assessee.
Certain software which are accessible over the c loud (like Office 365), the IT Infrastructure, if a ny is owned and maintained by Microsoft as the service provider and not by the a ssessee.
In both these cases the assessee only contracts with Microsoft for the software licences and cross charges the cost of the licence to SGIPL based on actual users .
The assessee never submitted these facts, and the AO also did not bring any evidence on record to support this state ment. As stated above, the assessee has no t maintained any IT infrastructure or servers for providing software licenses to SGIPL. Thus, these facts are incorrec t and mere gue sswork of the AO.
9 ITA No. 2010/Del/2023Saxo Bank A/s The cost-to-cost reimbursement does no t have any income element and thus, cannot be brought to tax. Further , mapping the cost with IT infrastructure is not applicable in the instant case in absence of any IT infra structure maintained by the assessee for the said purpose.
When a new employee / user joins the organization viz. SGIPL, a request is made for various softwares re quired by the employee and licensed from Microsoft.
The software provided by the assessee to SGI PL mostly does not require any IT Infrastructure / server as the same are installed in the hardware (laptops/ desktops) of the end users i.e., employees of SGIPL.
the software used by SGIPL and the amount for which is cross charged by assessee, does not per tain to any use or right to use o f any co pyright as neither the assessee nor SGIPL can sub-license , transfer , reverse engineer, modify or reproduce the software / user license . SGIPL acknowledges that the Micro soft So ftware has been granted to assessee by Microsoft Denmark ApS under an objec t code-o nly, non-exclusive, non-s ublicensable, non- trans ferable, revocable license to access and use the objec t code version of the proprietary software, solely for assessee and its group/associate co mpanies' internal business purposes.
10 ITA No. 2010/Del/2023Saxo Bank A/s
17. On going through above averments, the ld. DRP held as under:
"4.1.3...... ...An opportunity of being heard w as afforded to the assessee before the Pa nel on 27.03.2023. During the hearing, the Authorize d Representa tive of the assessee by refe rring the paper- book including page no. 9 o f the paper-book s ubmitted inter-alia that the servers were not maintained by the as sessee and the c loud infras tr ucture was made and provided by the Mic rosoft company. The AR furthe r submitted that this case was cove red by the Supreme Court judgment in case of M/s Engineering Analysis Centre of Excellence Private Limited vs. CIT and had refe rre d to page no . 26 o f the paper- book. However, the AR was asked to file a copy of the agreement ma de between the holding company and the Microsoft regarding prov iding the so ftware to the group entities .
4.1.3.1 The assessee vide letter dated 03.04.2023, has filed the documents be ing Microsoft Business and Service s Agreement, correspo nding Signature Form, Pro duct Selection Fo rm and Cus tomer Price Sheet between the assessee and Microsoft as A nnexure A. The assessee has submitted that the as sessee is no t re quired to maintain IT infrastruc ture of any k ind for using the licenses procured from Microsoft. Further, all the requisite facilitie s are managed and handled by Microsoft and its affiliates. Thus, the question of equipment royalty does not arise in the instant case .
4.1.3.2 The Panel take s note of the assessee's submission made at page no . 9 of the pape r-book that the assessee ne ver submitted these fac ts, and the Ld. AO also did not bring any e vidence on reco rd to support this statement. The Panel further take a note of A O's the draft orde r and is of the view that the AO has not ac tually reco rde d his obse rv ations r egarding the exa mination o f the re levant facts and documents fo r arriving at the co nclusion regarding the assessee has 11 ITA No. 2010/Del/2023 Saxo Bank A/s not maintained any IT infrastructure or serve rs for providing softw are licenses to SGIPL . Conside ring the above , the Panel is of the view that the AO should consider and factually verify the assessee's submission dated 03.04.2023 made before the Pane l by pass ing a spe aking and reasoned or der within the am bit o f law and judic ial precedents. The Pane l hastens to clar ify that the AO shall not conduct any fresh inquiry in this r egard; the ve rific atio n shall be made base d on do cuments/submissions available on the assessment records . T he asse ssee's objections made at 2 and 3 in this regard, are hereby rejecte d a nd disposed off acco rdingly."
18. We have gone through the facts and in agreement with the fact that the software used by SGIPL and the amount for which is cross charged by assessee, does not pertain to any use or right to use o f any copyright as neither the asses see nor SGIPL can sub-license, transfer, reverse engineer, modify or reproduce the software / user license. SGIPL acknowle dges that the Microsoft Software has been granted to assessee by Microsoft Denmark ApS under an object code-only, non-e xclusive, non- sublicensable, non-transferable, revocable license to access and use the object code version of the proprietary s oftware, solely for assessee and its group/associate compa nies' internal business purposes.
19. Reliance is being placed on the judgments of EY Global Services Ltd. Vs. ACIT 133 taxmann.com 157 (Del) and Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT 125 taxmann.com 42 (SC). The co nclusion drawn from the above said judgments is as under:
"(i) Co pyri ght is an e xclusive right, which is negative in nature , being a right to re str ict others from doing ce rtain ac ts .12 ITA No. 2010/Del/2023
Saxo Bank A/s
(ii) Copyr ight is a n intangible, incor poreal right, in the nature of a privilege , which is quite independent of any mate rial s ubs tance. Owne rship of copy right in a work is diffe rent from the ownership of the phys ica l mate rial in which the copyrighted wo rk may happe n to be embodied. An obvio us e xample is the purchaser o f a book or a CD/DVD, w ho beco mes the owner of the physic al article, but does not become the owner of the copyright inherent in the work, suc h copyright remaining exclusive ly w ith the o wner.
(iii) Parting with copyright entails parting w ith the right to do any of the ac ts mentio ne d in sec tio n 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The trans fer of the owners hip of the physical substance , in w hich copyright subsists, gives the purchaser the right to do with it w hatever he ple ases, e xcept the right to reproduce the same and iss ue it to the public , unless such copies are already in circulation, and the othe r acts mentio ned in secti on 14 of the Copyright Act.
(iv) A licence fro m a copyright o wner, confer ring no propr ietary interest on the licensee, does no t entail parting w ith any copyright, and is differe nt from a lice nce issued unde r section 30 of the Copyright Ac t, w hich is a lice nce which grants the licensee an interest in the r ights mentioned in section 14(a) and 14 ( b) of the Copyright Act. Where the core of a transaction is to authorize the end- use r to have access to and make use of the " lice nsed" computer softw are pro duc t over w hic h the licensee has no exclusive rights, no copyright is parte d with and conse quently, no infringement takes place , as is recognized by section 52(1)( aa) of the Copyright Act. It makes no differ ence whether the end-user is e nabled to use computer softw ar e that is custo mized to its specifications or otherwise.
13 ITA No. 2010/Del/2023Saxo Bank A/s
(v) A non-e xclusi ve, non-transfe ra ble licence, merely enabling the use of a copy righted product, is in the nature of restric tive conditio ns which are ancillar y to such use, and canno t be construed as a licence to enjoy all or any of t he enumerated rights mentione d in sectio n 14 of the Copyr ight Act, or create any interest in any such rights so as to attract section 30 o f the Co py right Act.
(vi) The right to repro duce and the right to use compute r software are dis tinct and s eparate rights, as has been reco gnized in SBI v. Collec tor of Custo ms, (2000) 1 S CC 727 (see paragraph 21), the former amounting to parting with copyright and the latter , in the context o f non-e xclusive EULAs, no t being so ."
20. A reading of the above judgment would clearly show that for the payment received by the assessee to be taxed as "royalty", it is essential to sho w a transfer of co pyright in the software to do any of the acts mentioned in section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licencee, does not entail parting with the copyright. Where the core of a tr ansaction is to authorize the end-user to have access to and make use of the licenced software over which the licencee ha s no exclusive rights, no copyright is parted with e nd therefore, the payme nt received cannot be termed as "royalty". The software used by SGIPL and the amount for which is cross charged by assessee, does not pertain to any use or right to use of any co pyright as neither the assessee nor SGIPL can sub-lice nse, transfer, reverse engineer, modify or reproduce the so ftware / user license. SGIPL acknowledges that the Microsoft Software has be en granted to assessee by Microsoft Denmark ApS under an object code-only, non-exclusive , non-sublicensable, non-transferable, revocable 14 ITA No. 2010/Del/2023 Saxo Bank A/s license to ac cess and use the object code version of the propr ietary software, solely for assesse e and its group/associate compa nies' internal business purposes.
21. In view of the factual position and judicial pronounce ment, we hold that no liability arises on the assessee. The mere fact that tax has been de ducted doesn't automatically make the receipt taxable as "royalty".
22. In the re sult, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 16/04/202 4.
Sd/- Sd/-
(C. N. Prasad) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 16/04/2024
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR