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6. That the AO and the DRP failed to appreciate that the software license and software which are embedded in the hardware are IT(IT)A No.1159/Bang/2023 standardized and not customizable and that the distributor/customer does not have the right to copy, modify, reverse compile, reverse assemble any portion of the software and do not have any unrestricted rights in the software, including the source code, and therefore, income earned cannot be treated as royalty income.

6. Thus the total income as per Form 26AS of Rs.35,83,19,076 was stated to be not chargeable to tax in India. The ld. AO examined the claim of assessee and held that this sum of Rs.35,83,19,076 is taxable as royalty in India and is not covered by the decision of Hon'ble Supreme Court. The reasons given by the AO are at para 12.1 of the draft assessment order as under:-

"12.1 The submission of the assessee was carefully perused and the same is not acceptable as the assessee has not commented on the issue of "confidential information' containing Intellectual Property being accessed by the Distributors. It is significant to note that the assessee has not categorically denied that there has been no instance where the confidential information was shared during the software distribution process. This demonstrates that in case there is a requirement, the assessee can share the confidential information for the effective usage of software. For instance- a glitch during installation of the software or IT(IT)A No.1159/Bang/2023 the hardware embedded with software, the distributor might require deeper access of the software to trouble shoot the issue being faced. It is not the case that the source code will be used to manipulate the software, but such access is available in case there is an issue to be resolved.

12. It is the claim of the assessee that income earned by the assessee is not in the nature of royalty as defined under Article 12 of the India-Ireland DTAA and Therefore same is not chargeable to tax in India.

13. The ld. AO examined the argument of the assessee and held that the software royalty revenue is not fitting into the 4 categories as decided by the Hon'ble Supreme Court. The AO was of the view that the access of source code amounts to royalty even under the OECD commentary on Article 12 relying on para 14.3of the Commentary. The ld. AO was also of the view that by getting access to the source code also gives information concerning industrial, commercial or scientific expertise and same is also royalty as per para 11.5 of the Commentary on Article 12. Thus by giving the source code, the logic, algorithm or programming language and technique are also shared and therefore it is royalty on account of supply of scientific, technical, industrial or commercial knowledge. Thus, there is royalty on account of copyright as well as royalty on account of scientific, technical, industrial or commercial knowledge. The ld. AO also referred to the IT(IT)A No.1159/Bang/2023 End user licence agreement [ EULA] between the assessee and the customer. He referred to para 18 of the EULA regarding confidentiality and found that in the confidentiality clause it is clearly stated that the parent company can share software source code, trade secret, know-how, inventions, development, etc. and therefore there is transfer of right to use of the patents and copyrights. The ld. AO further referred to para 45 of the decision of the Hon'ble Supreme Court and held that it is clear from the confidentiality clause that the distributor agreement does fall into the ambit of the judgment of Hon'ble Supreme Court. Accordingly a show-cause notice was issued and same was replied.

19. On considering the agreement with the distributors and reading clause 3.1, it is provided that assessee grants distributor a limited, non- exclusive, 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.