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2022 (9) TMI 525 - AT - Income TaxTDS u/s 195 - payment for purchase of software products was made without deduction of tax at source - royalty payment - International Distribution Agreement between Assessee and Foreign entity - Assessee claimed that the MGI has appointed the Assessee as distributor with non-exclusive rights to market its products and no transfer of rights in respect of any copyright (section 9(1)(vi)) is extended under the distribution agreement - HELD THAT - From the clauses of agreement, it appears that the Assessee was appointed as a distributor/licensee only by the MGI for the sale of its products manufactured, while reserving all rights including ownership of material with it and without assigning or giving any copyright to the Assessee and without giving rights of modifications to the user agreements as well. Considering the Assessee was granted a distributorship/license to sell the products manufactured by the MGI, with a condition not to make or assign any copyright therein and while reserving all rights including ownership of material with it, goes to show that the transaction between the Assessee and the MGI cannot be termed as ROYALTY but in fact the same amounts to sale of goods only on the basis of distributorship/license. Applicability of provisions of the Act u/s 195 qua payments made by the Assessee to the MGI (foreign company) having no PE in India and therefore not assessable to income tax in India - In the instant case admittedly the Assessee dealt with the MGI which is admittedly a foreign company and having no PE in India and thus the case of the Assessee falls under 2nd category of cases which deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users and as per dictum of the Hon ble Apex Court, the Assessee was not liable to deduct any TD Sunder Section 195 of the Income Tax Act, hence respectfully following the dictum of the Hon ble Apex Court in Engineering Analysis Centre for Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT , we are inclined to delete the addition made by the Ld. AO and sustained by the Ld. Commissioner, hence the same stands deleted. Consequently appeal of the Assessee stands allowed.
Issues Involved:
1. Treatment of transactions between the Assessee and MGI as 'Royalty'. 2. Applicability of provisions of Section 195 of the Income Tax Act regarding payments made by the Assessee to MGI. Detailed Analysis: Issue 1: Treatment of Transactions as 'Royalty' The primary contention was whether the payments made by the Assessee to Mentor Graphics (Ireland) Limited (MGI) for the purchase of software products constituted 'Royalty' under Section 9(1)(vi) of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and Ireland. - Assessee's Argument: The Assessee argued that the payments did not constitute 'Royalty' as they were made for the purchase of software products without any transfer of rights in respect of any copyright. The Assessee emphasized that under the distribution agreement, it had no right to alter, reproduce, or commercially exploit the software, and thus, the payments were for the mere use of copyrighted software, not for the exploitation of any copyright. - AO's Decision: The Assessing Officer (AO) determined that the payments were 'Royalty' and subjected the Assessee to tax deduction at source (TDS) under Section 195. The AO's decision was based on the interpretation that the transactions involved the use of or right to use any copyright. - Tribunal's Analysis: The Tribunal referred to the Supreme Court judgment in Engineering Analysis Centre for Excellence Private Limited Vs. Commissioner of Income Tax, which clarified that payments for the resale/use of computer software through End User License Agreements (EULAs) or distribution agreements do not constitute 'Royalty'. The Tribunal noted that the Assessee was merely a distributor without any rights to modify or commercially exploit the software, thus the transactions were not 'Royalty' but amounted to the sale of goods. Issue 2: Applicability of Section 195 of the Income Tax Act The second issue was whether the Assessee was liable to deduct TDS under Section 195 on payments made to MGI, a foreign company with no Permanent Establishment (PE) in India. - Assessee's Argument: The Assessee contended that since MGI had no PE in India, the income was not taxable in India, and therefore, there was no obligation to deduct TDS under Section 195. - Tribunal's Analysis: The Tribunal again referred to the Supreme Court's judgment, which categorized cases involving software transactions and concluded that payments made by resident Indian companies to non-resident suppliers for software do not constitute 'Royalty' and are not taxable in India. Consequently, the Assessee was not liable to deduct TDS under Section 195. Conclusion: The Tribunal concluded that the payments made by the Assessee to MGI did not constitute 'Royalty' and were not subject to TDS under Section 195. The appeals filed by the Assessee were allowed, and the additions made by the AO were deleted. Summary: The Tribunal, following the Supreme Court's judgment, held that the payments made by the Assessee to MGI for software products were not 'Royalty' and thus not subject to TDS under Section 195. The appeals of the Assessee were allowed, and the orders of the lower authorities were set aside.
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