2005 (4) TMI 530 - AT - Income Tax

Deduction of tax at source u/s 195 - Payments for import of software - Assessee in default - non-resident - Payment of royalty chargeable u/s 9(1)( vi ) - HELD THAT - This Tribunal in the case of S amsung Electronics Co. Ltd. v. ITO 2005 (2) TMI 438 - ITAT BANGALORE-A has recently held that where the software imported which is a shrink wrapped software or off the shelf software, same amounts to purchase of goods and not payment of royalties. The payment is for use of copy rights article and not for acquiring any copy right. This view has been arrived at after considering various decisions on the subject as well as the decision of Hon ble Supreme Court in Tata Consultancy Services case 2004 (11) TMI 11 - SUPREME COURT . We accordingly hold that the payments for import of software do not amount to payment of royalty chargeable u/s 9(1)(vi) of the Act. The payments partakes the character of purchase and sale of goods. Actually, the payee has no permanent establishment in India. Hence, it can be concluded that no income is deemed to accrue or arise in India. Accordingly, the provision of section 195 is not applicable to such payment. The assessee therefore cannot be fastened with liability by treating it as in default u/s 201 of the Act. We accordingly set aside the order u/s 201(1) as well as charging of interest u/s 201(1A) of the Act. In the result all the appeals are allowed.

Summary

Issues:
- Whether the payments made for the purchase of software from outside India constitute royalty?
- Whether the payments for the import of software amount to payment of royalty chargeable under section 9(1)(vi) of the Act?
- Whether the provision of section 195 is applicable to the payment for the import of software?

Analysis:

Issue 1:
The appeals were filed against the order under section 201(1) for failure to deduct tax as required under section 195 of the Act. The Assessing Officer considered the payments for imported software as royalty payments, while the appellant argued that the incomes represented by these payments should be considered as 'business profits' of the non-resident taxable only under the respective Double Taxation Avoidance Agreement (DTAA) if there was a permanent establishment in India. The appellant contended that since there was no permanent establishment in India, the payments should not be chargeable to tax in India and thus outside the purview of tax deduction under section 195.

Issue 2:
The Commissioner of Income-tax (Appeals) confirmed that the payments made for the purchase of software from outside India constituted royalty. The appellant argued that software should be treated as goods under various sales tax enactments and referenced a case where it was held that software standardized and marketed for certain classes of clients would constitute goods. The Tribunal, considering various decisions and the Supreme Court's ruling, held that the payments for importing software did not amount to payment of royalty under section 9(1)(vi) of the Act. The Tribunal concluded that the payments were for the purchase and sale of goods, not for acquiring any copyright, and no income was deemed to accrue or arise in India.

Issue 3:
The Tribunal held that the payments for the import of software did not amount to payment of royalty chargeable under section 9(1)(vi) of the Act. The Tribunal determined that the payments partook the character of purchase and sale of goods, and since the payee had no permanent establishment in India, no income was deemed to accrue or arise in India. Consequently, the provision of section 195 was deemed not applicable to such payments, and the appellant could not be held liable under section 201 of the Act. The Tribunal set aside the order under section 201(1) and the charging of interest under section 201(1A) of the Act, thereby allowing all the appeals.