2010 (4) TMI 877 - AT - Income Tax

Double taxation relief - Article 12(3) of the Indo-US DTAA - supply of software - nature of Royalty - liable for tax - HELD THAT - Computer programme cannot also be treated as patent and invention. Computer programme cannot said to be an invention and therefore cannot be said to be covered by the patient Act. Computer software cannot also be as process. End user of the software in the case of shrink-wrap software does not have any access to source code. He has only right to use the software for his personal or business use. In the absence of any distinguishing feature brought on record by the revenue we respectfully following the order of the Lucent Technologies Hindustan Ltd. v. ITO 2003 (10) TMI 250 - ITAT BANGALORE-A , hold that the payment received by the assessee was not in the nature of royalty within the meaning of Article 12(3) of Indo-US DTAA and accordingly we are inclined to uphold the order of the ld. CIT(A) in deleting the addition made by the AO, The grounds taken by the revenue are, therefore, rejected. liability to pay interest u/s 234B - we find that the facts are not in dispute inasmuch as it is also not in dispute that the assessee being a non-resident, its entire income arising in India is subject to deduction of tax at source in terms of section 195. In the absence of any distinguishing feature brought on record by the revenue, we, respectfully following the decision of the DIT (International Taxation) v. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT and the Tribunal 2005 (6) TMI 226 - ITAT DELHI-A , hold that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the assessee and accordingly we are inclined to uphold the order, of the ld. CIT(A) in deleting the interest charged u/s 234B. The ground taken by the revenue is therefore rejected.

Issues Involved:
1. Nature of payment received for software supply: Whether it is 'royalty' under Article 12(3) of the Indo-US DTAA.
2. Liability to pay interest under section 234B of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of Payment Received for Software Supply:

The primary issue was whether the payment received by the assessee for the supply of software 'Solid Works 2003' is in the nature of 'royalty' under Article 12(3) of the Indo-US Double Taxation Avoidance Agreement (DTAA). The assessee, a company incorporated and tax resident in the USA, develops and markets 3D mechanical design solutions. The software is provided to users in India through an end-user license agreement (EULA), which restricts the user from modifying, reverse engineering, or disassembling the software. The software distribution agreement with Indian distributors allows them to market and support the product but does not grant any rights over the copyright.

The Assessing Officer (AO) considered the payment received as 'royalty' and brought it to tax in India. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, holding that the payment was for the purchase of a copyrighted article and not for the use of or right to use a copyright. The CIT(A) concluded that the payment did not amount to royalty under Article 12(3) of the DTAA and deleted the addition made by the AO.

The Tribunal upheld the CIT(A)'s decision, noting that the software distribution agreement did not grant any rights over the copyright to the distributor or end-user. Citing the Supreme Court's decision in Tata Consultancy Services (P.) Ltd. v. State of Andhra Pradesh, the Tribunal stated that software, once put on media and sold, becomes goods and ceases to be a transfer of intellectual property rights. The Tribunal also referenced various ITAT decisions, including Samsung Electronics Co. Ltd. v. ITO and Motorola Incorporation, which uniformly held that the sale of shrink-wrap software does not involve the receipt of consideration that can be classified as royalty. Consequently, the Tribunal concluded that the payment received by the assessee was not in the nature of royalty and dismissed the revenue's appeal on this ground.

2. Liability to Pay Interest Under Section 234B of the Income-tax Act, 1961:

The second issue was whether the assessee, being a non-resident, was liable to pay interest under section 234B of the Income-tax Act, 1961. The AO had charged interest under section 234B, but the CIT(A) deleted this interest, holding that the assessee's entire income arising in India was subject to tax deduction at source (TDS) under section 195 of the Act. The Tribunal, in the assessee's own case for the assessment year 2003-04, had held that since the entire income was subject to TDS, there could be no liability to pay advance tax, and consequently, no liability to pay interest under section 234B.

The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench decision in Motorola Incorporation v. Dy. CIT and the Jurisdictional High Court's decision in DIT (International Taxation) v. NGC Network Asia LLC, which held that when a duty is cast on the payer to deduct tax at source, no interest can be imposed on the payee-assessee for failure to pay advance tax. Thus, the Tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order that the payment received by the assessee for the supply of software was not in the nature of royalty under Article 12(3) of the Indo-US DTAA and that the assessee was not liable to pay interest under section 234B of the Income-tax Act, 1961.

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