2012 (10) TMI 980 - AT - Income Tax

Treatment of receipts from Indian customers as Royalty - payments received on sale and marketing of software license to the customers - DTAA between India and Ireland - Held that - As decided in the case of Samsung Electronics Co. Ltd. & Others ( 2011 (10) TMI 195 - KARNATAKA HIGH COURT) and its decision therein, that payments to non-resident software supplies for purchase of shrink-wrapped software was in the nature of royalty - Decided against assessee. Levy of interest u/s. 234A - Held that - No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of s. 191 along with s. 209(1)(d). For this reason, it would not be permissible for the Revenue to charge any interest under s. 234B. Levy of interest u/s. 234B of the Act cannot be sustained. Ground raised by the assessee is accordingly allowed.

Summary

Issues:
1. Whether payments received by the assessee on sale and marketing of software licenses constitute 'royalty' under section 9(1)(v) of the Income-tax Act and Article 12 of the DTAA between India and Ireland.
2. Whether interest under section 234B of the Act can be levied on the assessee, a non-resident, for failure to pay advance tax.

Analysis:

Issue 1:
The appeal concerns the classification of payments received by the assessee on the sale and marketing of software licenses as 'royalty' under the Income-tax Act and the DTAA between India and Ireland. The assessee contended that the transactions were akin to the sale of goods, generating business income not subject to taxation due to the absence of a Permanent Establishment in India. However, the revenue argued that the consideration for granting the right to use computer software constituted 'royalty.' The Tribunal referred to a Karnataka High Court decision, which held that payments to non-resident foreign software suppliers for shrink-wrapped software were considered royalty. The Court emphasized that the license granted only permitted the use of the software without any alteration or redistribution rights, indicating a transfer of copyright. Consequently, the payments were deemed 'royalty' under the DTAA and the Income-tax Act, obligating the assessee to deduct tax at source. The Tribunal, in line with the High Court decision, dismissed the assessee's grievance on this issue.

Issue 2:
The second issue pertains to the levy of interest under section 234B of the Act on the assessee, a non-resident, for alleged default in paying advance tax. The assessee argued that since the payer was obligated to deduct tax at source under section 195, the income tax so deducted should reduce the advance tax payable by the assessee. Relying on various judicial decisions, the assessee contended that the levy of interest under section 234B was unwarranted. The Department, however, maintained that the interest was mandatory. The Tribunal, after considering the legal position and precedents, concluded that the liability to deduct or collect tax at source rested with the payer, not the payee. As the payer was responsible for deducting tax under section 195, any default in deduction did not make the assessee liable for interest under section 234B. Citing the Delhi High Court decision, the Tribunal held that the scheme of the Act concerning non-residents clarified that the payer's default in tax deduction did not absolve the non-resident from tax liability but precluded the levy of interest under section 234B. Consequently, the Tribunal allowed the assessee's appeal on this issue, ruling that the levy of interest under section 234B was unsustainable.

In conclusion, the Tribunal partly allowed the appeal by the assessee, dismissing the contention regarding 'royalty' classification while allowing the appeal on the interest levy issue.