2006 (12) TMI 507 - AT - Income Tax

TDS u/s 195 - consideration received on sale of computer software programme - Commercial income under Article 7 Or Royalty under Article 12 of the Treaty - No Permanent establishment in India - DTAA between India and US - HELD THAT - According to learned counsel for assessee, Reference was drawn to the commentary on Article 12 (royalties) of model treaties issued by OECD with regard to payments for computer programmes. By reading that, It can therefore be noted that under the OECD model commentary also, payments for acquiring a copy of a computer programme will not be treated as payments for rights to use the copyright in the computer programmes. Accordingly, such payments are to be considered as commercial income under Article 7 and not as royalty under Article 12 of the Treaty. Further, it is to be noted that computer programme may be copy-rightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the programme is tangible, movable and available in the market place. The fact that some programmes may be tailored for specific purposes need not alter their status as 'goods' because the code definition included 'specially manufactured goods'. In yet another decision in the case of Tata Consultancy Services v. State of Andhra Pradesh 2004 (11) TMI 11 - SUPREME COURT held that the purchaser of a computer programme does not receive mere knowledge but receives an arrangement of matter which makes his computer perform a desired function. This arrangement of matter recorded on a tangible medium constitutes a corporeal body. A software recorded in physical form becomes inextricably inter-wined with or part and parcel of the corporeal object upon which it is recorded, be that a disc, tape or hard drive or other device. Apex Court has also noted its earlier decision in the case of Associated Cement Co. Ltd. 2001 (1) TMI 248 - SUPREME COURT and held that once a computer programme embodied in a medium, it takes the character of goods even under the narrow definition of the said term under the Customs Act. The Apex Court further held that a software programme, which is put in a medium like a disc or floppy, takes the character of goods. The medium and the programme become inseparable and cannot be split up. The Apex Court had relied on the definition of the term 'goods' as used in Article 366(2) of the Constitution of India and held that the term is very wide and covers all types of movable properties . The Apex Court further held that acquisition of a copy of such computer programme, which is a copyrighted article, amounts to sale of such article. Therefore, considering all the judicial pronouncements and relevant provisions of law we find much force in the stand taken by the assessee. Therefore, the payments are not in the nature of royalty but are subject-matter of Article 7 of the India-USA Tax Treaty. Further it is an admitted fact that Hewlett Packard Co., USA does not have any permanent establishment in India. Therefore, the assessee had no obligation to deduct tax at source on such payments made to Hewlett Packard Co., USA. Therefore, the claim of the assessee has to be accepted and it is ordered accordingly. In the result, the appeals filed by the assessee are allowed.

Issues Involved:
1. Validity of the CIT(A)'s order dated 23-9-2004.
2. Confirmation of the ITO's order imposing liability for tax deduction at source under section 195 and interest under section 201(1A).
3. Nature of consideration paid for computer software as royalty under the DTAA between India and USA and the Income-tax Act, 1961.
4. Tax deductibility under section 195 from the consideration paid for computer software.
5. Demand for tax and mandatory interest by the ITO for transactions in computer software with non-resident/foreign companies.
6. Demand for interest by the CIT(A) when the ITO had not levied any interest in his order.

Detailed Analysis:

1. Validity of the CIT(A)'s Order Dated 23-9-2004:
The appellant contended that the order passed by the CIT(A) was "bad in law, void ab initio and/or liable to be quashed." However, the tribunal did not specifically address this contention in isolation but focused on the substantive issues related to the nature of payments and tax obligations.

2. Confirmation of the ITO's Order Imposing Liability for Tax Deduction at Source:
The CIT(A) confirmed the ITO's order under sections 201(1) and 201(1A), which imposed liability on the appellant for not deducting tax at source under section 195. The tribunal examined whether the payments made by the appellant to Hewlett Packard Co., USA, were in the nature of 'royalty' and thus subject to tax deduction at source.

3. Nature of Consideration Paid for Computer Software as Royalty:
The tribunal analyzed whether the consideration paid for computer software constituted 'royalty' under the Double Taxation Avoidance Agreement (DTAA) between India and the USA and the Income-tax Act, 1961. The appellant argued that the payments were for the purchase of software packages, which are considered tangible goods once they are recorded on a medium. The tribunal referred to various judicial pronouncements and OECD commentary, concluding that the payments for acquiring a copy of a computer program do not amount to royalty but are commercial income under Article 7 of the India-USA Tax Treaty.

4. Tax Deductibility Under Section 195:
The tribunal held that the payments made by the appellant for the software packages were not in the nature of royalty. Therefore, the appellant was not required to deduct tax at source under section 195. The tribunal emphasized that Hewlett Packard Co., USA, did not have a permanent establishment in India, further supporting the appellant's position.

5. Demand for Tax and Mandatory Interest by the ITO:
The tribunal found that the ITO's demand for tax and mandatory interest was incorrect, as the payments were not considered royalty. The tribunal's decision was based on the interpretation of the term 'royalty' and the nature of the software transactions, which were deemed to be purchases of goods rather than licenses for intellectual property use.

6. Demand for Interest by the CIT(A):
The tribunal noted that the CIT(A) erred in demanding interest when the ITO had not levied any interest in his original order dated 28-11-2003. Since the tribunal concluded that the payments were not subject to tax deduction at source, the demand for interest was also invalid.

Conclusion:
The tribunal allowed the appeals filed by the assessee, concluding that the payments made for the software packages were not in the nature of royalty and therefore not subject to tax deduction at source under section 195. The tribunal's decision was supported by various judicial pronouncements and interpretations of the relevant tax treaty and income tax provisions.

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