2010 (11) TMI 1020 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is required to withhold tax u/s 195 of the Act for the purchase/use of software from parties resident in the Netherlands.

Summary:

Issue 1: Withholding Tax u/s 195 for Purchase/Use of Software

The sole issue that arises for our consideration in these appeals is whether the assessee is required to withhold tax u/s 195 of the Act, for purchase/use of software from the parties who are resident of Netherlands. The software in question is operational software, purchased for the internal use of the assessee. The assessee was granted a non-exclusive, perpetual, irrevocable, royalty-free, worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, including use of software for ASP Services and web housing services. The parties from whom the assessee acquired the software do not have a "PERMANENT ESTABLISHMENT" in India.

The learned CIT(Appeal) in her orders dated 19-11-2007 and 21-08-2008, considered agreements for purchase with M/s Jason Geosystems BV and Geoquest Systems BV, Netherlands respectively. The AR submitted that the payment made by the Appellant did not amount to royalty within the meaning of Article 12 of the Indo-Netherlands Double Taxation Avoidance Agreement (DTAA) and that JG does not have a Permanent Establishment (PE) in India, making its business income non-taxable in India as per Articles 7 and 5 of the DTAA.

The AO, however, concluded that the payment made by the Appellant to JG is 'royalty' within the meaning of Article 12 of the DTAA and also u/s 9(1)(vi) of the Income-tax Act, 1961. The CIT(A) held that the payment made for the purchase of software is not 'royalty' but only business income and is taxable in India only if JG has a PE.

The Tribunal, referencing similar cases, held that the software supplied was a copyrighted article and not a copyright right, and the payment received by the assessee in respect of the software cannot be considered as royalty either under the Income-tax Act or the DTAA. The Tribunal cited various cases, including the Bangalore Bench in the case of Samsung Electronic Company Ltd. vs. ITO and the Delhi Special Bench in the case of Motorola Inc vs. DCIT, which supported the view that the payment for the purchase of software is not royalty but business income.

In conclusion, the Tribunal upheld the order of the first appellate authority, stating that the software supplied was a copyrighted article and not a copyright, and the payment received by the assessee in respect of the software cannot be considered as royalty under the Income-tax Act. Since it is not royalty, it is business income, and as the assessee does not have a PE in India, it is not taxable in India. The appeals filed by the Revenue were dismissed.

Order pronounced in the open court on 26th Nov., 2010.