2010 (11) TMI 1021 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is required to withhold tax under Section 195 of the Income-tax Act for the purchase/use of software from parties resident in Singapore.

Detailed Analysis:

1. Withholding Tax Requirement under Section 195:
The central issue in these appeals is whether the assessee must withhold tax under Section 195 of the Income-tax Act for purchasing or using software from Singapore-based entities. The software in question is operational and purchased for the assessee's internal use. The assessee received a non-exclusive, perpetual, irrevocable, royalty-free, worldwide license to use the software solely for internal operations. The parties from whom the software was acquired do not have a "Permanent Establishment" in India.

2. CIT(Appeals) Decision:
The CIT(Appeals) considered an agreement with M/s Sun Microsystems Pte. Ltd., Singapore. The CIT(A) noted that the payment made by the appellant did not amount to royalty under Article 12 of the Indo-Singapore Double Taxation Avoidance Agreement (DTAA) and was not taxable in India as SUN did not have a Permanent Establishment in India. The CIT(A) concluded that the payment was business income, not royalty.

3. Terms and Conditions of Purchase:
The terms and conditions of the software purchase agreement included several restrictions on the use, duplication, and distribution of the software. The software was supplied on a computer disk from outside India on an FOB basis, and none of the parties involved had a Permanent Establishment in India. The CIT(A) noted that the appellant had not received any rights to modify, decompile, or reverse engineer the software, and the right to use the software was confined to the appellant's internal operations.

4. Tribunal's Analysis and Precedents:
The Tribunal referred to several precedents, including the Bangalore Bench's decision in Samsung Electronic Company Ltd. vs. ITO, where it was held that the payment for software was not royalty but business income. Similarly, the Delhi Bench in Motorola Inc vs. DCIT and the Special Bench in the same case concluded that the software supplied was a copyrighted article, not a copyright right, and thus, the payment could not be considered royalty under the Income-tax Act or the DTAA.

5. Definition of Royalty under Indo-Singapore DTA:
The Tribunal examined the definition of "royalty" under the Indo-Singapore DTA, which is similar to the Indo-US DTAA. It concluded that the payment for the software was for a copyrighted article and not for the use of a copyright. Therefore, Section 9(1)(vii) of the Income-tax Act, which deals with royalty, was not applicable.

6. Tribunal's Conclusion:
The Tribunal upheld the first appellate authority's order, concluding that:
- The software, once put on media and sold, becomes goods like any other tangible item.
- The assessee purchased a copyrighted article, not the copyright itself.
- The software cannot be treated as a patent or an invention.
- The payment for the software is business income, not royalty, and since the seller does not have a Permanent Establishment in India, it is not taxable in India.

7. Final Decision:
The Tribunal dismissed the appeals filed by the Revenue, affirming that the payment for the software was not royalty and, therefore, not subject to withholding tax under Section 195 of the Income-tax Act.

Order Pronounced:
The order was pronounced in the open court on 26th Nov., 2010.