2010 (11) TMI 1022 - 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 Canada.
2. Whether the payment made by the appellant to M/s DBR Software Inc., Canada amounts to 'royalty' under Article 12 of the Indo-Canada DTAA and u/s 9(1)(vi) of the I.T. Act, 1961.

Summary:

Issue 1: Withholding Tax u/s 195
The primary issue is whether the assessee is required to withhold tax u/s 195 of the Act for the purchase/use of software from Canadian residents. The software in question is operational software, purchased for internal use, with a non-exclusive, perpetual, irrevocable, royalty-free, worldwide license. The parties from whom the software was acquired do not have a "PERMANENT ESTABLISHMENT" in India.

Issue 2: Nature of Payment as 'Royalty'
The CIT(Appeals) examined the agreement with M/s DBR Software Inc., Canada, and concluded that the payment did not amount to royalty within the meaning of Article 12 of the Indo-Canada DTAA. The appellant did not acquire any copyright, and DBR does not have a Permanent Establishment in India. Therefore, its business income is not taxable in India as per Articles 7 and 5 of the DTAA. The AO's argument that the payment was 'royalty' was based on the License Agreement, which the CIT(A) found to be a purchase agreement with specific terms and conditions that did not confer any copyright to the appellant.

Terms and Conditions of Purchase:
The CIT(A) detailed the terms and conditions of the purchase, emphasizing that the appellant did not receive any right or copyright over 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.

Tribunal's Findings:
The Tribunal referred to similar cases, including the Bangalore Bench's decision in Samsung Electronic Company Ltd. vs. ITO and the Delhi Bench's decision in Motorola Inc vs. DCIT, which distinguished between payments for a copyright and a copyrighted article. The Tribunal concluded that the software supplied was a copyrighted article and not a copyright itself. Therefore, the payment received by the assessee could not be considered as royalty under the Income-tax Act or the Indo-Canada DTAA. Since the assessee does not have a P.E. in India, the business income is not taxable in India.

Conclusion:
The Tribunal upheld the CIT(A)'s order, stating that the software purchase was a transaction involving a copyrighted article, not a copyright. Consequently, the payment was not 'royalty' and was not taxable in India. The appeal filed by the Revenue was dismissed.

Order:
The appeal filed by the Revenue is dismissed. Order pronounced in the open court on 26th Nov., 2010.