2010 (11) TMI 1023 - AT - Income Tax

Summary

Issues Involved:
1. Requirement to withhold tax under Section 195 of the Income-tax Act for the purchase/use of software from an Australian resident.
2. Nature of payments made for the software - whether they constitute 'royalty' under the Double Taxation Avoidance Agreement (DTAA) between India and Australia.
3. Taxability of business income under the DTAA in the absence of a Permanent Establishment (PE) in India.

Issue-wise Detailed Analysis:

1. Requirement to Withhold Tax under Section 195 of the Income-tax Act:
The primary issue in the appeal is whether the assessee is required to withhold tax under Section 195 of the Income-tax Act for purchasing/using software from a party resident in Australia. The software in question is operational software for internal use, and the agreements are governed by the DTAA between India and Australia. The software was purchased for Seismic Data Processing/Interpretation for the Oil & Gas Division from M/s Paradigm Geophysical Pty Ltd., Australia.

2. Nature of Payments - Whether Constituting 'Royalty' under DTAA:
The CIT(Appeals) examined whether the payment made for the software constitutes 'royalty' under Article 12 of the DTAA and Section 9(1)(vi) of the Income-tax Act. The CIT(A) concluded that the payment did not amount to royalty as defined under the DTAA. The appellant did not acquire any copyright but only a license for internal business purposes. The software was supplied on proprietary hardware, and the agreement did not grant any rights to modify, reverse engineer, or commercially exploit the software. The CIT(A) relied on a previous decision in the appellant's own case, holding that the payment was business income, not royalty, and thus not taxable in India without a PE.

3. Taxability of Business Income under DTAA in Absence of PE:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the payment for the software was not 'royalty' but business income. Since M/s Paradigm did not have a PE in India, the business income was not taxable in India under Articles 5 and 7 of the DTAA. The Tribunal referenced multiple cases, including decisions from the Bangalore and Delhi Benches, which distinguished between payments for copyrighted articles and copyright rights. The Tribunal concluded that the software was a copyrighted article, not a copyright, and thus the payment was not 'royalty' under Section 9(1)(vi) of the Income-tax Act or the DTAA.

Conclusion:
The Tribunal dismissed the Revenue's appeal, holding that:
- The software purchased was a copyrighted article, not a copyright.
- The payment made by the assessee was business income, not royalty.
- In the absence of a PE in India, the business income was not taxable in India under the DTAA.
- The assessee was not required to withhold tax under Section 195 of the Income-tax Act for the software purchase.

Order Pronounced:
The appeal filed by the Revenue was dismissed, and the order was pronounced in the open court on 26th November 2010.