2010 (11) TMI 1024 - 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 the UK.

Issue-wise Detailed Analysis:

1. Withholding Tax under Section 195:
The primary issue in these appeals is whether the assessee must withhold tax under section 195 of the Income Tax Act for purchasing/using software from UK-based parties. The software in question is operational software purchased for internal use, and the assessee was granted 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. Agreements and Software Details:
The appeals involve agreements with different UK-based parties for various software purchases:
- M/s Petroleum Experts Ltd.: Software for Material Balance analysis related to Oil & Gas Exploration.
- M/s Independent Technology Systems Ltd.: Inter Connect V6.06, intermediate 3.3.7, and maxi-route E v1.2 software.
- M/s Petrel Software Ltd.: Software for reserve modeling and characterization calculation and analysis for O&G Business.
- Sofibits Consultants Ltd.: Flare Radiation & Noise analysis Software for O&G Division.

3. CIT(Appeals) Decision:
The CIT(Appeals) considered the agreement with Petroleum Experts Ltd. (PEL) and concluded that the payment made by the appellant did not amount to royalty under Article 13 of the Indo-UK Double Taxation Avoidance Agreement (DTAA) and section 9(1)(vi) of the Income Tax Act. The software was supplied on a computer disk from outside India, and none of the parties involved had a Permanent Establishment in India.

4. Terms and Conditions of Purchase:
The terms and conditions of purchase included restrictions on the use, copying, and distribution of the software. The software was supplied for internal use only, and the assessee did not acquire any copyright.

5. Tribunal's Findings:
The Tribunal referenced previous decisions, including the Bangalore Bench in Samsung Electronic Company Ltd. vs. ITO and the Delhi Bench in Motorola Inc vs. DCIT, which distinguished between acquiring a copyrighted article and acquiring a copyright. The Tribunal concluded that the assessee had purchased a copyrighted article and not the copyright itself, meaning the payment was not royalty but business income.

6. Application of DTAA:
The Tribunal noted that the definition of "royalty" under the Indo-UK DTAA is similar to the Indo-US DTAA. Since the payment was not considered royalty under the Income Tax Act, it was not necessary to examine its status under the DTAA. The payment was classified as business income, and since the assessee had no Permanent Establishment in India, it was not taxable in India.

7. Conclusion:
The Tribunal upheld the CIT(Appeals) decision, concluding that the software supplied was a copyrighted article and not a copyright. The payment received by the assessee for the software could not be considered royalty under the Income Tax Act. Consequently, the appeals filed by the Revenue were dismissed.

Final Judgment:
The appeals filed by the Revenue are dismissed. The order was pronounced in the open court on 26th Nov., 2010.