2012 (4) TMI 678 - AT - Income Tax

Summary

Issues Involved:

1. Whether the amount received by BEA Systems Inc. from BEA Systems India Pvt. Ltd. on account of distribution of software product constitutes 'Royalty' u/s 9(i)(vi) of the Income-tax Act, 1961 read with Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and USA.
2. Whether BEA Systems Inc. retains ownership over the copyright in the software and BEA Systems India has no right to commercially exploit the copyright.
3. Whether the initiation of penalty proceedings u/s 271(c) of the Income-tax Act by the AO was justified.

Summary:

1. Treatment of Software Distribution Amount as 'Royalty':

The main grievance of the assessee was the CIT(A)'s decision to uphold the AO's view that the payment of Rs. 24,04,22,581/- received from BEA Systems India Pvt. Ltd. for the distribution of software products was 'Royalty' and thus, required tax deduction at source. The AO held that payments towards 'Shrink Wrapped Software' constituted royalty payments and charged tax @ 10.54% on such payments. The CIT(A) confirmed this view, following the judgment of the Hon'ble Karnataka High Court in the case of Samsung Electronics, which held that payments for 'Shrink Wrapped Software' were liable for withholding tax.

2. Ownership and Commercial Exploitation of Copyright:

The assessee argued that the receipts represented proceeds from product distribution and not for the transfer of intellectual property rights. It was contended that BEA retained ownership of the copyright in the software and BEA Systems India did not have any right to commercially exploit the copyright. However, the CIT(A) followed the jurisdictional High Court's decision, which stated that the license to use the software, including making copies for internal business, constituted a transfer of part of the copyright, thus amounting to royalty.

3. Penalty Proceedings u/s 271(c):

The AO initiated penalty proceedings u/s 271(c) of the Income-tax Act. However, the judgment primarily focused on the main issue of royalty and did not provide specific details on the penalty proceedings.

Conclusion:

The ITAT dismissed the appeal, upholding the CIT(A)'s order that the payment received for the distribution of software products constituted 'Royalty' u/s 9(i)(vi) of the Income-tax Act, 1961, read with Article 12 of the DTAA between India and USA. The Tribunal relied on the jurisdictional High Court's decision in the case of Samsung Electronics, confirming the obligation to deduct tax at source u/s 195 of the Act.