2011 (8) TMI 330 - AT - Income Tax

Assessee is default u/s 201(1) - failure of deduction tax at source u/s 195 - payment made for the use of or right to use of the properties - royalty - Held that - Find that both the definitions are similar and encompass the payment for the use of and the right to use of any intellectual property mentioned therein such as copyright of a literary, artistic or scientific work or any patent, trade mark, design or model, plan etc. - Thus, the license granted by Oracle Data Base for use of its software by the assessee company constitutes royalty - the remittances are in the nature of Royalty both under the Indian Income Tax Act as well as the DTAA between India and Switzerland - Therefore, the assessee is required to deduct tax at source before making the remittances - As the assessee has failed to do so, the assessee has to be treated as an assessee in default u/s 201(1) of the Act - Decided against the assessee.

Summary

Issues:
Assessment of default u/s 201(1) of the Income-tax Act, 1961 for failure to deduct tax at source on payments made for purchase of shrink-wrapped software from outside India.

Analysis:
The appeal was filed against the order of the CIT(A) considering the assessee in default u/s 201(1) for not deducting tax at source on payments to ING Zurich for software purchase. The AO treated the payment as royalty under the Act and the DTAA between India and Switzerland. The assessee argued the payments were for software purchase not liable to tax in India. The AO held the payment as royalty, requiring TDS. The CIT(A) found the assessee obtained a license to use software, not ownership, hence considered the payment as royalty. The High Court decision supported tax deduction regardless of tax liability in India. The assessee contended the payment was for shrink-wrapped software, not royalty, citing a Supreme Court case and a Tribunal decision.

The Tribunal found the assessee purchased a license for software use, not intellectual property transfer. The nature of the payment as 'royalty' under the Indian Income Tax Act and the DTAA with Switzerland was analyzed. The definition of 'royalty' under the Act includes consideration for transferring rights in patents, copyrights, or similar property. The DTAA defines 'royalties' broadly, covering payments for using copyrights, patents, or industrial equipment. Both definitions encompass intellectual property payments, including software licenses. The one-time payment for the Oracle Database software license was deemed royalty taxable in India. The Tribunal noted the Supreme Court's decision remitting the taxability issue to the High Court. Despite the High Court's previous stance on tax deduction, the Tribunal held the assessee was in default for not deducting TDS on royalty payments. The Tribunal dismissed the appeal, affirming the default status under section 201(1) of the IT Act, 1961.