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2011 (9) TMI 207 - AT - Income TaxWithholding tax u/s 195 - Royalty u/s 9(1)(iv) - right to use the licensed version of the software - Disallowance u/s 40(a)(i) for non deduction of TDS - CIT(A) observed that - when the payer has a bona fide belief that the income is not chargeable to tax at all, there is no application of the section 195 at all and there is no liability on the payer to follow its provisions when making payment to non-residents. As a consequence, all the proceedings as a result of non-compliance thereof would be otiose. - In view of the above factual position and legal authorities, the payments cannot be treated as royalty u/s 9(1)(vi) of the Act. - Held that - In the instant case, the assessee sold copy righted software and not copyright in the software. - Order of CIT(A) upheld - decided in favor of assessee.
Issues Involved:
1. Deletion of disallowance under Section 40(a)(i) of the Income-tax Act, 1961 on amounts paid without deduction of tax. 2. Whether the payments made for software licenses constituted "royalty" under Section 9(1)(vi) of the Act. 3. Validity of reopening of assessment. 4. Scope of Additional Commissioner of Income-tax's powers under Section 144A of the Act. Issue-wise Detailed Analysis: 1. Deletion of Disallowance under Section 40(a)(i): The Revenue contested the deletion of disallowance under Section 40(a)(i) on payments made to a non-resident entity (M/s Abaqus Inc.) without tax deduction. The Assessing Officer (AO) had treated these payments as "royalty" under Section 9(1)(vi) and thus subject to tax deduction under Section 195. However, the CIT(A) held that the payments were not for the transfer of copyright but for the purchase of copyrighted products. The CIT(A) relied on various judicial precedents, including the Supreme Court's ruling in Tata Consultancy Services v. State of Andhra Pradesh, which treated software as goods, and the Special Bench decision in Motorola Inc. vs DCIT, which differentiated between a copyrighted article and the copyright itself. 2. Payments Constituting "Royalty": The AO, supported by the Additional CIT, concluded that the payments were royalties based on clauses in the Regional Support Agreement (RSA) that allegedly granted rights to reproduce, affix copyrights, and generate license keys. The CIT(A) disagreed, stating these clauses imposed duties rather than rights on the appellant. The CIT(A) referenced the AAR ruling in Dassault Systems KK, which found similar payments were not royalties. The Tribunal upheld the CIT(A)'s view, emphasizing that the software was a copyrighted product, not the copyright itself, thus not fitting the definition of "royalty" under Section 9(1)(vi). 3. Validity of Reopening of Assessment: The assessee's cross objections included a challenge to the reopening of assessments, arguing that the AO lacked "reason to believe" that income had escaped assessment due to existing precedents favoring the assessee. The CIT(A) dismissed this contention as academic since the primary issue was resolved in favor of the assessee. The Tribunal concurred, noting that the cross objections became infructuous due to the favorable decision on the main issue. 4. Scope of Additional CIT's Powers under Section 144A: The assessee also contested the Additional CIT's directions under Section 144A, arguing that they exceeded mere guidance and concluded the issue. The CIT(A) did not address this point directly, deeming it academic. The Tribunal agreed, dismissing the cross objections as academic given the resolution of the primary issue. Conclusion: The Tribunal upheld the CIT(A)'s decision, confirming that the payments for software licenses did not constitute "royalty" under Section 9(1)(vi) and thus were not subject to disallowance under Section 40(a)(i). The Tribunal also dismissed the cross objections regarding the validity of reopening assessments and the scope of the Additional CIT's powers, as these issues were rendered academic by the main decision. Consequently, the appeals by the Revenue and the cross objections by the assessee were dismissed.
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