2011 (10) TMI 239 - HC - Income Tax

Income deemed to accrue or arise in India - Assessee imported software from USA - AO raised query for faliure to deduct TDS on payment - Assessee also entered into contract with Telecom department for execution of foreign agreement - Held that - Even thougn the software was utilised in the execution of the contract by the assessee the payments made by the assessee cannot be integrated into the contract executed with the telecom Department. It was therefore held that the payments were made for supply of software which was utilised by the assessee and consequently the provisions of Section 9(1)(vi) of the Act read with the Double Taxation Avoidance Agreement between. India and USA was applicable. Decided against assessee.

Summary

Issues involved:
1. Interpretation of whether payment made for purchase of software constitutes royalty.
2. Determination of tax liability on payments made to foreign software suppliers.
3. Application of Section 9(1)(vi) of the Income Tax Act and Double Taxation Avoidance Agreement.

Analysis:

Issue 1: Interpretation of Royalty Payment
The High Court examined the case involving payments made for software purchases by an Indian entity from foreign suppliers. The Income Tax Appellate Tribunal (ITAT) had previously ruled that such payments did not constitute royalty, based on a similar judgment in another case. The Court noted that the software and hardware were imported separately and integrated in India, leading to a dispute over whether the payments were for software supply or royalty. The Tribunal concluded that the payments were not royalty as the assessee did not acquire rights in the copyright program for commercial exploitation. This interpretation was challenged by the revenue.

Issue 2: Tax Liability on Foreign Software Suppliers
The Court considered the contracts between the Indian entity and the foreign suppliers to determine the tax liability on payments for software supply. It noted that the software supply by the US supplier was an independent transaction, distinct from the hardware supply by the Taiwan supplier. The Court held that the payments made by the Indian entity amounted to royalty and were taxable in India under Section 9(1)(vi) of the Income Tax Act, read with the Double Taxation Agreement. The Tribunal's failure to consider these separate transactions led to an erroneous conclusion regarding tax liability.

Issue 3: Application of Income Tax Act and Double Taxation Agreement
The Court highlighted the importance of examining the contracts between the parties to ascertain the transaction liable to tax under the Income Tax Act. It emphasized that the software supply and hardware integration were distinct transactions, and the payments for software acquisition constituted royalty. The Court disagreed with the Tribunal's interpretation and set aside its order, restoring the decision of the assessing authority and the appellate authority. The Court ruled in favor of the revenue, holding that the payments were taxable under Section 9(1)(vi) of the Act and the Double Taxation Agreement.

In conclusion, the High Court allowed the appeals, setting aside the ITAT's orders and restoring the decisions of the appellate authority and the assessing officer. The Court held that the payments made for software purchases constituted royalty and were taxable in India, in accordance with the provisions of the Income Tax Act and the Double Taxation Agreement.