2011 (10) TMI 473 - HC - Income Tax

TDS u/s 195 - payment for royalty - assessee contended that payment is akin to making a subscription for a journal or magazine of a foreign publisher or payment for subscription for a journal or magazine of a foreign publisher and cannot be held as royalty - Held that - Mere fact that in the instant case, the issue do not pertain to shrink wrapped software or off-the-shelf software and access to database maintained by M/s. Gartner is granted online, would not make any difference in the reasoning assigned by us to hold that such right to access would amount to transfer of right to use the copyright held by M/s. Gartner and the payment made by the respondent to M/s. Gartner in that behalf is for the licence to use the said database maintained by M/s. Gartner and such payment is to be treated as royalty - Decided against the assessee

Summary

Issues:
Interpretation of royalty payments under Section 195 of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and USA.

Analysis:
The judgment by the Karnataka High Court involved the interpretation of royalty payments made by the respondent to a non-resident company, M/s. Gartner, and the tax implications under Section 195 of the Income Tax Act, 1961. The Revenue contended that the payments constituted royalty or fees for technical services, thus attracting tax liability in India. The Assessing Officer assessed the payments as royalty and demanded tax and interest. The Commissioner of Income Tax (Appeals) upheld the assessment for certain years, but partially allowed the appeal for one year. The Tribunal later allowed the appeals filed by the respondent, concluding that the payments were akin to a subscription for a journal or magazine, not constituting royalty. The Tribunal held that no tax deduction was required under Section 195(1) of the Act. The Revenue challenged this decision, leading to the present appeal before the High Court.

The Revenue argued that the payments were for access to a database maintained by M/s. Gartner, constituting a transfer of copyright and thus qualifying as royalty. On the other hand, the respondent contended that the payments did not involve the transfer of copyright and were merely for business purposes, akin to a subscription for a journal or magazine. The High Court noted that in similar cases, it had previously held that such payments to a non-resident company amounted to royalty, necessitating tax deduction under Section 195 of the Act. The Court emphasized that the right to access a database online still constituted a transfer of the right to use copyright, making the payments royalty.

In light of its previous rulings and the nature of the payments made by the respondent to M/s. Gartner, the High Court set aside the Tribunal's decision. The Court held that the payments were indeed royalty, imposing a statutory obligation on the respondent to deduct tax at the source. Consequently, the Court allowed the appeals, restoring the orders passed by the Assessing Officer and the Appellate Authority for the relevant assessment years. The judgment clarified the tax implications of such payments and reinforced the obligation to deduct tax on royalty payments to non-resident entities under Section 195 of the Income Tax Act, 1961.