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2012 (9) TMI 752 - AT - Income TaxTDS u/s 195 - Whether the payment made for import of software or supply of software by the non-resident companies was royalty or not - Assessee imported certain software products from UK for onward distribution Held that - Following the order in case of Samsung Electronics Co. Ltd.(2012 (8) TMI 112 - ITAT BANGALORE) payment made by the assessee to non-resident companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective countries and there was obligation on the part of the assessee to deduct tax at source u/s. 195 of the I.T. Act. Appeal decided in favour of revenue
Issues Involved:
1. Legality of the CIT(A)'s order. 2. Obligation to deduct taxes at source under Section 195 of the Income-tax Act, 1961. 3. Classification of payment for software and support services as "royalty" under Section 9(1)(vi) of the Act. 4. Consideration of judicial precedents in determining the nature of the payment. 5. Treatment of the appellant as an "assessee in default" under Section 201(1) of the Act. Detailed Analysis: 1. Legality of the CIT(A)'s Order: The appellant contended that the order passed by the CIT(A) was "bad in law and on facts." The Tribunal examined the grounds of the appeal and found that the CIT(A) had upheld the Assessing Officer's (AO) view based on the Karnataka High Court's judgment in the case of M/s. Samsung Electronics Co. Ltd. The Tribunal observed that the CIT(A) was correct in following the jurisdictional High Court's ruling unless it was overturned by a higher authority. Therefore, the Tribunal found no merit in the appellant's contention regarding the legality of the CIT(A)'s order. 2. Obligation to Deduct Taxes at Source under Section 195: The appellant argued that it was not required to deduct taxes at source on payments made to Mercury Interactive (UK) Limited for the purchase of software and support services. The AO, however, treated the appellant as an "assessee in default" under Section 201(1) for not deducting tax at source, relying on the Karnataka High Court's judgment in the Samsung Electronics case. The Tribunal upheld the AO's view, stating that the payment for software constituted "royalty" and was subject to tax deduction at source under Section 195. 3. Classification of Payment as "Royalty": The appellant contended that the payment made to Mercury UK did not constitute "royalty" under Section 9(1)(vi) of the Act or the India-UK Tax Treaty. The Tribunal referred to the Karnataka High Court's judgment, which held that payments for "shrink-wrapped software" were liable for withholding tax as "royalty." The Tribunal also noted that the Supreme Court had remanded the matter back to the High Court for reconsideration, but the High Court's ruling on the issue of payments towards "shrink-wrapped software" being liable for withholding tax still stood. Therefore, the Tribunal concluded that the payment made by the appellant to Mercury UK was indeed "royalty." 4. Consideration of Judicial Precedents: The appellant argued that the CIT(A) had erred in not appreciating the judicial precedents relied upon by the appellant. The Tribunal observed that the CIT(A) had considered the relevant judicial precedents, including the ITAT Delhi Bench's decision in the case of M/s. Microsoft and the AAR ruling in the case of ABC, IN RE. The Tribunal found that the CIT(A) had correctly applied the law as interpreted by the jurisdictional High Court and other relevant authorities. 5. Treatment as "Assessee in Default": Based on the above findings, the Tribunal upheld the CIT(A)'s decision to treat the appellant as an "assessee in default" under Section 201(1) for not withholding tax on the payment made to Mercury UK. The Tribunal noted that the appellant was also liable for interest under Section 201(1A) of the Act. Conclusion: The Tribunal dismissed the appeal by the assessee, affirming the CIT(A)'s order. The Tribunal concluded that the payment made by the appellant to Mercury UK constituted "royalty" and was subject to tax deduction at source under Section 195. Consequently, the appellant was correctly treated as an "assessee in default" under Section 201(1) and liable for interest under Section 201(1A).
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