2012 (11) TMI 88 - AT - Income Tax

TDS - Payment towards Software treated as royalty - Held that - 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 - in favour of the revenue It is well settled that in the absence of any definition of copyright in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of Copyright , namely, Copyright Act, 1957, in India, wherein it is clearly stated that literary work includes computer programmes, tables and compilations including computer databases . Payment would constitute royalty within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of the Act as the definition of royalty under clause 9(1)(vi) of the Act is broader than the definition of royalty under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute royalty for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act.

Issues Involved:
1. Payment towards Software treated as 'royalty' and liable for deduction of tax at source under section 195.
2. Levy of interest under section 201(1A).

Detailed Analysis:

1. Payment towards Software treated as 'royalty' and liable for deduction of tax at source under section 195:

Background:
The assessee, a leading provider of Mobile Value Added Services and products (MVAS), made payments to non-residents for software purchases from Telisma SA, France, and Telenity, USA, without deducting tax at source. The payments for the financial year 2008-09 amounted to Rs. 11,12,43,171/-.

Assessing Officer's View:
The AO initiated proceedings under section 201(1) of the Income-tax Act, 1961, as the assessee did not comply with section 195. The AO held that the payments were 'royalty' and thus taxable in India, obligating the assessee to deduct TDS. Consequently, the AO treated the assessee as in default and calculated the tax liability at Rs. 1,14,58,047 and interest under section 201(1A) at Rs. 17,38,407.

CIT(Appeals) Decision:
The CIT(A) confirmed the AO's view, relying on the jurisdictional High Court's judgment in CIT v. Samsung Electronics Co. Ltd., which held that payments for software amounted to 'royalty' under Article 12 of the DTAA and section 9(1)(vi) of the Act.

Assessee's Argument:
The assessee contended that the payments were neither royalties nor fees for technical services but business profits, not taxable in India due to the absence of a permanent establishment of the supplier. They also cited the Supreme Court's remand in GE India Technology Center Private Limited v. CIT and the Delhi High Court's favorable ruling in DIT v. Ericsson A.B.

Tribunal's Analysis:
The Tribunal noted that the issue was already settled by the jurisdictional High Court in Samsung Electronics Co. Ltd., where it was held that software payments constituted 'royalty.' The Tribunal emphasized that the license to use software, make copies, and store it on a designated computer constituted a transfer of rights under the Copyright Act, thus qualifying as 'royalty.'

Conclusion:
Respecting the High Court's judgment, the Tribunal found no merit in the assessee's appeal and upheld the CIT(A)'s decision, confirming the payments as 'royalty' and the obligation to deduct tax at source under section 195.

2. Levy of interest under section 201(1A):

Background:
The AO levied interest under section 201(1A) due to the assessee's failure to deduct tax at source on the software payments.

Assessee's Argument:
The assessee argued against the levy of interest, contending that the payments were not 'royalty' and thus not subject to TDS.

Tribunal's Analysis:
Given the Tribunal's confirmation that the payments were indeed 'royalty' and subject to TDS under section 195, the levy of interest under section 201(1A) was justified.

Conclusion:
The Tribunal upheld the levy of interest under section 201(1A), reinforcing the assessee's default in tax deduction.

Final Judgment:
The appeal by the assessee was dismissed, affirming the CIT(A)'s order that treated the software payments as 'royalty' subject to TDS under section 195 and upheld the levy of interest under section 201(1A).

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