2012 (12) TMI 244 - AT - Income Tax

TDS - Applicability of the provisions contained in section 9(1)(vi) of the Income-tax Act - sale of software as royalty - manufacture and sale of Automated Teller Machines (ATMs) - assessee imported software from NCR Global Solutions Ltd., Ireland, however while making outward remittances, the assessee did not deduct tax at source - 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 favor of revenue. Decision in Samsung Electronics Co. Ltd.. v. Dy. CIT (International Taxation) 2012 (8) TMI 112 - ITAT BANGALORE followed.

Issues Involved:
1. Applicability of provisions under section 9(1)(vi) of the Income-tax Act, 1961.
2. Consideration of the sale of software as royalty.
3. Obligation to deduct tax at source under section 195 of the Income-tax Act, 1961.
4. Interpretation of relevant case law and judicial precedents.

Detailed Analysis:

1. Applicability of Provisions under Section 9(1)(vi) of the Income-tax Act, 1961:
The primary issue in this case revolves around the applicability of section 9(1)(vi) of the Income-tax Act, 1961. The Assessing Officer (AO) held that the payment for imported software constituted a payment of royalty. Consequently, the AO assessed the liability under section 201(1) and charged interest under section 201(1A) due to the failure of the assessee to deduct tax at source as required under section 195 of the Act.

2. Consideration of the Sale of Software as Royalty:
The assessee contended that the payment for the imported software should not be considered as royalty. However, the CIT(A) confirmed the AO's action, citing the Karnataka High Court's judgment in the case of Samsung Electronics Co. Ltd., which held that payments for "shrink-wrapped software" were liable for withholding tax. The CIT(A) emphasized that until the High Court reverses its judgment, the lower authorities are obliged to follow it. The Supreme Court's limited remand in the GE India Technology Centre case did not alter the binding nature of the High Court's ruling on this issue.

3. Obligation to Deduct Tax at Source under Section 195 of the Income-tax Act, 1961:
The Tribunal noted that a similar issue with identical facts had been adjudicated by the same Bench in the case of Samsung Electronics Co. Ltd. The High Court had clarified that payments made for software licenses constituted royalty under Article 12 of the DTAA and section 9(1)(vi) of the Act. Therefore, the assessee was obligated to deduct tax at source under section 195.

4. Interpretation of Relevant Case Law and Judicial Precedents:
The Tribunal extensively referred to the Karnataka High Court's judgment, which analyzed the definition of 'royalty' and the nature of software license agreements. The High Court held that such agreements granted a license to use the software, which involved the transfer of a part of the copyright. This transfer constituted royalty, and the payments were subject to withholding tax. The Tribunal also referenced the Supreme Court's decision in Tata Consultancy Services, distinguishing it from the present case as it dealt with sales tax and not income tax. The Tribunal concluded that the High Court's interpretation was binding and applicable to the assessee's case.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT(A)'s order that the payment for imported software constituted royalty, thereby necessitating tax deduction at source under section 195 of the Income-tax Act, 1961. The judgment emphasized the binding nature of the Karnataka High Court's ruling on the issue and the obligation to follow judicial precedents.

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