2013 (4) TMI 513 - AT - Income Tax

TDS - royalty - import of software and hardware and payment for services - held that - Even though the figures of import of hardware and payment for services are on record, we are of the opinion that the Assessing Officer is required to examine the details of import of hardware, software and payment for services. It is also seen that the Assessing Officer has not properly examined provisions of the Treaties in deciding whether the impugned payments constitute royalty . In view of the foregoing, we are of the considered opinion that unless the facts of the case are clearly examined by the Assessing Officer, the quantum and to whether payment for imports of software amounts to royalty cannot be decided.

Issues Involved:

1. Whether payments for the import of software, hardware, and services constitute 'royalty' under section 9(1)(vi) of the Income Tax Act, 1961.
2. Applicability of the second proviso to section 9(1)(vi) regarding the import of software along with hardware.
3. Examination of the applicability of Treaties in determining whether the payments constitute 'royalty'.

Detailed Analysis:

1. Payments for Import of Software, Hardware, and Services as 'Royalty':

The assessee, an Indian company providing business printing solutions, imported software, hardware, and services from non-residents without deducting tax at source under section 195 of the Income Tax Act, 1961. The Assessing Officer (AO) treated the payments for software, hardware, and services as 'royalty' under section 9(1)(vi) and disallowed the expenses under section 40(a)(i) for non-deduction of tax at source. The AO relied on the Karnataka High Court's decision in CIT Vs. Samsung Electronics Co. Ltd. The assessee argued that payments for shrink-wrapped software for resale amounted to the purchase of 'goods' and were not liable for TDS. The AO rejected this contention, holding that the payments constituted 'royalty' as defined under section 9(1)(vi).

2. Applicability of the Second Proviso to Section 9(1)(vi):

The assessee contended that the second proviso to section 9(1)(vi) exempts lump sum payments for computer software supplied along with computer-based equipment from being considered 'royalty.' The assessee submitted that the software was imported along with hardware, and thus, even if the payments were considered 'royalty,' they would fall outside the scope of section 9(1)(vi) due to the second proviso. The assessee provided sample invoices to support the claim that the software was imported along with hardware.

3. Examination of the Applicability of Treaties:

The assessee argued that even if the payments were considered 'royalty' under the Act, they would not be regarded as 'royalty' under Treaties, as only the 'use' of copyrights gives rise to 'royalty' under Treaties. The assessee, being a reseller, did not secure any right or license in the software, and the transfer of rights or granting of licenses was directly between the non-resident and the end user. The assessee referred to the OECD commentary, which states that payments for the acquisition and distribution of software copies without the right to reproduce should be treated as business profits, not royalties.

Tribunal's Directions:

The Tribunal noted that the AO and CIT(A) did not examine whether the payments consisted only of software imports or included hardware and services. The Tribunal directed the AO to:

i) Verify the details of imports of software, hardware, and payment for services. Payments for hardware and services should not be regarded as 'royalty' and no disallowance should be made under section 40(a)(i) for these payments.

ii) Verify the claim that the software was imported along with hardware and decide on the applicability of the second proviso to section 9(1)(vi).

iii) Examine whether the payment for software imports amounts to 'royalty' after considering the assessee's submissions and providing an opportunity for a hearing. The assessee may submit relevant documents to support its claims.

Conclusion:

The Tribunal set aside the CIT(A)'s order and remitted the matter back to the AO for thorough verification and examination of the issues. The assessee's appeal was allowed for statistical purposes.

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