2015 (5) TMI 779 - AT - Income Tax

Treatment of receipts from Indian customers as Royalty - payments received on sale and marketing of software license to the customers - DTAA between India and Ireland - Held that - As decided in the case of Samsung Electronics Co. Ltd. & Others ( 2011 (10) TMI 195 - KARNATAKA HIGH COURT) and its decision therein, that payments to non-resident software supplies for purchase of shrink-wrapped software was in the nature of royalty, was followed by the coordinate bench of this Tribunal in the assessee s own case for A.Y 2006-07 2012 (10) TMI 980 - ITAT BANGALORE . Consequently, the assessee was under obligation to deduct tax at source under section 195 of the Act form the amount paid to foreign software suppliers. - Decided against assessee. Interest under section 234B - Held that - No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of s. 191 along with s. 209(1)(d). For this reason, it would not be permissible for the Revenue to charge any interest under s. 234BLevy of interest u/s. 234B of the Act cannot be sustained. Ground raised by the assessee is accordingly allowed. The aforesaid decision of the co-ordinate bench was followed by another co-ordinate bench of this Tribunal in the assessee s own case for Assessment Year 2007-08 - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of receipts from Indian customers as 'royalty.'
2. Charging of interest under Section 234B of the Income Tax Act.
3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Receipts from Indian Customers as 'Royalty':
The primary issue was whether payments received by the assessee, a foreign company incorporated under the laws of Ireland, for the sale and marketing of software licenses to Indian customers constituted 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and Ireland. The assessee argued that the software sold was Shrink-Wrapped software, akin to any other goods, and since it did not have a Permanent Establishment (P.E) in India, the income from such sales should not be taxable in India. However, the Assessing Officer (A.O.) and the Dispute Resolution Panel (DRP) held that the consideration received was for the right to use the software, thus qualifying as 'royalty.' This view was supported by precedents, including the Karnataka High Court's decision in CIT v. Samsung Electronics Co. Ltd., which held that payments for Shrink-Wrapped software are in the nature of royalty. The Tribunal, following these precedents, dismissed the assessee's appeal on this issue, affirming that the payments received constituted 'royalty' and were taxable in India.

2. Charging of Interest under Section 234B of the Income Tax Act:
The assessee contested the charging of interest under Section 234B, arguing that as a non-resident, it was not liable to pay advance tax since the payer was obligated to deduct tax at source under Section 195. The Tribunal agreed with the assessee, referencing judicial pronouncements, including the Delhi High Court's decision in Jacobs Civil Inc., which clarified that non-residents are not liable for advance tax if the payer fails to deduct tax at source. Consequently, the Tribunal held that the charging of interest under Section 234B was not sustainable and allowed the assessee's appeal on this ground.

3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
The assessee challenged the initiation of penalty proceedings under Section 271(1)(c). However, since no penalty had been levied for the Assessment Year 2008-09, the Tribunal found this ground to be premature and non-maintainable. Therefore, the appeal on this ground was dismissed.

Conclusion:
The Tribunal dismissed the grounds related to the treatment of receipts as 'royalty' and the initiation of penalty proceedings but allowed the appeal concerning the charging of interest under Section 234B. The final order was pronounced in the open court on 6th February 2015.