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2015 (7) TMI 843 - AT - Income TaxTDS liability u/s 195 - whether the payment made by the assessee company for purchase of software amounts to royalty and hence the same subject to TDS? - Held that - The issue is squarely covered in favour of the assessee by the said decision of Hon ble jurisdictional High Court in the case of DIT Vs. Ericsson AB (2011 (12) TMI 91 - Delhi High Court ) and DIT Vs. Nokia Network Oy (2012 (9) TMI 409 - DELHI HIGH COURT ). We further held that the CIT(A) was quite correct and justified in holding that the consideration paid by the assessee for purchasing of embedded software was to be treated as consideration for supply of goods and therefore, the same was taxable as business income and not as royalty. It was also held that therefore, the payments made by the assessee is not chargeable tax in India and hence not subject to withholding tax u/s 195 of the Act. We are unable to see any perversity ambiguity or any other valid reason to interfere with the finding and conclusion of the CIT(A) and hence we upheld the same. Accordingly, the sole issue/ground raised by the Revenue in both the appeals being devoid of merits is dismissed. - Decided in favour of assessee.
Issues Involved:
1. Whether the payment made by the assessee company for the purchase of software amounts to royalty and hence subject to TDS under Section 195 of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Whether the payment for software amounts to royalty and subject to TDS under Section 195 of the Income Tax Act, 1961 Background: The assessee company, engaged in providing cellular mobile telephone and wireless services, procured a CDMA Mobile Telephone System from Huawei International Pte Limited, Singapore. The system included both hardware and embedded software specifically designed for the hardware. The assessee made payments under the belief that the consideration for the embedded software did not attract withholding tax as per the Income Tax Act and the DTAA between India and Singapore. Assessment Officer's (AO) Position: The AO issued show cause notices requiring the assessee to explain why the payments for software should not be treated as royalty. Subsequently, the AO passed an order treating the payments as royalty, thereby attracting withholding tax in India. A consolidated demand notice was issued for Rs. 1,84,70,751/- for FYs 2008-09 and 2009-10. CIT(A) Decision: The assessee appealed to the CIT(A), who allowed the appeal, holding that the payments for embedded software were not royalty but consideration for the supply of goods. Revenue's Argument: The Revenue Department contended that the payments constituted royalties and were subject to withholding tax at 10%, grossed up to 11.11% due to the agreement being net of taxes. Assessee's Argument: The assessee argued that the AO ignored relevant judgments, including those by the Delhi High Court in DIT Vs. Ericsson AB and DIT Vs. M/s Nokia Network Oy, which supported the assessee's position that the payments were not royalties. Tribunal's Findings: The Tribunal noted that the CIT(A) had considered the relevant judgments from the Delhi High Court, which ruled that payments for integrated supply of hardware and software do not constitute royalties. Specifically, the judgment in DIT Vs. Ericsson AB held that such payments were for the supply of goods, not royalties. The Tribunal agreed with the CIT(A) that the payments were for the purchase of goods and thus taxable as business income, not royalties. Consequently, the payments were not subject to withholding tax under Section 195. Conclusion: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeals. The payments made by the assessee for embedded software were deemed consideration for the supply of goods, not royalties, and therefore not subject to withholding tax under Section 195. Outcome: Both appeals by the Revenue were dismissed. The decision was pronounced in the open court on 22nd July, 2015.
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