2015 (8) TMI 48 - AT - Income Tax

Non deduction of TDS on payments made in the nature of royalty - orders passed by the A.O. under section 201(1) and 201(1A) treating the assessee as is in default - whether there was transfer of any rights including the granting of a license in respect of copy right to the assessee in the present case under the license agreements? - Held that - Orders passed by the Ld. CIT(A), however, shows that although he has passed a very detailed order, he has neither considered nor analysed the terms and conditions of the relevant license agreements so as to ascertain the exact nature of rights acquired by the assessee which is so vital and material to decide the issue under consideration. Moreover, as pointed out by the learned D.R., the scope of the definition Royalty as given in Explanation (2) to Section 9(1)(vi) has been further clarified by inserting Explanation (iv) and Explanation (v) by the Finance Act, 2012 with retrospective effect from 01.06.1976 and the benefit of this amendment made subsequently with retrospective effect was not available to the Ld. CIT(A) while passing the impugned orders. As contended by assessee in this regard, it is also relevant to see whether there is any amendment in the relevant articles of the DTAAs widening the scope of the term Royalty as done in the domestic Law. Keeping in view all these relevant aspects of the matter which have a direct bearing on the issue under consideration, consider it fair and proper and in the interest of justice to remit the matter back to the Ld. CIT(A) for deciding the same afresh on merit in accordance with law, after giving the assessee proper and sufficient opportunity of being heard. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Whether the payments made by the assessee to M/s. Tekla Corporation, Finland, and M/s. Design Data Corporation, USA, for the purchase of software licenses are in the nature of royalty.
2. Whether the assessee was required to deduct tax at source from these payments under section 195 of the Income Tax Act, 1961.
3. Whether the assessee is liable to be treated as in default under section 201(1) and 201(1A) of the Income Tax Act for failure to deduct tax at source.

Issue-wise Detailed Analysis:

1. Nature of Payments as Royalty:
The primary issue is whether the payments made by the assessee to M/s. Tekla Corporation and M/s. Design Data Corporation for software licenses constitute 'royalty'. The Assessing Officer (A.O.) treated these payments as royalty based on the definition provided in Explanation 2 to Section 9(1)(vi) of the Income Tax Act and relevant judicial precedents. The A.O. argued that the payments were for the right to use the copyright in the software, not merely for the purchase of a copyrighted article. The Ld. CIT(A) upheld this view, distinguishing between royalties and consideration for sale, and emphasized that the payments for the right to use the software amounted to royalty.

2. Requirement to Deduct Tax at Source:
The A.O. held that the assessee was required to deduct tax at source under section 195 of the Income Tax Act, as the payments were deemed to accrue or arise in India. The assessee contended that the payments were for the purchase of standard software without any proprietary knowledge, and therefore, did not constitute royalty. The Ld. CIT(A) rejected this argument, stating that the payments were indeed for the right to use the software, which falls under the definition of royalty, necessitating tax deduction at source.

3. Assessee in Default under Section 201(1) and 201(1A):
Due to the failure to deduct tax at source, the A.O. treated the assessee as in default under section 201(1) and also charged interest under section 201(1A). The Ld. CIT(A) upheld this decision, leading the assessee to appeal before the Tribunal. The Tribunal noted that the main contention was whether the payments were for a copyright or a copyrighted article. The Tribunal emphasized the need to analyze the terms and conditions of the relevant license agreements to determine the nature of the rights acquired by the assessee.

Tribunal's Decision:
The Tribunal observed that the Ld. CIT(A) did not adequately consider or analyze the terms of the license agreements, which are crucial to ascertain the nature of the payments. Additionally, the Tribunal noted that the scope of 'royalty' had been clarified by the Finance Act, 2012, with retrospective effect from 01.06.1976, which was not available to the Ld. CIT(A) while passing the impugned orders. The Tribunal remitted the matter back to the Ld. CIT(A) for a fresh decision on merits, considering all relevant aspects, including the amendments and the terms of the license agreements.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the Ld. CIT(A) to re-examine the case, considering the terms of the license agreements and the retrospective amendments to the definition of 'royalty'. The matter was sent back for a fresh decision in accordance with the law, after providing the assessee with an opportunity to present their case.

Order Pronounced:
The order was pronounced in the open Court on 29.07.2015.

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