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2015 (8) TMI 413 - AT - Income Tax


Issues Involved:
1. Whether the payment made by the assessee to Lionbridge Technologies Inc. USA for the purchase of off-the-shelf software constitutes 'royalty' under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
2. Whether the assessee was liable to deduct tax at source (TDS) under Section 195 of the Income Tax Act on the payment made to Lionbridge Technologies Inc. USA.
3. Whether the assessee can be treated as an 'assessee in default' under Section 201(1) and 201(1A) of the Income Tax Act for non-deduction of TDS.

Detailed Analysis:

1. Nature of Payment:
The primary issue was whether the payment made by the assessee to Lionbridge Technologies Inc. USA for the purchase of standard off-the-shelf software constitutes 'royalty'. The assessee argued that the payment was merely a reimbursement of cost for software purchased from Microsoft Inc. and Skillsoft, and not a royalty. The software was used by various Lionbridge entities globally, and the cost was allocated based on the number of desktops in each office without any mark-up. The assessee contended that such a payment does not give rise to 'royalty' or 'income' in the hands of Lionbridge USA under the Income Tax Act and the DTAA between India and the USA.

2. Obligation to Deduct TDS:
The assessee argued that under Section 195 of the Income Tax Act, tax must be deducted at source only if the income is chargeable to tax in India. Since the payment was a reimbursement of cost without any income element, it was not chargeable to tax in India, and hence, there was no obligation to deduct TDS. The assessee cited the Supreme Court decision in the case of G E India Technology Centre P Ltd vs CIT, which supported the view that TDS is required only if the payment is chargeable to tax under the Income Tax Act.

3. Assessee in Default:
The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the assessee should have deducted TDS on the payment, treating it as 'royalty'. Consequently, the assessee was deemed an 'assessee in default' under Section 201(1) and was liable for interest under Section 201(1A). However, the Tribunal found that since the payment was not chargeable to tax in India, the assessee was not required to withhold tax, and thus, could not be treated as an 'assessee in default'.

Tribunal's Findings:
The Tribunal observed that:
- The payment was a reimbursement of cost for software purchased from Microsoft and allocated among group entities without any mark-up.
- The reimbursement was not chargeable to tax in India, and hence, there was no obligation to deduct TDS under Section 195.
- The Supreme Court's decision in G E India Technology Centre P Ltd supported the assessee's position that TDS is required only if the payment is chargeable to tax under the Income Tax Act.
- No assessment was made in the hands of Lionbridge USA to bring the amount received from the assessee to tax in India.

Conclusion:
The Tribunal concluded that the assessee was not liable to deduct TDS on the payment made to Lionbridge Technologies Inc. USA, as the sum paid was not chargeable to tax in India. Consequently, the assessee could not be treated as an 'assessee in default' under Section 201(1) and 201(1A). The appeal of the assessee was allowed, and the tax liability and interest imposed by the AO and CIT(A) were deleted.

Order:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 5th August 2015.

 

 

 

 

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