2010 (4) TMI 1205 - AT - Income Tax

Summary

Issues Involved:
1. Whether the payments made by the assessee to the parent company for the purchase of designs are in the nature of 'royalty' under section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and Austria.
2. Whether the assessee was required to deduct tax at source under section 195 of the Income Tax Act on these payments.

Detailed Analysis:

Issue 1: Nature of Payments as 'Royalty'
The primary contention was whether the payments made by the assessee to its parent Austrian company for the purchase of designs should be classified as 'royalty'. The Assessing Officer (AO) argued that the payments were for the use of designs, which fell under the definition of 'royalty' as per Explanation 2 to section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA. The AO emphasized that the designs were not sold outright but were provided for limited use, and the parent company retained proprietary rights over them. The AO also noted that the designs were specific to the parent company's technology and were not available off the shelf.

The Commissioner of Income Tax (Appeals) [CIT(A)], however, observed that the transaction was one of sale and purchase of goods on a principal-to-principal basis. The CIT(A) held that the definition of 'royalty' under the DTAA should prevail over the domestic law, as per the Supreme Court's ruling in Union of India Vs Azadi Bachao Andolan. The CIT(A) concluded that the payments did not give rise to any income in India and were not in the nature of royalty under the DTAA.

The Tribunal, after considering the submissions and material on record, agreed with the CIT(A). It noted that the designs were procured for specific projects and were handed over to the buyers of the plant and machinery. The Tribunal emphasized that the transaction was a purchase of a copyrighted article, not a transfer of copyright. It held that the payments were not 'royalty' as per the DTAA and confirmed the findings of the CIT(A).

Issue 2: Requirement to Deduct Tax at Source
The AO held that the assessee had failed to deduct tax at source under section 195 of the Income Tax Act on the payments made to the parent company, which were considered 'royalty'. The AO raised a demand under section 201(1) and interest under section 201(1A).

The CIT(A) disagreed, stating that since the payments were not in the nature of royalty and did not give rise to any income in India, section 195 was not applicable. The Tribunal upheld this view, confirming that the payments were for the purchase of copyrighted articles and not royalties, thus not requiring tax deduction at source under section 195.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue, confirming that the payments made by the assessee to its parent company for the purchase of designs were not 'royalty' under the DTAA and the Income Tax Act. Consequently, the assessee was not required to deduct tax at source on these payments. The Tribunal's decision was based on the interpretation of the transaction as an outright sale of copyrighted articles rather than a transfer of copyright.