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2018 (3) TMI 1956 - AT - Income TaxTDS u/s 195 - non-deduction of Tax at Source towards payment made for reimbursement of Warranty - HELD THAT - In the case of the assessee, the assessee is a manufacturer of motor cars in India and exports the motor cars to other countries and sells them in those countries through its sister concerns who acts as the dealer of the assessee company - assessee company also provides warranty to the end customers who purchase the car - assessee's sister companies who acts as the dealers of the assessee company maintains the cars sold by them according to the terms of the warranty promised by the Assessee Company, towards which the dealer companies incurs expenditure. As per the contractual obligation, the assessee company reimburses such expenses incurred by its dealer sister companies . Thus the assessee company incurs expenditure outside India for the purpose of earning income from source outside India. Therefore by virtue of Section 9(1)(vii)(b) the payment made by the assessee company to a person outside India for earning income from any source outside India, and the income arising from such payment to the recipient shall be excluded from the deeming provision of Section 9(1) of the Act. Hence we are of the considered view that the assessee company will not be liable to deduct tax u/s.195 - Decided in favour of assessee. Non-deduction of Tax at Source towards payment made for purchase of software from non- residents - HELD THAT - From the facts of the case it is apparent that the assessee has obtained license only for the usage of the software for a limited period and does not have the right to change or modify the software. This issue is squarely covered by the decision in the case DCIT Vs. Atmel R D India (P) Ltd 2008 (11) TMI 9 - AUTHORITY FOR ADVANCE RULINGS as held merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses in his favour. The license granted to the licensee permitting him to use the programme for its business purpose is only incidental to the facility extended to the licensee to make use of the copyrighted product for its internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income - the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the programme and, therefore, consideration cannot be treated as royalty. As held by the CIT(A), the payments made by the assessee company cannot be held as 'royalties' coming into the ambit of Article 12 of DTAA or 'fee for technical services' u/s 9(1 )(vii) of the IT Act and accordingly no tax need to be deducted u/s 195 - We, therefore, uphold the order of the CIT(A) on this count and dismiss the grounds raised by the revenue in this regard. In the case of the assessee, the payment made for obtaining license to use the software cannot be held as royalties coming into the ambit of the DTAA or fees for technical services under Section 9(1)(vii) of the Act and accordingly tax need not be deducted at source u/s.195 of the Act. Error in computation of interest payable u/s.201(1A) - HELD THAT - Since we have held that, in the case of the assessee, tax need not be deducted at source with respect to payment made towards reimbursement of warranty and payment made towards purchase of software and deleted the addition made on account of non-deduction of tax at source, this ground raised by the assessee does not survive because the assessee is not liable for payment of interest u/s.201(1A).
Issues Involved:
1. Non-deduction of Tax at Source towards payment made for reimbursement of warranty expenditure. 2. Non-deduction of Tax at Source towards payment made for purchase of software from non-residents. 3. Error in computation of interest payable under Section 201(1A) of the Act. Detailed Analysis: Issue 1: Non-deduction of Tax at Source towards payment made for reimbursement of warranty expenditure The core issue was whether the payments made by the assessee towards reimbursement of warranty expenditure to its group entities outside India should be treated as "fees for technical services" (FTS) and thus be subject to tax deduction at source (TDS) under Section 195 of the Income Tax Act. Findings and Analysis: - The assessee argued that the reimbursement was for actual costs incurred without any profit element and thus did not constitute income in the hands of the non-resident entities. - The assessee cited various judicial precedents to support that the payments did not amount to FTS and were not taxable in India due to the absence of a permanent establishment (PE) of the non-resident entities in India. - The Ld.DCIT held that the payments were for technical services and thus taxable in India, relying on the decisions in SPX India Pvt. Ltd. and Ashok Leyland Ltd. - The Ld.CIT(A) upheld the Ld.DCIT's view, emphasizing that the warranty services involved technical expertise and thus constituted FTS. Tribunal's Decision: - The Tribunal referred to Section 9(1)(vii)(b) of the Act, which exempts payments made for services utilized in a business or profession carried on outside India from being deemed as income accruing or arising in India. - It was determined that the assessee's payments were for services utilized in earning income from sources outside India, thus not subject to TDS under Section 195. - The Tribunal concluded that the decisions in SPX India Pvt. Ltd. and Ashok Leyland Ltd. were not applicable to the assessee's case. Issue 2: Non-deduction of Tax at Source towards payment made for purchase of software from non-residents The issue was whether payments made for the purchase of software licenses from entities in Japan and the United Kingdom should be treated as "royalty" and thus be subject to TDS under Section 195. Findings and Analysis: - The Ld.DCIT and Ld.CIT(A) held that the payments were for the use of copyrighted software and thus constituted royalty under Section 9(1)(vi) of the Act and the respective DTAAs with Japan and the UK. - The assessee argued that the payments were for the purchase of software licenses and did not involve the transfer of any copyright, thus not constituting royalty. - The assessee cited the decision in DCIT Vs. Atmel R & D India (P) Ltd., which distinguished between payments for copyrighted articles and royalties. Tribunal's Decision: - The Tribunal found that the assessee had only obtained a license to use the software without any rights to modify or change it. - Citing the decision in DCIT Vs. Atmel R & D India (P) Ltd., the Tribunal held that the payments were for copyrighted articles and not royalties. - Consequently, the payments did not fall under the definition of royalty in the DTAA or under Section 9(1)(vi) of the Act, and thus, no TDS was required under Section 195. Issue 3: Error in computation of interest payable under Section 201(1A) of the Act This issue pertained to the computation of interest payable due to the alleged non-deduction of TDS. Findings and Analysis: - Since the Tribunal held that the assessee was not liable to deduct TDS on the payments made towards reimbursement of warranty expenses and purchase of software, the issue of interest computation under Section 201(1A) became moot. Tribunal's Decision: - The Tribunal concluded that since there was no liability to deduct TDS, the assessee was not liable for any interest under Section 201(1A). Conclusion: The appeal by the assessee was allowed in its entirety. The Tribunal ruled that the payments made for reimbursement of warranty expenses and for the purchase of software licenses were not subject to TDS under Section 195, and thus, the assessee was not liable for any interest under Section 201(1A).
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