2021 (9) TMI 1498 - HC - Income Tax

TDS u/s 195 - Income taxable in India - Royalty - use of the assessee customer in India of operating net work payments - whether a non resident companies, ACI of Singapore and IRPL of Australia have permanent establishment in India through the medium of assessee company? - Whether the Tribunal was right in holding that the amounts paid by the assessee company to the non resident company for use of the assessee customer in India of operating net work payments, ATMs is not Royalty as per the provisions of Section 9(1)(vi) of the Income Tax Act? - HELD THAT - It is not disputed before us that the substantial questions of law, which have been raised in this appeal, have been answered in favour of the assessee in the decision of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT as held amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 were not liable to deduct any TDS u/s 195. Decided in favour of assessee.

Summary

Issues:
1. Disallowance made by the AO regarding TDS deduction under Section 9(1)(vi) of the Income Tax Act, 1961.
2. Applicability of TDS deduction for non-resident companies with a permanent establishment in India.
3. Determination of payments made for the use of customer network as Royalty under Section 9(1)(vi).
4. Requirement of TDS deduction under Section 195 of the Income Tax Act for payments made to non-resident companies.

Analysis:
1. The Tax Case Appeal filed by the Revenue challenged the order of the Income Tax Appellate Tribunal concerning the disallowance of TDS deduction under Section 9(1)(vi) of the Income Tax Act, 1961. The Tribunal's decision was based on the retrospective amendment introduced by the Finance Act, 2012, which was held not applicable. The Hon'ble Supreme Court's ruling in a similar case favored the assessee, stating that no TDS was required to be deducted in such scenarios.

2. The issue of TDS deduction for non-resident companies with a permanent establishment in India was also addressed. The Tribunal's decision was upheld based on the Supreme Court's judgment, which clarified that payments made by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers did not constitute royalty for the use of copyright in the software. Therefore, no income taxable in India arose, and TDS deduction under Section 195 of the Income Tax Act was not required.

3. The Tribunal's ruling regarding the determination of payments made for the use of customer network as Royalty under Section 9(1)(vi) was consistent with the Supreme Court's decision. The Court emphasized that distribution agreements/EULAs did not create any interest or right amounting to the use of copyright, hence no TDS deduction obligation existed under Section 195 of the Income Tax Act.

4. Lastly, the judgment reiterated that the Supreme Court's decision applied to all four categories of cases involving the purchase and resale of computer software by various entities. The Tax Case Appeal filed by the Revenue was dismissed, and the substantial questions of law were answered against the Revenue, aligning with the principles established by the Supreme Court's ruling.