2016 (3) TMI 213 - AT - Income Tax

Assessee in default u/s.201(1) and 201/(1A)- non deduction of tds on software licence - whether the provisions of sec.9(1)(vi) of the Act, is applicable to the payment made to the software license by treating the same as royalty concluding that the assessee is liable for deduction of tax u/s.195? - Held that - It is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases, where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. In the present case, what was transferred is copyright and the right to use the copyright give rise to royalty payment. Being so, in our opinion, the finding of the CIT(Appeals) in observing that granting of any license to use the software amounts to royalty and the provisions of sec.9(1)(vi) are applicable. Accordingly, we are of the opinion that the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) of the Act for non-deduction of T.D.S. on the impugned payment. - Decided against assessee Nonpayment of TDS on bandwidth charges - Held that - As decided in Verizon Communications Singapore Pte. Ltd. v. ITO(International Taxation) 2013 (11) TMI 1058 - MADRAS HIGH COURT the receipts are liable to be treated as royalty for the use of IPLC under Section 9(1)(vi) read with Explanation 2(iva) and correspondingly Article 12(3) of DTAA between India and Singapore. We also agree that even if the payment is not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer is guaranteed the transmission of the data and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is royalty within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. and thus the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) of the Act for non-deduction of T.D.S. on the impugned payment. - Decided against assessee Reimbursement of expenses - AO classified reimbursement of Expenses under the head business development commission and bandwidth charges - Held that - There was nothing on record to indicate as to how such reimbursement could be termed as business income of the assessee. The reimbursements were made in the process of executing the agreement. The expenditure being part and parcel of the process of advice of technical character, the payment on account of reimbursement also attracted the provisions of section 195(2) of the Act. - Decided against assessee

Summary

Issues Involved:

1. Taxability of software bandwidth and reimbursement of expenses under sections 201(1) and 201(1A) of the Income Tax Act.
2. Applicability of section 9(1)(vi) of the Income Tax Act to software license payments as 'royalty' and the requirement to deduct tax under section 195.
3. Taxability of bandwidth charges as 'royalty' under section 9(1)(vi) and the requirement to deduct tax under section 195.
4. Classification and taxability of reimbursement of expenses.

Issue-wise Detailed Analysis:

1. Taxability of Software Bandwidth and Reimbursement of Expenses:

The assessee challenged the findings of the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] that it was in default under sections 201(1) and 201(1A) of the Income Tax Act regarding the taxability of software bandwidth and reimbursement of expenses. The appeals were consolidated for convenience.

2. Applicability of Section 9(1)(vi) to Software License Payments:

The AO determined that payments for the use of software constituted 'royalty' under section 9(1)(vi) of the Income Tax Act, requiring tax deduction under section 195. The AO concluded that the payments were for the right to use software, not for software purchases, citing agreements with software providers. The CIT(A) upheld this view, and the assessee appealed.

The tribunal examined the facts and noted that the assessee had acquired software licenses on a non-exclusive, non-transferable basis for business use. The software ownership remained with the suppliers. The tribunal referenced the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh (271 ITR 401), which distinguished between the purchase of software as a product and the right to use software. The tribunal concluded that the payments constituted 'royalty' under section 9(1)(vi) and upheld the CIT(A)'s finding that the assessee was in default for not deducting tax under section 195.

3. Taxability of Bandwidth Charges as 'Royalty':

The AO classified bandwidth charges as 'royalty' under section 9(1)(vi) of the Income Tax Act, stating that the payments were for the use of a dedicated undersea cable for international voice-based calls. The CIT(A) agreed, noting that the payments were for the use of a process involving sophisticated technology.

The tribunal referenced the Madras High Court's decision in Verizon Communications Singapore Pte. Ltd. v. ITO (361 ITR 575), which held that payments for international private leased circuits constituted 'royalty' under section 9(1)(vi) and the India-Singapore DTAA. The tribunal concluded that the payments for bandwidth charges were 'royalty' and upheld the CIT(A)'s finding that the assessee was in default for not deducting tax under section 195.

4. Classification and Taxability of Reimbursement of Expenses:

The AO reclassified 'reimbursement of expenses' under specific heads, noting that they were payments to the parent company and other group companies for common expenses. The CIT(A) observed that the payments were not purely reimbursements and should have been classified under appropriate account heads. The tribunal referenced its earlier decision in Ashok Leyland Ltd. v. DCIT (313 ITR (AT) 191), which held that reimbursements related to technical services attracted tax deduction under section 195. The tribunal upheld the CIT(A)'s finding that the reclassification was justified and dismissed the assessee's appeal.

Conclusion:

The tribunal dismissed all the appeals of the assessee, upholding the findings of the AO and the CIT(A) regarding the taxability of software bandwidth, reimbursement of expenses, and bandwidth charges as 'royalty.' The tribunal emphasized the requirement to deduct tax under section 195 for such payments.