2016 (6) TMI 96 - AT - Income Tax

Royalty - Existence of Permanent Establishment in India - TDS liability - software purchase - DTAA - payment made to M/s. Paradigm Geophysical Pty.Ltd., Australia (Paradigm) for supply of certain Geological and Seismic Data Interpretation Software - Held that - The purchase orders were made by the assessee for the softwares as mentioned in column No.5, prior to the bringing of amendment vide Finance Act, 2012, though the amendment has been made with retrospective effect from 01.06.1976 By the introduction of the said Explanation 4, computer software has been specifically included in the definition of right, property or information which was never assumed to have been included by any court of law prior to the insertion of Explanation 4 vide amendment of Act of 2012. The Hon ble Supreme Court in the case of Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another (2005 (11) TMI 25 - SUPREME Court ) has held that if an explanation added to a provision changes the law, then it is not to be presumed to be retrospective irrespective of the fact that the phrase used are it is declared or for the removal of doubts . As it is an admitted position that in the earlier years, not only the various High Courts but also the Tribunal in the cases of the assessee has taken a view that the consideration paid for the purchase of the software cannot be treated as royalty; the assessee was, thus, under the bonafide belief that no TDS/withholding of tax was required to be done in respect to said purchases. The assessee had no reason to believe or to foresee a subsequent event vide which the definition of royalty has been extended to include the consideration for the use of or right to use the software has been included in the definition of royalty under the Act. As per the existing law which was in operation at the time of purchase of software, the assessee was under the bonafide belief that there was no liability to deduct tax in respect of the consideration paid for the said purchase of software. It may be further observed that as the definition as was in existence before the insertion of Explanation 4, there was a remote possibility to give a broad interpretation to the definition of right, property or information so as to include the right to use or right for use of the software in the said definition. The Explanation 4 has brought and added a further meaning to the provision which was not supposed to be foreseen by the assessee The co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. vs. ACIT (2014 (9) TMI 165 - ITAT MUMBAI ), while relying upon various other decisions of the Tribunal, has held that the disallowance cannot be made under section 40(a)(ia) on the basis of a subsequent amendment brought into the Act with retrospective effect. In view of this, even otherwise, the Explanation 4 inserted vide Finance Act, 2012 cannot be applied retrospectively to the case of the assessee as the said Explanation 4 has the effect of change in law and the assessee was not expected to foresee such change at the time of making the remittance in consideration of purchase of the software in question. Hence, under such circumstances, even otherwise, the assessee was not supposed to deduct TDS on such purchases. In the light of the law laid down by the Hon ble Supreme Court in the case of Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another (supra) and in view of the observations made above, we hold that the assessee during the relevant period prior to the insertion of explanation 4 to section 9(1)(vi) of the I.T. Act, was not liable to deduct TDS - Decided in favour of assessee

Issues Involved:

1. Whether the remittance made by Indian resident-assessee companies to foreign parties for the purchase of software is taxable in India as 'Royalties' under section 9(1)(vi) of the Income Tax Act or as business income under DTAA provisions.
2. The effect of the absence of DTAA with Hong Kong on the taxability of software purchases.
3. The interpretation of 'royalty' under DTAA versus the Income Tax Act.
4. The retrospective application of Explanation 4 to section 9(1)(vi) of the Income Tax Act.
5. Consistency in the application of law based on previous judgments and amendments.

Detailed Analysis:

1. Taxability of Software Remittance as 'Royalties' or Business Income:

The primary issue is whether payments made by Indian resident-assessee companies to foreign parties for software purchases are taxable as 'royalties' under section 9(1)(vi) of the Income Tax Act or as business income under the DTAA. The assessees argued that these payments do not constitute royalties and are thus not taxable in India, contending they were not liable to withhold tax on such payments. The Assessing Officer (AO) held that the payments were for the license to use the software, thus constituting royalties. However, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessees, stating that the payments did not amount to royalties under the DTAA and were therefore not taxable in India.

2. Effect of Absence of DTAA with Hong Kong:

In cases involving software purchases from Hong Kong, which lacks a DTAA with India, the CIT(A) upheld the AO's decision, rejecting the assessees' application under section 195(2). However, the Tribunal considered the retrospective application of Explanation 4 to section 9(1)(vi) and the consistent interpretation of law in earlier years, ultimately ruling in favor of the assessees.

3. Interpretation of 'Royalty' under DTAA vs. Income Tax Act:

The Tribunal examined whether the definition of 'royalty' under the Income Tax Act should align with that under the DTAA. It concluded that the definitions are not in para materia, with the DTAA providing a more restrictive definition. The Tribunal emphasized that the DTAA's definition, being more beneficial to the assessee, should prevail as per section 90(2) of the Income Tax Act. The Tribunal also noted that the DTAA does not specifically include computer software in the definition of 'royalty,' unlike the broader definition under the Income Tax Act.

4. Retrospective Application of Explanation 4 to Section 9(1)(vi):

The Tribunal addressed the retrospective application of Explanation 4, inserted by the Finance Act, 2012, which included computer software in the definition of 'royalty.' It ruled that the explanation, though retrospective, cannot be applied to transactions made before its introduction, as it changes the law and was not foreseeable by the assessees at the time of the transactions. The Tribunal cited the Hon'ble Supreme Court's decision in Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another, which held that explanations changing the law are not presumed to be retrospective.

5. Consistency in Application of Law:

The Tribunal emphasized the importance of consistency in the application of law based on previous judgments. It noted that in earlier years, various courts and the Tribunal had ruled that payments for software purchases did not constitute royalties. The Tribunal held that the assessees were justified in their belief that no TDS was required, given the prevailing interpretations of the law at the time of the transactions.

Conclusion:

The Tribunal ruled in favor of the assessees, holding that the payments for software purchases did not constitute royalties under the DTAA and were not taxable in India. It dismissed the Revenue's appeals and allowed the assessees' appeals, emphasizing the need for consistency and the non-retrospective application of Explanation 4 to section 9(1)(vi).

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