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2016 (6) TMI 889 - AT - Income TaxTDS u/s 195 - applicability of provisions of Sec. 201(1) and 201(1A) - assessee purchased software from two nonresidents companies being in Singapore and Australia and made payments on acquisition of software - AA disallowed the said amount u/s.40(a)(i) of the Act for non deduction of TDS as the transaction is in the nature of Royalty payments - Indo-US DTAA - Held that - Purchase of software is not in the nature of Royalty and no disallowance u/s.40(a)(i) of the Act is warranted. We set aside the order of ld. Commissioner of Income Tax (Appeals) concurred with the Assessing Officer in passing order u/s.201(1) and 201(1A) of the Act and allow the ground of the assessee. See Financial Software & Systems (P.) Ltd. Versus Deputy Commissioner of Income-tax/Assistant Commissioner of Income-tax, Company Circle II (1), Chennai 2014 (10) TMI 463 - ITAT CHENNAI - Decided in favour of assessee
Issues Involved:
1. Legality of the CIT(A)'s order confirming the AO's order under sections 201(1)/201(1A). 2. Non-consideration of the favorable decision by the Chennai Tribunal in the assessee's own case. 3. Treatment of the appellant as an 'assessee in default' under section 201(1). 4. Applicability of section 201(1) if there is no obligation to withhold tax under section 195. 5. Reclassification of payments made to non-residents towards the purchase of software as royalty. 6. Validity of the AO's order under section 201(1)/201(1A) based on disallowed payments under section 40(a)(i). 7. Levy of interest under section 201(1A). 8. Consideration of the amount for proceedings under section 201 without acknowledging already deducted taxes. 9. Computation of interest under section 201(1A) from the date taxes are due to the date of filing the return by the payee. Detailed Analysis: 1. Legality of the CIT(A)'s Order Confirming the AO's Order Under Sections 201(1)/201(1A): The Tribunal noted that the CIT(A) confirmed the AO's order under sections 201(1) and 201(1A) without considering the principles of equity and natural justice. The Tribunal emphasized that the CIT(A) failed to appreciate that the payments made to non-residents for software purchases were not chargeable to tax in India under the provisions of the Act and the applicable tax treaties. 2. Non-Consideration of the Favorable Decision by the Chennai Tribunal: The Tribunal highlighted that the CIT(A) did not consider its own favorable decision in the assessee's case for the same assessment year, where it was held that there was no requirement for the appellant to deduct tax at source under section 195, and hence, no disallowance was warranted under section 40(a)(i). 3. Treatment of the Appellant as an 'Assessee in Default' Under Section 201(1): The Tribunal observed that the CIT(A) and the AO erred in treating the appellant as an 'assessee in default' without appreciating that the payments made to non-residents for software purchases were not taxable in India. The Tribunal reiterated that the payments could not be treated as royalty under the provisions of the Act. 4. Applicability of Section 201(1) if There is No Obligation to Withhold Tax Under Section 195: The Tribunal noted that the CIT(A) and the AO failed to appreciate that the provisions of section 201(1) would not be applicable if there was no obligation to withhold tax under section 195. The Tribunal emphasized that the AO's disallowance under section 40(a)(i) could not be a reason for initiating proceedings under section 201. 5. Reclassification of Payments Made to Non-Residents Towards Purchase of Software as Royalty: The Tribunal found that the CIT(A) and the AO erred in reclassifying the payments made to non-residents for software purchases as royalty. The Tribunal referred to its previous decision, which held that such payments could not be treated as royalty. 6. Validity of the AO's Order Under Section 201(1)/201(1A) Based on Disallowed Payments Under Section 40(a)(i): The Tribunal noted that the CIT(A) failed to appreciate that the AO's order under section 201(1)/201(1A) was based on the disallowance of payments under section 40(a)(i), which was already decided in favor of the appellant by the Tribunal. The Tribunal emphasized that the basis of the AO's order under section 201(1)/201(1A) did not survive. 7. Levy of Interest Under Section 201(1A): The Tribunal observed that the CIT(A) and the AO erred in levying interest under section 201(1A). The Tribunal reiterated that since there was no obligation to deduct tax at source, the levy of interest was not justified. 8. Consideration of the Amount for Proceedings Under Section 201 Without Acknowledging Already Deducted Taxes: The Tribunal noted that the AO erred in considering an amount of ?16,91,22,981 for proceedings under section 201 without acknowledging that taxes had already been deducted on ?9,33,67,964 being payment towards services. The Tribunal emphasized the need to consider the already deducted taxes. 9. Computation of Interest Under Section 201(1A) from the Date Taxes are Due to the Date of Filing the Return by the Payee: The Tribunal observed that the AO ought to have computed interest under section 201(1A) only from the date on which taxes were due to be deducted up to the date of filing the return of income by the payee. The Tribunal emphasized the correct computation of interest. Conclusion: The Tribunal set aside the order of the CIT(A) and allowed the appeals of the assessee. The Tribunal held that the payments made for the purchase of software were not in the nature of royalty and no disallowance under section 40(a)(i) was warranted. Consequently, the Tribunal allowed the appeals of the assessee in ITA Nos. 822, 823, and 824/Mds/2016.
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