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2017 (1) TMI 984 - AT - Income TaxTDS u/s 195 - payment made by the assessee for use of software owned by USA company - whether is not royalty subject to deduction of tax at source - retrospective amendment - Held that - Issue raised by the Ld. DR that the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of royalty as given therein should be read into the DTAA is unable to be appreciated because the retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of royalty . The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of royalty in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the royalty has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty. - Decided in favour of assessee
Issues Involved:
1. Whether the payment made by the assessee for the use of software owned by a USA company constitutes "royalty" subject to deduction of tax at source under Indian law and the India-USA DTAA. Detailed Analysis: Issue 1: Payment for Use of Software as "Royalty" - Facts and Background: The assessee, a resident company in India, engaged in employment background screening services, entered into an agreement with a USA-based company (FADV US) for the use of CSPi software. The payment made for this software amounted to ?1,32,13,654 for the financial year ending March 31, 2008. The assessee contended that this payment was not taxable as "royalty" under both the Indian Income Tax Act and the India-USA Double Taxation Avoidance Agreement (DTAA). - AO's Decision: The Assessing Officer (AO) classified the payment as "royalty" under Section 195(2) of the Income Tax Act, directing the assessee to withhold taxes at 10.56% on a gross basis as per Section 115A of the Act. - CIT(A)'s Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO, holding that the payment for the use of software was not "royalty" under the Act or the India-USA DTAA. The CIT(A) relied on various case laws and concluded that the sale of a copyrighted article does not constitute "royalty". - Assessee's Argument: The assessee argued that the payment was for the use of a copyrighted article (the software) and not for the use of the copyright itself. The assessee did not acquire any rights to exploit the copyright in the software, merely a limited right to use the software for internal business operations. Therefore, the payment should not be considered as "royalty". - Revenue's Argument: The Revenue relied on decisions from the Karnataka High Court and other cases that supported the AO's view that such payments constituted "royalty". - Tribunal's Analysis: - The Tribunal examined the agreement, which restricted the assessee's rights to merely using the software for internal purposes without any rights to modify, sublicense, or reverse-engineer the software. - The Tribunal noted that the ownership of the software's intellectual property rights (IPR) remained with the US company. - The Tribunal referenced the Delhi High Court's decision in DIT Vs. Infrasoft Ltd, which supported the view that payments for the use of copyrighted articles do not constitute "royalty". - The Tribunal also referred to its own previous decisions and those of other coordinate benches, which consistently held that such payments are not "royalty" under the India-USA DTAA. - Key Case Laws Referenced: - DIT Vs. Infrasoft Ltd: Held that payments for the use of copyrighted software do not constitute "royalty". - CIT Vs. CGI Information Systems & Management Consultants (P) Ltd: Karnataka High Court's decision supporting the AO's view. - CIT Vs. Samsung Electronics Co Ltd: Another Karnataka High Court decision supporting the AO's view. - Conclusion: The Tribunal upheld the CIT(A)'s decision, concluding that the payment made by the assessee for the use of software is not "royalty" under the Income Tax Act or the India-USA DTAA. Consequently, the appeals filed by the Revenue were dismissed. Final Judgment: Both appeals filed by the Revenue were dismissed, affirming that the payment made by the assessee for the use of software owned by a USA company does not constitute "royalty" and is not subject to deduction of tax at source under Indian law or the India-USA DTAA. The Tribunal's decision was pronounced on January 11, 2017.
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