2017 (3) TMI 142 - AT - Income Tax

Tds U/S 195 - Grant of license - P.E. in India - whether the sums paid by the Appellant to NPL is in the nature of Royalty chargeable to tax in India has to be decided - Whether the definition of Royalty as provided under the Income Tax Act is to be taken or that which has been provided in the DTAA between India and Singapore? - Held that - We have to clarify that Explanation-4 to Sec.9(1)(vi) of the Act was inserted by the Finance Act, 2012 w.r.e.f 1-6-1976 which enlarges the definition of Royalty and therefore not beneficial to NPL in so far as it treats mere right for use or right to use a computer software as distinct from the definition in Article 12(3) of the DTAA which refers to use of or the right to use any copyright of literary, artistic, scientific work including. In view of Sec.90(2) of the Act NPL can opt to be governed by the DTAA which is more favourable rather than Explanation-4 to Sec.9(1)(vi) of the Act which imposes a tax burden on NPL. The question whether Explanation-4 to Sec.9(1)(vi) which was enacted after the DTAA can override the provisions of the DTAA is another question which will be discussed later. Therefore the definition of Royalty as given in the DTAA has to be adopted. whether the term literary work as mentioned in the definition of royalty in the treaty would include software or not? - Held that - We are of the view that the view expressed by the Hon ble Delhi High Court in the case of DIT Vs. Ericsson AB, New Delhi (2011 (12) TMI 91 - Delhi High Court), which is favourable to the Assessee, should be followed and therefore we hold that the consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the NPL. Admittedly NPL does not have a permanent establishment and therefore business income of the NPL cannot be taxed in India in the absence of a permanent establishment. In the present case there is no dispute raised by the revenue that NPL was not a tax resident of Singapore and that the benefits of DTAA between India and Singapore cannot therefore be available to the appellant. The amount paid by the appellant to NPL is not in the nature of royalty within the meaning of the DTAA between India and Singapore and therefore the amount received by NPL would be in the nature of business income which would be chargeable to tax in India under Article 7(1) of the DTAA only if NPL has a Permanent Establishment (PE) in India. Admittedly NPL did not have a PE in India and therefore the payment in question is not chargeable to tax in India and therefore there was no obligation on the part of the appellant to deduct tax at source u/s.195 of the Act. Consequently, the Assessee could not be treated as an Assessee in default u/s.201(1) of the Act nor could interest be levied on tax not deducted at source on tax not deducted at source till date of payment to the account of the Central Government u/s.201(1A) - Decided in favour of assessee

Issues Involved:
1. Nature of payment made by the appellant to NPL.
2. Applicability of the definition of "Royalty" under the Income Tax Act vs. DTAA.
3. Whether the payment constitutes "Royalty" under the DTAA.
4. Impact of Explanation 4 to Section 9(1)(vi) of the Income Tax Act.
5. Applicability of judicial precedents and their interpretation.

Issue-wise Detailed Analysis:

1. Nature of Payment Made by the Appellant to NPL:
The appellant made a payment to NPL for a perpetual, non-transferable, non-exclusive, non-sub-licensable right to use specific software components. The agreement specified that the software was to be used solely for the appellant's business purposes, without any rights to rent, lease, or provide the software to third parties. The appellant was also granted the right to receive updates and engage third parties for software installation.

2. Applicability of the Definition of "Royalty" under the Income Tax Act vs. DTAA:
The AO and CIT(A) concluded that the payment constituted "Royalty" under Section 9(1)(vi) of the Income Tax Act, as it involved the use of intellectual property. However, the Tribunal emphasized that the definition of "Royalty" under the DTAA between India and Singapore should be considered, as it is more beneficial to the assessee. The DTAA defines "Royalty" as payments for the use of or the right to use any copyright of literary, artistic, or scientific work, among other things.

3. Whether the Payment Constitutes "Royalty" under the DTAA:
The Tribunal examined whether the payment for the software license constituted "Royalty" under the DTAA. It was determined that the appellant only had the right to use the software, not the copyright in the software. The Tribunal referred to Section 14 of the Copyright Act, 1957, which outlines the exclusive rights of copyright owners. Since the appellant did not receive any of these exclusive rights, the payment was not considered "Royalty" under the DTAA.

4. Impact of Explanation 4 to Section 9(1)(vi) of the Income Tax Act:
Explanation 4, inserted by the Finance Act, 2012, expanded the definition of "Royalty" to include payments for the use of computer software. However, the Tribunal noted that this amendment could not override the provisions of the DTAA. The Delhi High Court in "DIT vs Nokia Networks OY" and "DIT vs New Skies Satellite BV" held that amendments to the Act could not affect the terms of an international treaty. Therefore, the Tribunal concluded that Explanation 4 did not impact the definition of "Royalty" under the DTAA.

5. Applicability of Judicial Precedents and Their Interpretation:
The Tribunal considered various judicial precedents, including the Delhi High Court's decision in "DIT vs. Ericsson AB," which distinguished between the sale of copyrighted articles and the transfer of copyright rights. The Tribunal favored the view that the payment for the software license was for a copyrighted article, not a copyright right. The Tribunal also addressed the revenue's reliance on the Karnataka High Court's decision in "CIT vs. Samsung Electronics Company Ltd." but chose to follow the more favorable interpretation for the assessee.

Conclusion:
The Tribunal held that the payment made by the appellant to NPL was not "Royalty" under the DTAA between India and Singapore. Consequently, the payment was considered business income, not subject to tax in India due to the absence of a Permanent Establishment (PE) of NPL in India. The appellant was not obligated to deduct tax at source under Section 195 of the Income Tax Act, and the orders under Sections 201(1) and 201(1A) were canceled. The appeal by the assessee was allowed.

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