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2017 (10) TMI 50 - AT - Income TaxDisallowance u/s 40(a)(i) - non deduction of TDS - purchase of software - payments made by the assessee for purchase of a copyrighted article being software product - whether remittance made by the assessee to IMTF, Switzerland was in the nature of payment for royalty - CIT-A held a conviction that the payment made by the assessee to the company for allowing the use of software could not be characterized as royalty - Held that - The coordinate bench of the ITAT, Mumbai in the case of DDIT Vs. Solidworks Corporation (2017 (3) TMI 331 - ITAT MUMBAI ) concurred with the view arrived at by the High Court of Delhi in the case of Director of Income Tax Vs. Ericsson A.B. 2011 (12) TMI 91 - Delhi High Court , wherein it was held that when software is incorporated in a CD it becomes a tangible property and the payment made for acquiring the same is not a payment by way of royalty. We further find that a similar view had also been arrived at by the coordinate bench of the ITAT, Mumbai in the case of ACIT Vs. Sonata Information Technology Ltd. (2013 (9) TMI 519 - ITAT MUMBAI). We thus being of the considered view that no infirmity does emerges from the order passed by the CIT(A) Addition in respect of guarantee commission - Held that - We are of the considered view that as the issue pertaining to the taxability of guarantee commission is covered in favour of the assessee by the earlier orders of the coordinate benches of the Tribunal in the assesses own case for AY s 2002-03, 2005-06 and 2008-09, therefore, having no reason to take a different view, we respectfully follow the same. Expenses allocated by the Head Office (H.O) and other Branches of the assessee to its Indian Branch - Held that - We have deliberated on the issue under consideration and find that the Tribunal in assessee s own case had held that the payments made by the assessee to its H.O, viz. Societe Generale, Singapore were neither Royalty or Fees for technical services, but were pure reimbursements for services, viz. data communication charges, Annual Miscrosoft Enterprise Software product billing and true up charges incurred etc., rendered for its Indian branch. We being of the considered view that the issue involved in the present appeal before us is squarely covered by the aforesaid order of the Tribunal, therefore, respectfully follow the same. The Ground raised by the revenue before us are dismissed. Taxability of the interest paid by the assessee to its H.O and other overseas branches on borrowings - Held that - We have deliberated on the issue under consideration and are persuaded to be in agreement with the ld. A.R that the same is squarely covered by the order passed by the Tribunal in the assessee s own case for AYs 2005-06 and 2006-07 as held that the interest paid by the Indian branch/Permanent establishment of the foreign bank to its H.O and other overseas branches is not chargeable to tax. Disallowance under Sec. 14A of the expenses relatable to the interest paid by the assessee P.E to its H.O and Overseas Branches - Held that - We are of the considered view that now when we have concluded that the interest of ₹ 15,86,609/- paid by the assessee to its H.O and other Overseas branches on borrowings is not liable to be brought to tax, therefore, as a necessary corollary, interest paid in respect of the deposits on which such interest was received would also be liable to be disallowed under Sec. 14A. We are persuaded to be in agreement with the view taken by the coordinate bench of the Tribunal while disposing of the appeal of the revenue in the assesses own case for A.Y.2001-02 as well as the order passed by the Tribunal in the case of Oman International Bank SAOG Vs. Jt.DIT (International Taxation) (2014 (1) TMI 537 - ITAT MUMBAI). The A.O shall during the course of the set aside proceedings adjudicate the issue afresh in the backdrop of the facts involved therein, though keeping in view our aforesaid observations.
Issues Involved:
1. Tax treatment of payments for software purchases as royalty. 2. Taxability of guarantee commission. 3. Nature of payments made to Head Office (HO) and other branches as royalty/fees for technical services. 4. Taxability of interest paid by the Indian Branch to its HO and other overseas branches. 5. Disallowance under Section 14A related to interest payments. Detailed Analysis: 1. Tax Treatment of Payments for Software Purchases as Royalty: The primary issue was whether payments made by the assessee for purchasing software should be treated as royalty under Explanation 4 of Section 9(1) of the Income Tax Act, 1961. The Assessing Officer (A.O) treated the payment as royalty and disallowed the expenditure under Section 40(a)(i) due to non-deduction of tax at source. However, the CIT(A) and the Tribunal relied on the Delhi High Court's decision in DIT vs. Infrasoft Ltd., which clarified that payments for software use are not royalties but business income. The Tribunal upheld the CIT(A)'s decision, emphasizing that the software purchase did not constitute royalty under the Indo-France DTAA. 2. Taxability of Guarantee Commission: The A.O added the entire guarantee commission as taxable income in the year it was received, contrary to the assessee’s practice of spreading it over the guarantee period. The CIT(A) deleted this addition, referencing earlier Tribunal decisions in the assessee’s favor for AYs 2002-03, 2005-06, and 2008-09. The Tribunal upheld the CIT(A)'s decision, following the precedent set in previous years. 3. Nature of Payments Made to HO and Other Branches: The A.O classified payments made to the HO and other branches for services like data communication and software maintenance as royalty/fees for technical services, thus taxable in India. The CIT(A) disagreed, treating these as reimbursements without any markup. The Tribunal confirmed this view, citing its own decision in the assessee’s case for AY 2010-11, where similar payments were not considered royalty or fees for technical services but mere reimbursements. 4. Taxability of Interest Paid by Indian Branch to HO and Other Overseas Branches: The A.O deemed the interest payments by the Indian Branch to its HO and other branches as taxable income in India. The CIT(A) deleted this addition, referencing Tribunal decisions in the assessee’s favor for AYs 2005-06 and 2006-07. The Tribunal upheld the CIT(A)'s decision, aligning with the Special Bench ruling in Sumitomo Mitsui Banking Corporation vs. DDIT, which concluded that such interest payments are not taxable in India under the DTAA provisions. 5. Disallowance under Section 14A Related to Interest Payments: The A.O did not address Section 14A disallowance in the draft order. However, the Tribunal noted that since the interest income was not taxable, the related interest expense should be disallowed under Section 14A. The matter was remanded to the A.O for fresh adjudication in line with the Tribunal’s earlier decision in the assessee’s case for AY 2001-02 and the case of Oman International Bank SAOG vs. Jt.DIT. Conclusion: The Tribunal dismissed the revenue's appeal for AY 2009-10 and partly allowed the appeal for AY 2010-11, remanding the Section 14A disallowance issue for fresh adjudication. The Tribunal consistently applied legal precedents and DTAA provisions, favoring the assessee on most issues.
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