2009 (9) TMI 65 - HC - Income Tax

TDS Withholding Tax Import of Software Download of Software - The assessee imported shrink-wrapped computer software from outside India for use in its business. No tax was withheld in respect of such payments on the ground the same cannot be treated as royalty either under the Income Tax Law or DTAA - ITO held such payments to be in the nature of royalty and subject to deduction of tax at source held that - Charging provisions are independent of the provisions governing deduction of tax at source - The Tax Authority is not required to determine the income of a non-resident for the purpose of determining the taxes to be withheld - Any payment resulting in any income in the hands of a non- resident would be subject to withholding tax Decision of Supreme Court in, Transmission Corporation of A.P. Ltd. v CIT (2008 -TMI - 5757 - SUPREME Court) and TCS v State of Andhra Pradesh (2008 -TMI - 4143 - Supreme Court), followed.

Issues Involved:
1. Maintainability of appeal under section 248 of the Income Tax Act.
2. Taxability of payments made for the purchase of software from non-resident suppliers.
3. Obligation to deduct tax at source under section 195 of the Act.
4. Interpretation and application of Double Taxation Avoidance Agreements (DTAA).
5. Applicability of section 9(1)(vi) of the Income Tax Act regarding royalty payments.
6. Consequences of non-deduction of tax under section 201 of the Act.

Detailed Analysis:

1. Maintainability of Appeal under Section 248 of the Act:
The Tribunal was correct in holding that an appeal was maintainable under section 248 of the Act, even though there was no adjudication by the authorities under sections 195(3), (4), & (5) read with section 200 of the Act. The Tribunal's decision to remand the matter to the Commissioner of Income Tax (Appeals) for fresh disposal on its merits was upheld, confirming that the assessee, who had deducted and remitted the amount, was entitled to maintain an appeal.

2. Taxability of Payments for Software Purchase:
The Tribunal erred in holding that the payments made by the assessee company for the purchase of software were not liable to income tax in India. The payments were considered to be in the nature of royalty and thus taxable under section 9(1)(vi) of the Act. The Tribunal's decision was reversed, and it was held that the assessee was obligated to deduct tax at source.

3. Obligation to Deduct Tax at Source under Section 195:
The Tribunal was incorrect in merely following the judgment in the case of Samsung Electronics Co. Ltd. without recording an independent finding. The Tribunal's order was deemed perverse, and it was held that the assessee was bound to deduct tax at source under section 195 of the Act. The Tribunal's failure to consider the ruling of the Advance Ruling Authority and the provisions of the DTAA was also erroneous.

4. Interpretation and Application of DTAA:
The Tribunal should have taken into consideration the ruling of the Advance Ruling Authority, the DTAA between India and the respective countries, and the provisions of section 9(1)(vi) of the Act. The Tribunal's decision was incorrect, and it was held that the payments made by the assessee were liable to tax in India, and the assessee was bound to deduct tax at source.

5. Applicability of Section 9(1)(vi) Regarding Royalty Payments:
The Tribunal was wrong in holding that the payment for the purchase of software did not constitute royalty. The Tribunal's interpretation that the payment was for the purchase of a copyrighted article and not the copyright itself was incorrect. The payment was deemed to be royalty under section 9(1)(vi) of the Act and the DTAA, and thus taxable in India.

6. Consequences of Non-Deduction of Tax under Section 201:
The Tribunal was incorrect in holding that the assessee could question the taxability of the recipient in proceedings under section 201(1) and 201(1A) of the Act. The assessee's failure to deduct tax at source without obtaining a certificate under section 195(2), (3), or (4) of the Act was not a sufficient reason to avoid the obligation. The Tribunal's decision was reversed, and it was held that the assessee was liable for the consequences of non-deduction of tax under section 201 of the Act.

Conclusion:
The appeals by the revenue were allowed, and the orders passed by the Tribunal were set aside. The orders of the assessing authorities and the first appellate authorities were restored, confirming the demand raised under section 201 of the Act for the failure of the assessees to comply with the requirement of section 195(1) of the Act.

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