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2018 (4) TMI 80 - AT - Income TaxTDS u/s 195 - non deducting tax at source for the payments made by them to the non-resident-entities - payments for purchase of software to non-resident-entities - income accrued in India - PE in India - India-Sweden DTAA - Held that - From the perusal of the agreements one thing is clear that there was no transfer of copyright of the software in any manner. As mentioned earlier, a copyright is different from the work in respect of which copyright subsists. The assessee had only got a copy of software without any part of the copyright of the software. All the arguments advanced by the DR about ICA, including the section 30, in our opinion are of no help. At the cost of repletion , we are holding that in the cases under consideration payments made by the assessee was for copyrighted articles. So, we are of the opinion that payments made by it to various suppliers of six countries did not amount to royalty within the definition of Article 12/13(3) of the DTAA - and it was not obliged to deduct tax at source. - Decided in favour of assessee
Issues Involved:
1. Alleged violation of the provisions of section 40(a)(i) of the Income Tax Act. 2. Obligation of the assessee to deduct tax at source for payments made to non-resident entities. 3. Classification of payments for software as 'royalty' under the Income Tax Act and DTAA. Issue-wise Detailed Analysis: 1. Alleged Violation of Section 40(a)(i) of the Income Tax Act: The Assessing Officers (AOs) challenged the orders of the CIT(A)-XXXI, Mumbai, which granted relief to the assessees for the alleged violation of section 40(a)(i) of the Income Tax Act. The AOs contended that the assessees failed to deduct tax at source for payments made to non-resident entities for software purchases. The CIT(A) held that the assessees did not acquire any rights to transfer, decode, or duplicate the software, except for backup purposes, and thus the payments did not amount to royalty under Article 12(3) of the DTAA. Consequently, the CIT(A) allowed the appeals, stating there was no obligation on the part of the assessees to deduct tax at source. 2. Obligation to Deduct Tax at Source: The AOs argued that the payments made by the assessees to non-resident entities for software were taxable in India and that tax should have been deducted at source. The assessees contended that the payments were for the purchase of software and did not constitute royalty. The CIT(A) analyzed the contracts and held that the assessees only acquired the right to use the software for business purposes without any rights to the software itself. The CIT(A) concluded that the payments were not royalties and thus not subject to tax deduction at source. 3. Classification of Payments for Software as 'Royalty': The AOs classified the payments for software as 'royalty,' arguing that software is a process, invention, or equipment, and thus the payments constituted royalty under section 9(l)(vi) of the Income Tax Act and the DTAA. The CIT(A) and the Tribunal analyzed the contracts and agreements, finding that the payments were for copyrighted articles (software) and not for the use of copyright. The Tribunal referred to various judicial precedents, including the Supreme Court's judgment in Tata Consultancy Services (271 ITR 401), which distinguished between the sale of copyrighted articles and the transfer of copyright. The Tribunal concluded that the payments were not royalties and were not subject to tax deduction at source. Analysis of Agreements: The Tribunal examined the agreements between the assessees and the software suppliers, noting that the agreements restricted the assessees from using the software for commercial purposes, copying, sublicensing, or modifying the software. The agreements also stipulated that the copyright remained with the suppliers, and the assessees only had the right to use the software for their operations. The Tribunal held that the payments were for copyrighted articles and not for the transfer of copyright, thus not constituting royalty. Judicial Precedents: The Tribunal referred to various judicial precedents, including the Delhi High Court's judgment in Ericsson A.B. (343 ITR 470) and the Madras High Court's judgment in Vinzas Solutions India Pvt. Ltd. (392 ITR 155), which held that payments for software do not constitute royalty. The Tribunal also considered the conflicting judgment of the Karnataka High Court in Samsung Electronics Co. Ltd. (345 ITR 494) but chose to follow the judgments favorable to the taxpayer, as per the Supreme Court's principle in Pradip J. Mehta (300 ITR 231). Conclusion: The Tribunal concluded that the payments made by the assessees to the non-resident software suppliers did not constitute royalty under the Income Tax Act or the DTAA. The Tribunal upheld the CIT(A)'s orders, stating that the assessees were not obligated to deduct tax at source for these payments. Consequently, all the appeals filed by the AOs were dismissed.
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