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2018 (4) TMI 449 - AT - Income TaxPayments for software licenses fees as Royalty as per Section 9(1)(vi) - treatment to payment made for software licence fees - DTAA applicability - withholding of tax - Held that - The present case before us the Assessing Officer has held that the payment made by the assessee was royalty as per definition of royalty under the DTAA also. We find no merit in the said stand of Assessing Officer, in view of the issue being so held in DIT Vs. Infrasoft Ltd. (2013 (11) TMI 1382 - DELHI HIGH COURT). We further hold that payment made for purchase of software was not royalty as per definition of royalty under the DTAA between India and USA, Germany and Singapore, since the term royalty under the DTAA with these different countries had not been amended. Even if the definition of royalty under the Act stands amended but the assessee was not liable to withhold tax on the payments made to Non-resident entities on account of purchase of software. Unilateral amendment by the Indian Government to the term royalty by way of amendment to section 9(1)(vi) of the Act cannot be extended to the meaning of the term royalty defined under DTAA. Applying the principle laid down by the Hon ble High Court of Delhi in DIT Vs. New Skies Satellite BV (2016 (2) TMI 415 - DELHI HIGH COURT), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act being beneficial and the definition of royalty having not undergone any amendment in DTAA, the assessee was not liable to withhold tax on the payments made for purchase of software. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term royalty had been defined originally and not amended. As per the definition of royalty under the DTAA, purchase of software does not fall in realm of royalty . Accordingly, there was no liability on the assessee to withhold tax and the assessee cannot be held to be in default. The demand created under section 201(1) and interest under section 201(1A) of the Act is thus, cancelled.
Issues Involved:
1. Treatment of software license fees as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961. 2. Classification of computer software as literary or scientific work under the Copyright Act, 1957. 3. Qualification of licensed software as a secret formula or process. 4. Interpretation of software payments under Double Tax Avoidance Agreements (DTAA). 5. Applicability of beneficial provisions of India-USA and India-Singapore DTAA under Section 90(2) of the Act. 6. Distinction between the right to use a copyright and the sale of copyrighted software. 7. Retrospective amendment to Section 9(1)(vi) by the Finance Act, 2012. 8. Assessee's default under Section 201(1) for not deducting tax under Section 195. 9. Validity of proceedings under Section 201(1) without issuing a show cause notice. 10. Time limitation for initiating proceedings under Section 201(1). 11. Application of tax rates under India-USA and India-Greece Tax Treaties. Detailed Analysis: 1. Treatment of Software License Fees as 'Royalty' under Section 9(1)(vi): The core issue in the appeal was whether payments made for software license fees should be treated as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961. The CIT(A) treated these payments as royalty, relying on the retrospective amendment introduced by the Finance Act, 2012, which clarified that payments for software licenses are considered royalty. The assessee argued that this retrospective amendment could not be applied to payments made in the financial year 2006-07, as the liability to deduct tax was not foreseeable at that time. 2. Classification of Computer Software as Literary or Scientific Work: The CIT(A) held that computer software could be considered as literary work under the Copyright Act, 1957. The Assessing Officer noted that the software could also qualify as scientific work and a secret formula or process, thus falling under the definition of royalty. 3. Qualification of Licensed Software as a Secret Formula or Process: The Assessing Officer argued that the software licenses involved the transfer of a right to use a secret formula or process, thereby classifying the payments as royalty under Section 9(1)(vi) of the Act. 4. Interpretation of Software Payments under DTAA: The assessee contended that the payments for software did not fall within the definition of 'royalty' under the respective DTAAs with the USA and Singapore. The CIT(A), however, upheld the view that the payments were taxable as royalty under the DTAA, relying on the Pune Bench of Tribunal in Cummins Inc and the Mumbai Bench of Tribunal in Reliance Infocom. 5. Applicability of Beneficial Provisions of India-USA and India-Singapore DTAA: The assessee argued that the beneficial provisions of the India-USA and India-Singapore DTAA should apply, which would exclude the software payments from being classified as royalty. The CIT(A) disagreed, stating that the retrospective amendment clarified the existing legal position and did not create a new charge. 6. Distinction Between Right to Use a Copyright and Sale of Copyrighted Software: The assessee highlighted the difference between the right to use a copyright and the sale of copyrighted software, arguing that the payments were for the latter and should not be treated as royalty. The CIT(A) concluded that the payments were for the right to use the software, thus taxable as royalty. 7. Retrospective Amendment to Section 9(1)(vi) by the Finance Act, 2012: The CIT(A) upheld the retrospective amendment, stating that it was clarificatory in nature and did not create a new charge. The assessee argued that the amendment could not be applied retrospectively to impose a tax deduction obligation that did not exist at the time of payment. 8. Assessee's Default under Section 201(1) for Not Deducting Tax under Section 195: The Assessing Officer held the assessee in default under Section 201(1) for not deducting tax on payments made for software licenses. The CIT(A) confirmed this view, leading to a tax liability of ?1,794,263, including interest. 9. Validity of Proceedings under Section 201(1) Without Issuing a Show Cause Notice: The assessee argued that the proceedings under Section 201(1) were invalid as no show cause notice was issued. The CIT(A) dismissed this ground as not pressed. 10. Time Limitation for Initiating Proceedings under Section 201(1): The assessee contended that the proceedings were initiated beyond the reasonable period of four years. The CIT(A) did not address this issue in detail. 11. Application of Tax Rates under India-USA and India-Greece Tax Treaties: The assessee argued that the Assessing Officer incorrectly applied a 15% tax rate under the India-USA Tax Treaty and a 20% tax rate under Section 115A for payments to Greece entities, instead of the applicable 10% rate. The CIT(A) upheld the Assessing Officer's decision. Conclusion: The Tribunal held that the payments for software licenses could not be treated as royalty under the Income Tax Act or the DTAA. The retrospective amendment introduced by the Finance Act, 2012, could not impose a tax deduction obligation that did not exist at the time of payment. The Tribunal concluded that the assessee was not liable to withhold tax on the payments made for software licenses, and the demand under Section 201(1) and interest under Section 201(1A) was canceled. The appeal was partly allowed, with certain grounds being dismissed as infructuous or not pressed.
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