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2018 (10) TMI 485 - AT - Income TaxTDS u/s 195 - tax liability under section 201(1) and 201(1A) - default for non-deduction of tax at source on computer hardware and software, as well as installation, support services and post-warranty services- assessee remitted to Network Appliance BV, Netherland without deduction of tax - amount was paid without obtaining any certificate from the Assessing Officer under section 195(2) of the Act or the accountant certificate - existence of PE - Held that - The software has been sold to the assessee as shrink-wrapped software, which is commercially off the shelf software sold in retail, in contract to the specially developed (unique) software written by own or contracted programmers. This fact has not been disputed by the Revenue. Thus, in view of the binding precedence of the jurisdictional High Court in the case of Infrasoft Ltd (2013 (11) TMI 1382 - DELHI HIGH COURT we hold that sale of the hardware along with the software embedded therein is not taxable in the hands of the non-resident recipient in absence of any permanent Establishment of said non-resident in India. In case of software embedded with the hardware of computers, being contract for supply of the goods which is a copyrighted articles and not a copyright itself and therefore not liable for tax in India either as royalty or fee for technical services. When the payment to the non-resident is not subject to tax in India, there was no requirement for the assessee to obtain clearance certificate from the Assessing Officer or to file accountant certificate as held by the apex court in the case of GE India technology Centre 2010 (9) TMI 7 - SUPREME COURT OF INDIA . Royalty payment - assessee submitted that payments are not in lieu of use or right to use any copyright in the software and the assessee has been given the right to use the software only - Held that - We note that in Article 12(6) exceptions to the fee for technical services are mentioned. One of the exception mentioned in 12(6)(a) is that the fee for technical services does not include amount paid for services that are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of the property. The contention of the Assessing Officer is that since the services availed by the assessee are not inextricably and essentially linked with the sale therefore, the assessee not being covered by the said exception, the services should be treated as fee for technical services. This finding of the Assessing Officer is not justified. We are agreed with the submission of the Ld. Counsel that the clauses related to inextricably link with sale of property in Article 12(6)(a) are as exceptions to Article 12(5). Since the services are not covered under Article 12(5) either under clause (a) or (b), applicability of Article 12(6) is not required to be examined. Accordingly, we reject the finding of the Ld. Assessing Officer on this issue. Also agreed with the contention of the assessee that support services or warranty services has not made available any technology or know-how to the assessee and therefore payment made for such services does not qualify for FTS under the relevant DTAA. The payment for services of installation, support, services, subscription and warranty is also not liable for tax in India either as royalty or FTS and therefore the assessee is not required to deduct tax at source on the same. - Decided in favour of assessee
Issues Involved:
1. Tax liability under section 201(1) of the Income Tax Act, 1961 for non-deduction of tax at source on payments for computer hardware and software. 2. Classification of payments for installation, support services, and post-warranty services as "Fees for Technical Services" (FTS) or "Royalty" under Article 12 of the India-Netherlands DTAA. 3. Levy of interest under section 201(1A) of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Tax Liability for Non-Deduction of Tax at Source - The Assessing Officer (AO) held the assessee in default under section 201 of the Act for not deducting tax at source under section 195 for payments made to Network Appliance BV, Netherlands. - The AO applied a tax rate of 42.23% on payments for hardware and software and 10% on payments for installation and support services. - The assessee argued that the payment for hardware and software is not taxable in India as it constitutes business income for the non-resident seller, and in the absence of a Permanent Establishment (PE) in India, such income is not taxable under Article 5 of the Indo-Netherlands DTAA. - The Tribunal agreed with the assessee, citing the decision of the Hon’ble Delhi High Court in DIT Vs Infrasoft Ltd, which held that software embedded in hardware is a copyrighted article and not a copyright, thus not taxable in India. Issue 2: Classification of Payments for Installation, Support Services, and Post-Warranty Services - The AO classified these payments as "royalties" and "fees for technical services" under Article 12 of the India-Netherlands DTAA. - The assessee contended that these payments do not qualify as royalties or FTS as they do not involve the use or right to use any copyright in the software, nor do they make available any technical knowledge, experience, skill, know-how, or processes. - The Tribunal agreed with the assessee, stating that the payments are not in lieu of the use or right to use any copyright and do not qualify as FTS under Article 12(5)(b) of the DTAA. - The Tribunal also rejected the AO's reliance on Examples 8 and 9 of the MoU to the India-US DTAA, stating that the services are not covered under Article 12(5) and thus, the applicability of Article 12(6) is not required to be examined. Issue 3: Levy of Interest under Section 201(1A) - The AO levied interest under section 201(1A) for non-deduction of tax at source. - Since the Tribunal deleted the liability of the assessee under section 201(1) in Ground No. 2, the issue of interest under section 201(1A) was rendered infructuous. Conclusion: - The Tribunal allowed the appeals of the assessee, holding that the payments for hardware and software, as well as installation, support services, and post-warranty services, are not taxable in India. - The Tribunal deleted the liability under section 201(1) and the corresponding interest under section 201(1A). Order: - Both appeals of the assessee are allowed.
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