2019 (4) TMI 308 - AT - Income Tax

Demand raised u/s 201(1) and interest u/s 201(1A) - TDS u/s 195 - payments towards use of software - case of Revenue was that the payments made for use of software was taxable as royalty under Explanation 4 to section 9(1)(vi) - HELD THAT - We hold that the payments made by assessee for use of software were not taxable as royalty and hence, the assessee has not defaulted in not deducting tax at source out of such payments. Consequently, there is no merit in raising the demand under section 201(1) of the Act and charging interest under section 201(1A) of the Act. Payments towards subscription charges / fees for use or access to database or portal - treatment as royalty on the same simile that the definition of royalty under DTAA had not undergone any change - HELD THAT - There is no merit in holding the aforesaid payments as liable to deduct tax under section 201(1) of the Act and consequently, the assessee has not defaulted in not deducting the tax out of such payments. Hence, the demand created under section 201(1) of the Act and interest charged under section 201(1A) is cancelled - the payments made for purchase of hardware cannot be held to be royalty. The said amount was held to be liable to tax as royalty by the authorities below on the ground that software was held to be royalty. No merit in the orders of authorities below in this regard. CIT(A) in the later paras have directed the Assessing Officer to verify the stand of purchase of hardware raised by the assessee. However, since we have already decided the issue in turn, relying on the order of Tribunal in John Deere India Pvt. Ltd. Vs DDIT 2019 (3) TMI 458 - ITAT PUNE we find no merit in the stand of authorities below in this regard and the same is dismissed. Monetary limit - Grossing up under section 195A - HELD THAT - The tax effect involved in the appeal of Revenue is below the monetary limit prescribed by the CBDT vide Circular No.3/2018, dated 11.07.2018. In view of the said Circular prescribing the limits for filing the appeals before the Tribunal by the Revenue and since the tax effect in the present appeal filed by the Revenue is below the said limit, then the appeal of Revenue is not maintainable and the same is dismissed.

Summary

Issues Involved:

1. Assessee in default for remittances outside India.
2. Timeliness of the order under section 201(1) & 201(1A) of the Income-tax Act.
3. Taxability of payments for software use as royalty.
4. Taxability of database access charges as royalty.
5. Taxability of consultancy fees as fees for technical services.
6. Grossing up under section 195A of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Assessee in Default for Remittances Outside India:
The assessee was deemed in default for not deducting tax at source on payments made to non-residents for software, consultancy services, and AMC charges. The Assessing Officer issued a notice and held the assessee liable under sections 201(1) and 201(1A) of the Income-tax Act, raising a demand for tax and interest.

2. Timeliness of the Order under Section 201(1) & 201(1A) of the Income-tax Act:
The assessee contended that the order was time-barred as the notice was issued after four years from the end of the relevant financial year. The CIT(A) held that no period of limitation was prescribed in the Statute, thus the order was not annulled.

3. Taxability of Payments for Software Use as Royalty:
The CIT(A) and the Assessing Officer held that payments for software use were taxable as royalty under section 9(1)(vi) of the Income-tax Act and the relevant DTAA. The Tribunal, however, referenced its decision in John Deere India Pvt. Ltd. Vs DDIT, concluding that payments for software, being for copyrighted articles, were not royalty under section 9(1)(vi) or the DTAA. Consequently, the demand under sections 201(1) and 201(1A) was canceled.

4. Taxability of Database Access Charges as Royalty:
The CIT(A) held that database access charges were taxable as royalty and the assessee should have deducted tax at source. The Tribunal, applying the same rationale as for software, held that such payments did not fall within the definition of royalty under the DTAA and thus, the demand under sections 201(1) and 201(1A) was canceled.

5. Taxability of Consultancy Fees as Fees for Technical Services:
The CIT(A) held that consultancy fees were taxable as fees for technical services under the Income-tax Act and the DTAA. The Tribunal, referencing its prior decisions, concluded that there was no requirement to deduct tax at source for such payments, thus canceling the demand under sections 201(1) and 201(1A).

6. Grossing Up under Section 195A of the Income-tax Act:
The Revenue's appeal on the issue of grossing up under section 195A was dismissed as the tax effect was below the monetary limit prescribed by the CBDT Circular No.3/2018. The CIT(A) had previously allowed this issue in favor of the assessee.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal held that payments for software and database access were not taxable as royalty, and consultancy fees were not taxable as fees for technical services, thereby canceling the demands under sections 201(1) and 201(1A). The issue of grossing up under section 195A was dismissed due to the low tax effect.