2019 (5) TMI 681 - AT - Income Tax

TDS u/s 195 - Disallowance of expenditure u/s 40(a)(i) - payment to GFG Gorup Ltd., New Zealand for purchase of software - AO notes this to be licensed software and hence, was of the view that payment was in the nature of royalty and the assessee ought to have deducted tax at source - whether the deduction claimed by assessee on purchase of licensed software is to be allowed as deduction in the hands of assessee or not? - HELD THAT - As decided in JOHN DEERE INDIA PVT. LTD., (JOHN DEERE EQUIPMENT MERGED WITH JOHN DEERE INDIA PVT. LTD.) VERSUS THE DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 1, PUNE 2019 (3) TMI 458 - ITAT PUNE where the software is purchased across the counter as shrink proof software, then it is not akin to royalty both under the Income Tax Act or the DTAA. The Tribunal held that since the definition of royalty has not been amended under DTAA, then the said definition would be paramount and would have to be applied for deciding the issue. It also held that amendment to section 9(1)(vi) of the Act by insertion of Explanations 4 to 6 would not change the scenario and make the assessee liable for deduction of tax at source in the relevant year. Thus no merit in the orders of authorities below in having held the assessee to be in default for non deduction of tax at source out of aforesaid payments. We reverse the order of CIT(A) in this regard and direct the Assessing Officer to allow the claim of expenditure - Decided in favour of assessee.

Summary

Issues involved: Disallowance of expenditure under section 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source on payment made for purchase of software.

Detailed Analysis:

1. Issue of Disallowance of Expenditure: The appellant contested the disallowance of expenditure amounting to &8377; 32,35,518/- by the Deputy Commissioner of Income Tax Circle 3, Pune, under section 40(a)(i) of the Act for failure to deduct tax at source on payment made for purchasing software. The Assessing Officer considered the payment as royalty due to the purchase of licensed software and disallowed the expenditure since tax was not deducted at source. The CIT(A) upheld the disallowance citing precedents like Cummins Inc and DDIT Vs. Reliance Infocom, disregarding the appellant's reliance on the Allianz SE case. The appellant contended that the issue was resolved in their favor in earlier years and referred to the decision in John Deere India Pvt. Ltd. Vs. DDIT to support their case.

2. Judgment Analysis: The Tribunal analyzed whether the purchase of licensed software should be treated as royalty and if the appellant was obligated to deduct tax at source. The Tribunal referred to the Pune Bench's decision in John Deere India Pvt. Ltd. Vs. DDIT, where it was clarified that software purchased off-the-shelf, without acquiring copyright, does not constitute royalty under the Act or DTAA. The Tribunal emphasized that the definition of 'royalty' under DTAA remains unchanged, and the amended domestic law provisions do not extend to DTAA definitions. As per the DTAA definition, royalty pertains to payments for copyright use, excluding purchase of copyrighted articles. Therefore, the appellant was not liable to deduct tax at source for software purchases. Consequently, the Tribunal overruled the CIT(A)'s decision, allowing the appellant's expenditure claim of &8377; 32,35,518/- and negating the default status for tax deduction. The judgment was delivered on May 3, 2019.

3. Conclusion: The Tribunal's verdict favored the appellant, rejecting the disallowance of expenditure for failure to deduct tax at source on software purchases. By clarifying the distinction between royalty and purchase of copyrighted articles, the Tribunal upheld the appellant's position based on the DTAA definition of 'royalty.' The decision highlighted the precedence of DTAA provisions over domestic laws and emphasized the non-applicability of tax deduction obligations in the given scenario, ultimately allowing the appellant's appeal.