2019 (5) TMI 1193 - AT - Income Tax

TDS u/s 195 - payments made for software purchased by assessee - case of assessee is that it is across counter purchase, wherein the assessee does not acquire any copyright but it purchased copyrighted article for its application purposes - HELD THAT - We hold that there is no merit in the orders of authorities below where the assessee has purchased shrink wrap software or off-shelf software, which is copyrighted article and not purchased any copyright and hence the same is not liable to deduct tax at source u/s 195. Hence, the assessee cannot be held to be liable for non deduction of tax u/s 201(1) and interest charged u/s 201(1A). We thus, direct the Assessing Officer to delete demand created u/s 201(1) and interest charged u/s 201(1A). The grounds of appeal raised by assessee are thus, allowed. Penalty u/s 271C of the Act for such non deduction of tax at source out of payment made for purchase of royalty - HELD THAT - As already held that the assessee has not defaulted in non deduction of tax at source and hence, the assessee is not liable for any penalty u/s 271C. The grounds of appeal raised by Revenue are thus, dismissed.

Summary

Issues involved:
1. Interpretation of software license fees as royalty under Income-tax Act and DTAA agreements.
2. Application of tax withholding provisions for software payments.
3. Assessment of penalty under section 271C for non-deduction of tax at source.

Analysis:

Issue 1: Interpretation of software license fees as royalty under Income-tax Act and DTAA agreements:
The appeals by the assessee and Revenue were against separate orders relating to the assessment year 2007-08 under sections 201(1) & 201(1A) and 271C of the Income-tax Act, 1961. The primary contention raised by the assessee was regarding the treatment of payments for software license fees as 'Royalty' under Section 9(1)(vi) of the Act. The CIT(A) had interpreted computer software as literary work, scientific work, and a secret formula or process. The assessee argued that the software payments did not qualify as 'Royalty' under the DTAA agreements with India - USA and India - Singapore. The dispute also involved the distinction between the right to use copyright in software and the sale of copyrighted articles. The Tribunal, citing precedents, concluded that the purchase of copyrighted software did not constitute 'Royalty' under the Act or DTAA. Therefore, the demand for tax withholding was canceled, and the assessee was not held in default.

Issue 2: Application of tax withholding provisions for software payments:
The Assessing Officer contended that the assessee should have deducted tax at source for the payments made to purchase software, considering it as a case of royalty. However, the assessee argued that it was a purchase of copyrighted articles for application purposes and not the acquisition of copyright. The Tribunal, relying on previous decisions, held that the purchase of shrink wrap or off-shelf software, being a copyrighted article, did not require tax deduction at source under Section 197 of the Act. Consequently, the demand created under section 201(1) and interest charged under section 201(1A) were directed to be deleted.

Issue 3: Assessment of penalty under section 271C for non-deduction of tax at source:
In the appeal by the Revenue, the issue concerned the penalty under section 271C for the non-deduction of tax at source for software payments. However, since the Tribunal had already determined that the assessee was not liable for tax deduction at source, it followed that no penalty under section 271C was applicable. Therefore, the penalty was not levied, and the appeal by the Revenue was dismissed.

In conclusion, the Tribunal allowed the appeal by the assessee, directing the deletion of the tax demand and interest charged, while dismissing the appeal by the Revenue regarding the penalty under section 271C. The judgment emphasized the distinction between software purchases and royalty payments, providing clarity on the tax treatment of such transactions.