2019 (6) TMI 1220 - AT - Income Tax

TDS u/s 195 - withhold of tax - software license fees and IT support services - as per AO same was taxable under the Income Tax Act as well as under the DTAA as Royalty - provisions of section 9(1)(vi) or Article 12 of DTAA between India and USA - HELD THAT - Since provisions of DTAA overrides the provisions of Income Tax Act and since they were more beneficial and the definition of royalty having not undergone any change, then the assessee was not liable to deduct tax at source out of aforesaid payments made for purchase of software. Following the same parity of reasoning, we hold that assessee was not in default and hence, there was no merit in the demand created u/s 201(1) and charging of interest u/s 201(1A) The said finding of Tribunal above in JOHN DEERE INDIA PVT. LTD. VERSUS DIT (INTERNATIONAL TAXATION) 2019 (3) TMI 458 - ITAT PUNE would squarely apply to the facts of present case as the CIT(A) also while deciding the appeal has held that the issue raised in present appeal is squarely covered by the orders of CIT(A) in earlier years. Hence, relying on the aforesaid ratio of the Tribunal in assessee s own case for earlier years, we cancel the demand created under section 201(1) and charging of interest under section 201(1A) of the Act in respect of payments made for purchase of software. TDS on provision of IT support charges i.e. internet charges, use of e-mail facility, backup support services, etc., which was also held to be royalty - HELD THAT - Payments on account of interest charges, line charges, service charges and other charges i.e. VPN charges, online meeting charges, etc. were not payment of royalty and also no technical services were made available, hence there was no requirement for deduction of tax at source. Applying the said ratio to the facts of present case, we accordingly, hold so. TDS on lease line charges - HELD THAT - The issue arising in the present appeal on account of payment for lease line charges is identical to the issue before the Tribunal (supra) and following the same parity of reasoning, we hold that there was no requirement to deduct tax at source out of such lease line charges and hence, the assessee had not defaulted in not so deducting. TDS on payment for web based training fees - HELD THAT - The first issue was adjudicated by Tribunal (supra) it was concluded that in the absence of any transfer of technology, the payment is not covered under the definition of fees for technical services and hence, there was no liability upon the assessee to deduct tax at source out of payments made for web based training. Following the same parity of reasoning, we hold that assessee could not be held to be in default u/s 201(1) and 201(1A) in respect of payments made for web based training. TDS on payment against reimbursement of expats salaries - HELD THAT - The said issue was also decided by Tribunal (Supra) and it was held that where the assessee had deducted tax at source out of salary paid to expat employees deputed in India for providing assistance to the employees of assessee, then assessee could not be held to be in default u/s 201(1) and 201(1A). Applying the same parity of reasoning, we hold that there is no merit in raising the demand u/s 201(1) and charging of interest u/s 201(1A) of the Act on this count. - appeal of assessee is allowed

Summary

Issues Involved:
1. Deductibility of TDS on payments for software license fees and IT support services.
2. Classification of payments as 'Royalty' or 'Fees for Technical Services' under the Income Tax Act and DTAA.
3. Treatment of lease line charges for TDS purposes.
4. Enhancement by CIT(A) regarding TDS on training fees and reimbursement of salary to expat employees.
5. Grossing up of amounts chargeable to TDS under section 195A.

Issue-wise Detailed Analysis:

1. Deductibility of TDS on Payments for Software License Fees and IT Support Services:
The assessee argued that payments made to Deere & Co. USA for software license fees and IT support services were not taxable as 'Royalty' under the Income Tax Act or the DTAA between India and USA. The CIT(A) had held these payments as taxable, thus requiring TDS deduction under section 195. The Tribunal referred to its earlier decision in the assessee’s case for AY 2007-08 and 2008-09, where it was concluded that purchase of software as a copyrighted article does not constitute 'Royalty' under section 9(1)(vi) of the Act or the DTAA. Therefore, the assessee was not liable to deduct TDS, and the demand under section 201(1) and interest under section 201(1A) were canceled.

2. Classification of Payments as 'Royalty' or 'Fees for Technical Services':
The Tribunal reiterated that the amended definition of 'Royalty' under domestic law could not be extended to the DTAA, where the term 'Royalty' had not been amended. Thus, the purchase of software did not fall under 'Royalty' as per the DTAA. The same reasoning applied to IT support charges, which were not considered 'Royalty' or 'Fees for Technical Services', and hence, no TDS was required.

3. Treatment of Lease Line Charges for TDS Purposes:
The CIT(A) had classified lease line charges as 'Royalty'. The Tribunal, however, found that such payments were not for the use of any equipment but for services like internet and email facilities. Referring to the Delhi High Court's decision in Asia Satellite Telecommunications Co. Ltd., the Tribunal held that lease line charges do not constitute 'Royalty' and are merely reimbursements of expenses, thus not attracting TDS.

4. Enhancement by CIT(A) Regarding TDS on Training Fees and Reimbursement of Salary to Expat Employees:
The CIT(A) enhanced the assessment by holding that TDS should have been deducted on web-based training fees and reimbursement of expat salaries. The Tribunal found that web-based training fees did not involve the transfer of technology and thus did not qualify as 'Fees for Technical Services'. Regarding expat salaries, the Tribunal noted that TDS under section 192 was already deducted by the assessee, and no additional TDS was required under section 195. Therefore, the enhancement by CIT(A) was not justified.

5. Grossing Up of Amounts Chargeable to TDS under Section 195A:
The Tribunal agreed with the assessee that the grossing up of amounts for computing tax and interest under section 201 and 201(1A) was not justified, as section 195A was not applicable in this context.

Conclusion:
The Tribunal allowed the appeal of the assessee, canceling the demand under section 201(1) and interest under section 201(1A) for all the payments in question, including software license fees, IT support charges, lease line charges, web-based training fees, and reimbursement of expat salaries. The Tribunal's decision was based on the interpretation of 'Royalty' and 'Fees for Technical Services' under the Income Tax Act and the DTAA, and the principle that DTAA provisions override domestic law when more beneficial.