2019 (12) TMI 1207 - AT - Income Tax

TDS u/s 195 - Royalty - Assessee purchased certain software licenses from M/s.Saipem SPA, Italy, which were used by assessee for providing services to customers for various support functions in accounting, reporting, etc.- Addition u/s 40(a)(i) - whether the aforesaid payments are Royalty payment u/s 9(1)(vi) of the 1961 Act and Article 13(3) of India-Italy DTAA which were subject to income-tax deduction at source u/s 195 ? - HELD THAT - As could be seen from decision of Hon ble Karnataka High Court in the case of CiT v. Synopsis International Old Limited 2013 (2) TMI 448 - KARNATAKA HIGH COURT which decision was rendered in context of Royalty as defined in India-Ireland DTAA wherein definition of Royalty is paramateria to definition of Royalty as used in India-Italy DTAA(except exclusion to aircraft in case of India- Ireland DTAA as detailed above by us in this order by reproducing relevant Article of both the treaties) with which we are seized of and Hon ble Karnataka High Court has held that grant of non-exclusive non transferable license in computer software with no right to sub-lease or transfer shall fall within Royalty both under DTAA as well u/s 9(1)(vi) of the 1961 Act read with explanations and shall be chargeable to incometax under the provisions of the 1961 Act. Hon ble jurisdictional High Court has affirmed the ratio of decision of Hon ble Karnataka High Court in the case of Synopsis International Old Limited, in a recent judgment in the case of Zylog Systems Limited 2019 (5) TMI 1209 - MADRAS HIGH COURT . We are bound by aforesaid decision of Hon ble Jurisdictional High Court decision and Respectfully following the decision of Hon ble Madras High Court in the case of Zylog, we allow appeal of Revenue

Summary

Issues Involved:
1. Disallowance of deduction under Section 40(a)(i) of the Income-tax Act, 1961.
2. Classification of payment towards software licenses as Royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 13(3) of India-Italy DTAA.
3. Obligation to deduct tax at source under Section 195 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 40(a)(i):
The Assessing Officer (AO) disallowed the deduction of ?5.59 crores claimed by the assessee under Section 40(a)(i) on the grounds that the payment for software licenses to M/s Saipem SPA, Italy, constituted royalty and was subject to tax deduction at source (TDS) under Section 195. The AO held that the payments were royalty under Section 9(1)(vi) of the Income-tax Act and Article 13(3) of the India-Italy DTAA. The AO noted that the assessee had deducted TDS on similar software purchases from third-party vendors but not on payments to its group concern, M/s Saipem SPA, Italy. The AO relied on judicial pronouncements, including the Karnataka High Court's decision in CIT vs. CGI Information Systems & Management Consultants (P) Ltd., to support the disallowance.

2. Classification of Payment towards Software Licenses as Royalty:
The AO classified the payment for software licenses as royalty, citing that the software licenses were used for various support functions in accounting and reporting, and thus, payments for such software licenses were subject to TDS under Section 195. The AO's classification was based on the definition of royalty under Section 9(1)(vi) and Article 13(3) of the India-Italy DTAA. The AO emphasized that the nature of the software, including Structure Calculation software and PDMS-3D modeling software, required TDS as it amounted to royalty payments. The AO rejected the assessee's contention that the payments were not royalty under the DTAA between India and Italy, citing pending appeals against similar decisions.

3. Obligation to Deduct Tax at Source under Section 195:
The assessee argued that the payments for software licenses did not constitute royalty under the India-Italy DTAA and hence, no obligation to deduct tax at source under Section 195 arose. The assessee relied on the Chennai Tribunal's decision in its own case for AY 2014-15, where it was held that payments for software licenses did not constitute royalty under Article 13(3) of the India-Italy DTAA. The CIT(A) allowed the assessee's appeal, following the Tribunal's decision, and held that no TDS was required before making payments to Saipem SPA, Italy, as the payments did not constitute royalty under the DTAA.

Tribunal's Decision:
The Tribunal considered the rival contentions and relevant case laws, including the Chennai Tribunal's decision in the assessee's own case and the jurisdictional High Court's decision in Zylog Systems Ltd. v. ITO. The Tribunal noted that the Chennai Tribunal had earlier held that payments for software licenses did not constitute royalty under Article 13(3) of the India-Italy DTAA. However, the Tribunal also considered the recent decision of the Hon'ble Madras High Court in Zylog Systems Ltd., which affirmed the Karnataka High Court's decision in CIT v. Synopsis International Old Ltd., holding that payments for non-exclusive, non-transferable software licenses constituted royalty under both the DTAA and Section 9(1)(vi) of the Income-tax Act.

Conclusion:
The Tribunal, bound by the jurisdictional High Court's decision in Zylog Systems Ltd., allowed the Revenue's appeal, holding that the payments for software licenses to Saipem SPA, Italy, constituted royalty and were subject to TDS under Section 195. Consequently, the disallowance under Section 40(a)(i) was upheld, and the appeal filed by the Revenue was allowed.

Order Pronounced:
The Tribunal pronounced the order on 23rd December 2019, allowing the Revenue's appeal in ITA No.1210/Chny/2019 for AY 2014-15.