2021 (4) TMI 180 - HC - Income Tax

TDS u/s 195 - payments made to non-resident - Disallowance made u/s.40(a)(i) for non deduction of tax at source for the payment made by the assessee to Abaqus Inc., USA - addition made on account of royalty income which was taxable as per provision of section 9(1)(vi) - HELD THAT - The questions of law involved in the above appeals were already decided by the Hon'ble Supreme Court of India against the revenue and in favour of the assessee in the Judgment reported in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9 (1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. The amounts paid by resident Indian endusers/ distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act - Decided in favour of the assessee.

Summary

Issues:
- Challenge to orders passed by the Income Tax Appellate Tribunal regarding Assessment Years 2008-2009 and 2010-2011
- Questions of law raised in the appeals regarding disallowance of tax, royalty income, and copyright software

Analysis:
1. Challenge to Tribunal Orders:
The Revenue challenged the orders passed by the Income Tax Appellate Tribunal for the Assessment Years 2008-2009 and 2010-2011. The appellant raised questions of law in the appeals, primarily focusing on the deletion of disallowance made under section 40(a)(i) of the Income Tax Act for non-deduction of tax at source and the treatment of royalty income under section 9(1)(vi) of the Act. The Tribunal's findings were contested by the Revenue, leading to the appeals before the High Court.

2. Questions of Law Raised:
In the Tax Case Appeal No. 758 of 2013, the questions of law included whether the Tribunal was correct in deleting the disallowance for non-deduction of tax at source for payments made to a non-resident, whether TDS should have been deducted for royalty payments under section 195, and whether the assessee acquired only the right to use copyright software. Similarly, in Tax Case Appeal No. 443 of 2017, the issue revolved around the deletion of addition made on account of taxable royalty income under section 9(1)(vi) of the Act. The Tribunal's findings were questioned, especially in light of Explanation (2) to section 9(1)(vi) regarding deemed accrual of royalty income in India.

3. Supreme Court Precedent:
The High Court referred to a judgment of the Hon'ble Supreme Court where the Court categorized cases involving the purchase and resale of computer software by end-users and distributors. The Court emphasized the distinction between royalty payments and business profits, highlighting that certain payments for software did not constitute royalty under Double Taxation Avoidance Agreements. The Supreme Court's ruling clarified that in cases where there was no creation of interest or right amounting to the use of copyright, the provisions of section 195 for TDS deduction did not apply.

4. Decision and Conclusion:
After considering the arguments presented by both parties and the precedent set by the Supreme Court, the High Court concluded that the substantial questions of law raised in the appeals had already been decided against the Revenue. Following the Supreme Court's ruling, the High Court decided the questions of law against the Revenue and in favor of the assessee. Consequently, the Tax Case Appeals were dismissed, with no costs imposed. The High Court upheld the decisions based on the principles established by the Supreme Court regarding the taxation treatment of software transactions and royalty payments.

This detailed analysis of the judgment outlines the key issues raised, the legal questions examined, the relevant precedent cited, and the final decision rendered by the High Court based on the Supreme Court's authoritative interpretation of the law.