2021 (5) TMI 879 - HC - Income Tax

TDS u/s 195 - payments made by the appellant for purchase of computer software by holding that the said payments are in the nature of royalty - disallowance made under Section 40(a)(i) - HELD THAT - As decided in the case of ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT amounts paid by resident Indian end-users/distributors to non-resident computer software manufacture/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 - Decided in favour of assessee.

Summary

Issues:
Challenge to order of Income-tax Appellate Tribunal regarding disallowance under Section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source under Section 195 for purchase of computer software.

Analysis:

1. Nature of Payments and Tax Deduction:
The appellant purchased software from non-residents in the relevant financial year but did not have the right to reproduce or make copies. The assessing officer disallowed the payments under Section 40(a)(i) as 'royalty' subject to tax deduction under Section 195. The Commissioner of Income-tax (Appeals) initially allowed the appeal, citing the timing of the decision in a related case. However, the Tribunal later upheld the disallowance due to the nature of payments and the obligation to deduct tax at source.

2. Appeal and Tribunal Decision:
The appellant challenged the Tribunal's decision on two main grounds: whether the entire payments for software purchase constituted 'royalty' and whether it was feasible to withhold taxes on these payments. The Tribunal upheld the 'royalty' characterization and ruled that the appellant was liable to deduct tax at source during payment, rejecting the argument of impossibility of performance.

3. Substantial Questions of Law:
The Court admitted the appeal to address substantial questions of law, including the characterization of payments as 'royalty' and the feasibility of tax deduction at the time of payment. However, during the hearing, it was highlighted that a similar issue had been resolved in another case by the Division Bench, referencing a Supreme Court decision. The Division Bench's ruling favored the assessee, leading to the resolution of the substantial questions of law in favor of the appellant and against the Revenue.

4. Final Judgment:
Considering the precedent set by the Supreme Court decision in Civil Appeal, the Court ruled in favor of the assessee, quashing the Tribunal's order dated 13.6.2018. The substantial questions of law were resolved in favor of the appellant, leading to the allowance of the appeal and the dismissal of the Tribunal's decision.