2021 (7) TMI 558 - AT - Income Tax

TDS u/s 195 - assessee had purchased the software from a company located in Israel - AO took a view that payment made for purchase of software was in the nature of royalty and that assessee was required to deduct TDS while making such payment - HELD THAT - As relying on ENGINEERING ANALYSIS CENTRE OF 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 deduce any TDS u/s 195. We are of the view that Ld. CIT(A) erred in treating the receipts from sale of software as royalty. Accordingly grounds raised by assessee stands allowed.

Summary

Issues:
Interpretation of payment for software as royalty under DTAA and obligation to deduct TDS.

Analysis:
The appeal pertains to a dispute over the characterization of payment made by the assessee for purchasing software from a company in Israel. The Assessing Officer (AO) deemed the payment as royalty, necessitating TDS deduction. The AO relied on the decision of the Hon'ble Karnataka High Court in CIT vs Samsung Electronics Co. Ltd., classifying the payment as royalty under the Indo Israel DTAA. However, both parties agreed that the issue is now settled by the recent Supreme Court judgment in Engineering Analysis Centre for Excellence Pvt. Ltd. vs CIT. The Appellate Tribunal noted that the Hon'ble Karnataka High Court had previously decided a similar issue in favor of the assessee for the assessment year 2011-12.

The Hon'ble Karnataka High Court's decision in the assessee's case for the assessment year 2011-12 highlighted that the payment for software did not constitute royalty under the DTAA. The Court emphasized that the transactions involved the sale of physical objects containing embedded computer programs, akin to sales of goods. The Court clarified that the distribution agreements did not grant any rights amounting to the use of or right to use any copyright, thus not falling under the definition of royalties as per the DTAA. Consequently, the Court ruled that the payments made by resident Indian end-users/distributors to non-resident software suppliers did not attract TDS deduction under Section 195 of the Income Tax Act.

In light of the Supreme Court and Karnataka High Court judgments, the Appellate Tribunal concluded that the CIT(A) erred in treating the software sale receipts as royalty. Therefore, the grounds raised by the assessee were allowed, and the appeal was deemed successful. Additionally, the Tribunal disregarded the additional grounds raised by the assessee in the absence of their pursuit during the hearing. Ultimately, the appeal was allowed in favor of the assessee, in line with the recent judicial precedents and the specific facts of the case.

This detailed analysis showcases the evolution of legal interpretations regarding software payments, royalty classification, and TDS obligations under the DTAA and domestic tax laws. The judgments referred to provide clarity on the nature of such transactions and the corresponding tax implications, ensuring consistency and alignment with the prevailing legal framework.