2021 (8) TMI 858 - AT - Income Tax

TDS u/s 195 - disallowing sum paid by the assessee as software maintenance charges to its overseas group companies by invoking section 40(a)(ia) - whether the provisions of the Act can override the provisions of the DTAA, the Hon'ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the transfer of all or any rights in respect of any right, property, or information included and had always included the transfer of all or any right for use or right to use a computer software ? - HELD THAT - Once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of 'royalties' will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term 'copyright' has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary work includes a computer program or software. It was held that regarding the expression use of or the right to use , the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a)(i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. As contended by the DR, neither the AO nor the CIT(A) had the benefit of the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT and therefore in all fairness, the issue should be remanded to the AO to examine the terms of the agreement under which right were granted to the Assessee in the light of the provisions of the DTAA as to whether the same would amount to royalty. We accordingly remand the issue to the A.O. The AO will afford opportunity of being heard to the Assessee in the set aside proceedings. The appeal of the Assessee is accordingly treated as allowed for statistical purpose.

Summary

Issues:
1. Taxability of software maintenance charges paid to overseas group companies under section 40a(ia) of the Income Tax Act, 1961 for Assessment Year 2014-15.
2. Interpretation of royalty under the India-USA Double Taxation Avoidance Agreement (DTAA) in relation to software maintenance fees.
3. Applicability of the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. to determine taxability of payments for software services.
4. Examination of whether the provisions of the Income Tax Act can override the provisions of the DTAA regarding the definition of royalties.

Analysis:
1. The assessee, a wholly owned subsidiary of a US company, paid software maintenance charges to its overseas group company. The tax authorities disallowed the deduction under section 40a(ia) as they considered the payment as royalty taxable in India. The AO held that the payment was for the right to use software, akin to royalty, and disallowed the deduction. The CIT(A) upheld the AO's decision.
2. The assessee argued that the payment did not constitute royalty under the DTAA as it did not involve the use of copyright. The Hon'ble Delhi High Court's decision in DIT vs. Ericsson AB was cited to support the argument that the DTAA definition of royalty prevails over the Act. The AO relied on the Karnataka High Court's decision in Samsung Electronics Co. Ltd. to treat the payment as royalty.
3. The Tribunal referred to the Supreme Court's ruling in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified the concept of copyright and royalties in relation to software payments. The Court held that payments for software on physical media do not constitute royalties under the Copyright Act, thereby overruling the Karnataka High Court's decision.
4. The Tribunal emphasized that the provisions of the Act cannot override the DTAA if the latter is more beneficial to the taxpayer. The insertion of Explanation 4 to section 9(1)(vi) expanded the scope of royalty under the Act, but the DTAA definition prevails if it is more advantageous to the taxpayer. The Court's interpretation of 'use of or the right to use' under the DTAA aligned with the Copyright Act's provisions.

The Tribunal remanded the case to the AO to re-examine the agreement terms in light of the DTAA and the Supreme Court's ruling. The decision was based on the need for a fresh assessment considering the recent legal developments. The appeal for Assessment Year 2014-15 was treated as allowed for statistical purposes, while the appeal for Assessment Year 2012-13 was partly allowed for statistical purposes.