2018 (2) TMI 2126 - AT - Income Tax

TDS u/s 195 - no TDS was deducted on payment made to foreign parties/agents - addition u/s 40(a)(i) - CIT(A) has deleted the disallowance of export commission paid to foreign parties HELD THAT - It is clear from the order of the CIT(A) that after applying various judicial pronouncements, he reached to the conclusion that payment to M/s. Columbus Travel Media Ltd., and Zagat Survey LLC cannot be treated as royalty u/s.9(1)Ivi) of the Act. Hence, assessee was not required to deduct tax accordingly, no disallowance can be made u/s.40 (a) (i) of the Act. Export commission paid to the foreign agents , the CIT(A) recorded a clear finding that commission has been paid for procuring export order and payment was made outside India. After relying on the CBDT Circular No.23 of 1969, 786 of 2000 and 7 of 2009, the CIT(A) held that no tax is deductible in respect of such export commission. CIT(A) also relied on the decisions Welspring Universal 2015 (1) TMI 736 - ITAT DELHI and Faizan Shoes (P) Ltd. 2014 (8) TMI 170 - MADRAS HIGH COURT , which has been accepted by the Department and no SLP has been filed. Thus no infirmity in the order of CIT(A) for deleting the disallowance made on account of payment made to foreign parties without deduction of tax at source - Decided against revenue. Nothing was brought on record by learned DR to persuade us to deviate from the findings and conclusion recorded by CIT(A). Accordingly, we do not find any reason to interfere in the order of CIT(A) for deleting the disallowance made by the AO. Decided against revenue.

Summary

Issues Involved:

1. Non-deduction of TDS on export commission paid to foreign parties.
2. Classification of payments for software content licenses as royalty and the applicability of TDS under Section 195 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Non-deduction of TDS on Export Commission:

The primary issue revolved around whether the assessee was required to deduct tax at source (TDS) on export commission payments made to foreign parties. The assessee, engaged in the business of software export, had paid an export commission of Rs. 63,56,339/- to foreign agents for procuring export orders. The Assessing Officer (AO) contended that the assessee should have deducted TDS on these payments under Section 195 of the Income Tax Act, as the payments were made to non-residents. The AO added the amount to the total income of the assessee and made a disallowance under Section 40(a)(i) for non-deduction of TDS.

The CIT(A) deleted the disallowance by relying on judicial precedents and CBDT Circulars (Nos. 23 of 1969, 786 of 2000, and 7 of 2009), which clarified that commission income for services rendered outside India by non-resident agents is not chargeable to tax in India. The CIT(A) referred to the decisions of the ITAT Delhi in the case of Welspring Universal and the Madras High Court in Faizen Shoes (P) Ltd., which supported the assessee's case. Consequently, it was held that no TDS was required to be deducted on such payments, and the addition made by the AO was deleted.

2. Classification of Payments for Software Content Licenses as Royalty:

The second issue concerned whether payments made by the assessee to foreign entities, Columbus Travel Media Ltd. and Zagat Survey LLC, for software content licenses constituted "royalty" under Section 9(1)(vi) of the Income Tax Act, necessitating TDS deduction. The AO classified these payments as royalty, asserting that the licenses granted rights over copyrighted content, thereby requiring TDS deduction.

The CIT(A) examined the agreements and concluded that the licenses were non-exclusive and non-transferable, and did not involve the transfer of copyright. The assessee merely obtained a license to use the content without acquiring any rights in the intellectual property. The CIT(A) relied on judicial decisions, including DIT v. Ericsson A.B. and CIT v. Alcatel Lucent Canada, which distinguished between "copyrighted articles" and "copyright" itself. The payments were characterized as consideration for copyrighted articles, not royalty, under the relevant Double Taxation Avoidance Agreements (DTAAs) with the UK and the USA.

The CIT(A) further referenced various ITAT and High Court decisions, including DIT v. Infrasoft Ltd. and Velankani Mauritius Ltd. v. DDIT, which supported the view that payments for software licenses do not constitute royalty. Consequently, the CIT(A) held that the assessee was not required to deduct TDS on these payments, and the disallowance made by the AO under Section 40(a)(i) was deleted.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the deletion of disallowances for both issues. The Tribunal confirmed that the payments made to foreign parties, both for export commission and software content licenses, did not warrant TDS deduction under Indian tax laws. The appeals filed by the Revenue were dismissed, affirming the CIT(A)'s order in favor of the assessee.