2005 (2) TMI 438 - AT - Income Tax

Double Taxation Relief - purchase of software - payment made to the foreign companies - Whether, the payment is royalty or not - HELD THAT - According to the ITO (TDS), the payment made by the assessee-company to the foreign companies for purchase of software is to be treated as royalty u/s 9(1)(vi) of the IT Act read with section DTAA of relevant countries. In view of the provisions of section 90(2) of the Act, we have to give preference to the definition as provided in the treaties. Apart from the provisions of the treaties, we have to consider the licence agreement entered into by the assessee with foreign companies which has been quoted at page 17 of the paper book filed by the revenue. It has been submitted by the revenue that under such an agreement, the developer of the software licences its intellectual property in the software in favour of the licensee. As a result of such agreement, the licensor of the software retains ownership over the copyright in the software and protects such copyright in the licence On perusal of the agreement between the parties, we are of the view that in the present case also what the assessee had acquired is only a copy of the copyrighted articles i.e., software, whereas the copyright remains with the owner, i.e., foreign parties. We find that the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed the definition of 'royalty' in the DTAA, which has been quoted above. The primary condition for bringing within the definition of 'royalty' in DTAA is that the payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc., Right to use of a copyright is totally different from right to use the programme embedded in a cassette or CD or it may be a software. In this case, the assessee had acquired a ready made off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called 'software'. Looking to the circumstances of the case and considering the fact that the definition of 'royalty' as provided in the treaties does not apply to the facts of the case. We are of the view that the finding recorded by the authorities below cannot be sustained. Accordingly, we hold that the remittance made by the appellant for purchase of software is not an income in India, hence, no tax is to be deducted in India under section 195 of the Income-tax Act, 1961. Since we have decided the issue on merit, therefore, we are not going into the technical objections raised on behalf of the assessee. In the result, the appeals are allowed.

Issues Involved:
1. Jurisdiction and Validity of Proceedings under Section 201(1) of the Income-tax Act.
2. Nature of Payments for Imported Software - Whether Royalty or Not.
3. Applicability of Double Taxation Avoidance Agreements (DTAA).
4. Compliance with Section 195 of the Income-tax Act.
5. Technical Objections Regarding Summons and Notice Issuance.

Detailed Analysis:

1. Jurisdiction and Validity of Proceedings under Section 201(1) of the Income-tax Act:
The assessee challenged the jurisdiction of the proceedings under Section 201(1) of the Income-tax Act, arguing that the proceedings were initiated without any pending case and that the summons issued to the Finance Manager were invalid as they should have been issued to the Principal Officer. The Tribunal did not address these technical objections as it decided the case on merits.

2. Nature of Payments for Imported Software - Whether Royalty or Not:
The primary issue was whether the payments made by the assessee for importing software from the USA, France, and Sweden constituted 'royalty' under Section 9(1)(vi) of the Income-tax Act and the relevant DTAAs. The assessee argued that the payments were for off-the-shelf software and did not involve the transfer of any copyright, thus not qualifying as 'royalty'. The Tribunal agreed with the assessee, noting that the payments were for copyrighted articles (software) and not for the use of or right to use any copyright.

3. Applicability of Double Taxation Avoidance Agreements (DTAA):
The Tribunal emphasized that the provisions of the DTAA override the Income-tax Act if they are more beneficial to the assessee. The definition of 'royalty' under the DTAAs with the USA, France, and Sweden required the payment to be for the use of or the right to use a copyright. Since the assessee only acquired a copy of the software without any rights to exploit the copyright, the payments did not qualify as 'royalty' under the DTAAs.

4. Compliance with Section 195 of the Income-tax Act:
The revenue argued that the payments were royalties and thus subject to tax deduction at source under Section 195. The Tribunal, however, concluded that since the payments did not constitute 'royalty' under the DTAAs, there was no obligation to deduct tax at source.

5. Technical Objections Regarding Summons and Notice Issuance:
The assessee raised objections regarding the validity of summons issued under Section 131 and the proper issuance of notices. The Tribunal did not delve into these technical objections, focusing instead on the substantive issue of whether the payments were royalties.

Conclusion:
The Tribunal ruled in favor of the assessee, determining that the payments for imported software did not constitute 'royalty' under the relevant DTAAs and thus were not subject to tax deduction at source under Section 195. Consequently, the orders imposing tax and interest under Sections 201(1) and 201(1A) were set aside, and the appeals were allowed.

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