2009 (9) TMI 526 - HC - Income Tax

Deduction of Tax at source- The Tribunal had allowed appeals filed by resident assessee in respect of different assessment year holding that the resident assessee were not liable to deduct any part of the payment made by them to non resident suppliers as price (for consideration) for the software which the resident assessees had acquired/ purchased from the non-residents for the purpose of the activities/ business of the resident assessee, thus the payment is not the nature of royaly income thus no deduction is to be made. The Commissioner (Appeals) upheld the order of Assessing officer. Tribunal allow the appeal of assessee. Held that- there was to be a payment to the non-resident and admittedly the payers having not taken any steps or not having invoked the reliving provisions of sub section (2) of section 195 of the Act, such obligation on the resident payers remaining intact and having regard to the limited scope for examination in an appeal u/s 246A(1)(ha) of the Act there was absolutely no way in law, for the tribunal, while exercising its appellate power u/s 250 of the Act and, therefore all orders passed by Tribunal for allowing the appeals of the assessee filed under section 253 of the Act and, therefore order passed by the Tribunal declared illegal and not sustainable.

Issues Involved:

1. Maintainability of appeal under section 248 of the Income-tax Act.
2. Tax liability of payments made for software purchases.
3. Tribunal's reliance on previous judgments.
4. Consideration of various legal provisions and agreements.
5. Requirement of obtaining a certificate under section 195(2), (3), (4).
6. Taxability of the recipient in section 201 proceedings.
7. Classification of payments for software as royalty or scientific work.
8. Purchase of right to use copyright vs. entire copyright.
9. Characterization of payments as purchase and sale of goods.

Detailed Analysis:

1. Maintainability of Appeal under Section 248:

The Tribunal correctly held that an appeal under section 248 is maintainable even if there was no adjudication by the authorities under section 195(3), (4), and (5) read with section 200. The Tribunal's decision to remand the matter for fresh disposal on merits was upheld, affirming the appellate authority's duty to hear the appeal substantively.

2. Tax Liability of Payments for Software Purchases:

The Tribunal's decision that payments made by the assessee for software purchases were not liable to income tax in India and consequently no TDS was required was found incorrect. The High Court emphasized that the obligation to deduct tax under section 195 arises if the payment bears the character of income, and the Tribunal erred in its judgment.

3. Tribunal's Reliance on Previous Judgments:

The Tribunal's reliance on its previous judgment in the case of Samsung Electronics Co. Ltd. without independent examination was deemed incorrect. The High Court noted that the facts were not identical, and the Tribunal should have recorded an independent finding.

4. Consideration of Various Legal Provisions and Agreements:

The Tribunal failed to consider the ruling of the Advance Rulings Authority, the Double Taxation Avoidance Agreements (DTAA), section 9(1)(vi) of the Income-tax Act, and other relevant laws and regulations. The High Court concluded that the Tribunal should have taken these into account to determine the taxability of the payments.

5. Requirement of Obtaining a Certificate under Section 195(2), (3), (4):

The High Court held that the assessee was bound to deduct tax at source as per section 195 unless a certificate under section 195(2), (3), or (4) was obtained. The Tribunal's failure to recognize this requirement was incorrect.

6. Taxability of the Recipient in Section 201 Proceedings:

The High Court clarified that the assessee cannot question the taxability of the recipient in section 201 proceedings. The obligation to deduct tax arises irrespective of the recipient's taxability, and failure to deduct tax without sufficient reason makes the assessee liable.

7. Classification of Payments for Software as Royalty or Scientific Work:

The Tribunal's decision that payments for software cannot be treated as income liable to tax in India as royalty or scientific work under section 9 read with the DTAA was incorrect. The High Court emphasized that such payments could be classified as royalty.

8. Purchase of Right to Use Copyright vs. Entire Copyright:

The Tribunal's conclusion that purchasing the right to use the software (and not the entire copyright) exempts it from being treated as royalty was incorrect. The High Court ruled that the payment for the right to use the software could still be classified as royalty under the DTAA.

9. Characterization of Payments as Purchase and Sale of Goods:

The High Court rejected the Tribunal's characterization of the payments as mere purchase and sale of goods. It held that the payments could be treated as royalty payments liable to income tax.

Conclusion:

The High Court allowed the appeals, set aside the Tribunal's orders, and restored the orders of the assessing authorities and first appellate authorities, confirming the demand raised under section 201 for failure to comply with section 195. The substantial questions of law were answered in favor of the Revenue and against the assessees.

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