2012 (12) TMI 776 - AT - Income Tax

Sale of Software Royalty failure to deduct tax u/s. 195 - assessee in default u/s. 201(1) - Held that - Analysis of the DTAA, Income Tax Act, Copyright Act that the payment would constitute royalty within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) as the definition of royalty under clause 9(1)(vi) is broader than the definition of royalty under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute royalty for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi). In view of the provisions of Section 90 agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty, thus it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 - the facts of the present case are similar to the facts involved in M/s. Samsung Electronics Co. Ltd. v. DCIT (International Taxation) 2012 (8) TMI 112 - ITAT BANGALORE therefore respectfully following the said order appeals of the assessee dismissed - against assessee.

Issues Involved:
1. Applicability of section 9(1)(vi) of the Income-tax Act, 1961 regarding the classification of "sale of software" as "royalty".
2. Treatment of the assessee as "assessee in default" under section 201(1) of the Income-tax Act for failure to deduct tax at source under section 195.
3. Reference to judicial precedents and their applicability to the present case.

Issue-wise Detailed Analysis:

1. Applicability of Section 9(1)(vi) of the Income-tax Act, 1961:
The primary issue in these appeals is whether the payments made by the assessee for the purchase of software from non-residents should be considered as "royalty" under section 9(1)(vi) of the Income-tax Act, 1961. The assessee purchased software from CSC Italia SRL, Italy, and PUMA AG Rudolf Dassler Sport, Germany, and made payments to non-residents for the licensed software. The Assessing Officer (AO) held that these payments amounted to royalty, requiring tax deduction at source under section 195. Consequently, the AO assessed the liability under section 201(1) and charged interest under section 201(1A).

The CIT(A) upheld the AO's decision, referencing the Karnataka High Court's judgment in the case of M/s. Samsung Electronics Co. Ltd., which stated that payments towards "shrink-wrapped software" were liable for withholding tax. The CIT(A) noted that, despite the Supreme Court remanding the matter for reconsideration, the jurisdictional High Court's ruling on the liability for withholding tax on payments for "shrink-wrapped software" remained binding.

2. Treatment of the Assessee as "Assessee in Default" under Section 201(1):
The assessee was treated as "assessee in default" under section 201(1) for failing to deduct tax at source on payments made for the purchase of software. The CIT(A) confirmed the AO's action, emphasizing the obligation to follow the jurisdictional High Court's judgment unless it was reversed. The CIT(A) also referenced the ITAT Delhi Bench's decision in the case of Microsoft and the Ruling of AAR in the case of ABC, which supported the view that payments for software constituted royalty.

3. Reference to Judicial Precedents and Their Applicability:
The Tribunal considered the submissions of the Departmental Representative (DR) and reviewed the material on record. It noted that a similar issue had been adjudicated in the case of M/s. Samsung Electronics Co. Ltd. v. DCIT (International Taxation), where the Tribunal followed the Karnataka High Court's judgment. The High Court had held that payments for software amounted to royalty under Article 12 of the DTAA and section 9(1)(vi) of the Act, creating an obligation to deduct tax at source under section 195.

The Tribunal reiterated the High Court's findings, emphasizing that the right to use the software, including making copies for internal business purposes, constituted a transfer of copyright. This transfer was deemed royalty, and the payments were subject to tax deduction at source. The Tribunal dismissed the assessee's appeals, affirming the CIT(A)'s orders and the AO's actions.

Conclusion:
The Tribunal upheld the applicability of section 9(1)(vi) of the Income-tax Act, 1961, classifying payments for software as royalty. It confirmed the treatment of the assessee as "assessee in default" under section 201(1) for failing to deduct tax at source. The Tribunal relied on the Karnataka High Court's judgment and other judicial precedents to support its decision. The appeals were dismissed, and the orders of the CIT(A) and the AO were affirmed.

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