2014 (5) TMI 744 - AT - Income Tax

Non-speaking order - Assessee in default u/s 201(1) of the Act or not Payment of income chargeable to tax not made Requirement to deduct TDS u/s 195 of the Act Purchase of software Scope of term Royalty u/s 9(1)(vi) of the Act Held that - Assessee contended that the order passed by the Commissioner is not a speaking order as none of the contentions of the assessee have been dealt with while rejecting them and adjudication has been made solely based on a case law in which facts were different as also assessee s contentions were not dealt with Relying upon Motorola Inc. vs. Dy. CIT 2005 (6) TMI 226 - ITAT DELHI-A - where the software imported which is a shrink wrapped software or off the shelf software, same amounts to purchase of goods and not payment of royalties - The payment is for use of copy rights article and not for acquiring any copy right - the payments for import of software do not amount to payment of royalty chargeable u/s 9(1)(vi) of the Act - The payments partakes the character of purchase and sale of goods - the payee has no permanent establishment in India - no income is deemed to accrue or arise in India thus, the provision of section195 is not applicable to the payment - the assessee has filed an application for admitting the additional evidences the entire issues require a fresh adjudication at the level of CIT(A) thus, the order of the CIT(A) is set aside and the matter is remitted back to the CIT(A) for fresh adjudication Decided in favour of Assessee.

Issues Involved:
1. Whether the order passed by the Commissioner of Income Tax (Appeals) was erroneous and contrary to law and facts.
2. Whether the appellant should be considered an assessee in default under Section 201(1) and liable for interest under Section 201(1A) of the Income Tax Act.
3. Whether the remittance made by the appellant towards the purchase of computer software constitutes a royalty payment under Section 9(1)(vi) of the Act.
4. The impact of the retrospective amendment of Section 9(1)(vi) by the Finance Act, 2012, on the appellant's liability.
5. Whether payments made towards software maintenance, troubleshooting, technical support, and upgrades are considered 'royalty' or 'fees for technical services'.

Issue-wise Detailed Analysis:

1. Erroneous Order by CIT(A):
The appellant argued that the CIT(A)'s order was not a speaking order as it did not address the appellant's contentions and relied solely on a case law with different facts. The appellant cited the Delhi High Court's decision in Director of Income Tax vs. Infrasoft Ltd., which dissented from the Karnataka High Court's decision in CIT vs. Samsung Electronics Co. Ltd. The Delhi High Court held that purchasing software does not transfer copyright or the right to use copyright, thus not constituting royalty income.

2. Assessee in Default under Section 201(1) and Interest under Section 201(1A):
The appellant contended that it did not make any payment chargeable to tax in India and therefore was not required to deduct tax at source under Section 195. The payments were for business income in the hands of recipients without a Permanent Establishment (PE) in India. The appellant cited various decisions, including Air Canada (Delhi ITAT), HCL Infosystem Ltd. (Delhi ITAT), and Prasad Products Pvt. Ltd. (Chennai Special Bench), supporting the view that no TDS was required if the payer believed the payment was not taxable.

3. Remittance for Software Purchase as Royalty:
The CIT(A) upheld the AO's decision that payments for software licenses were royalty under Section 9(1)(vi) and taxable under DTAA. The appellant argued that the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh held that the sale of software packages is a sale of goods. The appellant also referenced OECD commentary and various ITAT decisions distinguishing between copyright and copyrighted articles, asserting that software purchases should not be classified as royalty.

4. Retrospective Amendment of Section 9(1)(vi):
The appellant argued that the retrospective amendment could not impose a liability for past actions. The appellant cited ITAT decisions, including Channel Guide India Ltd. (Mumbai ITAT) and Sterling Abrasive Ltd. (Ahmedabad ITAT), asserting that retrospective amendments should not affect the appellant's bona fide belief at the time of payment. The appellant also noted that the DTAA definitions of royalty were narrower and did not cover software payments.

5. Payments for Software Maintenance and Support:
The CIT(A) considered payments for maintenance, troubleshooting, technical support, and upgrades as part of the software license and thus as royalty. The appellant argued that these payments should be treated as fees for technical services, which are not taxable under DTAA unless 'made available' to the recipient. The appellant cited decisions from the Karnataka High Court in De Beers India Minerals (P) Ltd. and the Delhi High Court in Guy Carpenter & Co. supporting this view.

Conclusion:
The Tribunal found that the CIT(A) did not address all the appellant's contentions and relied solely on the Karnataka High Court's decision. Given the conflicting decisions from different High Courts, the Tribunal set aside the CIT(A)'s order and remanded the case for fresh adjudication. The CIT(A) was directed to consider all case laws and additional evidence presented by the appellant and to seek a remand report from the AO before passing a new order. The appeal was allowed for statistical purposes.

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