2015 (5) TMI 573 - AT - Income Tax

Payment made for transfer of user rights of software - whether the same are taxable as royalty under Article 12/13 of Double Taxation Avoidance Agreement (DTAA) between India and USA/UK/Singapore - non-deduction of tax at source - whether the assessee is liable to the demand raised u/s 201(1) and interest u/s 201(1A) - CIT(A) allowed assessee appeal - Held that - Following the ratio laid down by the Mumbai Bench of the Tribunal in New Bombay Park Hotel Pvt. Ltd. Vs. ITO (Intr. Taxation) (2014 (4) TMI 68 - ITAT MUMBAI ) we hold that no liability can be fastened on the assessee to deduct tax at source on the basis of subsequent amendments made in the Act, in relation to earlier payments made to Non-residents, when the said amendment was not in force. We confirm the order of CIT(A) albeit on different grounds. The grounds of appeal raised by the Revenue are thus, dismissed. - Decided in favour of assessee.

Issues Involved:
1. Taxability of payments for transfer of user rights of software under Article 12/13 of the DTAA.
2. Taxability of payments for maintenance and training services under Article 13(4) of the DTAA.
3. Liability of the assessee for non-deduction of tax at source under section 201(1) and interest under section 201(1A) of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Payments for Transfer of User Rights of Software:
The primary issue was whether payments made for the transfer of user rights of software are taxable as royalty under Article 12/13 of the DTAA between India and USA/UK/Singapore. The Assessing Officer (AO) concluded that such payments constituted royalty, relying on the Karnataka High Court's decision in CIT Vs. M/s. Samsung Electronics Co. Ltd. Consequently, the AO held the assessee liable for non-deduction of tax at source under section 195 of the Act, resulting in a tax demand and interest under sections 201(1) and 201(1A).

The CIT(A) disagreed, noting that retrospective amendments to section 9(1)(vi) of the Act by the Finance Act, 2012, making software payments taxable, could not override the DTAA provisions. The CIT(A) relied on the Delhi High Court's decision in DIT Vs. Nokia Networks OY and other similar rulings, concluding that such payments were not taxable as royalty under the DTAA.

2. Taxability of Payments for Maintenance and Training Services:
The second issue was whether payments for maintenance and training services are taxable as 'fees for technical services' under Article 13(4) of the DTAA. The AO held that these services were ancillary to the use of software and thus taxable. However, the CIT(A) found that these payments did not meet the DTAA's definition of 'fees for technical services' and were not taxable under the DTAA, despite being taxable under the Income-tax Act.

3. Liability for Non-Deduction of Tax at Source:
The final issue was whether the assessee was liable for non-deduction of tax at source on these payments. The CIT(A) ruled that since the payments were not taxable under the DTAA, the assessee was not required to deduct tax at source. The Tribunal upheld this view, emphasizing that subsequent amendments to the Act could not impose a liability retrospectively. The Tribunal cited the Mumbai Bench's decision in New Bombay Park Hotel Pvt. Ltd. Vs. ITO, which held that retrospective amendments could not compel a person to perform an impossible act, such as deducting tax on payments made before the amendment.

Conclusion:
The Tribunal dismissed the Revenue's appeals, confirming that the payments for software and related services were not taxable under the respective DTAAs, and the assessee was not liable for non-deduction of tax at source. This decision applied to all the assessment years under appeal, as the facts and issues were identical. The order was pronounced on April 10, 2015.

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