2015 (6) TMI 211 - AT - Income Tax

Deduction of tax at source u/s. 195 - whether payment made by assessee to the foreign company being in the nature of royalty ? - CIT(A)deleting the demand raised u/s. 201(1) and 201(1A) - Held that - When the department has not been able to bring any material on record to controvert the factual findings, arrived at by the Ld.CIT(A), we do not see any merit in the contention of the department that the payment made is in the nature of royalty . On going through the facts and materials on record, we are of the firm opinion that the payments made by the assessee to M/s. Altiris do not come within the purview of royalty as finds place u/s. 9(1)(vi) of the Act. As far as the decisions relied upon by the parties, we are of the view that they have no relevance to the facts of the present case since, on the basis of facts on record, it is proved that assessee is merely a trader of software products of the foreign company. In the aforesaid facts and circumstances, we find no reason to interfere with the order of the Ld.CIT(A) which is accordingly upheld. - Decided against revenue.

Summary

Issues Involved:
1. Whether the payment made by the assessee to a foreign company constitutes 'royalty' under the Income Tax Act, requiring deduction of tax at source u/s. 195?
2. Whether the additions made by the AO on account of disallowance under Section 40(a)(i) for alleged non-deduction of tax at source on payments made to the foreign company are justified?

Issue 1: Payment Classification as 'Royalty'
The department appealed against the CIT(A)'s decision on the nature of payment made by the assessee to a foreign company, M/s. Altiris, for software products. The AO contended that the payment constituted 'royalty' as it involved the right to distribute copyrighted software. However, the CIT(A) analyzed the registered reseller agreement and other documents to determine that the assessee was merely a trader and not a user of the software, concluding that the payment did not fall under the definition of 'royalty' as per Section 9(1)(vi) of the Act. The tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's role was that of a distributor, not a user, and hence the payment did not attract 'royalty' taxation.

Issue 2: Disallowance under Section 40(a)(i)
The department's appeals also challenged the disallowance made by the AO under Section 40(a)(i) for non-deduction of tax at source on payments to M/s. Altiris for AYs 2008-09 and 2009-10. The AO disallowed the amounts paid by the assessee, considering them as 'royalty' and invoking Section 40(a)(i). However, in line with the decision on Issue 1, the tribunal found that since the payments were not 'royalty,' the disallowance under Section 40(a)(i) was unwarranted. The appeals on this issue were deemed infructuous and dismissed.

Conclusion
The tribunal, after thorough analysis and consideration of the arguments and documents presented, upheld the CIT(A)'s decision that the payment made by the assessee to M/s. Altiris did not constitute 'royalty' under the Income Tax Act. Consequently, the demands raised by the AO and the disallowances under Section 40(a)(i) were found to be unjustified and dismissed. The tribunal's decision was based on the factual findings that the assessee acted as a distributor, not a user, of the software products, and therefore, the payments did not attract 'royalty' taxation.