2016 (5) TMI 808 - AT - Income Tax

Purchase of software - royalty payment - Held that - As the assessee buys software from its AE and only facilitates the installation of these software in the premises of the customers will not be treated as royalty . Hence these transactions can only be treated as purchase of software . - Decided in favour of assessee TDS u/s 195 - Disallowance towards payment made towards fees for annual maintenance services - TDS liability - Held that - The assessee has made the payment of AMS fees in the following AY and TDS was made accordingly. Hence we direct the AO to verify the same and if found proper it may be allowed. Needless to say that assessee may be given proper opportunity of being heard

Summary

Issues:
1. Tax treatment of payments made towards purchase of software from group companies.
2. Disallowance of fees for annual maintenance services due to non-deduction of tax at source.

Issue 1: Tax treatment of software purchase payments
The assessee, engaged in providing consulting services in the oil and gas sector, procured high-end technology software licenses from its associate enterprise in the US. The Assessing Officer (AO) disallowed payments for software purchases due to non-deduction of tax under section 195 of the Income Tax Act, treating them as 'Royalty'. The Commissioner of Income-tax (Appeals) upheld the disallowance. The ITAT, in a previous order, remitted the matter back to the AO for fresh consideration. Subsequently, the AO reiterated the disallowance, considering the payments as 'Royalty' and subject to tax in India. The CIT(A) dismissed the assessee's appeal, holding that the payments constituted 'royalty' under the DTAA and the Income Tax Act. The CIT(A) emphasized the obligation to deduct tax at source under section 195. The assessee contended that the payments were for software purchase and not 'Royalty'. The ITAT analyzed the business model, noting that the appellant acted as a distributor without access to software source code. The ITAT observed a discrepancy in the AO's treatment of similar transactions in different assessment years. Referring to a previous case involving the associate enterprise, the ITAT held that the transactions were purchases and not 'Royalty'. The ITAT allowed the appeal, considering the payments as 'purchase of software'.

Issue 2: Disallowance of fees for annual maintenance services
Regarding the disallowance of fees for annual maintenance services, the AO added the amount to the assessee's income under section 40(a)(ia) for failure to deduct tax on technical services. The CIT(A) upheld the disallowance, categorizing the payments as fees for technical services under the Act and the DTAA. The assessee argued that the services did not involve the transfer of technical knowledge or skills. The payment for annual maintenance services was made in a subsequent assessment year with proper tax deduction. The ITAT directed the AO to verify the payment and allow it if found in order. Grounds 8 to 12 were allowed for statistical purposes. The appeals for the assessment years 2004-05, 2005-06, and 2009-10 were allowed, while the appeal for 2010-11 was partly allowed for statistical purposes.

In conclusion, the ITAT ruled in favor of the assessee, determining that the payments for software purchases were not 'Royalty' but rather purchases of software. The ITAT also directed the AO to verify the payment for annual maintenance services and allow it if found appropriate. The judgment highlighted inconsistencies in the tax treatment of similar transactions by the revenue authorities and emphasized the importance of correctly categorizing payments to avoid unnecessary tax implications.