2017 (5) TMI 1272 - AT - Income Tax

TDS u/s 195 - Remittances of Purchase of software not taxable in India - whether the amount paid was royalty payment u/s 9(1)(vi) and Article 12(3) of the Tax Treaty with Singapore requiring the assessee to deduct tax at source at the rate of 15%? - Held that - The payment was not royalty and hence assessee was not liable to deduct tax at source.

Issues Involved:
1. Taxability of remittances for the purchase of software.
2. Taxability of payments towards annual maintenance charges.
3. Charging of interest under section 201(1A) for short deduction of TDS.

Issue-wise Detailed Analysis:

1. Taxability of Remittances for Purchase of Software:
The primary issue concerns whether payments made by the assessee to a Singapore-based company, Apex Systems P. Ltd., for the purchase of software should be classified as royalty and thus subject to tax deduction at source (TDS) at 15%. The Commissioner of Income Tax (Appeals) [CIT(A)] held that these payments were royalty under Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the India-Singapore Tax Treaty. The CIT(A) concluded that the payments constituted consideration for a license to use the software, which falls under the definition of royalty. The assessee argued that the software license was non-transferable and non-exclusive, meant only for internal business use, and did not involve any transfer of copyright. The assessee contended that the payments should be treated as business profits, not royalty, and hence not subject to TDS.

The Tribunal examined similar cases, including decisions from various High Courts and Tribunals, and concluded that the payments for software do not constitute royalty. The Tribunal held that the transfer/sale of software is not taxable as royalty under the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA) with Singapore. The Tribunal also noted that a retrospective amendment (Explanation 4 to Section 9(1)(vi)) cannot impose a TDS liability retrospectively.

2. Taxability of Payments Towards Annual Maintenance Charges:
The second issue is whether payments made towards software maintenance charges should be classified as Fees for Technical Services (FTS) and subject to TDS at 15%. The CIT(A) held that these payments were for technical or consultancy services, covered under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-Singapore Tax Treaty. The CIT(A) linked the maintenance charges to the software purchase, treating them as ancillary to the royalty payments.

The assessee argued that the maintenance services did not involve any transfer of technology and were merely for software upkeep, which should be classified as business profits, not FTS. The Tribunal, following the reasoning applied to the software purchase payments, held that the maintenance charges should not be classified as FTS and thus not subject to TDS.

3. Charging of Interest Under Section 201(1A) for Short Deduction of TDS:
The final issue pertains to whether the assessee is liable for interest under Section 201(1A) for short deduction of TDS. The Assessing Officer (AO) had charged interest on the grounds of short deduction. The assessee contended that there was no short deduction since the payments were not liable for TDS in the first place.

Given the Tribunal's findings that the payments for software and maintenance charges were not subject to TDS, it followed that there was no short deduction of TDS. Consequently, the Tribunal directed the AO to delete the interest charged under Section 201(1A).

Conclusion:
The Tribunal allowed the appeals filed by the assessee, holding that the payments for software and maintenance charges were not taxable as royalty or FTS and thus not subject to TDS. Additionally, the Tribunal directed the deletion of interest charged under Section 201(1A) for short deduction of TDS. The judgment emphasized the precedence of DTAA provisions over domestic laws and the inadmissibility of retrospective amendments to impose TDS liabilities.

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