2017 (9) TMI 513 - AT - Income Tax

Penalty proceedings u/s. 271(1)(c) - non deduction of tds u/s 195 - distributing the software to the end users - levy of interest u/s. 201(1A) - Indo-UK DTAA - Held that - We are of the opinion that definition of term royalty as appearing in the India UK DTAA apply and amendments made by Finance Act, 2012 would have no bearing on the present case. Even the Cir. No. 333 of CBDT states that where a DTAA provides for a particular mode of computation of income, the same should be followed irrespective of the provisions of the Act. In the case before us, the DTAA is providing particular mode of computation for royalty. As per the agreement the assessee did not have any right to generate the license key or make copies of license key or was provided access to source code in the software. The ASL software products were developed and marketed by it were in the nature of shrink-wrap-software-products that are also known as off the shelf software products. The assessee had no role in developing a software, it was just distributing the software to the end users. Therefore, we are of the opinion that payment by the assessee to ASL for procuring and distributing copyrighted software on principal to principal basis could not be treated as payment towards royalty. ASL was not having a PE in India, therefore, the assessee was not liable to deduct tax at source as per the provision of section 195 of the Act, hence, for its failure it cannot be treated as A-I-D u/s. 201. Reversing the order of the FAA we decide effective First effective Ground of appeal. As far as grossing of tax-rate is concerned, we want to state that we have already held that assessee was not liable to deduct tax at source, therefore, the issue of grossing up would not arise. Secondly, even if the taxes were to be paid same were to be paid by ASL. But, we have already held that as it was not having PE in India so ASL was not supposed to pay tax in India. Levy of interest u/s. 201(1A) of the Act. We have already held that the assessee was not liable to deduct tax for the payments made by it. Therefore, there would not be any liability towards payment of interest under section 201(1A).

Issues Involved:
1. Assessee in Default (A-I-D) under Sections 201 and 201(1A) of the Income Tax Act for AYs 2007-08 to 2011-12.
2. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act.
3. Grossing Up of Tax Rate.
4. Levy of Interest under Section 201(1A) of the Income Tax Act.
5. Disallowance under Section 40(a)(ia) of the Income Tax Act.
6. MAT Credit.
7. Erroneous Computation of Business Income.

Detailed Analysis:

1. Assessee in Default (A-I-D) under Sections 201 and 201(1A) of the Income Tax Act for AYs 2007-08 to 2011-12:
The primary issue was whether the assessee was liable to deduct tax at source on payments made to ASL under a distribution agreement. The Assessing Officer (AO) and the First Appellate Authority (FAA) held that the payments qualified as royalty under Explanation-2 of Section 9(1)(vi) of the Act and Article-13 of the India-UK DTAA. The Tribunal, however, found that the assessee was merely distributing copyrighted software products and did not have rights to the intellectual property itself. The Tribunal cited several cases, including Vinzas Solutions India (P.) Ltd. and Dynamic Vertical Software India (P.) Ltd., to conclude that the payments were not royalty. Consequently, the assessee was not liable to deduct tax at source, and thus, could not be treated as an A-I-D under Sections 201 and 201(1A) of the Act.

2. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
The Tribunal deemed the initiation of penalty proceedings under Section 271(1)(c) as premature and did not require adjudication.

3. Grossing Up of Tax Rate:
Since the Tribunal held that the assessee was not liable to deduct tax at source, the issue of grossing up of tax rate did not arise. Even if taxes were to be paid, they were to be paid by ASL, which did not have a Permanent Establishment (PE) in India.

4. Levy of Interest under Section 201(1A) of the Income Tax Act:
Given that the Tribunal concluded the assessee was not liable to deduct tax at source, there was no liability towards payment of interest under Section 201(1A).

5. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The AO and FAA had disallowed payments made to ASL under Section 40(a)(ia) due to non-deduction of tax at source. The Tribunal, referring to the case of Dynamic Vertical Software India (P.) Ltd., held that the payments could not be termed as royalty and thus, Section 40(a)(ia) was not applicable. Therefore, the disallowance was deleted.

6. MAT Credit:
The issue of MAT Credit required verification by the AO. The Tribunal directed the AO to verify the details and decide accordingly.

7. Erroneous Computation of Business Income:
The Tribunal found that the issue of erroneous computation of business income needed verification at the AO's level. The AO was directed to decide the issue afresh after hearing the assessee.

Conclusion:
The appeals for AYs 2007-08 to 2011-12 were allowed, and the appeals for AYs 2009-10 and 2010-11 were partly allowed. The Tribunal concluded that the payments made by the assessee to ASL were not royalty and thus, the assessee was not liable to deduct tax at source. Consequently, issues related to grossing up of tax rate, levy of interest under Section 201(1A), and disallowance under Section 40(a)(ia) were decided in favor of the assessee. The issues of MAT Credit and erroneous computation of business income were remanded to the AO for verification and fresh adjudication.

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