2018 (1) TMI 184 - AT - Income Tax

TDS u/s 195 - intranet charges, payment of SAP software - AO held that above services constitute royalty u/s 9(l)(vi) of the Act and it has deemed to accrue or arise in India hence, chargeable to tax u/s 5(2) of the Act in the hands of the non-resident recipient - India Germany DTAA - Held that - In the present case the financial year are FY 1999-2000 to 2005-06, therefore, the ld Assessing Officer cannot assume jurisdiction for FY 1999- 2000 and 2000-01 accordingly, the ld AO cannot work out short deduction of tax on SAP Maintenance expenses of ₹ 18248673/- and ₹ 2503235/- for FY 2000-01 respectively. Accordingly, respectfully following the decision of the Hon ble Delhi High Court we direct AO to not to treat the assessee in default u/s 201(1) as well as not to charge interest consequently, u/s 201(1A) of the Act for these two financial years. Accordingly, the orders passed u/s 201 (1) / 201 (1A) for FY 1999-2000 and 2000-01, consequent tax and interest thereon covered in the order for these two years are cancelled. Contentions raised by the assessee that it is a reimbursement of expenses and therefore, no tax is required to be deducted thereon - Held that - To test the payment made by the assessee for SAP charges it is important to note that payment of such charges are made for use of licensed software on the Internet/ intranet and payment is also contingent on the basis of number of the user license or number of sessions for which the software is used, in the present case the technical support would also be provided by SAP, a German company and not by the recipient of the expenditure. In view of this, the above software receipt is scientific equipment under the Act and India Germany Tax Treaty. Hence, such payment is correctly regarded as royalty by the lower authorities according to article 12 of the DTAA. In view of this, the above payment made by the assessee to its holding company is chargeable to tax as royalty according to the income tax act as well as according to the double taxation avoidance agreement. Therefore, on such payment assessee should have deducted tax at source under the provisions of section 195 of the income tax act at the beneficial rate of 10% provided under the double taxation avoidance agreement. In view of this, the order passed by the Ld. assessing officer under section 201/201 (1A) for financial year 2001 - 2002 to 2005 - 2006 are correctly confirmed by the Ld. CIT (A). Hence, appeal of the assessee with respect to the financial years 2001 - 2002 to 2005 - 2006 are dismissed.

Issues Involved:
1. Validity of the CIT(A)'s order.
2. Tax demand and interest upheld by CIT(A).
3. Assessee treated as in default under Section 201(1).
4. Non-compliance with Section 195.
5. Nature of payments as royalty.
6. Applicability of Double Taxation Avoidance Agreement (DTAA).
7. Precedent decisions not followed by CIT(A).
8. Timeliness of the appeal.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The assessee challenged the CIT(A)'s order, claiming it was flawed both legally and factually.

2. Tax Demand and Interest Upheld by CIT(A):
The CIT(A) upheld a tax demand of ?8,774,548, which included interest of ?3,065,522. This was based on the Assessing Officer's (AO) determination that the assessee should have deducted tax on remittances to M/s SMS Demag AG, Germany, under Section 195.

3. Assessee Treated as in Default under Section 201(1):
The CIT(A) supported the AO’s decision to treat the assessee as a defaulter under Section 201(1) for not deducting tax at source on payments made for intranet and SAP charges, which were considered royalty under Section 9(1)(vi).

4. Non-compliance with Section 195:
The AO found that the payments made by the assessee to its parent company for intranet and SAP charges constituted royalty, which should have been taxed under Section 195. The AO also held that these payments were taxable under Article 12(3) of the DTAA between India and Germany.

5. Nature of Payments as Royalty:
The AO categorized the payments for intranet and SAP software as royalty under Section 9(1)(vi) and Article 12(3) of the DTAA. Consequently, a tax rate of 10% was applied, resulting in a tax liability of ?5,708,206 and interest of ?3,066,522 under Sections 201(1) and 201(1A).

6. Applicability of Double Taxation Avoidance Agreement (DTAA):
The assessee argued that the payments were not taxable as royalty under the DTAA, citing a decision by the DRP for AY 2012-13. However, the CIT(A) and the AO did not accept this argument, as the agreements and detailed workings of the reimbursement were not provided.

7. Precedent Decisions Not Followed by CIT(A):
The assessee contended that the CIT(A) did not follow the ITAT's decision in the assessee’s own case for AY 2000-01, which ruled against disallowance under Section 40(a)(i) for non-deduction of tax on similar payments. The CIT(A) rejected this, stating that the ITAT's decision was based on depreciation disallowance, not the deductibility of tax at source.

8. Timeliness of the Appeal:
The AO issued a show-cause notice on 01.03.2006 for FY 1999-2000 to 2005-06. The Delhi High Court in NHK Japan Broadcasting Corp. ruled that such actions must be initiated within four years. Consequently, the AO could not assume jurisdiction for FY 1999-2000 and 2000-01, and the orders for these years were canceled.

Conclusion:
- The appeals for FY 1999-2000 and 2000-01 were allowed due to the time-barred nature of the notices.
- The appeals for FY 2001-02 to 2005-06 were dismissed, upholding the CIT(A)'s decision that the payments constituted royalty and were subject to tax deduction under Section 195 and the DTAA.

This detailed analysis preserves the legal terminology and significant phrases from the original text while providing a comprehensive understanding of the judgment.

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