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2020 (11) TMI 642 - AT - Income TaxTDS u/s 195 - addition u/s 40(a)(i) - computer maintenance expenses - Royalty - nature of service rendered by the Singapore entity to the assessee pursuant to the system support and maintenance agreement - assessee s case falls under Article 12(4)(a) of Indo-Singapore Treaty - characterization of income in the hands of Singapore entity - AO observed that the rights of software acquired by the assessee along with computers are very much ancillary to the application or enjoyment of the software rights and therefore, the requirement of make available as contested by the assessee is not required in the instant case - HELD THAT - From the scope of services rendered by the Singapore entity to the assessee, it could be safely concluded that the said case does not fall within the ambit of purchase of any copyrighted article by the assessee so as to constitute the same to be in the nature of royalty. The Singapore entity buys various licenses from third party manufacturers and in turn sells the same to the Indian assessee. The Singapore entity is not the owner of any copyright. This is a clear case of providing services by the Singapore entity to the assessee company. Hence, the same cannot fall within the ambit of royalty. Whether the subject mentioned incurrence of expenditure by the assessee could be characterized as royalty in the facts and circumstances of the case? - We have already held hereinabove that the subject mentioned expenditure cannot fall within the ambit of royalty. Hence, the disallowance made u/s.40(a)(i) of the Act cannot be made in the facts of the instant case. Since, the relief is granted to the assessee on first principle, the other argument advanced by the ld. AR that money is actually not paid by the assessee during the year under consideration and hence, the same would not be liable for deduction of tax at source, is not adjudicated herein and the same is hereby left open. Accordingly, the ground Nos. 1 2 raised by the assessee are allowed.
Issues Involved:
1. Disallowance of computer maintenance expenses under Section 40(a)(i) of the Income Tax Act, 1961. 2. Classification of the payment as "fee for technical services" or "royalty". 3. Applicability of tax deduction at source (TDS) provisions under Section 195 of the Income Tax Act, 1961. 4. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance of Computer Maintenance Expenses under Section 40(a)(i): The primary issue was whether the disallowance of ?58,48,567/- for computer maintenance expenses under Section 40(a)(i) was justified. The assessee had incurred these expenses for system maintenance and support services provided by Omron Asia Pacific Pte. Ltd., Singapore. The assessee argued that these expenses were reimbursements and did not involve any income element, thus not attracting TDS provisions under Section 195. However, the Assessing Officer (AO) disagreed, stating that the services rendered fell under "fee for technical services" and were taxable in India, necessitating TDS deduction. 2. Classification of the Payment as "Fee for Technical Services" or "Royalty": The AO classified the payment as "fee for technical services" under Section 9(1)(vi) and 9(1)(vii) of the Act and Article 12(4)(a) of the India-Singapore DTAA. The AO argued that the services were utilized in India, making them taxable. Conversely, the Commissioner of Income Tax (Appeals) [CIT(A)] treated the payment as "royalty," citing that the consideration for the right to use the software fell under this category. The CIT(A) relied on the Karnataka High Court's decision in CIT vs. Samsung Electronics Co. Ltd. and the Mumbai Tribunal's decision in Reliance Infocomm to uphold the disallowance. 3. Applicability of TDS Provisions under Section 195: The assessee contended that the payment was for the purchase of licensed software, not for technical services or royalty. It argued that Omron Asia Pacific Pte. Ltd., Singapore, did not have a Permanent Establishment (PE) in India, and thus, the income was not chargeable to tax in India. The Tribunal examined the nature of services and concluded that the payment did not constitute royalty as the Singapore entity was not the owner of any copyright but merely provided services and sold licenses. Therefore, the Tribunal held that TDS provisions under Section 195 were not applicable. 4. Charging of Interest under Sections 234A, 234B, and 234C: The assessee's ground regarding the charging of interest under Sections 234A, 234B, and 234C was deemed consequential. Since the primary issue was decided in favor of the assessee, the interest charges would be adjusted accordingly. Conclusion: The Tribunal allowed the appeal, concluding that the payment for computer maintenance expenses did not fall under the ambit of royalty or fee for technical services. Consequently, the disallowance under Section 40(a)(i) was not justified, and TDS provisions under Section 195 were not applicable. The assessee's grounds related to interest charges were consequential and did not require specific adjudication. The appeal was allowed in favor of the assessee.
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