2021 (3) TMI 687 - AT - Income Tax

TDS u/s 195 - Addition u/s 40(a)(ia) - disallowance of software expenses paid to non-residents - HELD THAT - It is clear from the order of the Assessing Officer passed u/s 201(1A) of the I.T.Act and the order of the CIT(A) confirming the same that assessee had only purchased software, which is copyrighted article and there is no transfer of copyright, and therefore, in such cases, the same cannot be treated as royalty under the respective tax treaty. The Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT has noted that the end user can only use the computer programme by installing it in the computer hardware and cannot reproduce the same for sale or transfer and the licence granted vide the End-User License Agreements is not a license in terms of section 30 of the Indian Copyright Act, 1957 (CA) but is a licence which imposes restrictions or conditions for the use of the computer software. Hon ble Apex Court has held that the provisions of the Act section 9(1)(vi), along with Explanations 2 and 4 thereof), are not more beneficial to the assessee and hence, the same have no application. Thus we hold that amounts paid by the assessee to the non-resident computer software manufacturers / suppliers as consideration for the resale / use of computer software, is not payment of royalty for use of copyright in the computer software. Hence, the consideration paid to non-resident software manufactures / suppliers does not give rise to income taxable in India and was not liable for deduction of tax at source u/s 195 of the I.T.Act. - Decided in favour of assessee.

Summary

Issues:
Assessment of software expenses under section 40(a)(ia) of the I.T.Act
Treatment of assessee as an assessee in default under sections 201(1) and 201(1A) of the I.T.Act
Applicability of tax deduction at source u/s 195 of the I.T.Act
Interpretation of royalty under section 9(1)(vi) of the I.T.Act and relevant DTAA provisions

Analysis:
The appeals involved challenges against CIT(A) orders for assessment years 2010-2011 to 2012-2013 regarding software expenses disallowance under section 40(a)(ia) of the I.T.Act. The Assessing Officer initiated proceedings under sections 201(1) and 201(1A) of the I.T.Act for non-deduction of tax at source u/s 195. The assessee contended that the issue was covered by a Supreme Court judgment and a Tribunal order in favor of the assessee. The assessee argued that the payments to non-residents did not constitute royalty under the Act or relevant DTAA provisions.

The Appellate Tribunal analyzed the nature of the software transactions and cited the Supreme Court's ruling in a similar case. The Tribunal emphasized that the end user's rights were limited to using the software without reproduction for sale or transfer. It highlighted that the license granted did not confer copyright rights but imposed restrictions on software use. The Tribunal noted that the definition of royalty under the Act was broader than in DTAA provisions, including lump sum considerations and transfer of all rights. Consequently, the Tribunal held that the payments to non-resident software manufacturers were not taxable as royalty under the Act or DTAA, based on the Supreme Court's interpretation.

Regarding the disallowance under section 40(a)(ia) of the I.T.Act, the Tribunal referenced its earlier order following the Supreme Court's judgment, where the disallowance was deleted. Consequently, the Tribunal allowed the appeals, ruling that the consideration paid to non-resident software manufacturers did not give rise to taxable income in India and was not subject to tax deduction at source under section 195 of the I.T.Act. The Tribunal upheld the assessee's position based on the Supreme Court's interpretation of royalty and the broader scope of the Act compared to DTAA provisions.

In conclusion, the Tribunal found in favor of the assessee, holding that the payments for software use did not constitute royalty under the Act or DTAA, as per the Supreme Court's interpretation. The Tribunal's decision aligned with the earlier Tribunal order and the Supreme Court's ruling, leading to the allowance of the appeals and the orders pronounced on March 17, 2021.