2021 (4) TMI 420 - HC - Income Tax

TDS u/s 195 - Royalty income as taxable in terms of Section 9(1)(vi) - whether the Tribunal was right in holding that the disallowance made under Section 40(a)(ia) for non deduction of tax at source on payments effected by the assessee is not taxable under Section 9(1)(vi) of the Income Tax Act? - HELD THAT - The questions of law involved in the above appeals were already decided by the Hon'ble Supreme Court of India against the revenue and in favour of the assessee in the judgment reported in Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT wherein as held given the definition of royalties contained in Article 12 of the DTAAs it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9 (1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessee, have no application in the facts of these cases. Our answer to the question posed before us, is that the amounts paid by resident Indian endusers/ distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 9(1)(vi) of the Income Tax Act regarding taxation of royalty income.
2. Application of Section 40(a)(ia) for non-deduction of tax at source on payments made by the assessee.
3. Determination of whether payments made by the assessee constitute royalty under the Double Taxation Avoidance Agreement (DTAA) between India and USA.
4. Consideration of whether the consideration received by the assessee amounts to royalty under Section 9(1)(vi) for the transfer of rights.

Analysis:
1. The High Court considered appeals challenging orders passed by the Income Tax Appellate Tribunal regarding the Assessment Years 2003-04 to 2009-10. The substantial questions of law revolved around the taxation of royalty income under Section 9(1)(vi) of the Income Tax Act. The Court analyzed whether the Tribunal was correct in deleting additions made on account of royalty income and disallowance under Section 40(a)(ia) for non-deduction of tax at source. The Court referred to the retrospective effect of Explanation (iv) introduced by the Finance Act, 2012, which clarified that transactions in software amounted to royalty.

2. In another appeal, the Court examined whether the Tribunal was justified in deleting disallowances under Section 40(a)(ia) for non-deduction of tax at source. The Court delved into the clauses of the agreement between the assessee company and a US entity to determine if the payments constituted royalty under the DTAA between India and the USA. The Court also assessed whether the payments made by the assessee fell under the category of royalty due to the sale of copyright/license only.

3. The Court considered the distinction between royalties and business profits under the DTAA, emphasizing that the payment for computer software should be treated as business income taxable in India if there is a Permanent Establishment (PE) in India. The Court referred to the definition of royalties in Article 12 of the DTAA, concluding that the payments made by Indian end-users to non-resident software manufacturers were not royalty for the use of copyright in the software. The Court highlighted that the Income Tax Act provisions on royalty did not apply in these cases.

4. Following the precedent set by the Hon'ble Supreme Court in a related case, the High Court decided the questions of law against the revenue and in favor of the assessee. The Court dismissed the Tax Case Appeals, aligning with the Supreme Court's interpretation and the common judgment of the High Court in similar cases. The Court emphasized that the payments made did not constitute royalty under the DTAA, leading to the dismissal of the appeals.