2022 (9) TMI 1097 - AT - Income Tax

TDS u/s 195 - remittances made by the assessee to GEISA towards use of Pro-E software or Global Web - non deduction of tds - CIT(A) concluded that this software not only furnishes the instructions but also actually designs the machines, and, therefore, any payment made to derive such benefit answers the description of royalty - HELD THAT - Nothing could be more clear that the contents of the agreement referred to above to show that PTC is the sole owner of the Pro-E software and GEISA/GEIE only has limited right to use the software subject to the conditions stipulated in the agreement. There is no sale of copyright of software, but the sale is only in respect of the rights to use the software and not the right to the code in itself. When once the transaction is very clear that no copyright of the software is sold but only the rights to use the software were sold without impacting any rights to the source code, merely because the assessee puts it to a particular use, such a usage will not relate back to change the nature of transaction from the sale of product to the sale of copyright. Facts of the case involved in this matter are squarely covered by the decision in the case of Engineering Analysis Centre Of Excellence (P) Ltd 2021 (3) TMI 138 - SUPREME COURT . We, therefore, while respectfully following the same hold the issue in favour of the assessee and inasmuch as such payments do not result in any income taxable in India, the person referred to in section 95 of the Act is not liable to deduct any tax under section 195 of the Act. We, therefore, hold that the remittances made by the assessee to GEISA towards use of Pro-E software or Global Web are not royalty income chargeable to tax under the Act as well as under the treaty and consequently the assessee cannot be treated as an assessee-in-default under section 201 of the Act for non-deduction of taxes under section 195 of the Act. Grounds of appeal are accordingly allowed.

Summary

Issues:
1. Whether payments made by the assessee to vendors for software licenses without deduction of tax at source constitute royalty income under section 195 of the Income Tax Act, 1961.
2. Whether the payments made for the use of Pro-E software, Oracle, My Work Place, and Global Web qualify as royalty income.
3. Whether the assessee is liable to pay tax under section 201(1) of the Act for non-deduction of taxes under section 195 of the Act.

Analysis:
Issue 1: The assessee appealed against the order passed by the Commissioner of Income Tax (Appeals) regarding payments made to vendors for software licenses without tax deduction. The Assessing Officer found the assessee liable to pay tax under section 201(1) of the Act. The assessee contended that the payments were for goods and not royalty. The CIT(A) concluded that payments for the Pro-E software constituted royalty as it facilitated machine design and manufacturing. However, payments for Oracle and My Work Place software were not considered royalty.

Issue 2: The CIT(A) held that payments for Global Web services provided by GEC, USA amounted to royalty due to the nature of services offered. The assessee challenged this reasoning, citing the purchase of software and services directly without involving copyright issues. The agreement between GEC and software vendors clarified the ownership and usage rights, highlighting that the payments were for software usage rights, not copyright.

Issue 3: The Tribunal analyzed the agreements and the nature of software purchases to determine if the payments qualified as royalty income. Referring to the decision in Engineering Analysis Centre Of Excellence (P) Ltd vs. CIT, the Tribunal held that payments for software usage rights do not constitute royalty income taxable in India. The Tribunal found that the payments made by the assessee for software licenses were not royalty income and thus, the assessee was not liable to deduct tax under section 195 of the Act.

The Tribunal allowed the appeal for the assessment year 2008-09, stating that the findings applied to subsequent years with identical facts. Consequently, all appeals of the assessee were allowed, and it was not considered an 'assessee-in-default' for non-deduction of taxes under section 195 of the Act.