2023 (3) TMI 824 - HC - Income Tax

Application u/s 197 - reduction of withholding tax - petitioner had sought a certificate, at NIL rate of tax - request to issue certificate at lower was rejected - whether or not the consideration received by the petitioner against the sale of software constituted royalty within the meaning of Section 9(1)(vi) and/or Article 13(3) of the Double Taxation Avoidance Agreement (DTAA) entered into between India and Denmark? - HELD THAT - Least that the concerned officer ought to have done was to, at least, broadly, look at the terms of Distributor Agreement, to ascertain as to what is the nature of right which is conferred on the distributor partner and/or the reseller. Reduction of withholding tax u/s 195 is the rule, it is required to be borne in mind, that deduction of withholding tax morphs into an obligation, only if the sum received is chargeable to tax. The petitioner s entire case is, that the sum that it receives under the Distributor Agreement is not chargeable to tax. It is in that context, that the petitioner has moved an application under Section 197 of the Act for being issued a certificate with NIL rate of withholding tax. We are of the view, that the best way forward would be to set aside the impugned certificate and the order, with a direction to the concerned officer, to revisit the application, in the light of what is indicated hereinabove. While doing so, the concerned officer will apply his mind, inter alia, to the terms of the Distributor Agreement, and the ratio of the judgment rendered by the Supreme Court in Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT - thus provisions of Rule 28AA shall also be kept in mind. The concerned officer will not be burdened by the fact that a review petition is pending, in respect of the judgment rendered by the Supreme Court in Engineering Analysis. The concerned officer will ensure, that the re-examination of the application is carried out, at the earliest.

Summary

Issues involved:
The issues involved in the judgment are the rejection of a lower withholding tax certificate by the concerned officer and the failure to address the core issue of whether the consideration received by the petitioner constituted royalty under the Income Tax Act and the Double Taxation Avoidance Agreement.

Summary:

Rejection of Lower Withholding Tax Certificate:
The petitioner, a non-resident company, sought a lower withholding tax certificate at a "NIL" rate of tax but the impugned certificate set the tax rate at 9.99%, leading to the rejection of the petitioner's prayer. The petitioner contended that the consideration received against the sale of software did not constitute royalty as per relevant provisions. The concerned officer's decision was challenged for not addressing the central issue raised by the petitioner.

Failure to Address Core Issue:
The core issue in question was whether the software sold by the petitioner conferred the right to use the original copyright, which was crucial in determining if the consideration received constituted royalty. The concerned officer failed to analyze this aspect adequately and bypassed the Supreme Court judgment in Engineering Analysis, which distinguished between consideration for copyrighted material and the right to use original copyright work.

Judicial Directions:
The High Court found that the concerned officer did not deal with the central issue and failed to consider the terms of the Distributor Agreement and the Supreme Court's judgment. The impugned certificate and order were set aside, with directions for a re-examination of the application in light of the relevant legal principles within eight weeks. The concerned officer was instructed to apply the provisions of Rule 28AA and not be influenced by the pending review petition.

Conclusion:
The writ petition was disposed of, and the parties were directed to act based on the digitally signed copy of the judgment. The High Court emphasized the need for a thorough re-examination of the application to determine the withholding tax rate appropriately based on the nature of the consideration received by the petitioner.