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TMI Blog2019 (5) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... 201(IA) is legally valid having regard to the provisions of the Income Tax Act and the Double Tax Avoidance Agreement entered into between Indian and USA? ii) Whether the Tribunal was right in law in holding that the appellant has to deduct tax at source since the payment constituted Royalty?" 3. The facts in brief are as under:- The Assessee-Company is engaged in the business of development of Software. The Assessee entered into a Licence Agreement with M/s.Bluestone Software Inc. for getting a licence to use Bluestone's Total e-Business and Universal Business Server, Universal Listener Framework, Scheduler, XMLServer and Visual XML development. The assessee has paid a sum of US $3,00,000 which is equivalent to Indian Rs. 1,38,57,2501- towards licence fee. The Assessing Officer treated this payment of US $3,00,000 as Royalty and also treated the Assessee a Assessee-in-default under Section 201( 1) of the Income Tax Act. The Assessing Officer has also levied interest under Section 201(IA) of the Income Tax Act. The Assessee, being aggrieved by the order of the Assessing Officer, filed an appeal before the CIT(A). The CIT(A), after elaborately discussing the issue, confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Therefore, the agreement between the assessee and the foreign company is not only to use the copy of a copyright of software but to take copies and to develop the same and they are also permitted to market the product with a trademark and logo of the foreign company. For the purpose of this authorisation to use the software, trademark and logo in the product, the assessee is paying the annual fee. Therefore, the question arises for consideration is whether the annual fee paid by the assessee for using the software, trademark and logo would amount to payment of royalty. 22. The contention of the assessee before this Tribunal is that the definition given in Section 9(1)(vi) of the Income Tax Act is very wide, therefore, we have to take the definition given in the Double Taxation Avoidance Agreement entered into between India and United States of America. The assessee has produced a copy of the Double Taxation Avoidance Agreement entered into between India and United States of America. Article 12(3) defines royalty as follows: "The term "royalties" as used in the Article means: (a) payments of any kind received as a consideration for the use of, or the right to use any copyri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the payment is liable to be taxed in India. In view of the above, the assessee ought to have deducted tax as provided in Section 195 of the Income Tax Act. 25. We have also carefully gone through the provisions of Sec.9(1)(vi) of the Income Tax Act. As rightly submitted by the learned representative for the assessee, the definition given in Section 9(1)(vi) of the Income Tax Act is very wide in order to cover any payment relating to any right of property or information used for the purpose of business. As we have already observed, the payment of annual fee falls even within the restricted meaning given in Article 12(3) of the Double Taxation Avoidance Agreement. Since a right to copy and develop the software and to use the trademark was given to the assessee in their business, the payment would definitely fall within the definition of Section 9(1)(vi) of the I. T. Act also apart from the definition given in article 12(3) of Double Taxation Avoidance Agreement. Therefore, the inescapable conclusion would be that the annual fee paid by the assessee is a royalty, therefore, is no question of any doubt regarding deduction of tax. 26. Let us now examine the case laws relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Kerala High Court in the case of Fertilisers & Chemicals Travancore Ltd. (supra). The learned representative relied upon by this judgment for the proposition that the assessee has to deduct tax when the sum payable to the foreign company is chargeable under the Income Tax Act. As we have already discussed, we concluded that the payment is a royalty, therefore, it is liable for taxation under the Income Tax Act. Therefore, as held by the Kerala High Court, the assessee has to deduct tax when the amounts were paid to the foreign company. For the very same proposition, the learned representative for the assessee placed his reliance on the judgment of the Karnataka High Court in the case of Hyderabad Industries Ltd. (supra) and decision of the Hyderabad Bench of this Tribunal in the case of SOL Pharmaceuticals Ltd. (supra). The judgment of the Madras High Court in the case of Neyveli Lignite Corporation Ltd. (supra) is with regard to the payment made by the assessee under a comprehensive contract for design, manufacture, supply and erection etc. and not for any license, patent, model and design. In this case, admittedly, the license was to copy, develop and reproduce the softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. 31. In view of the above discussion, it is not necessary to discuss the other case laws relied upon by the learned representative for the assessee. In view of the foregoing discussion, we hold that the payment of annual fee and maintenance charges are in the nature of royalty, therefore, the assessee is liable to deduct tax under Section 195 of the Income Tax Act. Accordingly, we uphold the orders of the lower authorities. 32. In the result, both the appeals filed by the assessee stands dismissed. However, there will be no order as to cost." 5. Learned counsel for the Revenue Mr.Karthik Ranganathan submitted that a Division Bench of Karnataka High Court dealt with the similar controversy in the case of CIT v. Synopsis International Old Ltd. ((2012) 28 taxmann.com 162 (Kar.) and held, after detailed discussion, that such payments made by the Indian Company to the Foreign Company amounted to payment of Royalty and the Indian Company was liable to deduct tax at source on such payment of Royalty made by the Indian Company to the Foreign Company. The relevant portion of the decision of the Division Bench of the Karnataka High Court, with which we respectfully agree, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty. In the result, we pass the following:- ORDER (a) All the appeals are allowed. (b) Impugned orders passed by the Income Tax Appellate Tribunal, Bangalore Bench, is hereby set aside. (c) The order passed by the Commissioner of Income Tax (Appeals) affirming the order passed by the Assistant Commissioner of Income Tax, Circle 19(1), Bangalore, with modification is restored. (d) No costs." 6. We may note here that the Karnataka High Court dealt with the case of M/s.Samsung Electronics Co. Ltd. v. ITO ((2005) 94 ITD 91 (Bang.)), which was distinguished by the learned Tribunal, in para 26 of the impugned order. 7. The learned Official Liquidator for the Assessee could not controvert the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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