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TMI Blog2018 (3) TMI 1956X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had not deducted TDS in accordance with the provisions of Section 195 of the Act, such expenditure cannot be allowed as deduction. (ii) The Ld.CIT(A) has erred in upholding the order of the Ld.AO who had invoked the provisions of Section 195 of the Act and disallowed the expenditure incurred towards purchase of software from tax resident of Japan and United Kingdom by treating it as taxable income in India in the hands of the recipients under the head 'royalty' as per provisions of Section 9(1)(vi) of the Act. (iii) The Ld.CIT(A) has erred by not adjudicating the ground relating to the error in computation of interest payable U/s.201(1A) of the Act. 3. The brief facts of the case are that the assessee is a resident private limited company engaged in the business of manufacturing and selling motor cars in India as well as abroad. During the course of verification of Form 15CA/CB filed by the assessee for the assessment year 2014-15, it was noticed that the assessee had not deducted 'tax at source' with respect to the payment made towards reimbursement of warranty expenses to the assessee's associated companies and payment made towards purchase of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be treated as business income in the hands of non-resident. However, the same shall not be subject to tax due to absence of any business connection/ permanent establishment of the non-resident in India. Without prejudice to the above, even if it is admitted that the payment made are in the nature of FTS, section 9(1)(vii) of the Income-tax Act, 1961 ("the Act") provides that such FTS paid by a resident to non-resident would not be deemed to accrue /arise in India where the payment is made for the purpose of earning income outside India. Given that the payment made by NMIPL to the non-resident parties does not result in NMIPL earning any income in India, such payment made by NMIPL would not be taxable in the hands of the non-resident in India and consequently, not liable to withholding tax . ..... . All services that involve technology will not be treated as payment made towards fee for technical services ..... The technical repairs are different from technical services; and Mere repair work would not be in the nature of fee for technical services and therefore is not liable to tax in India. Assessee placed reliance on the following judicial precedents - Luftansa Cargo Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in 36 taxmann.com 377 (Delhi Tribunal) and the decision in the case Ashok Leyland Vs. DCIT reported in 120 ITO sic., ITD 14 (Chennai) was of the view of that payment made outside India towards reimbursement of warranty expenditure is a taxable income in the hands of the recipient in India and therefore the assessee was bound to deduct tax at source. The reasons that led to such belief by the Ld.DCIT are as follws:- (i) The responsibility is cast on the assessee to provide warranty services to its customers at its own cost for which the amount was included in the sale proceeds. (ii) The assessee has engaged its dealers (sister companies) to provide warranty services and the expenses incurred by them are reimbursed by the Assessee Company. (iii) The warranty is promised by the manufacturer i.e., the Assessee Company and not the dealers. (iv) The customers while making the purchases relies on the warranty offered by the manufacturer and not the dealer. (v) Warranty schemes for the products are devised and offered by the manufacturer viz., the Assessee Company and not the dealer. (vi) The contract of warranty is between the Assessee Company and the end cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t remains a difficult and unscientific process. For the said purpose, the mechanic using visual inspection, technical manuals, service bulletin etc. are matched with the warranty conditions for carrying out repairs or to resolve the problem. Clearly, reflects that the mechanics process is a strong diagnostic skill. Thus, what is rendered at the repair shop level is a technical service. On completion of the repair at dealer repair shop, the claim is sent to NSCs and who in turn raise the claim on assessee, NMIPL. It makes it abundantly clear that warranty is not only a warranty for the service after the defect but a warranty is for the no defect of the product offered by the manufacturer. Thus, warranty relates to the sale of goods and will say that it is of a particular standard. A warranty is a promise that refers to more tangible things, like parts of the product or machine. It promises that the motor in a juicer will function smoothly for a year or two If It does not, the manufacturer will repair or replace the motor The contract of warranty IS between the assessee arid customer and the further contract for carrying out the warranty service is between the assessee and the dealer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide India; or" The above provision of Section 9(1)(vii) and the second limp of (b) of the Act, clearly provides that where a resident is liable to pay fees in respect of services utilized in a business or profession carried on by such person for the purpose of making or earning any income from any source outside India, the income arising from such payment shall be excluded from the deeming provision of Section 9(1) of the Act viz., "income accruing or arising in India". In the case of the assessee, the assessee is a manufacturer of motor cars in India and exports the motor cars to other countries and sells them in those countries through its sister concerns who acts as the dealer of the assessee company. The assessee company also provides warranty to the end customers who purchase the car. The assessee's sister companies who acts as the dealers of the assessee company maintains the cars sold by them according to the terms of the warranty promised by the Assessee Company, towards which the dealer companies incurs expenditure. As per the contractual obligation, the assessee company reimburses such expenses incurred by its "dealer - sister companies". Thus the assessee company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by Dealer is strictly prohibited. - The right to change/modify the software rests only with NML and NMIPL has the license only to use the software without any right to modify/change. - Further, NMIPL would pay a software annual fee to NML for updates including New Model Data, New Programme for electronic control system, Bug fixing and other Vehicle data. Further, NMIPL would charge a software annual fee from the dealers. - This Annual fee cycle will start from date of software license purchase. And would be based on the number of Software Licenses purchased. - To avail the software update, each dealer PC is linked with NML server for Software updates. This update will be automatically installed in the dealer PC through "Online Update" application." 5.1 The Ld.DCIT opined relying on the provisions of Section 9(1)(vi) clause (v) to explanation 2 of the Act that payment of royalty is nothing but consideration for transfer of all or any rights (including granting of license) in respect of any copyright etc. He further opined that though the copy rights vests with the owner of the software, the license allows the assessee to use the software subject to certain terms and condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities. 5.5 We have heard the rival submissions and carefully perused the materials on record. From the facts of the case it is apparent that the assessee has obtained license only for the usage of the software for a limited period and does not have the right to change or modify the software. This issue is squarely covered by the decision of the Chennai Bench of the Tribunal in the case DCIT Vs. Atmel R&D India (P) Ltd., cited by the Ld.AR wherein the Bench after relying on various decisions of the higher judiciary observed as follows: "41. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non- exclusive and non- transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat such copyright shall include Intra Asia Trading (P) Ltd. copyright and all copies of the software shall be exclusive properties of Intra Asia Trading (P) Ltd. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Intra Asia Trading (P) Ltd. 45. The licensee has been prohibited from copying, de-compiling, de-assembling, or reverse engineering the software without the written consent of lntra Asia Trading (P) Ltd. The licence agreement between the Assesseè company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Intra Asia Trading (P) Ltd. and only Intra Asia Trading (P) Ltd. has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to lntra Asia Trading (P) Ltd.. 46. The incorporeal right to the software i.e. copyright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the CIT(A) on this count and dismiss the grounds raised by the revenue in this regard." In view of the above, we are inclined to allow the ground taken by the assessee. This ground is allowed." Since the issue is squarely covered by the decision of the Chennai Bench of the Tribunal, following the same, we hereby hold that in the case of the assessee, the payment made for obtaining license to use the software cannot be held as royalties coming into the ambit of the DTAA or fees for technical services under Section 9(1)(vii) of the Act and accordingly tax need not be deducted at source U/s.195 of the Act. 6. Ground No.2(iii) : Error in computation of interest payable U/s.201(1A) of the Act:- Since we have held that, in the case of the assessee, tax need not be deducted at source with respect to payment made towards reimbursement of warranty and payment made towards purchase of software and deleted the addition made on account of non-deduction of tax at source, this ground raised by the assessee does not survive because the assessee is not liable for payment of interest U/s.201(1A) of the Act. 7. In the result the appeal of the assessee is allowed. Order pronounced on ..... 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