Payments for Software Licenses Not 'Royalty'; Non-Resident Not Liable for Interest

The Tribunal dismissed the contention that payments received on software licenses constituted 'royalty' under the Income-tax Act and DTAA between India and Ireland. However, the Tribunal allowed the appeal on the issue of interest levy under section 234B of the Act, ruling that the non-resident assessee was not liable for interest due to the payer's responsibility for tax deduction under section 195.

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Issues:
1. Whether payments received by the assessee on sale and marketing of software licenses constitute 'royalty' under section 9(1)(v) of the Income-tax Act and Article 12 of the DTAA between India and Ireland.
2. Whether interest under section 234B of the Act can be levied on the assessee, a non-resident, for failure to pay advance tax.

Analysis:

Issue 1:
The appeal concerns the classification of payments received by the assessee on the sale and marketing of software licenses as 'royalty' under the Income-tax Act and the DTAA between India and Ireland. The assessee contended that the transactions were akin to the sale of goods, generating business income not subject to taxation due to the absence of a Permanent Establishment in India. However, the revenue argued that the consideration for granting the right to use computer software constituted 'royalty.' The Tribunal referred to a Karnataka High Court decision, which held that payments to non-resident foreign software suppliers for shrink-wrapped software were considered royalty. The Court emphasized that the license granted only permitted the use of the software without any alteration or redistribution rights, indicating a transfer of copyright. Consequently, the payments were deemed 'royalty' under the DTAA and the Income-tax Act, obligating the assessee to deduct tax at source. The Tribunal, in line with the High Court decision, dismissed the assessee's grievance on this issue.

Issue 2:
The second issue pertains to the levy of interest under section 234B of the Act on the assessee, a non-resident, for alleged default in paying advance tax. The assessee argued that since the payer was obligated to deduct tax at source under section 195, the income tax so deducted should reduce the advance tax payable by the assessee. Relying on various judicial decisions, the assessee contended that the levy of interest under section 234B was unwarranted. The Department, however, maintained that the interest was mandatory. The Tribunal, after considering the legal position and precedents, concluded that the liability to deduct or collect tax at source rested with the payer, not the payee. As the payer was responsible for deducting tax under section 195, any default in deduction did not make the assessee liable for interest under section 234B. Citing the Delhi High Court decision, the Tribunal held that the scheme of the Act concerning non-residents clarified that the payer's default in tax deduction did not absolve the non-resident from tax liability but precluded the levy of interest under section 234B. Consequently, the Tribunal allowed the assessee's appeal on this issue, ruling that the levy of interest under section 234B was unsustainable.

In conclusion, the Tribunal partly allowed the appeal by the assessee, dismissing the contention regarding 'royalty' classification while allowing the appeal on the interest levy issue.

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