2011 (10) TMI 370 - HC - Income Tax

Payments to Non-Resident = Royalty Tax: High Court Decision Upholds Revenue Appeal

Commissioner of Income-tax, International Taxation Versus Infosys Technologies Ltd.

The High Court allowed the revenue's appeals, determining that payments to a non-resident company constituted royalty, requiring tax deduction under ... TDS - Payments made to non resident prima facie appeared as Royalty - Show cause issue under 201 - Tribunal relied on Wipro Ltd and set aside the order of Assessing Officer - Held That:- Payments made M/s. Gartner, a non-resident are considered as royalty and thus liable to tax deduction. Order of wipro ltd. [2004 (12) TMI 304 - ITAT BANGALORE-B ] - is set aside and AO is restored. Issues:1. Interpretation of whether payments made to a non-resident company constitute royalty.2. Obligation to deduct tax at source under Section 195 of the Income Tax Act.3. Applicability of Double Taxation Avoidance Agreement (DTAA) in determining tax liability.4. Validity of the Tribunal's decision in light of previous judgments.Issue 1: Interpretation of Royalty PaymentsThe case involved determining whether payments made by the appellant to a non-resident company constituted royalty, leading to an obligation to deduct tax under Section 195 of the Income Tax Act. The appellant argued that the payments were not royalty but akin to payments for information services, such as obtaining a book or a railway timetable. The Assessing Officer initially held that the payments amounted to royalties, leading to a tax demand. The Appellate Authority upheld this decision, but the Tribunal, relying on its earlier judgment in Wipro Ltd.'s case, reversed the order, stating that the payments did not qualify as royalties.Issue 2: Obligation to Deduct Tax at SourceThe Assessing Officer issued a show cause notice under Section 201 of the Act due to the non-deduction of tax on the payments to the non-resident company. The appellant contended that the payments were not subject to tax deduction as they did not fall under the definition of royalty. However, the Assessing Officer demanded tax under Section 195 of the Act and interest under Section 201(1A) for the failure to deduct tax at source.Issue 3: Applicability of DTAAThe appellant argued that the payments made to the non-resident company were not covered under the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The appellant claimed that the payments were not royalties as per the DTAA provisions, further supporting their position that tax deduction was not required.Issue 4: Validity of Tribunal's DecisionThe Tribunal's decision, based on its earlier ruling in Wipro Ltd.'s case, was challenged by the revenue. The High Court, in a separate order, reversed the Tribunal's decision in Wipro Ltd.'s case, leading to the conclusion that the payments made by the appellant to the non-resident company did amount to royalty. Consequently, the High Court set aside the Tribunal's order, restoring the decision of the Appellate Authority confirming the Assessing Officer's tax liability determination.Overall, the High Court allowed the appeals filed by the revenue, holding that the payments made by the appellant to the non-resident company constituted royalty, necessitating tax deduction at the source under Section 195 of the Income Tax Act.