2012 (8) TMI 112 - AT - Income Tax

Tribunal Upholds Tax Deduction Order for Software Purchases from Foreign Company

The Tribunal upheld the CIT(A)'s order requiring the appellant to deduct tax at source for payments to CEVA DSP Limited, Israel, for software purchases, ... TDS - purchase of software from Israel treated as royalty – Held that:- Issue under consideration has been settled by the High Court in assessee's own case and it has been held that payment made by the assessee to non-resident companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective countries and there was obligation on the part of the assessee to deduct tax at source u/s. 195 of the I.T. Act - appeal is dismissed. In the absence of any definition of 'copyright' in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of 'Copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that 'literary work' includes computer programmes, tables and compilations including computer [databases]. Section 16 of the Copyright Act, 1957 states that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Issues Involved:1. Validity of the CIT(A)'s order under section 248 read with section 254 of the Income-tax Act, 1961.2. Requirement for the appellant to deduct tax at source for payment to CEVA DSP Limited, Israel.3. Classification of the payment as royalty.4. Appellant's liability to deduct tax at source.5. Refund of the tax deposited by the appellant.Detailed Analysis:1. Validity of the CIT(A)'s Order:The appellant contended that the CIT(A)'s order dated 30.12.2010 was not based on facts and was contrary to the provisions of the law. The appellant sought to quash this order.2. Requirement for the Appellant to Deduct Tax at Source:The main grievance of the assessee was the CIT(A)'s confirmation of the Assessing Officer's view that the payment of USD 21,270 to CEVA DSP Limited, Israel, for software purchase was in the nature of royalty, necessitating tax deduction at source under section 195 of the Income-tax Act, 1961. The CIT(A) observed that the jurisdictional High Court's judgment in the Samsung case, which held that payments for 'shrink-wrapped software' constituted royalty, was binding unless reversed by a higher court.3. Classification of the Payment as Royalty:The CIT(A) referenced the Hon'ble Supreme Court's remand in the GE India Technology Centre case, emphasizing that the chargeability of payments to non-residents must be determined before applying section 195. The CIT(A) upheld the view that payments for software purchases were royalty, citing the jurisdictional High Court's judgment in the Samsung case and the Delhi Tribunal's decision in the Microsoft case, which both supported the revenue's stance.4. Appellant's Liability to Deduct Tax at Source:The appellant's counsel acknowledged that the jurisdictional High Court had decided the issue against the assessee in a similar case on 15.10.2011. Despite a Special Leave Petition (SLP) filed before the Hon'ble Supreme Court, the CIT(DR) argued that the CIT(A)'s decision was justified based on the jurisdictional High Court's ruling.5. Refund of the Tax Deposited by the Appellant:The appellant sought a refund of the tax deposited, which was not directed by the CIT(A). The CIT(A) held that the payments made by the appellant to non-residents for software purchases were subject to tax deduction under section 195, following the jurisdictional High Court's judgment.Conclusion:The Tribunal reviewed the jurisdictional High Court's judgment dated 15.10.2011, which held that payments for software purchases constituted royalty under Article 12 of the DTAA and section 9(1)(vi) of the Income-tax Act. Consequently, the appellant was obligated to deduct tax at source under section 195. The Tribunal found no merit in the appeal and upheld the CIT(A)'s order, dismissing the appeal.Result:The appeal was dismissed.