2013 (4) TMI 515 - AT - Income Tax

ITAT Upholds CIT(A) Decision on Software Royalty Payment

The Income Tax Appellate Tribunal (ITAT) upheld the decisions of the Commissioner of Income Tax (Appeals) [CIT(A)] in a case involving the payment ... Deduction of tax at source - DTAA - distribution of software product - royalty - authorized distributor - non-exclusive non-transferable right to market, sell, distribute and support BEA products in its territory - ‘Shrink wrapped software’ constituted royalty payment. - Held that - Hon’ble jurisdictional High Court in Commissioner of Income-tax Versus Samsung Electronics Co. Ltd. & Others [2011 (10) TMI 195 - KARNATAKA HIGH COURT] held that payment made by the assessee to nonresident 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. We therefore do not see any infirmity in the order of the ld. CIT(A), as such we do not find any merit in this appeal of the assessee. Since facts in the present case are same with that of the earlier assessment year, following the decision of the Tribunal, we do not see any merit in the grounds of appeal of the assessee and accordingly dismiss the same. - Decided against the assessee. Deletion of nterest levied u/s 234B - Held that - This view has also been upheld by the Honorable Delhi High Court in the case of DIT vs. Jacabs Civil Incorporated [2010 (8) TMI 37 - Delhi High Court] Respectfully following the above judicial pronouncements, the Assessing Officer is directed to delete the interest charged u/s 234B of the Income tax Act. we do not find any infirmity in the order of the first appellate authority and as such we uphold the same for the reasons stated therein. The grounds of appeal of the revenue are dismissed. In the result, both the appeal of the assessee and the appeal of the revenue are dismissed. Issues Involved:1. Whether the payment received by the assessee for the distribution of software constitutes royalty and requires tax deduction at source.2. The initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.3. The charging of interest under Section 234A of the Income Tax Act.4. The charging of interest under Section 234B of the Income Tax Act.Detailed Analysis:1. Royalty Payment and Tax Deduction at Source:The primary issue in the assessee's appeal was whether the payment of Rs. 32,51,18,194 received from BEA Systems India Pvt. Ltd. for the distribution of software products constituted royalty, thereby necessitating tax deduction at source. The assessee argued that the receipts were merely proceeds from the distribution of products and not for the transfer of intellectual property rights. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld that the payment constituted royalty. This decision was based on the judgment of the Karnataka High Court in the case of M/s. Samsung Electronics Co. Ltd. & Others, which held that payments for 'shrink-wrapped software' are liable for withholding tax. The Income Tax Appellate Tribunal (ITAT) followed the earlier decision in the assessee's own case for the assessment year 2007-08, where it was concluded that such payments amount to royalty and thus require tax deduction at source under Section 195 of the Income Tax Act.2. Penalty Proceedings under Section 271(1)(c):The assessee also contested the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. The CIT(A) dismissed this ground, stating that the initiation of penalty proceedings is not an appealable order as no prejudice is caused to the assessee merely by the initiation. The ITAT upheld this view, confirming that there cannot be an appeal against the initiation of penalty proceedings.3. Charging of Interest under Section 234A:The assessee challenged the charging of interest under Section 234A of the Income Tax Act. The CIT(A) held that interest under Section 234A is mandatory and the assessee failed to point out any mistake in its computation. The ITAT agreed with this conclusion, finding no infirmity in the CIT(A)'s order and thus dismissing this ground of appeal.4. Charging of Interest under Section 234B:In the revenue's appeal, the issue was the CIT(A)'s direction to the AO to delete the interest charged under Section 234B of the Income Tax Act. The CIT(A) had relied on various judicial pronouncements, including the Bombay High Court's decision in Director of Income Tax (International Taxation) v. NGC Network Asia LLC, which held that when the duty to deduct tax at source is on the payer, the payee cannot be penalized for the payer's failure. The ITAT upheld the CIT(A)'s direction, agreeing that the assessee should not be liable for interest under Section 234B as the tax was deductible at source by the payer.Conclusion:Both the appeal of the assessee and the appeal of the revenue were dismissed. The ITAT upheld the CIT(A)'s decisions on all issues, confirming that the payment received by the assessee constituted royalty, the initiation of penalty proceedings was not appealable, the charging of interest under Section 234A was mandatory, and the deletion of interest under Section 234B was justified.