2014 (4) TMI 569 - AT - Income Tax

Foreign software payments not subject to TDS under business income, not royalties or technical fees.

The Tribunal ruled that payments for software acquisition to foreign companies did not attract TDS as they constituted business income, not royalties or ... Applicability of section 9 of the Act – Royalty for technical services – Supply of software on license – Article 12 of Indo-Singapore Treaty – Liability to deduct TDS u/s 195 of the Act - Held that:- Relying upon Motorola Inc. Versus Deputy Commissioner Of Income-tax, Non-resident Circle [2005 (6) TMI 226 - ITAT DELHI-A] – Copyright is distinct from the material object, copyrighted - It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript - He has an individual right of exclusive enjoyment - The transfer of the manuscript does not, of itself, serve to transfer the copyright - The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public - Just because one has the copyrighted article, it does not follow that one has also the copyright in it. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work - In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work - Distinction has to be made between the acquisition of a 'copyright right' and a 'copyrighted article' - The decision in Director of Income Tax Versus Infrasoft Ltd. [ 2013 (11) TMI 1382 - DELHI HIGH COURT] followed - the assessee has acquired a readymade off - the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the programme – the consideration cannot be treated as royalty - As held by the CIT(A), the payments made by the assessee company cannot be held as 'royalties' coming into the ambit of Article 12 of DTAA or 'fee for technical services' u/s 9(1)(vii) of the IT Act and accordingly no tax need to be deducted u/s 195 of the IT Act – thus, the order of the CIT(A) upheld – Decided against Revenue. Issues Involved:1. Whether the payments made by the assessee to foreign companies for acquiring software and source code are subject to TDS under Section 195 of the Income Tax Act.2. Whether the payments constitute 'royalties' or 'fees for technical services' under Article 12 of the DTAA (India-Singapore) or Section 9 of the IT Act.3. Whether the payments should be treated as business income under Article 7 of the DTAA.4. Whether the supplementary agreements and the bifurcation of payments towards software and source code are valid and should be considered.Detailed Analysis:Issue 1: TDS Applicability under Section 195The Assessing Officer (AO) determined that the payments made by the assessee to the foreign companies, Intra Asia Trading Pte Ltd. and Gamma Machinery and Equipments Pte Ltd., were subject to TDS under Section 195 of the Income Tax Act. The AO concluded that the payments were for acquiring intellectual property rights and software, thus falling under the purview of Section 9(1)(vi) or 9(1)(vii) of the IT Act, making the assessee liable under Section 201(1) and 201(1A) for TDS and interest, respectively.Issue 2: Classification as 'Royalties' or 'Fees for Technical Services'The AO argued that the payments for the 'source code(s)' of the smart card operating systems should be characterized as 'royalties' under the DTAA, as they involve the use or right to use secret formulas or processes, and also as 'fees for technical services.' The AO cited Article 12 of the DTAA, which allows royalties or fees for technical services arising in a contracting state to be taxed in that state.Issue 3: Treatment as Business Income under Article 7The assessee contended that the payments should be treated as business income under Article 7 of the DTAA, which stipulates that business income earned by a non-resident in India can only be taxed if the non-resident has a 'permanent establishment' (PE) in India. The CIT(A) agreed with this view, stating that the foreign companies did not have a PE in India, and hence, the business income was not taxable in India.Issue 4: Validity of Supplementary Agreements and Bifurcation of PaymentsThe AO questioned the validity of the supplementary agreements and the bifurcation of payments towards software and source code, suggesting that the agreements were an attempt to avoid tax. The CIT(A), however, found that the agreements were valid and supported by proper documentation, such as invoices and shipping documents. The CIT(A) concluded that the payments for the software constituted the purchase of goods and were not subject to TDS, while the payments for the source code were considered business income and not royalties or fees for technical services.Conclusion:The CIT(A) held that the payments made to Intra Asia Trading Pte Ltd. and Gamma Machinery and Equipments Pte Ltd. for the purchase of software did not attract TDS, as they constituted business income and not royalties or fees for technical services. The Tribunal upheld the CIT(A)'s decision, stating that the transactions fell under Article 7 of the DTAA, and there was no need to examine them under Article 12. The Tribunal also emphasized that the payments were for copyrighted articles and not for the right to use the copyright, thus not qualifying as royalties. Consequently, the appeal of the revenue was dismissed.Pronouncement:The judgment was pronounced in the open court on 27/01/2014, dismissing the revenue's appeal and upholding the CIT(A)'s order.