2014 (12) TMI 430 - AT - Income Tax

Software License Payment Deemed Royalty; TDS Obligation Upheld

The Income Tax Officer (International Taxation) -II Chennai Versus M/s FL Smidth Ltd

The Tribunal held that the payment made by the assessee for acquiring software licenses amounted to 'royalty' under Section 9(1)(vi) of the Income-tax Act ... Deletion of demand u/s 201(1) and 201(1A) - Liability to Deduct tax on remittance made to its Denish group concern – Remittance made attract Provisions u/s 9(1)(vi) relating to Royalty or not - whether the assessee’s act of acquiring ‘2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals’ amounts to payment of ‘royalty’ or not – Held that:- The assessee has paid a ‘royalty’ sum to its Denish group concern in lieu of acquiring software licence for ‘2003 Microsoft licensing for 270 sets of MS Office, Windows & Cals’ - the granting of licence is already included as a right in Explanation 2 clause (i) and (v) - These clauses form part of the ‘royalty’ provision since its coming into being - This licence would also enable the assessee to make use of the ‘shrink wrap software’ availed. Following the decision in Commissioner of Income-tax Versus Samsung Electronics Co. Ltd. & Others [2011 (10) TMI 195 - KARNATAKA HIGH COURT] - right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14(1) of the Copyright Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software under the licence and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act - agreements with foreign countries DTAA would override the provisions of the Act - there is obligation on the part of the respondents to deduct tax at source u/s 195 of the Act - the nature of software technology availed, invoice raised specifically quoting only licence and right of usage embedded supports the case of the revenue. Transactions relating to sale of goods – Held that:- The present case involves only a licence pertaining to ‘shrink wrap software’ - There is no material to prove any ‘goods’ element in the ‘2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals’ - The CIT(A)’s view does not refer neither to any statutory provision nor evidence on record - cost sharing formula or any other method is only an internal arrangement - In determining ‘royalty’ payment, we have to refer to facts of the case vis-à-vis the statutory provision - Since the conditions are satisfied, this formula in itself cannot defeat applicability of the TDS provision - whatsoever may be the medium or mode of acquiring the licenced right, the fact remains that the assessee has acquired a licence to use the Microsoft Office software - Its claim that it is merely a copy of the copyrighted article does not make any difference - the assessee ought to have deducted TDS for acquiring ‘2003 Microsoft licensing for 270 sets of MS office, Windows and Cals’ - Thus, the assessing authority has rightly raised demand u/s 201(1) and interest u/s 201(1A) of the Act – Decided in favour of revenue. Issues Involved:1. Whether the payment made by the assessee for acquiring software licenses amounts to 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961.2. Whether the assessee was required to deduct TDS under Section 195 of the Income-tax Act, 1961.3. Whether the transaction involved was a mere purchase of goods or a payment for royalty.4. Whether the cost-sharing arrangement affects the determination of royalty.5. Applicability of judicial precedents and DTAA provisions.Issue-wise Detailed Analysis:1. Payment for Software Licenses as 'Royalty':The Revenue challenged the CIT(A)'s order deleting demands under Sections 201(1) and 201(1A) of the Income-tax Act, asserting that the payment for software licenses amounts to 'royalty' under Section 9(1)(vi). The assessee contended that the payment was for standardized software without any royalty element, classifying it as a purchase of goods. The CIT(A) accepted the assessee's view, stating that the payment was for a readymade off-the-shelf computer program without any rights to utilize the copyright, thus not attracting the provisions of Section 9(1)(vi).However, the Tribunal analyzed various judicial precedents, including the case of CIT vs Samsung Electronics Co. Ltd., which held that acquiring a license to use software constitutes a payment for royalty as it involves the right to use the copyright. The Tribunal concluded that the assessee's payment for '2003 Microsoft licensing for 270 sets of MS Office, Windows, and Cals' indeed amounted to royalty under Section 9(1)(vi) as it involved the granting of a license, thus supporting the Revenue's contention.2. Requirement to Deduct TDS under Section 195:The Revenue argued that the assessee should have deducted TDS under Section 195 when making payments to the non-resident entity. The Tribunal referred to the case law of GE India Technology Centre P. Ltd., which clarified that Section 195 applies only when the payment contains an element chargeable under the Act. Since the payment was determined to be royalty, the Tribunal upheld the Revenue's position that TDS should have been deducted.3. Transaction as Purchase of Goods vs. Payment for Royalty:The CIT(A) had treated the transaction as a sale of goods, arguing that the payment was for a copy of the software without any rights to the copyright. The Tribunal disagreed, stating that the payment for the software license involved a right to use the software, which falls under the definition of royalty. The Tribunal emphasized that the nature of the software technology and the specific invoice for the license indicated a royalty payment rather than a mere purchase of goods.4. Cost-Sharing Arrangement:The CIT(A) considered the cost-sharing arrangement as a factor in determining the nature of the payment. The Tribunal, however, held that internal arrangements like cost-sharing do not affect the applicability of the TDS provisions. The primary consideration is whether the payment falls under the statutory definition of royalty, which it did in this case.5. Applicability of Judicial Precedents and DTAA Provisions:The Tribunal analyzed various judicial precedents cited by both parties. It found that the cases cited by the Revenue, particularly CIT vs Samsung Electronics Co. Ltd., were directly applicable and supported the view that the payment for software licenses constitutes royalty. The Tribunal also considered the Indo-Denmark DTAA, which supports the taxability of royalty payments in India.Conclusion:The Tribunal concluded that the assessee's payment for acquiring software licenses amounted to royalty under Section 9(1)(vi) and that TDS should have been deducted under Section 195. The CIT(A)'s findings were overruled, and the Revenue's appeal was partly allowed, affirming the demand under Sections 201(1) and 201(1A) while rejecting the additional ground related to the procedure under Section 195.