2015 (3) TMI 683 - AT - Income Tax

Tribunal upholds tax ruling on software payments as 'royalty' under Income Tax Act

M/s Cosmic Circuits Private Limited Versus The Income Tax Officer, International Taxation, Ward-1(1), Bangalore.

The Tribunal upheld the CIT(A)'s decision confirming the Assessing Officer's order under sections 201(1) and 201(1A) of the Income Tax Act, deeming ... Non deduction of tds - payments made by the appellant towards the purchase of software to non-resident entities - whether the payments made by the appellant for the use of copyrighted software are in the nature of “royalty” as defined in Explanation 2 to section 9(1)(vi) of the Act - Held that:- 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 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. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. As relying on Citrix Systems Asia Pacific Pty. Limited (2012 (2) TMI 258 - AUTHORITY FOR ADVANCE RULINGS ) has held that sale or licensing for use of copyrighted software is grant of right to use copyright and payment thereof is ‘royalty’ and is liable for deduction of tax at source under section 195 of the Act. CIT(A) is justified in his conclusion that the payment made for the purchase of software from the non resident for the purpose of downloading of licensed software is liable for deduction of tax under section 195 of the Act. Therefore, we are of the view that the CIT(A)’s order is correct and in accordance with law and no interference is called for. - Decided against assessee. Issues Involved:1. Confirmation of the Assessing Officer's order under sections 201(1) and 201(1A) of the Income Tax Act.2. Obligation to deduct tax at source under section 195 on payments for the purchase of software from non-resident entities.3. Classification of payments for software as 'royalty' under Explanation 2 to section 9(1)(vi) of the Income Tax Act.4. Reliance on various judicial precedents and international tax rulings.5. Deeming the appellant as an assessee-in-default for non-deduction of taxes.6. Confirmation of tax and interest payable under sections 201(1) and 201(1A).Issue-wise Detailed Analysis:1. Confirmation of the Assessing Officer's Order:The appellant challenged the CIT(A)'s confirmation of the Assessing Officer's order under sections 201(1) and 201(1A) of the Act. The Tribunal upheld the CIT(A)'s decision, which was based on the precedent set by the Karnataka High Court in the case of Samsung Electronics Co. Ltd., affirming that payments for software constituted 'royalty' and required tax deduction at source.2. Obligation to Deduct Tax at Source:The appellant argued that it was not obligated to deduct tax at source under section 195 on payments made to non-resident entities for software purchases. The Tribunal, however, followed the jurisdictional High Court's ruling in Samsung Electronics, which held that such payments are subject to tax deduction under section 195 as they are considered 'royalty.'3. Classification of Payments as 'Royalty':The Tribunal agreed with the CIT(A) that payments for the use of copyrighted software are in the nature of 'royalty' as defined in Explanation 2 to section 9(1)(vi) of the Act. The Tribunal cited the Karnataka High Court's decision, which interpreted the software license agreements as granting a right to use the copyright, thus classifying the payments as 'royalty.'4. Reliance on Judicial Precedents and International Tax Rulings:The appellant contended that the CIT(A) erroneously relied on the Karnataka High Court's decision in Samsung Electronics, which was reversed by the Supreme Court. The Tribunal noted that the High Court's decision was still binding and relevant. The Tribunal also referenced the Authority for Advance Rulings' decision in Citrix Systems Asia Pacific Pty. Limited, which supported the classification of software payments as 'royalty.'5. Deeming the Appellant as an Assessee-in-Default:The Tribunal upheld the CIT(A)'s decision deeming the appellant as an assessee-in-default for non-deduction of taxes under section 195. This was based on the conclusion that the payments made for software were 'royalty' and required tax deduction at source.6. Confirmation of Tax and Interest Payable:The Tribunal confirmed the amounts payable by the appellant under sections 201(1) and 201(1A) for the assessment years in question. The Tribunal found no error in the CIT(A)'s order, which was consistent with the legal interpretation of 'royalty' payments and the obligation to deduct tax at source.Conclusion:The Tribunal dismissed the appeals filed by the appellant, affirming the CIT(A)'s order that payments for software constituted 'royalty' and were subject to tax deduction under section 195. The Tribunal relied on the jurisdictional High Court's ruling in Samsung Electronics and other relevant judicial precedents, concluding that the CIT(A)'s order was correct and in accordance with the law.