Foreign payment not 'royalty' under Income Tax Act, demands dismissed.

The tribunal upheld the CIT(A)'s decision that the payment made by the assessee to a foreign company did not constitute 'royalty' under the Income Tax Act. Consequently, the demands raised by the AO and the disallowances under Section 40(a)(i) were found to be unjustified and dismissed. The tribunal emphasized that the assessee acted as a distributor, not a user, of the software products, leading to the conclusion that the payments did not attract 'royalty' taxation.

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Issues Involved:
1. Whether the payment made by the assessee to a foreign company constitutes 'royalty' under the Income Tax Act, requiring deduction of tax at source u/s. 195Rs.
2. Whether the additions made by the AO on account of disallowance under Section 40(a)(i) for alleged non-deduction of tax at source on payments made to the foreign company are justifiedRs.

Issue 1: Payment Classification as 'Royalty'
The department appealed against the CIT(A)'s decision on the nature of payment made by the assessee to a foreign company, M/s. Altiris, for software products. The AO contended that the payment constituted 'royalty' as it involved the right to distribute copyrighted software. However, the CIT(A) analyzed the registered reseller agreement and other documents to determine that the assessee was merely a trader and not a user of the software, concluding that the payment did not fall under the definition of 'royalty' as per Section 9(1)(vi) of the Act. The tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's role was that of a distributor, not a user, and hence the payment did not attract 'royalty' taxation.

Issue 2: Disallowance under Section 40(a)(i)
The department's appeals also challenged the disallowance made by the AO under Section 40(a)(i) for non-deduction of tax at source on payments to M/s. Altiris for AYs 2008-09 and 2009-10. The AO disallowed the amounts paid by the assessee, considering them as 'royalty' and invoking Section 40(a)(i). However, in line with the decision on Issue 1, the tribunal found that since the payments were not 'royalty,' the disallowance under Section 40(a)(i) was unwarranted. The appeals on this issue were deemed infructuous and dismissed.

Conclusion
The tribunal, after thorough analysis and consideration of the arguments and documents presented, upheld the CIT(A)'s decision that the payment made by the assessee to M/s. Altiris did not constitute 'royalty' under the Income Tax Act. Consequently, the demands raised by the AO and the disallowances under Section 40(a)(i) were found to be unjustified and dismissed. The tribunal's decision was based on the factual findings that the assessee acted as a distributor, not a user, of the software products, and therefore, the payments did not attract 'royalty' taxation.

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