2015 (11) TMI 923 - AT - Income Tax

Software payments as 'Royalty' under Income Tax Act & DTAA; failure to deduct tax upheld. Appeal dismissed.

The Tribunal affirmed that payments for shrink wrapped software constituted 'Royalty' under Section 9(1)(vi) of the Income Tax Act and the India-Ireland ... TDS u/s 195 - payments made for acquiring the copy righted shrink wrapped software amount to ‘Royalty’ under Section 9(1)(vi) - Held that:- Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (2011 (10) TMI 195 - KARNATAKA HIGH COURT ) and Synopsis International Ltd. [2012 (10) TMI 980 - ITAT BANGALORE] we are of the opinion that the contentions raised by the assessee are not acceptable for the reason that the payment in question was consideration for the right to use copy right shrink-wrap software amounts to royalty within the meaning of sec. 9(1)(vi) of the Act and also Art 12 of the Indo- Ireland DTAA, therefore, grounds raised by the assessee are dismissed. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the nonresident companies would amount to 'royalty' within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and consequences would follow - Decided against assessee. Issues Involved:1. Payments towards purchase of Shrink Wrapped Software.2. Interest under Section 201(1A).Detailed Analysis:1. Payments towards purchase of Shrink Wrapped Software:The primary issue revolves around whether the payments made by the assessee to Cadence Designs Systems Ltd., Ireland for the purchase of shrink wrapped software qualify as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 and the India-Ireland Double Taxation Avoidance Agreement (DTAA). The Assessing Officer held that these payments constituted 'Royalty' and were subject to tax deduction at source under Section 195 of the Act. The assessee contended that the payments were for the purchase of copyrighted software, not for the purchase of a copyright, and thus should not be classified as 'Royalty'.The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, referencing the Hon'ble High Court of Karnataka's ruling in the case of CIT v. Samsung Electronics Co. Ltd., which determined that payments for the right to use copyrighted software are considered 'Royalty'. The Tribunal, upon reviewing the case, agreed with the CIT(A) and the Assessing Officer, citing the same precedent. The Tribunal noted that the license granted to the assessee allowed the use of the software for internal business purposes, which falls under the definition of 'Royalty' as per the Act and the DTAA. The Tribunal emphasized that the right to use the software, including the right to make copies for internal use, constitutes a transfer of part of the copyright, thereby classifying the payments as 'Royalty'.2. Interest under Section 201(1A):The second issue concerns the interest levied under Section 201(1A) for the failure to deduct tax at source on the payments classified as 'Royalty'. The CIT(A) upheld the interest charges, and the Tribunal concurred, stating that since the payments were rightfully classified as 'Royalty', the assessee was obligated to deduct tax at source. The failure to do so warranted the imposition of interest under Section 201(1A).Conclusion:The Tribunal dismissed the appeal, affirming that the payments made by the assessee to Cadence Designs Systems Ltd., Ireland for the purchase of shrink wrapped software are 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 and the India-Ireland DTAA. Consequently, the assessee was required to deduct tax at source on these payments. The Tribunal also upheld the interest levied under Section 201(1A) for the failure to deduct tax at source. The decision was based on the precedent set by the Hon'ble High Court of Karnataka in the case of CIT v. Samsung Electronics Co. Ltd.