2019 (8) TMI 1437 - AT - Income Tax

Tribunal rules in favor of assessee on taxability of software license fees and IT support payments.

John Deere India Pvt. Limited Versus The Dy. Director of Income Tax, (International Taxation) -1, Pune.

The Tribunal ruled in favor of the assessee, holding that payments made to Deere & Co. USA for software license fees and IT support services were not ... Failure to deduct TDS - assessee in default - payment of tax and interest received u/s 201(1) and 201(1A) of the Act on account of non-deduction of tax on the payments made by the assessee to Deere & Co., USA - AO was of the view that the payments made by the assessee were liable to tax as it was in the nature of royalty / FTS as per Section 9(1)(vi) & 9(1)(vii) of the I.T. Act as well as Article 12 of Double Taxation Avoidance Agreement (DTAA) between India & USA - HELD THAT:- An identical issue arose in assessee’s own case in JOHN DEERE INDIA PVT. LTD., (JOHN DEERE EQUIPMENT MERGED WITH JOHN DEERE INDIA PVT. LTD.) VERSUS THE DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) –1, PUNE [2019 (3) TMI 458 - ITAT PUNE] wherein the Co-ordinate Bench of the Tribunal has held that assessee is not liable to deduct the TDS on the payment. No material has been placed by Revenue to demonstrate that the order of Tribunal in assessee’s own case for A.Ys. 2007-08 and 2008-09 has been set aside / stayed by higher Judicial Forum. Revenue has also not pointed out any distinguishing feature in the facts of the present case and in the case of assessee’s own case in earlier years - the assessee has not defaulted in deduction of TDS on the impugned payments made. The order of AO passed u/s 201(1) / 201(1A) of the Act is set aside - appeal of the assessee allowed. Issues Involved:1. Deduction of TDS on payments made to Deere & Co. USA for software license fees and IT support services.2. Classification of payments as 'Royalty' or 'Fees for Technical Services' under the Income Tax Act and DTAA.3. Reimbursement of expenses and whether TDS is required on such reimbursements.4. Lease line charges and their classification under the DTAA and Income Tax Act.5. Training fees and whether they constitute fees for technical services.6. Reimbursement of salary paid to expatriate employees and whether it constitutes fees for technical services.Issue-wise Detailed Analysis:1. Deduction of TDS on payments made to Deere & Co. USA for software license fees and IT support services:The Assessee argued that the payments made to Deere & Co. USA for software license fees and IT support services were not taxable under the Income Tax Act or the DTAA as 'Royalty.' The AO held that the payments were liable to tax and the assessee should have deducted TDS. The Tribunal referred to its decision in the assessee's own case for A.Ys. 2007-08 and 2008-09, where it was held that the purchase of software being a copyrighted article was not covered by the term 'royalty' under section 9(1)(vi) of the Act.2. Classification of payments as 'Royalty' or 'Fees for Technical Services' under the Income Tax Act and DTAA:The Tribunal noted that the payments for software and IT support services did not fall under the definition of 'royalty' or 'fees for technical services' as per the DTAA between India and USA. The Tribunal emphasized that the definition of 'royalty' under the DTAA had not been amended and thus, the payments made for the purchase of software did not require TDS deduction.3. Reimbursement of expenses and whether TDS is required on such reimbursements:The Assessee contended that the payments made were reimbursements and hence, no TDS was required. The Tribunal upheld that lease line charges and other related expenses were reimbursements and not liable for TDS deduction, aligning with its previous ruling in the assessee's own case.4. Lease line charges and their classification under the DTAA and Income Tax Act:The Tribunal held that lease line charges paid to Deere & Co. USA were not in the nature of 'royalty' and did not involve the transfer of technical services. Therefore, the assessee was not required to deduct TDS on these payments. This decision was consistent with the Tribunal's earlier findings in the assessee's case for previous years.5. Training fees and whether they constitute fees for technical services:The Tribunal noted that the training fees paid for web-based training did not make available any technical knowledge or services. Therefore, these payments did not constitute fees for technical services under Article 12 of the DTAA between India and USA. Consequently, no TDS was required on such payments.6. Reimbursement of salary paid to expatriate employees and whether it constitutes fees for technical services:The Tribunal held that the reimbursement of salary paid to expatriate employees did not constitute fees for technical services. The expatriate employees were on the rolls of the appellant company, and TDS was already deducted under section 192 for the salary paid. Thus, there was no requirement for additional TDS deduction on these reimbursements.Conclusion:The Tribunal concluded that the assessee had not defaulted in deducting TDS on the impugned payments made to Deere & Co. USA. The order of the AO passed under sections 201(1) and 201(1A) of the Act was set aside, and the grounds of the assessee were allowed. The appeal of the assessee was thus allowed in favor of the assessee.