2018 (1) TMI 1648 - AT - Income Tax

Assessee wins: Software license payments not 'royalty' under Income Tax Act

M/s. Shell India Markets Private Limited Versus ITO (International Taxations), Ward 2 (1), Bangalore (now transferred to ITO (TDS) -LTU, Mumbai) )

The Tribunal ruled in favor of the assessee, concluding that payments for software licenses were not considered 'royalty' under Section 195 of the Income ... TDS u/s 195 - non-deduction of taxes on payment to NR entities - payment for acquiring access/user rights of software - transfer / sale of software - Royalty payment - distinction between a transaction involving the 'transfer of copyrighted article' and 'transfer of rights in a copyright' - exclusive right to do or authorise the doing of the acts - Diversified views- whether decision of non jurisdictional High Court is not binding on Mumbai ITAT? - HELD THAT:- We find ourselves in agreement with the submission of the ld. Counsel of the assessee that there is no Hon’ble Bombay High Court decision on this issue. In such circumstances, the co-ordinate bench of this tribunal in National Stock Exchange of India Ltd. [2017 (5) TMI 916 - ITAT MUMBAI] has considered identical issue find that admittedly there is no direct jurisdictional High Court decision on the subject. However there is a direct Hon’ble Delhi High Court decision which is in favour of the assessee. As against this there are decisions of Hon’ble Karnataka High Court which are in favour of revenue. In this regard we note that Hon’ble Apex Court in the case of vegetable products 88 ITR 192 [1973 (1) TMI 1 - SUPREME COURT] had held that if two constructions are possible one in favour of the assessee should be adopted. Accordingly respectfully following the precedent we follow the Hon’ble Delhi High Court decision. Accordingly we set aside the order of authority below. We hold that the transfer / sale of software in this case is not taxable as royalty. Hence the assessee was not liable to deduct tax at source u/s 195 of the Incometax Act, before remitting the money to the US supplier. - Decided in favour of assessee. Issues Involved:1. Obligation to deduct tax at source under Section 195 of the Income Tax Act.2. Classification of payments as 'royalty' under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA).3. Distinction between transfer of copyrighted article and transfer of rights in a copyright.4. Applicability of retrospective amendments to Section 9(1)(vi) of the Income Tax Act.5. Jurisdictional applicability of High Court decisions.Detailed Analysis:1. Obligation to Deduct Tax at Source under Section 195:The primary issue was whether the assessee was obligated to deduct tax at source under Section 195 for payments made to foreign companies for software licenses. The assessing officer and the Commissioner of Income Tax (Appeals) held that the assessee should have deducted tax as the payments were classified as 'royalty' under Section 9(1)(vi) of the Income Tax Act and the DTAA between India and Netherlands.2. Classification of Payments as 'Royalty':The assessing officer classified the payments as 'royalty' under Section 9(1)(vi) and the DTAA. The assessee contended that it had only acquired user rights to the software, not the rights to commercially exploit the software, and thus the payments should not be treated as royalty. The Commissioner of Income Tax (Appeals) upheld the assessing officer's view, relying on the Karnataka High Court decision in CIT vs. Samsung Electronics Co. Ltd., which treated payments for software as royalty.3. Distinction Between Transfer of Copyrighted Article and Transfer of Rights in a Copyright:The assessee argued that it had only obtained user rights in the copyrighted software, not the copyright itself. It emphasized that there was no transfer of the copyright, only the right to use the software. The Commissioner of Income Tax (Appeals) did not accept this distinction and treated the payments as royalty, citing the retrospective amendments to Section 9(1)(vi) introduced by the Finance Bill 2012, which clarified that payments for software use amount to royalty.4. Applicability of Retrospective Amendments:The retrospective amendments to Section 9(1)(vi) clarified that payments for software use are considered royalty. The Commissioner of Income Tax (Appeals) relied on these amendments to uphold the assessing officer's decision. The Tribunal, however, noted that the retrospective amendments could not be unilaterally read into the DTAA without corresponding amendments to the treaty.5. Jurisdictional Applicability of High Court Decisions:The Tribunal acknowledged conflicting High Court decisions on the issue. The Karnataka High Court had ruled in favor of the revenue, while the Delhi High Court had ruled in favor of the assessee. The Tribunal followed the principle laid down by the Supreme Court in CIT v. Vegetable Products Ltd., which states that in the case of conflicting decisions, the interpretation favoring the assessee should be adopted. Consequently, the Tribunal followed the Delhi High Court's decision, which held that payments for software are not royalty.Conclusion:The Tribunal concluded that the payments made by the assessee for software licenses were not 'royalty' and thus not subject to tax deduction at source under Section 195. The Tribunal set aside the orders of the lower authorities, deciding the issue in favor of the assessee. The Tribunal emphasized the principle of following the interpretation favoring the assessee in the case of conflicting High Court decisions.