2017 (3) TMI 1888 - AT - Income Tax

Tribunal: Software payments not 'royalty', no TDS. Disallowance under Section 40(a)(i) unwarranted.

Dy. CIT-LTU, Centre-1, Mumbai Versus M/s. Tata Consultancy Services Ltd.

Dy. CIT-LTU, Centre-1, Mumbai Versus M/s. Tata Consultancy Services Ltd. - TMI Issues Involved:1. Disallowance under Section 40(a)(i) for non-deduction of TDS on software expenses.2. Classification of software payments as 'royalty' under Section 9(1)(vi) of the Income Tax Act.3. Applicability of retrospective amendments by Finance Act, 2012.4. Distinction between 'copyrighted article' and 'copyright' in software transactions.5. Applicability of Double Taxation Avoidance Agreements (DTAAs).Detailed Analysis:1. Disallowance under Section 40(a)(i) for non-deduction of TDS on software expenses:The Tribunal had to reconsider Ground No. 3, which was previously unadjudicated, regarding the disallowance of software expenses under Section 40(a)(i) due to non-deduction of TDS amounting to Rs. 25,11,88,831. The Revenue argued that the payments for software amounted to 'royalty' under Explanation 3 to Section 9(1)(vi) and thus required TDS deduction. The assessee contended that the payments were for acquiring a 'copyrighted article' and not 'royalty,' thus not necessitating TDS under Section 195 and consequently, no disallowance under Section 40(a)(i).2. Classification of software payments as 'royalty' under Section 9(1)(vi) of the Income Tax Act:The Revenue supported the AO's stance that the software payments constituted 'royalty,' citing the Karnataka High Court's judgment in CIT vs Samsung Electronics Company Limited. The assessee, however, argued that the software purchases were for copyrighted articles, not the transfer of copyright, and thus not 'royalty.' The Tribunal examined various judgments, including Shinhan Bank, Vinzas Solutions India (P.) Ltd., and M Tech India (P.) Limited, which supported the assessee's position that such payments do not constitute 'royalty.'3. Applicability of retrospective amendments by Finance Act, 2012:The Tribunal considered the retrospective amendment by Finance Act, 2012, which included software payments under 'royalty.' The assessee argued that it was impossible to retrospectively comply with TDS requirements for past transactions. The Tribunal agreed, referencing the principle of 'impossibility of performance' and judgments like Shinhan Bank and Channel Guide India Ltd., which held that retrospective amendments cannot impose TDS obligations for past transactions.4. Distinction between 'copyrighted article' and 'copyright' in software transactions:The Tribunal analyzed the nature of the software transactions, distinguishing between acquiring a copyrighted article and acquiring copyright. The agreements reviewed indicated that the assessee only obtained a license for internal use, without rights to modify or commercially exploit the software. The Tribunal, referencing the Copyright Act and various judgments, concluded that payments for such software are for copyrighted articles, not 'royalty.'5. Applicability of Double Taxation Avoidance Agreements (DTAAs):The Tribunal noted that under DTAAs, the definition of 'royalty' is narrower than under the Income Tax Act. Judgments like Qad Europe B.V. and First Advantage (P.) Ltd. supported the view that software payments do not constitute 'royalty' under DTAAs. The Tribunal upheld that the payments were business income and not taxable as 'royalty' in the absence of a Permanent Establishment (PE) in India.Conclusion:The Tribunal upheld the CIT(A)'s decision, finding that the software payments were not 'royalty' and thus not subject to TDS under Section 195. Consequently, the disallowance under Section 40(a)(i) was rightly deleted. The Tribunal dismissed Ground No. 3 raised by the Revenue, affirming that no interference was required in the CIT(A)'s order.