2016 (3) TMI 213 - AT - Income Tax

Tribunal upholds taxability of software bandwidth, expenses, and royalties, stressing section 195 deduction.

The tribunal dismissed all the appeals of the assessee, upholding the findings of the Assessing Officer and the Commissioner of Income-tax (Appeals) ... Royalty for use or right to use intellectual property - Deduction of tax at source under section 195 - Default under section 201(1)/201(1A) - Process including transmission by cable, optic fibre or similar technology - Reimbursement of expenses treated as taxable paymentsRoyalty for use or right to use intellectual property - Deduction of tax at source under section 195 - Default under section 201(1)/201(1A) - Characterisation of payments for software licence/maintenance as 'royalty' and liability to deduct tax at source. - HELD THAT: - The Tribunal upheld the findings of the AO and the CIT(A) that payments made for software licences and maintenance, where the assessee was granted a license to use copyrighted software (non-exclusive and non-transferable) and did not acquire ownership of the IP, amounted to consideration for the use or right to use a copyright and therefore fell within the definition of 'royalty' under the Act. The Bench distinguished payments for purchase of software as goods (sale) from payments for the right to use software and applied the Explanation to the statute to treat licence/maintenance payments as royalty. Since such payments were chargeable as income of non-residents, the assessee was held to be under an obligation to deduct tax at source under section 195; failure to do so rendered the assessee in default under sections 201(1)/201(1A). The appeal on this ground was dismissed. [Paras 5]Payments for software licence and maintenance are 'royalty'; assessee liable to deduct TDS and held in default for non-deduction; ground dismissed.Process including transmission by cable, optic fibre or similar technology - Royalty for use or right to use intellectual property - Deduction of tax at source under section 195 - Default under section 201(1)/201(1A) - Whether bandwidth charges paid to non-resident providers amount to 'royalty' (use/right to use process or equipment) and attract TDS liability. - HELD THAT: - Relying on and respectfully following the reasoning in the Madras High Court decision in Verizon Communications Singapore Pte. Ltd., the Tribunal held that dedicated bandwidth/undersea cable services-whereby the assessee enjoyed an assured right to use capacity for transmission-constitute consideration for the use or right to use a 'process' or commercial/scientific equipment falling within the definition of 'royalty' (including Explanation 6 to section 9(1)(vi)). The fact that the international leg was provided by non-resident operators and that Indian-leg provisioning involved other entities did not negate the integrated nature of end-to-end connectivity; possession or location of equipment is not decisive after the relevant legislative explanations. Accordingly, bandwidth payments were held taxable as royalty in the hands of the non-resident and the assessee was liable to deduct tax under section 195; failure to deduct resulted in default. The appeal on this ground was rejected. [Paras 9]Bandwidth charges held to be 'royalty' for use/right to use process/equipment; assessee liable to deduct TDS and held in default; ground dismissed.Reimbursement of expenses treated as taxable payments - Deduction of tax at source under section 195 - Proper characterisation of payments shown as 'reimbursement of expenses' to parent/group companies and consequent TDS liability. - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the amounts labelled as reimbursements were not pure pass-through items devoid of independent character but comprised payments relating to software, bandwidth, commission and similar items which ought to have been separately accounted for. In the absence of segregated invoices and vouchers despite opportunities, the AO permissibly treated such reimbursements according to their true nature and applied the provisions relating to tax deduction at source. Relying on the Tribunal's earlier decision in Ashok Leyland Ltd. v. DCIT, the Tribunal rejected the assessee's contention that the amounts were mere reimbursements not chargeable to tax and dismissed the appeal on this ground. [Paras 13]Reimbursements characterized according to their underlying nature (software, bandwidth, commissions etc.); TDS obligations apply; ground dismissed.Final Conclusion: All grounds of the assessee's appeals dismissed; the Tribunal affirms that software licence/maintenance fees and bandwidth charges qualify as 'royalty' attracting tax in India and TDS under section 195, and that claimed reimbursements were rightly recharacterised for TDS purposes. Issues Involved:1. Taxability of software bandwidth and reimbursement of expenses under sections 201(1) and 201(1A) of the Income Tax Act.2. Applicability of section 9(1)(vi) of the Income Tax Act to software license payments as 'royalty' and the requirement to deduct tax under section 195.3. Taxability of bandwidth charges as 'royalty' under section 9(1)(vi) and the requirement to deduct tax under section 195.4. Classification and taxability of reimbursement of expenses.Issue-wise Detailed Analysis:1. Taxability of Software Bandwidth and Reimbursement of Expenses:The assessee challenged the findings of the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] that it was in default under sections 201(1) and 201(1A) of the Income Tax Act regarding the taxability of software bandwidth and reimbursement of expenses. The appeals were consolidated for convenience.2. Applicability of Section 9(1)(vi) to Software License Payments:The AO determined that payments for the use of software constituted 'royalty' under section 9(1)(vi) of the Income Tax Act, requiring tax deduction under section 195. The AO concluded that the payments were for the right to use software, not for software purchases, citing agreements with software providers. The CIT(A) upheld this view, and the assessee appealed.The tribunal examined the facts and noted that the assessee had acquired software licenses on a non-exclusive, non-transferable basis for business use. The software ownership remained with the suppliers. The tribunal referenced the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh (271 ITR 401), which distinguished between the purchase of software as a product and the right to use software. The tribunal concluded that the payments constituted 'royalty' under section 9(1)(vi) and upheld the CIT(A)'s finding that the assessee was in default for not deducting tax under section 195.3. Taxability of Bandwidth Charges as 'Royalty':The AO classified bandwidth charges as 'royalty' under section 9(1)(vi) of the Income Tax Act, stating that the payments were for the use of a dedicated undersea cable for international voice-based calls. The CIT(A) agreed, noting that the payments were for the use of a process involving sophisticated technology.The tribunal referenced the Madras High Court's decision in Verizon Communications Singapore Pte. Ltd. v. ITO (361 ITR 575), which held that payments for international private leased circuits constituted 'royalty' under section 9(1)(vi) and the India-Singapore DTAA. The tribunal concluded that the payments for bandwidth charges were 'royalty' and upheld the CIT(A)'s finding that the assessee was in default for not deducting tax under section 195.4. Classification and Taxability of Reimbursement of Expenses:The AO reclassified 'reimbursement of expenses' under specific heads, noting that they were payments to the parent company and other group companies for common expenses. The CIT(A) observed that the payments were not purely reimbursements and should have been classified under appropriate account heads. The tribunal referenced its earlier decision in Ashok Leyland Ltd. v. DCIT (313 ITR (AT) 191), which held that reimbursements related to technical services attracted tax deduction under section 195. The tribunal upheld the CIT(A)'s finding that the reclassification was justified and dismissed the assessee's appeal.Conclusion:The tribunal dismissed all the appeals of the assessee, upholding the findings of the AO and the CIT(A) regarding the taxability of software bandwidth, reimbursement of expenses, and bandwidth charges as 'royalty.' The tribunal emphasized the requirement to deduct tax under section 195 for such payments.