Software Payment Not Royalty: No TDS; Appeal Allowed

The Tribunal held that the payment for shrink-wrapped readymade software did not constitute royalty under Section 9(1)(vi) of the Income Tax Act and was not subject to TDS under Section 195. The retrospective amendments introduced by the Finance Act, 2012, were not applicable to the payment made before the amendments. The Double Taxation Avoidance Agreement between India and Singapore exempted the payment from tax deduction at source. Therefore, the appeal by the assessee was allowed, and the demand raised by the Assessing Officer was canceled.

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Issues Involved:
1. Whether the payment for shrink-wrapped readymade software constitutes "Royalty" under Section 9(1)(vi) of the Income Tax Act.
2. Applicability of tax deduction at source (TDS) under Section 195 on such payments.
3. Impact of retrospective amendments introduced by the Finance Act, 2012, on the assessee's liability.
4. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.

Issue-wise Detailed Analysis:

1. Payment for Shrink-Wrapped Readymade Software as Royalty:
The primary issue was whether the payment of Rs. 53,53,776/- for shrink-wrapped readymade software purchased from Salesforce.com, Singapore, constituted "Royalty" under Section 9(1)(vi) of the Income Tax Act. The Assessing Officer (AO) held that the payment was royalty and thus subject to TDS. The assessee argued that the software was a standard product available in the market and not specifically designed for them, citing several judgments, including Tata Consultancy Services Vs. State Andhra Pradesh, Ericsson A.B., and Infrasoft Ltd., which held that such payments do not fall under the ambit of royalty.

2. Applicability of TDS under Section 195:
The AO raised a demand of Rs. 12,95,614/- (including interest) for non-deduction of TDS on the payment. The assessee contended that as per the DTAA with Singapore, the supplier did not have a Permanent Establishment (PE) in India, and thus, the income was not chargeable to tax in India. The Tribunal referred to the Supreme Court's decision in G.E. India Technology Centre (P) Ltd., which clarified that TDS is required only if the payment is chargeable to tax in India. The Tribunal concluded that the payment did not constitute royalty and was not subject to TDS.

3. Retrospective Amendments by Finance Act, 2012:
The assessee argued that the retrospective amendments to Explanation 4 of Section 9(1)(vi) and Explanation 2 to Section 195(1) could not be applied as the payment was made before these amendments were introduced. The Tribunal noted that the assessee acted in good faith based on the law as understood at the time of payment and should not be penalized. The Tribunal also referred to the Delhi High Court's decision in Ericsson A.B., which held that the purchase of software is not royalty even after considering the amended provisions.

4. Applicability of DTAA between India and Singapore:
The assessee claimed exemption under Article 12 of the DTAA between India and Singapore, arguing that the supplier did not have a PE in India. The Tribunal agreed with the assessee, noting that the payment was for the purchase of copyrighted articles and not for the use of copyright, thus not falling under the definition of royalty. The Tribunal emphasized that the DTAA provisions, which are more beneficial to the assessee, should prevail.

Conclusion:
The Tribunal concluded that the payment for shrink-wrapped readymade software does not constitute royalty and is not subject to TDS under Section 195. The retrospective amendments introduced by the Finance Act, 2012, do not affect the assessee's liability as the payment was made before these amendments. The DTAA between India and Singapore exempts the payment from tax deduction at source. Consequently, the appeal filed by the assessee was allowed, and the demand raised by the AO was canceled.

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