Tribunal rules software and bandwidth payments not 'royalty', exempts from TDS. Interest levy unjustified.

The Tribunal ruled in favor of the assessee, determining that payments for software licenses and support services were not 'royalty', therefore not subject to TDS. Additionally, payments to Verizon for bandwidth services were also not considered 'royalty', exempting them from TDS. The interest levy under Section 201(1A) for non-deduction of TDS on software payments was deemed unjustified, leading to the allowance of the assessee's appeals on these grounds.

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Issues Involved:
1. Non-deduction of TDS for purchase of copyrighted software.
2. Levy of interest under Section 201(1A) of the Income Tax Act.
3. Tax treatment of payments made to Verizon Business, USA for leased circuit line services.
4. Tax treatment of payments for software support services.

Detailed Analysis:

Issue 1: Non-deduction of TDS for Purchase of Copyrighted Software
The assessee argued that payments for software licenses were for the purchase of copyrighted articles, not for the use of copyright, thus not liable for TDS under Section 195. The Assessing Officer (AO) and CIT (A) classified these payments as 'royalty' under Section 9(1)(vi) and relevant DTAAs, requiring TDS. The Tribunal found that the software was used for testing wireless equipment, granting only a right to use the product, not the copyright. Citing the Delhi High Court's decision in Pr. CIT-6 vs. M. Tech India P Ltd, it was determined that payments for copyrighted products are not 'royalty'. The Tribunal concluded that the payments were for copyrighted articles, not for the use of copyright, thus no TDS was required.

Issue 2: Levy of Interest under Section 201(1A)
The AO levied interest under Section 201(1A) for non-deduction of TDS on software payments. The Tribunal, having established that these payments were not 'royalty', ruled that the interest levy under Section 201(1A) was unjustified. The Tribunal allowed the assessee's appeal, negating the interest levy.

Issue 3: Tax Treatment of Payments to Verizon Business, USA for Leased Circuit Line Services
The AO deemed payments to Verizon for leased circuit line services as 'royalty' under Section 9(1)(vi) and the India-USA DTAA, due to the use of scientific or commercial equipment. The Tribunal found that Verizon provided bandwidth services, not the right to use scientific equipment. Citing judgments in Asia Satellite Telecommunications Co. Ltd and Estel Communications (P) Ltd, the Tribunal ruled that payments for bandwidth services are not 'royalty'. It was concluded that the payments to Verizon were for internet and bandwidth services, not for the use of equipment, thus not subject to TDS.

Issue 4: Tax Treatment of Payments for Software Support Services
The AO treated payments for software support services as 'Fees for Technical Services' (FTS) under Section 9(1)(vii) and relevant DTAAs. The Tribunal, referencing its decision on software payments, ruled that if software payments are not 'royalty', support services payments cannot be FTS. The Tribunal held that these payments were not 'royalty' or FTS, thus not subject to TDS.

Additional Ground: Retrospective Amendments
The assessee argued that TDS could not be deducted in anticipation of retrospective amendments to the Income Tax Act. The Tribunal noted that the lower authorities did not apply the amended provisions, deeming the additional ground misconstrued and not admitting it.

Conclusion:
The Tribunal allowed the assessee's appeals, ruling that payments for software and support services were not 'royalty', and payments to Verizon for bandwidth services were not 'royalty'. Consequently, no TDS was required, and the interest levy under Section 201(1A) was unjustified.

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