2017 (6) TMI 167 - AT - Income Tax

Software license payment not royalty under Income Tax Act or DTAA. No tax deduction at source. Lower authorities' decisions overturned.

M/s. Visteon Technical and Services Centre Pvt. Ltd. Versus The Dy. Commissioner of Income Tax, International Taxation-2 (2), Chennai

The Tribunal held that the payment for the software license did not constitute royalty under Section 9(1)(vi) of the Income Tax Act or the Indo-US DTAA. ... TDS u/s 195 - payment towards software purchase - non deduction of tds - Held that:- As gone through the clauses of the License agreement of the Section 14 of the Copyright Act and observe that the assessee is not authorized to do any of acts mentioned in the Copyrights Act. The Indo US treaty also excluded the computer soft ware from the definition of Royalty in the treaty. Thus we are of the considered opinion that The Company has merely been provided the access to the copyrighted software and not right to use the copyright embedded in the software. In other words, the Company is not permitted to make copies or make alternations to the software. The assessee has purchased software for the purpose of internal use and the same cannot be held as payments towards royalty. As per the terms and conditions of the purchase agreement payment made to acquire the software license does not fit into the definition of royalty and non-taxable as per 9(1) (vi) of Income tax act. Therefore, we hold that the payment towards software purchase is not royalty within the meaning of non-taxable u/s.9(1)(vi) of Income Tax Act and not liable for deduction of tax at source, accordingly, we set-aside the orders of the lower authorities allow the appeal of the assessee. Issues Involved:1. Non-deduction of tax at source on remittances to non-residents.2. Classification of payment for software license as royalty under Section 9(1)(vi) of the Income Tax Act and the Indo-US DTAA.3. Applicability of judicial precedents and the Copyright Act to the nature of the transaction.Detailed Analysis:Issue 1: Non-deduction of Tax at Source on Remittances to Non-ResidentsThe primary issue pertains to the assessee being treated as in default for non-deduction of tax at source on remittances amounting to Rs. 1,75,54,741/- made to M/s. Vector Software Inc., USA, during the FY 2013-14. The AO noticed this non-compliance through Form-15CA/CB and imposed tax and interest totaling Rs. 21,93,128/- under Section 201(1)/(1A) of the Income Tax Act.Issue 2: Classification of Payment for Software License as RoyaltyThe assessee contended that the payment was for the purchase of software licenses for internal business use, not for the right to use the copyrighted software. The AO, however, classified this payment as royalty under Section 9(1)(vi) of the Income Tax Act, relying on the terms of the invoices which indicated that the license was for a particular tenure and subject to specific conditions. The AO's decision was upheld by the CIT(A).The assessee argued that the payment did not constitute royalty under the Indo-US DTAA, as the software was used solely for internal purposes and could not be distributed, sub-licensed, or altered. The assessee cited several judicial decisions supporting this view, including:- Infrasoft Ltd. (ITA No.1034/2009)- DIT vs. Ericsson A.B. (2012) 343 ITR 470 (DEL)- DIT vs Nokia Networks OY (2012) (212 Taxmann 68)- Financial Software and Systems Pvt. Ltd. (Chennai ITAT) (ITA No. 2190 to 2196 and 2199/Mds/2013)- Mumbai tribunal in the case of Novel Inc.- Dassault systems KK, (AAR No.821/2009)The Tribunal examined the clauses of the license agreement, noting that the assessee did not acquire any ownership rights or the ability to alter or distribute the software. The software was protected by copyright laws, and the assessee was only granted a non-exclusive, non-transferable license for internal use.Issue 3: Applicability of Judicial Precedents and the Copyright ActThe Tribunal referred to the definition of royalties under the India-USA DTAA and Section 14 of the Copyright Act. The Tribunal observed that the assessee was not authorized to perform any acts mentioned in the Copyright Act, such as reproducing, distributing, or altering the software.The Tribunal also considered the decision of the jurisdictional High Court in CIT Vs. M/s. Vinzas Solutions India Pvt. Ltd. (ITA No.861/2016), which held that payments for outright purchase of software do not constitute royalty. The High Court emphasized that royalty involves payments for the use of or the right to use intellectual property, which was not the case here.Conclusion:The Tribunal concluded that the payment made by the assessee for the software license did not qualify as royalty under Section 9(1)(vi) of the Income Tax Act or the Indo-US DTAA. The payment was for the purchase of software for internal use, without any rights to alter, distribute, or sublicense the software. Consequently, the assessee was not liable for deduction of tax at source on these payments. The orders of the lower authorities were set aside, and the appeal was allowed.Result:The appeal of the assessee was allowed, and the order was pronounced in the Open Court on 28th February 2017, at Chennai.