2019 (3) TMI 458 - AT - Income Tax

Software licence and IT support payments held non-royalty, non-FTS; no TDS default under s.9(1)(vi), 201, Article 12

ITAT Pune held that payments made by the assessee to a US group entity for software licences constituted purchase of copyrighted articles, not 'royalty' ... TDS u/s 195 - payments made to Deere & Co. USA on account of for software license fees and IT support services - income accrued in India - default u/s 201(1) and 201(1A) - assessee was one of the permitted users by Deere & Co. of the aforesaid software - whether payments were liable to tax as Royalty / FTS as per section 9(1)(vi) & 9(1)(vii) of the Act as well as Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and USA? - amended definition of ‘royalty’ under the domestic law - HELD THAT:- Purchase of software by the assessee being copyrighted article is not covered by the term ‘royalty’ under section 9(1)(vi) of the Act. Where the assessee did not acquire any copyright in the software, is not covered under Explanation 2 to section 9(1)(vi) - amended definition of ‘royalty’ under the domestic law cannot be extended to the definition of ‘royalty’ under DTAA, where the term ‘royalty’ originally defined has not been amended. As per definition of ‘royalty’ under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of ‘royalty’. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of ‘royalty’ having not undergone any amendment in DTAA, the assessee was not liable to deduct tax for payments made for purchase of software. In such scenario, the assessee cannot be held to be in default and the demand created under section 201(1) and interest charged under section 201(1A) of the Act is thus, cancelled. Payment with regard to provision of IT support charges i.e. internet charges, use of e-mail charges, backup support services, etc. was held to be ‘royalty’ - HELD THAT:- The terms of DTAA between India and Australia and India and USA are similar and applying the said ratio to the facts of present case, we hold that the amount paid by assessee for internet charges, use of e-mail facility and backup support services is not ‘royalty’ under Article 12 of DTAA between India and USA and is also not ‘royalty’ under section 9(1)(vi) of the Act. The assessee has filed breakup of expenses accordingly, we hold that internet charges paid, line charges, service charges and other charges i.e. VPN charges, online meeting charges, etc. of ₹ 22,94,256/- are not payment of ‘royalty’ and are not even for make available of any technical services and hence, there was no requirement to deduct tax at source out of such payments. In the said breakup, the assessee has also pointed out that software charges paid were to the tune of ₹ 4,22,73,399/-, which we have already held in the paras hereinabove, not liable for deduction of tax at source. Payment on account of lease line charges and non deduction of tax at source - HELD THAT:- As in ASIA SATELLITE TELECOMMUNICATIONS CO. LTD. VERSUS DIRECTOR OF INCOME-TAX [2011 (1) TMI 47 - DELHI HIGH COURT] held that there was no lease of equipment but only use of broadband facilities and applying the said ratio to the facts of present case, we hold that in the case of assessee, there is no question of any equipment royalty where the assessee was only using lease lines for transmitting data and it cannot be said to be a case of equipment royalty. Applying the said propositions to the facts of present case, we hold that the assessee has not defaulted in non deduction of tax at source out of payments made for lease line charges. We also uphold the alternate plea of assessee that the said lease line charges are at best reimbursement of expenses and hence, not liable for deduction of tax at source. Training fees paid to Deere & Co - DTAA between India and USA - default for non deduction of tax at source on charges paid to Deere & Co. on account of reimbursement of salary of expat employees - HELD THAT:- As decided in VEEDA CLINICAL RESEARCH (P.) LTD. [2014 (1) TMI 886 - ITAT AHMEDABAD] where the onus was on Revenue authorities to demonstrate that these services too involve any transfer of technology and since that onus was not discharged, then the payment was not covered by the definition of ‘Fees for Technical Services’. The facts of the said case are similar to the facts before us, wherein training availed by employees of assessee were web based services available on internet and no technical knowledge was being imparted by service provider and the Revenue has failed to demonstrate that the services did involve transfer of technology and in the absence of same, it cannot be said to be payments in the nature of Fees for Technical Services. Applying the said ratio, we hold that there was no liability upon the assessee to deduct tax at source on the aforesaid payments and hence, assessee cannot be held to be in default under section 201(1) and 201(1A) Reimbursement of salary of expat employees - HELD THAT:- Where the Hon'ble Supreme Court has only dismissed SLP, then no ruling on principle being laid down by the Apex Court, the proposition laid down by the jurisdictional High Court of Bombay in MARKS & SPENCER RELIANCE INDIA PVT. LTD.[2017 (5) TMI 1638 - BOMBAY HIGH COURT] would rule. Accordingly, we further hold that the assessee having deducted tax at source out of salary paid to employees deputed, has not defaulted under section 201(1) / 201(1A) of the Act. The grounds of appeal of assessee allowed. Issues Involved:1. Deduction of TDS on payments made for software license fees and IT support services.2. Deduction of TDS on lease line charges.3. Deduction of TDS on training fees and reimbursement of salary paid to expat employees.4. Grossing up of amounts chargeable to TDS under section 195A.Detailed Analysis:1. Deduction of TDS on Payments Made for Software License Fees and IT Support Services:The primary issue was whether the payments made to Deere & Co. USA for software license fees and IT support services were taxable as 'royalty' under the Income Tax Act and the DTAA between India and USA. The CIT(A) held that these payments were indeed taxable as royalty, and thus, the assessee was required to deduct TDS under section 195 of the Act. The assessee argued that these payments were not covered under the definition of 'royalty' and were merely reimbursements, which did not require TDS deduction.The Tribunal analyzed the agreements and concluded that the payments were for copyrighted articles and not for the use of any copyright. The Tribunal relied on various judicial precedents, including the Hon’ble High Court of Delhi in DIT Vs. Infrasoft Ltd., which distinguished between the acquisition of a copyrighted article and a copyright. The Tribunal held that the payments did not constitute 'royalty' under the Income Tax Act or the DTAA, and thus, the assessee was not liable to deduct TDS.2. Deduction of TDS on Lease Line Charges:The second issue was whether the payments made for lease line charges were taxable as 'royalty' under the Income Tax Act and the DTAA. The Assessing Officer held that these payments were for the use of industrial, commercial, or scientific equipment and thus constituted royalty. The CIT(A) upheld this view.The Tribunal, however, referred to the decision of the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV, which held that amendments to the domestic law could not affect the terms of the DTAA unless the DTAA itself was amended. The Tribunal concluded that the payments for lease line charges did not constitute royalty under the DTAA, and thus, the assessee was not liable to deduct TDS on these payments.3. Deduction of TDS on Training Fees and Reimbursement of Salary Paid to Expat Employees:The CIT(A) enhanced the assessment by holding that the assessee should have deducted TDS on payments made for training fees and reimbursement of salary paid to expat employees. The CIT(A) treated these payments as fees for technical services under the Income Tax Act and the DTAA.The Tribunal found that the training provided was web-based and did not involve any transfer of technical knowledge or skills. Therefore, it did not qualify as fees for technical services. Regarding the reimbursement of salaries, the Tribunal noted that the expat employees were on the payroll of the assessee, and TDS was deducted under section 192. The Tribunal relied on the Hon’ble Bombay High Court's decision in DIT Vs. Marks & Spencer Reliance India Pvt. Ltd., which held that such reimbursements did not constitute fees for technical services and did not require additional TDS deduction.4. Grossing Up of Amounts Chargeable to TDS Under Section 195A:The assessee argued that the Assessing Officer had incorrectly grossed up the amounts chargeable to TDS under section 195A. The Tribunal found merit in the assessee's argument, noting that grossing up was not justified under the circumstances and should only be applied if there was an agreement to that effect.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the payments for software license fees, IT support services, lease line charges, training fees, and reimbursement of salaries did not require TDS deduction under the Income Tax Act or the DTAA. The Tribunal also found that the grossing up of amounts under section 195A was not justified. Consequently, the demands raised under sections 201(1) and 201(1A) were deleted.