Treaty definition of royalty prevails for software and database access payments; no withholding tax default arose.
Payments for software use and access to a database or portal were held not to constitute royalty under the relevant DTAA because the payer obtained only a copyrighted article, not any copyright interest. The domestic expansion of the royalty definition could not override the treaty definition, which remained controlling as the more beneficial provision. On that basis, no tax deduction obligation arose and the demand under section 201(1) with interest under section 201(1A) could not survive. Consultancy fees were also not treated as fees for technical services on the facts considered, and the assessee was not an assessee in default for non-deduction of tax. The appeals were allowed and the Revenue's appeal dismissed.
Issues: (i) Whether payments for use of software and access to database or portal were taxable as royalty under the Income-tax Act, 1961 and the relevant DTAA, attracting liability under section 201(1) and interest under section 201(1A); (ii) Whether consultancy fees were liable to be treated as fees for technical services so as to require deduction of tax at source; (iii) Whether the assessee was liable to be treated as an assessee in default for non-deduction of tax on such payments.
Issue (i): Whether payments for use of software and access to database or portal were taxable as royalty under the Income-tax Act, 1961 and the relevant DTAA, attracting liability under section 201(1) and interest under section 201(1A).
Analysis: The payments were for purchase or use of copyrighted articles and not for acquisition of any copyright. The domestic amendment to the definition of royalty could not enlarge the scope of the corresponding treaty definition where no similar amendment had been made. The treaty definition remained controlling because it was more beneficial to the assessee. On that basis, software payments and database access charges did not fall within royalty.
Conclusion: The issue was decided in favour of the assessee. No liability to deduct tax arose and the demand under section 201(1) and interest under section 201(1A) could not survive.
Issue (ii): Whether consultancy fees were liable to be treated as fees for technical services so as to require deduction of tax at source.
Analysis: The consultancy payments were examined on the same treaty-based footing and were not found to warrant deduction of tax at source on the facts considered. The characterization adopted by the lower authorities was not sustained.
Conclusion: The issue was decided in favour of the assessee. The consultancy fees were not exigible to tax deduction at source on the reasoning applied.
Issue (iii): Whether the assessee was liable to be treated as an assessee in default for non-deduction of tax on such payments.
Analysis: Once the underlying payments were held not to be chargeable as royalty or otherwise liable for deduction in the manner proposed, the foundation for treating the assessee as in default disappeared.
Conclusion: The assessee was not liable to be treated as an assessee in default.
Final Conclusion: The assessee's appeals were allowed and the Revenue's appeal was dismissed, with the substantive transfer-pricing and withholding-tax additions on the impugned payments not sustained.
Ratio Decidendi: A payment for use of software or access to a database, where only a copyrighted article is obtained and no copyright is transferred, is not royalty under a DTAA; the treaty definition prevails over an expanded domestic definition when more beneficial to the assessee.