2020 (10) TMI 450 - AT - Income Tax

Assessee not in default pre-2011 software payments. Section 201 demands deleted.

The Tribunal held that the assessee could not be treated as an assessee in default for payments made for software purchases before 15.10.2011, the date of ... Tax deduction at source (TDS) liability - assessee in default - royalty versus business profits - retrospective amendment and subsequent judicial pronouncement - bona fide beliefTax deduction at source (TDS) liability - assessee in default - bona fide belief - royalty versus business profits - Liability of the assessee to be treated as assessee in default under section 201(1) and interest under section 201(1A) for failure to deduct TDS on payments for purchase of licensed software made prior to 15.10.2011. - HELD THAT: - The Tribunal applied co-ordinate-bench authority holding that, prior to the Karnataka High Court's decision in CIT v. Samsung Electronics Co. Ltd. (pronounced 15.10.2011) and the subsequent retrospective legislative clarification, payments for purchase of off the shelf software were not regarded as royalty and there was no obligation to deduct tax at source. The assessee acted under a bona fide belief supported by earlier decisions that no TDS was required. The Tribunal held that liability to deduct TDS cannot be fastened retrospectively on the basis of a later court ruling or retrospective amendment and therefore the assessee cannot be treated as assessee in default for payments made before 15.10.2011. [Paras 7, 8]Demand under section 201(1) and interest under section 201(1A) deleted for payments made prior to 15.10.2011 for assessment years 2009-10 to 2011-12.Tax deduction at source (TDS) liability - retrospective amendment and subsequent judicial pronouncement - bona fide belief - Extent of relief for assessment year 2012-13 in respect of payments made for purchase of licensed software prior to 15.10.2011. - HELD THAT: - Applying the same principle that a subsequent judicial pronouncement or retrospective amendment cannot impose a past TDS obligation, the Tribunal modified the appellate order for AY 2012-13 and directed deletion of the demands insofar as they relate to payments made prior to 15.10.2011, while leaving demands relating to payments made after that date unaffected. [Paras 7, 8]Appeal for AY 2012-13 partly allowed: demands deleted only in respect of payments made prior to 15.10.2011.Final Conclusion: Appeals allowed for assessment years 2009-10 to 2011-12 by deleting demands under sections 201(1) and 201(1A); appeal for 2012-13 partly allowed by deleting demands in respect of payments made prior to 15.10.2011. Issues Involved:1. Whether the assessee is liable for non-deduction of tax at source under Section 195 of the Income-tax Act, 1961 for payments made towards the purchase of licensed software.2. Whether the assessee can be treated as an assessee in default under Section 201(1) and liable for interest under Section 201(1A) for the assessment years 2009-10 to 2012-13.Issue-wise Detailed Analysis:1. Liability for Non-Deduction of Tax at Source under Section 195:The primary issue revolves around whether the payments made by the assessee for the purchase of licensed software from non-residents should be treated as 'royalty' and thus subject to tax deduction at source (TDS) under Section 195 of the Income-tax Act, 1961. The assessing officer (AO) relied on the Karnataka High Court's decision in the case of Samsung Electronics Co Ltd (2011) (345 ITR 494) (Kar), which held that payments for the purchase of software licenses constitute 'royalty' income in the hands of non-residents. Consequently, the AO treated the assessee as an assessee in default for not deducting TDS on these payments and raised demands under Section 201(1) and charged interest under Section 201(1A).2. Treatment as Assessee in Default and Interest Liability:The assessee argued that prior to the Karnataka High Court's decision on 15.10.2011, there were judicial precedents, such as the Tribunal's decision in Sonata Information Technology Ltd vs. ACIT (103 ITD 324), which held that payments for software licenses do not constitute royalty. The assessee contended that it did not deduct TDS under a bona fide belief based on these earlier decisions. The Tribunal has consistently held that liability to deduct TDS cannot be imposed retrospectively based on subsequent amendments or court rulings. The Tribunal cited several cases supporting this principle, including Teekays Interior Solutions P Ltd (ITA No.400/Bang/2017) and Infineon Technologies India P Ltd (IT(TP)A No.405/Bang/2015).Tribunal's Findings:The Tribunal examined the issue of non-deduction of TDS in light of subsequent amendments and court rulings. It referred to the decision in Infineon Technologies India P Ltd, which emphasized that the legal position as of the last date of the previous year (31.3.2010) was that payments for software licenses were not considered royalty. The Tribunal noted that the change in legal position occurred due to the Karnataka High Court's ruling in Samsung Electronics Co. Ltd. on 15.10.2011 and a retrospective amendment by the Finance Act 2012. The Tribunal concluded that the assessee could not be held liable for TDS based on these subsequent changes.Conclusion:The Tribunal held that the assessee could not be treated as an assessee in default for payments made for software purchases prior to 15.10.2011, the date of the Karnataka High Court's decision in Samsung Electronics Co. Ltd. Consequently, the demands raised under Section 201(1) and interest charged under Section 201(1A) for assessment years 2009-10 to 2011-12 were not sustainable. For the assessment year 2012-13, the demands related to payments made before 15.10.2011 were also deleted.Final Orders:- Appeals for assessment years 2009-10 to 2011-12 were allowed, and the demands raised under Section 201(1) and 201(1A) were deleted.- Appeals for assessment year 2012-13 were partly allowed, with demands raised for payments made prior to 15.10.2011 being deleted.Order Pronounced:The order was pronounced in the open court on 5th October 2020.