2021 (7) TMI 615 - AT - Income Tax

Tax Tribunal: Software sales payments to non-resident suppliers not 'royalty' per IT Act

The Tribunal allowed the assessee's appeal, citing the Supreme Court's ruling that payments for software sales to non-resident suppliers by Indian ... TDS u/s 195 - Payments received for sale of software to Indian resellers/distributors/customers - 'Royalty' chargeable to tax under Section 9(1)(vi) - Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA')- HELD THAT:- In view of the provisions of section 90, agreements with foreign countries (DTAA) would override the provisions of the Act. Once it is held that payment made by the assessee to the non-resident companies would amount to 'royalty' within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the assessee to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the assessee to deduct tax at source under section 195 and consequences would follow. On facts and circumstances of the case, the Tribunal was not justified in holding that the amount(s) paid by the assessee to the foreign software suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and, wherefore, the assessee was not liable to deduct any tax at source. See SAMSUNG ELECTRONICS CO. LTD. & OTHERS [2011 (10) TMI 195 - KARNATAKA HIGH COURT]. - Also see NICE LTD. [2021 (5) TMI 877 - KARNATAKA HIGH COURT] amounts paid by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in Section 195 of the Income Tax Act were not liable to deduct any TDS under Section 195 - Decided in favour of assessee. Issues Involved:1. Legality of the final assessment order.2. Classification of payments for software sales as 'royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-USA DTAA.3. Applicability of the retrospective amendment to Section 9(1)(vi) and the DTAA.4. Reliance on previous High Court and AAR decisions.5. Distinction between the right to use a copyrighted article and the transfer of copyright.6. Classification of access to software without the right to exploit the copyright.7. Payments for software sales and their classification as payments for a secret process.8. Payments for software sales measured with reference to productivity or use.9. Non-adherence to certain High Court and Tribunal decisions.10. Classification of support services as royalty/fees for technical services.11. Consideration of amounts in Form 26AS.12. Initiation of penalty proceedings under Section 271(1)(c).13. Overall sustainability of the final assessment order.Issue-wise Detailed Analysis:1. Legality of the Final Assessment Order:The assessee challenged the final assessment order passed by the AO pursuant to DRP directions, claiming it was 'bad in law and on facts' and should be set aside.2. Classification of Payments for Software Sales as 'Royalty':The AO and DRP classified payments received by the assessee for software sales to Indian resellers/distributors/customers as 'royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-USA DTAA. The assessee contended this classification, arguing the payments were not 'royalty' but rather business income.3. Applicability of Retrospective Amendment to Section 9(1)(vi) and the DTAA:Despite the retrospective amendment to Section 9(1)(vi) by the Finance Act, 2012, the assessee argued that the definition of 'royalty' under the DTAA had not changed, and thus the DTAA's beneficial provisions should apply.4. Reliance on Previous High Court and AAR Decisions:The AO and DRP relied on Karnataka High Court judgments in cases like Samsung Electronics and others, which were under challenge before the Supreme Court. The assessee argued these judgments should not be followed.5. Distinction Between the Right to Use a Copyrighted Article and the Transfer of Copyright:The assessee argued that the transactions involved the right to use a copyrighted article, not the transfer of copyright itself, which should not be classified as 'royalty'.6. Classification of Access to Software Without the Right to Exploit the Copyright:The assessee contended that access to software without the right to exploit the embedded copyright does not amount to the use or right to use the copyright.7. Payments for Software Sales and Their Classification as Payments for a Secret Process:The assessee argued that the consideration received for software sales did not constitute payments for a secret process.8. Payments for Software Sales Measured with Reference to Productivity or Use:The assessee contended that since the payment for software sales was not measured with reference to productivity or use, it could not be construed as 'royalty'.9. Non-adherence to Certain High Court and Tribunal Decisions:The AO and DRP did not follow certain decisions by the High Courts of Delhi and Bombay, the AAR, and various Tribunal Benches on the same issue.10. Classification of Support Services as Royalty/Fees for Technical Services:The AO classified consideration received by the assessee for support services as royalty/fees for technical services under Article 12 of the DTAA. The DRP upheld this classification, stating the payments qualified as royalty for the use of a copyright.11. Consideration of Amounts in Form 26AS:The AO considered higher amounts appearing in Form 26AS wherever they exceeded the corresponding invoice amounts, which the assessee contested.12. Initiation of Penalty Proceedings Under Section 271(1)(c):The AO initiated penalty proceedings against the assessee under Section 271(1)(c) of the Act, which the assessee challenged.13. Overall Sustainability of the Final Assessment Order:The assessee argued that the final assessment order was unsustainable in law and on facts and should be set aside.Judgment Analysis:The Tribunal allowed the assessee's appeal, primarily relying on the Supreme Court's judgment in Engineering Analysis Centre for Excellence Private Limited v. CIT & Anr. The Supreme Court held that payments by resident Indian end-users/distributors to non-resident software suppliers for resale/use of software through EULAs/distribution agreements do not constitute 'royalty' and are not taxable in India. Consequently, there was no obligation to deduct TDS under Section 195.The Tribunal noted that the DRP's reliance on the Karnataka High Court's judgment in Samsung Electronics was misplaced as it was reversed by the Supreme Court. The Tribunal concluded that the issue was settled in favor of the assessee by the Supreme Court, and ancillary support services were also related to software services, thus not constituting 'royalty'.As a result, the Tribunal allowed grounds 1 to 10 raised by the assessee, rendering the other grounds moot. The final assessment order was set aside, and the appeal was allowed in favor of the assessee.