2021 (9) TMI 807 - AT - Income Tax

Appeal allowed: Software purchase remittances not royalty income

Dimple Creation Pvt. Ltd. Versus ITO (International Taxation) Ward-1 (2) New Delhi

The Tribunal allowed the appeal of the assessee, ruling that the remittances made for software purchase did not constitute royalty income. The Tribunal ... TDS u/s 195 - Remittaces for supply of software which is his income as per both Section 9(1)(VI) and as per Article 12(3) of India with U.S.A DTAA - HELD THAT:- It is pertinent to note in case of Engineering Analysis [2021 (3) TMI 138 - SUPREME COURT] has categorically given the findings thereby observing that the computer software cannot be held as royalty as set out in Paragraph 169 of the said decision - DR’s contention that the factual matrix is different is not sustainable as the ratio related to royalty is very much dealt by the Apex Court thereby observing that the same is applicable to computer software cases in different types of series which has been already defined. Hon'ble Supreme Court clearly held that there is no element of royalty in these type of transactions. Thus, the appeal of the assessee is allowed. Issues:1. Whether TDS should have been deducted on remittances made for the purchase of softwareRs.2. Whether the remittance for software purchase constitutes royalty income under Section 9(1)(vi) and India-USA DTAARs.3. Whether the decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. is applicable to the present caseRs.4. Whether the appeal of the assessee should be allowedRs.Analysis:1. The primary issue in this case was whether TDS should have been deducted on the remittances made for the purchase of software. The Assessing Officer held that TDS should have been deducted on the remittance made by the assessee to a company in the USA for software purchase. The CIT(A) upheld this decision, leading to a demand against the assessee. However, the assessee contended that the remittance was made for the purchase of software without any tax deduction under Section 195(1) of the Income Tax Act, 1961.2. The second issue revolved around whether the remittance for software purchase constituted royalty income under Section 9(1)(vi) of the Act and the India-USA Double Taxation Avoidance Agreement (DTAA). The CIT(A) upheld the Assessing Officer's order, stating that through the purchase of software, the assessee had acquired copyright, leading to taxation as royalty income. The assessee argued that recent judgments by the Supreme Court indicated that payments made for the use/resale of software to non-resident suppliers are not taxable as royalty.3. The third issue involved the applicability of the decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. to the present case. The assessee relied on this case to argue that payments made for software use/resale to non-resident suppliers should not be considered royalty. The Tribunal found that the findings of the Supreme Court in the Engineering Analysis case categorically stated that computer software cannot be considered royalty, and the same principles applied to the present case.4. Lastly, the Tribunal had to decide whether to allow the appeal of the assessee. After considering the arguments from both parties and reviewing the material on record, the Tribunal found that the factual matrix of the present case aligned with the principles established by the Supreme Court in the Engineering Analysis case. Therefore, the Tribunal allowed the appeal of the assessee, concluding that there was no element of royalty in the transactions related to the purchase of software.In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the purchase of software did not constitute royalty income, as per the decision of the Supreme Court in the Engineering Analysis case.