2022 (9) TMI 1097 - AT - Income Tax

Tribunal rules software license payments not royalty income under tax law

GE India Industrial Private Limited, (earlier known as GE India Exports Private Limited), New Delhi Versus Asst. Director of Income Tax-I, International Taxation, Hyderabad

GE India Industrial Private Limited, (earlier known as GE India Exports Private Limited), New Delhi Versus Asst. Director of Income Tax-I, International ... Issues:1. Whether payments made by the assessee to vendors for software licenses without deduction of tax at source constitute royalty income under section 195 of the Income Tax Act, 1961.2. Whether the payments made for the use of Pro-E software, Oracle, My Work Place, and Global Web qualify as royalty income.3. Whether the assessee is liable to pay tax under section 201(1) of the Act for non-deduction of taxes under section 195 of the Act.Analysis:Issue 1: The assessee appealed against the order passed by the Commissioner of Income Tax (Appeals) regarding payments made to vendors for software licenses without tax deduction. The Assessing Officer found the assessee liable to pay tax under section 201(1) of the Act. The assessee contended that the payments were for goods and not royalty. The CIT(A) concluded that payments for the Pro-E software constituted royalty as it facilitated machine design and manufacturing. However, payments for Oracle and My Work Place software were not considered royalty.Issue 2: The CIT(A) held that payments for Global Web services provided by GEC, USA amounted to royalty due to the nature of services offered. The assessee challenged this reasoning, citing the purchase of software and services directly without involving copyright issues. The agreement between GEC and software vendors clarified the ownership and usage rights, highlighting that the payments were for software usage rights, not copyright.Issue 3: The Tribunal analyzed the agreements and the nature of software purchases to determine if the payments qualified as royalty income. Referring to the decision in Engineering Analysis Centre Of Excellence (P) Ltd vs. CIT, the Tribunal held that payments for software usage rights do not constitute royalty income taxable in India. The Tribunal found that the payments made by the assessee for software licenses were not royalty income and thus, the assessee was not liable to deduct tax under section 195 of the Act.The Tribunal allowed the appeal for the assessment year 2008-09, stating that the findings applied to subsequent years with identical facts. Consequently, all appeals of the assessee were allowed, and it was not considered an 'assessee-in-default' for non-deduction of taxes under section 195 of the Act.