End-user payments for standard software under EULA held not "royalty" under DTAA Article 13; no s.195 TDS.

Payments by a resident end-user to a non-resident software manufacturer/supplier for use of standard software under an EULA were examined for characterization as "royalty" under Article 13 of the applicable DTAA and consequent TDS liability under s.195 r/w s.9(1)(vi). The tribunal held that the EULA granted only a non-exclusive, non-transferable right to use the software and did not convey any interest in, or right to use, the copyright (including rights of reproduction, modification, or adaptation). Since DTAA provisions were more beneficial than s.9(1)(vi) and its explanations, the payments were not taxable as royalty in India, resulting in no obligation to withhold tax under s.195; relief was granted to the assessee.

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Issues Involved:
1. Treatment of payment for software licenses as royalty under Article 12 of the India-UK Tax Treaty.
2. Applicability of Section 195A of the Income Tax Act for computing tax liability.
3. Levy of interest under Section 201(1A) of the Income Tax Act.
4. Initiation of penalty proceedings under Section 271C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Payment for Software Licenses as Royalty:
The primary issue revolves around whether the payments made by the assessee to Mycom (UK) Ltd. for software licenses should be treated as royalty under Article 12 of the India-UK Tax Treaty.

- Assessee's Argument:
- The software purchased was standard off-the-shelf software, not customized for the assessee.
- The payment was for the use of the software without acquiring any rights to commercially exploit the software's copyright.
- As per the India-UK Tax Treaty, payments for the purchase of software are not taxable in India.
- The payment should be classified as business profits under Article 7 of the India-UK Tax Treaty, and since Mycom does not have a permanent establishment in India, it should not be taxable.

- Assessing Officer (AO)'s Argument:
- The AO classified the payments as royalty under Section 9(1)(vi) of the Income Tax Act, referring to the definition of royalties in the DTAA and the Copyright Act, 1957.
- The AO relied on the judgment of the Karnataka High Court in the case of Samsung Electronics Co. Ltd., which held that payments for software licenses amount to royalty.

- Commissioner of Income Tax (Appeals) [CIT(A)]'s Decision:
- The CIT(A) concluded that the payment for the software license does not constitute royalty under the India-UK Tax Treaty.
- The CIT(A) relied on the decision of the Delhi High Court in the case of DIT vs. Infrasoft Ltd., which held that payments for software licenses are not royalties.
- The CIT(A) emphasized that differing views of High Courts should favor the assessee, citing the Supreme Court's judgment in the case of Vegetable Product Limited.

- Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision, stating that the payments do not constitute royalties under the DTAA.
- The Tribunal relied on the Supreme Court's judgment in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. CIT, which clarified that payments for software licenses do not amount to royalties and are not subject to TDS under Section 195 of the Income Tax Act.
- The Tribunal dismissed the Revenue's appeal on this ground.

2. Applicability of Section 195A of the Income Tax Act:
The Revenue contended that the CIT(A) erred in not adjudicating the issue of computing tax liability under Section 201(1) by applying Section 195A of the Income Tax Act.

- Tribunal's Decision:
- The Tribunal found this ground to be consequential and dismissed it along with the primary issue.

3. Levy of Interest under Section 201(1A) of the Income Tax Act:
The Revenue argued that the CIT(A) failed to adjudicate the issue of levying interest under Section 201(1A) of the Income Tax Act.

- Tribunal's Decision:
- The Tribunal dismissed this ground as it was consequential to the primary issue.

4. Initiation of Penalty Proceedings under Section 271C of the Income Tax Act:
The Revenue claimed that the CIT(A) did not address the issue of penalty under Section 271C of the Income Tax Act.

- Tribunal's Decision:
- The Tribunal dismissed this ground as it was consequential to the primary issue.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the payments made by the assessee to Mycom (UK) Ltd. for software licenses do not constitute royalties under the India-UK Tax Treaty and are not subject to TDS under Section 195 of the Income Tax Act. Consequently, the grounds related to the applicability of Section 195A, levy of interest under Section 201(1A), and initiation of penalty proceedings under Section 271C were also dismissed. The Revenue's appeal was dismissed in its entirety.

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