AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 48
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.... royalty 2.1. On the facts and circumstances of the case, the Hon'ble CIT(A) and the learned AO have erred in holding that the payments made by the Appellant to AVEVA UK amounting to Rs. 13,06,49,972 under the distribution agreement entered into between AVEVA India and AVEVA UK are subject to tax as 'royalty' in the hands of AVEVA UK under the provisions of Article 13 of the India-UK Tax Treaty as well as Section 9(l)(vi) of the Act. 3. Disallowance under Section 40(a)(ia) of the Act 3.1 On the facts and circumstances of the case, the Hon'ble CIT(A) and the learned AO have erred in disallowing a deduction in respect of the payments made by the Appellant to AVEVA UK amounting to Rs. 13,06,49,972 as per the above mentioned distribution agreement under Section 40(a)(ia) of the Act, for non-deduction of tax on such payments as per Section 195 of the Act. 4. Short grant of TDS credit 4.1. On the facts and circumstances of the case, the Hon'ble CIT(A) and the learned AO have erred in granting short credit of taxes deducted at source amounting to Rs. 6,81,907 claimed by the Appellant in its Return of Income. 5. Levy....
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....t tax at sources u/s 195 of the Act. In response, the assessee vide its letter 30/10/2013 filed a detailed written submissions which has been reproduced at para 4.3 on pages 2 to 9 of assessment order. The sum and substance of the arguments of the assessee, before the Assessing Officer are that license fee paid to Aveva England is for distribution of copyrighted software products in India but not payment for acquiring copyrights in software, therefore, the question of deduction of TDS u/s 195 of the Act, does not arise, consequently, no disallowance could be made u/s 40(a)(ia) of the Act. The Assessing Officer after considering the submissions of the assessee and also relied upon various judicial precedents, including the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd. & Ors. in ITA No.2808 of 2005 held that a right granted by way of license to make a copy of the computer program and use it for internal business and back up would itself amount transfer of right to use copyrights. In absence of such license, making a copy of would have been an act of infringement under the copyright Act, 1957. Accordingly, payment for purchase of copy of a comput....
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....ssessee's appeal is general in nature and hence, it does not require specific adjudication and accordingly, the same is dismissed as not pressed. 7. The next issue that came up for our consideration from ground no. 2 & 3 is disallowance of payment made to Aveva Solutions Ltd. UK for copyrighted software products u/s 40(a)(ia) of the Act, for non-deduction of tax at source as required u/s 195 of the Act. 8. The Ld. AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of the ITAT, Mumbai 'A' Bench in assessee's own case for AY 2007-08 in ITA No.3506/Mum/20014, where under identical set of facts and also on the basis similar distribution agreement, the Tribunal held that payment made by the assessee to Aveva Solutions Ltd., England for procuring and distributing copyrighted software on principle to principle basis could not be treated as payment towards royalty as defined u/s 9(1)(vi) of the Act, consequently, the assessee is not required to deduct tax at source u/s 195 of the Act, on such payment and hence no disallowance could be made u/s 40(a)(ia) of the Act. The Ld. AR further submitted that the Tribunal h....
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....payment towards royalty. The Tribunal, further held that since the parent company was not having PE in India, therefore, the assessee was not liable to deduct tax at source as required u/s 195 of the Act and hence for failure to deduct TDS, no disallowance could be made u/s 40(a)(ia) of the Act. The relevant findings of the Tribunal are as under:- 5.We have heard the rival submissions and perused the material before us. We would like to refer to some of the clauses of the agreement, entered into between the assessee and ASL, as same would help us to decide the issue before us. As per the agreement 'Aveva end user' was defined as under :- Aveva End User shall mean a third party within the Territory who is licensed by Aveva or an Aveva License to use one or more of the Products Clause 2 and Cl.3 deals with licence and delivery as follows: 2 Licence 2.1 AVEVA hereby grants to the Company with effect from the Effective Date a non-exclusive, non-transferable licence to do the following only within the Territory and in -accordance with this Agreement: 2.1.1 market, promote and demonstrate the Products; 2.1.2 grant Su....
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....enerate a security code for each copy of one or more Products on behalf of itself and End Users. The Company shall generate or request as appropriate replacement security codes in good time prior to the expiry of the relevant earlier security code. xxxxx 11 Fees and Royalty Sub-licence Fee 11.1 The Company shall set the Sub-licence Fees taking into account the Pricing Guidelines 11.2 The Company may amend such Sub-licence Fees from time to time in accordance with the Pricing Guidelines and shall promptly provide written notice of such amendment together with an updated list of Sublicence Fee to AVEVA. 11.3 AVEVA shall be entitled at its sole option at any time to adjust the Pricing Guidelines. Such adjustments shall take effect immediately. Royalty 11.4 Royalty shall be calculated on the remainder of all Sub-licence Fees less any relevant Third Party Royalties in accordance with the following provisions: 11.4.1 in relation to Initial Fees paid or payable by an End User during each Quarter, the Royalty shall be calculated in accordance with Schedule D on the remainder of such Initial Fees less any re....
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....ode of software products and was not permitted to modify the software products, including the documentation, that ASL was the sole owner of IPR of the patents copy rights trademarks modifications and updates, that assessee was not given any of these proprietary rights by ASL, the assessee would be purchasing the license for software products from ASL and would distribute it to end-customers, that the end-customers would pay sub licensing fee to the assessee. If we consider all these facts it becomes clear that the assessee was functioning as a distributor of ASL. There is no doubt that ASL is a tax resident of UK and as per the provisions of India-UK DTAA was eligible to be governed by the tax treaty to the extent it was more beneficial vis- avis the provisions of the Act. 5.1.The AO and the FAA had held the assessee was in receipt of royalty as the payments made by it to ASL for the distribution of software products would qualify as royalty in the hands of ASL, as per the Expl.2 to section 9(1)(vi) of the Act as well as the provisions of Article-13 of the India UK tax treaty. On the other hand, the assessee claimed that payment made by it could not be treated as ....
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....patents etc.) by the owner of such intellectual property by any other person. It is clear that the Act does not contain a definition of such intellectual properties that are included within the scope of term royalty. 5.1.3.We are aware that a retrospective amendment has been made to Explanation to section 9(1)(vi) of the Act by Finance Act, 2012. Earlier, the explanation read as under :- Royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains' for.... v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. The Finance Act 2012 inserted Explanation 4 to the Section 9(1)(vi) of the Act with retrospective effect from 1/06/1976. The same is reproduced below: Explanation 4. - For the removal of doubts, it is hereby....
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.... of CBDT states that where a DTAA provides for a particular mode of computation of income, the same should be followed irrespective of the provisions of the Act. In the case before us, the DTAA is providing particular mode of computation for royalty. As per the agreement the assessee did not have any right to generate the license key or make copies of license key or was provided access to source code in the software. The ASL software products were developed and marketed by it were in the nature of shrink-wrap-software-products that are also known as off the shelf software products. The assessee had no role in developing a software, it was just distributing the software to the end users. Therefore, we are of the opinion that payment by the assessee to ASL for procuring and distributing copyrighted software on principal to principal basis could not be treated as payment towards royalty. ASL was not having a PE in India, therefore, the assessee was not liable to deduct tax at source as per the provision of section 195 of the Act, hence, for its failure it cannot be treated as A-I-D u/s. 201.Reversing the order of the FAA we decide effective First effective Ground of appeal(Gs.OA-1to3)....