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2019 (12) TMI 1642 - AT - Income TaxWithholding liability u/s 195 - Royalty payment as under India-Singapore DTAA - copyrighted material - CIT(A) held that the payment for software licence is royalty is the access to significant proprietary database being allowed to the assessed by the software in question - HELD THAT - We find that assessee to database in the context of materially similar DTAA provision has been held to be outside the ambit of royalty . While holding so the coordinate bench in the case of ITO vs Cadila Healthcare Ltd. 2017 (1) TMI 554 - ITAT AHMEDABAD as held that Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments. When database access by itself does not result in taxation as royalty such database access being coupled with software licence cannot bring the software hence consideration within the scope of royalty. Nothing therefore turns on the reasoning adopted by the learned CIT(A). As per the taxation of payment for licencing of software we find that the issue is covered in favour of the assessee by a coordinate bench decision in the case of ADIT vs TII Team Telecom International Ltd. 2011 (8) TMI 497 - ITAT MUMBAI Payment for licence fee of software is not taxable in nature. No contrary decision which is binding in nature has been cited before us. We uphold the plea of the assessee and hold that no tax was deductible from remittance in question. Decided in favour of assessee.
Issues Involved:
1. Whether the consideration paid by the appellant to Exida Asia Pacific Pte. Limited represents Royalty as per the Income-tax Act, 1961 and the India-Singapore Double Taxation Avoidance Agreement (DTAA). 2. Whether the appellant is liable to withhold tax under section 195 of the Income Tax Act at the rate specified in the DTAA or the Act, whichever is beneficial. Detailed Analysis: Issue 1: Royalty Classification under Income-tax Act and DTAA The primary issue revolves around whether the payment for software license fees to Exida Asia Pacific Pte. Ltd. constitutes a "Royalty" under the Income-tax Act, 1961, and the India-Singapore DTAA. The appellant argued that the software is an off-the-shelf product, and the payment should not be treated as royalty. The CIT(A) held that the payment is for the use of proprietary databases and scientific tools, thus qualifying as royalty under Article 12(3) of the DTAA, which defines royalties as payments for the use of any copyright of a literary, artistic, or scientific work, among others. Issue 2: Tax Withholding under Section 195 The second issue concerns whether the appellant is required to withhold tax under section 195 of the Income Tax Act at the rate specified in the DTAA or the Act, whichever is more beneficial. The appellant deducted tax at source at 10%, but argued that no tax should be deductible from the license fee paid for the software. The CIT(A) rejected this contention, asserting that the payment for the software license is taxable as royalty. Judgment Analysis: The tribunal examined the nature of the software license and the access it provided. It was noted that the software in question, "exSILentia Version 3 Ultimate bundle," includes access to significant proprietary databases, which changes its character from a mere standalone software product to one involving the use of proprietary information. Findings: 1. Nature of Software License: The tribunal found that the software license included access to proprietary databases and scientific tools, which means the payment is not just for the software but also for the use of these databases. This aligns with the definition of royalty in the India-Singapore DTAA. 2. Precedents Considered: The tribunal referred to the case of ITO vs Cadila Healthcare Ltd., where it was held that access to a database does not constitute royalty. Similarly, in the case of ADIT vs TII Team Telecom International Ltd., it was established that payments for software licenses do not qualify as royalty if they do not involve the use of a copyright. 3. Distinction between Copyright and Copyrighted Article: The tribunal emphasized the distinction between the use of copyrighted material and the use of copyright itself. Payments for the use of copyrighted material do not qualify as royalty under the DTAA. 4. Taxability under DTAA: The tribunal concluded that the payment for the software license does not fall under the definition of royalty as per the DTAA, as it is for the use of copyrighted material, not the copyright itself. Conclusion: The tribunal upheld the appellant's plea, determining that no tax was deductible from the remittance in question. The appeal was allowed, and it was pronounced that the payment for the software license is not taxable as royalty. This decision is consistent with previous judgments that distinguish between the use of copyrighted articles and the use of copyright itself. Final Order: The appeal is allowed, and it was pronounced in the open court on the 10th of December, 2019.
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