2020 (1) TMI 1641 - AT - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(i) - payment of Software Maintenance charges - payment of Software charges made by the assessee for the year was excessive - assessee reported certain international transactions in Form No. 3CEB which included Payment of Software Maintenance charges to CMA CGM France - HELD THAT - CMA CGM France received the amount from the assessee in order to facilitate its shipping business. As such the amount will rightly qualify as profit derived from shipping business in the international traffic. Interest arising on funds connected with the operation of ships shall be regarded as profits derived from the operation of such ships and such interest will be dealt with as per Article 9 and not Article 12 (which specifically deals with Interest income). Thus it is ostensible that an item of income which is not only directly connected with the shipping business but also indirectly connected with the shipping business such as interest on funds connected with the operation of ships has also been understood as profits derived from shipping business under the DTAA. When we examine the nature of income of CMA CGM France under consideration it becomes unequivocal that the same being directly concerned with the operation of ships cannot be considered as anything other than profits derived from operation of ships and hence covered under Article 9 of the DTAA. As such it would not magnetize any taxation in the hands of CMA CGM France. Ex-consequenti there will be no obligation on the part of the assessee to deduct tax at source and the fortiori is that there will not be any disallowance u/s.40(a)(i) of the Act. Assessee was allowed the use of the software for its own business purpose and there was no permission to sub-licence the same. There is a specific bar on the assessee in not sub-licensing the software which were to be used for its sole business needs. In other words the consideration was for the use of software for its own business purpose and not for the use of or the right to use any copyright of software. As the consideration payable by the assessee for use of LARA DIVA and Ocean was only for the use of the software for its own business purpose and not having right to copyright the same will not constitute Royalties within Article 13(3) of the DTAA. Thus held that payment for use of software made by the assessee to CMA CGM France does not satisfy the requirement of use of or the right to use any copyright of software . Once it is held that para 3 of Article 12 is not attracted as a sequitur the application of clause (a) of para 4 of Article 12 of the DTAA with Portuguese would automatically be ousted thereby making the amount paid by the assessee to CMA CGM France for use of LARA DIVA and Ocean software as immune from taxation in India. Going by the beneficial provision in the DTAA vis- -vis the Act it is held that there was no requirement on the part of the assessee to deduct tax at source which should have called for any disallowance u/s. 40(a)(i) of the Act. We therefore order to delete the addition. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income-Tax Act, 1961 for non-deduction of tax at source on software maintenance charges.
2. Nature of the payment made by the assessee to CMA CGM, France.
3. Applicability of the India-France Double Taxation Avoidance Agreement (DTAA) and the concept of "Most Favoured Nation" (MFN) clause.
4. Classification of payments as "royalty" or "fees for technical services" under the Income-Tax Act and the DTAA.

Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income-Tax Act, 1961:
The primary issue was the disallowance under Section 40(a)(i) for non-deduction of tax at source on software maintenance charges amounting to Rs. 6,85,69,596/-. The Assessing Officer (AO) observed that the payment was excessive compared to the previous year and questioned the non-deduction of tax at source. The AO held that the payment was for IT support services and classified it as "royalty" under Section 9(1)(vi) and "fees for technical services" under Section 9(1)(vii) of the Act. The CIT(A) upheld the AO's decision, leading to the disallowance.

2. Nature of the Payment:
The payment was made for software maintenance charges to CMA CGM, France, under agreements for using LARA, DIVA, and Ocean IT systems. The Tribunal examined the nature of these services, which were aimed at facilitating the shipping business operations of CMA CGM and its affiliates, including the assessee. The agreements were primarily cost allocation arrangements without any profit element, implying that the payments were reimbursements of costs and not income in the hands of CMA CGM, France.

3. Applicability of the India-France DTAA and MFN Clause:
The Tribunal noted that under the India-France DTAA, profits derived from the operation of ships in international traffic are taxable only in France. The payment for software maintenance was linked to the shipping business, thereby qualifying as profits from the operation of ships. Article 9 of the DTAA supported this view, and the MFN clause in the DTAA with France allowed for the application of more restricted definitions from other DTAAs, such as the India-Portugal DTAA. The Tribunal concluded that the payment did not constitute "royalty" or "fees for technical services" under the DTAA.

4. Classification as "Royalty" or "Fees for Technical Services":
The authorities below classified the payment as "royalty" and "fees for technical services." However, the Tribunal found that the payment was for the use of software for business purposes without any right to sublicense or decompile, thereby not qualifying as "royalty" under the DTAA. The maintenance charges were considered "fees for technical services" under Section 9(1)(vii) of the Act but did not meet the criteria under the DTAA due to the MFN clause and the specific definitions in the India-Portugal DTAA.

Conclusion:
The Tribunal held that the payment for software maintenance charges was not chargeable to tax in India under the DTAA with France. Consequently, there was no obligation on the assessee to deduct tax at source, and the disallowance under Section 40(a)(i) was not warranted. The appeal was allowed, and the addition was deleted.

Other Grounds:
The Tribunal directed the AO to verify and grant the correct amount of TDS credit and allowed the grounds regarding the levy of interest under Sections 234B and 234C as consequential.

Order Pronouncement:
The appeal was allowed, and the order was pronounced in the Open Court on 02nd January, 2020.