2023 (3) TMI 478 - AT - Income Tax

TDS u/s 195 - reimbursement for software licenses liable to tax deduction as Royalty payments - Addition towards the 20% of TDS on the software license payment in the nature of royalty and also charged interest u/s 201(1A) - HELD THAT - When AO herself recorded that the parent entity has no role to play in the transaction of assessee s access to the software the agreement between the parent entity and Microsoft and Dell does not appear to be much relevant. Suffice to say that through the invoices produced by the assessee and as found by the learned Assessing Officer there is no component of income involved in this license transaction accruing to the parent entity. In view of the fact that the payments made by the assessee were essentially for making use of the shrink wrap computer software wherein the assessee has non-exclusive and non-transferrable license enabling use of the programme in the copyrighted product there is no transfer of any copyright in the product nor the assessee was granted any commercial right to exploit it other than for permissible usage. The matter is covered by the decision of the Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT respectfully following the same we hold that the impugned payments made by the assessee do not fall in the definition of royalty and consequently do not attract any addition on that score. Appeal of the assessee is allowed.

Summary

Issues:
1. Taxability of remittances towards software licenses as royalty payments.

Analysis:
The judgment involves the appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the taxability of remittances made for software licenses. The Assessing Officer treated the remittances as royalty payments, leading to a demand of Rs. 4,66,60,846. The CIT(A) found discrepancies in the documentation provided by the assessee and questioned the nature of the licenses obtained. The assessee argued that the parent company's role was merely to hold the license, and the payments were reimbursement in nature, following the decision of the Hon'ble Apex Court in a similar case.

The Tribunal analyzed the facts and found that the parent company acted as a pass-through entity, with no income component in the payments made by the assessee. The Assessing Officer's own findings indicated that the parent entity had no role in the transaction, and the nature of the software usage by the assessee did not involve any income accruing to the parent company. Referring to the decision of the Hon'ble Supreme Court in a related case, the Tribunal held that the payments made by the assessee did not qualify as royalty under the Income Tax Act.

The Tribunal concluded that the payments were essentially for using shrink-wrap computer software under a non-exclusive, non-transferable license, which did not involve the transfer of any copyright or commercial exploitation rights to the assessee. Citing the earlier decision, the Tribunal directed the Assessing Officer to delete the addition made on account of royalty payments. Consequently, the appeal of the assessee was allowed, and the order was pronounced in favor of the assessee on March 7, 2023.