2006 (1) TMI 464 - AT - Income Tax

TDS u/s 195 - Applicability of section 9 of the Act - TDS liability arise on payments for purchase of software to non-residents ? - Taxability of sale of software as Royalty - consideration received on sale of computer software programme i.e. C D ROM as business income OR Royalty Income - HELD THAT - In the instant case the appellant has acquired the software for business use. The rights acquired in the software are limited to the extent to enable the appellant to operate the programme. The appellant has not acquired any copyright of the software but has only acquired a copyrighted programme. The appellant relied on the judgment of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh 2004 (11) TMI 11 - SUPREME COURT in which the Apex Court held that canned software are goods and liable to sales tax. The worthy Supreme Court further observed that intellectual property has been incorporated in the media for transfer and both cannot be split up. The facts in the instant case are similar to the facts of Samsung Electronics (P.) Ltd. s case 2005 (2) TMI 438 - ITAT BANGALORE-A ruled that a readymade off the shelf computer programme does not grant any right to utilise the copyright of the computer programme and accordingly the payments for its import would not constitute royalty income in India and no tax needs to be deducted u/s 195 of the Act. The Special Bench also held that software supplied is goods. Though an information technology product is normally regarded as an intangible asset once technology is put on a media then it becomes goods liable to custom duty. Finally the Special Bench held that the payments for hardware and software were lump-sum payments and no separate consideration should be attributed towards software as royalty . Thus it is held that payments made for import of software is not royalty and tax was not required to be deducted at source. Hence the demand raised u/s 201 for non-deduction of tax at source is cancelled. In the result the appeals are allowed.

Summary

Issues:
Assessment of tax liability on payments for purchase of software made to non-residents without deduction of tax at source.

Analysis:
The appellant, an assessee-company engaged in software development, appealed against the order of the Commissioner of Income-tax (Appeals) regarding tax liability for assessment years 2000-01 to 2002-03. The central issue revolved around whether the payments made for software purchase to non-residents constituted royalty income, necessitating tax deduction at source under section 195 of the Income Tax Act. The Assessing Officer contended that the consideration for software use qualified as royalty under the Copyright Act, emphasizing the transfer of intellectual property rights. The Commissioner of Income-tax (Appeals) concurred, stating that the licensing of software involved the use of copyright, intellectual property rights, and know-how, thus constituting royalty income. The appellant argued against tax liability, citing legal precedents and OECD commentary on software payments to support their position that the software purchase did not grant copyright usage rights, aligning with judgments in similar cases.

The appellant's submissions highlighted that the nature of rights acquired in software transactions determined the tax treatment, emphasizing that the software purchase was for business use without acquiring copyright. Reference to legal judgments and OECD commentary supported the contention that the software acquisition did not confer copyright usage rights, aligning with precedents where off-the-shelf software purchases were not considered royalty income. The appellant also underscored that the source of income was the customers located outside India, thus challenging the tax liability for software imports.

In adjudicating the matter, the Tribunal referenced previous decisions involving software imports to determine the tax implications. Citing precedents in cases like Samsung Electronics Co. Ltd. and Lucent Technologies Hindustan Ltd., the Tribunal held that off-the-shelf software purchases did not grant copyright utilization rights, thus not constituting royalty income subject to tax deduction at source. The Tribunal emphasized that the appellant acquired only copies of copyrighted software, with the copyright remaining with foreign suppliers. Consistency in approach led to the conclusion that payments for software imports were not royalty, warranting the cancellation of the tax demand under section 201.

In conclusion, the Tribunal ruled in favor of the appellant, allowing the appeals and canceling the demand for tax deduction at source on payments made for software imports to non-residents. The decision aligned with precedents establishing that off-the-shelf software purchases did not constitute royalty income, ensuring a consistent approach to tax liability in similar cases.