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TMI Blog2015 (5) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... nd marketing of software licenses to the customers especially to software companies in India. The assessee considered the licensed software as Shrink Wrapped software and treating the software like any other goods, was of the view that, since the assessee did not have a Permanent Establishment ('P.E') in India, income arising on account of sale of such software is not exigible to tax in India. According to the A.O., the consideration received by the assessee on sale of shrink wrapped software in India was not akin to sale of goods, but was only a right to use computer software and the consideration received by giving such a right to use, partakes the character of 'royalty' within the meaning of section 9(1)(v)(a) of the Act as well as Article 12 of the DTAA between India and Ireland. In this view of the matter, the A.O. completed the draft assessment order u/s.143(3) r.w.s. 144C of the Act vide order dt.24.12.2010 bringing to tax the total value of software supplied amounting to Rs. 16,91,33,482, holding it to be chargeable to tax as income from royalty 2.2 Aggrieved with the draft order of assessment dt.24.12.2010 for A.Y. 2007-08, the assessee filed objections thereto before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Tribunal. 3.6 The A.O. and the DRP have erred in holding that since software is classified as 'goods' under the Karnataka Sales Tax Act, 1957, payments received form the sale of software could not be construed as 'royalty'. 4. Erroneous levy of interest under section 234B of the Act. The A.O. and the DRP have erred in levying interest under section 234B of the Act. 5. Initiation of penalty. The A.O. has erred in initiating penalty proceedings under Section 271(1)(c) of the Act. 6. Relief The appellant prays that the JDIT be directed to grant all such relief arising form the preceding grounds as also all relief consequential thereto." 4. The grounds raised at S.Nos.1, 2, and 6, being general in nature, and not being urged before us, are dismissed as infructuous. 5. Treatment of receipts from Indian customers as Royalty. 5.1 The Ground No.3 (3.1 to 3.6) raised by the assessee is with regard to the issue, as to whether the payments received by the assessee on sale and marketing of software license to the customers is 'royalty' within the meaning of section 9(1)(v) of the Act as well as Article 12 of the DTAA between India and Ireland. The assessee, a non-resident inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics co. Ltd. & others 245 CTR (Kar) 481 has held that Payment to non-resident foreign software suppliers for purchase of shrink wrapped software was in the nature of royalty. The Hon'ble Court held that what is granted under the licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences while the copyright continues to be with the non-resident as per the agreement. That even as per the agreements entered into with other distributors as also the end-user licence agreement, except as expressly set forth in the agreement, the distributor cannot rent, lease, loan, sell or otherwise distribute the software, documentation or any derivative works based upon the software or documentation in whole or in part. Thus, licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreements which authorizes the end-user i.e., customer to make use of the copyright in the said software. Hence, the contention of the assessee that there is no transfer of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the amount paid to foreign software suppliers. Consequently, the ground raised at S.No.3 (3.1 to 3.7) is dismissed. 6. Charging of interest under section 234B of the Act. 6.1 The ground raised at S.No.4 relates to the charging of interest u/s.234B of the Act. It is the assessee's submission that it is a non-resident under section 195 of the Act, there is an obligation placed upon the payer; i.e. any person responsible for making payment to a nonresident has to deduct tax at source at the rates in force from such payments. It is contended by the assessee that interest under section 234B of the Act can be charged only if there is any default in making payment of advance tax. The method of determining the advance tax payable is laid down in section 209 of the Act. Under section 209(1)(d) of the Act, income tax has to be calculated after reducing the amount of income tax which would be deductible or collectible at source. Since under section 195 of the Act, on payment to the assessee tax is deductible at source by the payer, income tax so deductible will have to be reduced while computing advance tax payable under section 209 of the Act. If so reduced, there would be no liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant case, the provisions of s. 234B would not be attracted at all. The scheme of the Act in respect of non-residents is clear. Sec. 195 puts an obligation on the payer, i.e. any person responsible for paying to a non-resident, to deduct income-tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head 'Salaries'. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payer to the non-resident. Sec. 201 lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remediless and therefore can take action against the payer under the provisions of s. 201 and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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