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2016 (8) TMI 47 - ITAT DELHI

2016 (8) TMI 47 - ITAT DELHI - TMI - TDS u/s 195 - Royalty Income chargeable to tax - payment for purchase of shrink wrapped readymade software from salesforce.com, Singapore - taxability in India - Held that:- The said payment does not fall with the purview of royalty as well as Article 12 of DTAA. - Respectfully following the ratio laid down in the case of DIT Vs Ericsson AB [2011 (12) TMI 91 - Delhi High Court] and Others and Infrasoft Ltd. [2013 (11) TMI 1382 - DELHI HIGH COURT ] by Hon' .....

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New Delhi for the Assessment Year 2012-13 on the following grounds of appeal: That under the facts and circumstances of the case the learned Income Officer has erred in holding the Assessee Company liable for deduction of Tax at source for Rs.I0,70,755/- and raised demand for ₹ 12,95,614/- (including interest ₹ 2,24,859) on payment of ₹ 53,53,776/- for purchase of shrink wrapped readymade software from salesforce.com, Singapore as Royalty Income chargeable to tax U/S 195 which .....

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others ( Delhi High Court) (c) Infrasoft Ltd. (ITA 1034/2009) (Delhi High Court) (d) Adit (International Taxation) Hyderabad Vs Batronics India Ltd. ITAT Hyderabad 'A' Bench ITA n 9181 Hyd. 2010 announced on 27.01.2014 (e) Larsen & Tourbo Ltd.- IT AT 'B' Bench Ahmedabad ITA No. 732 (Ahd.) 2013 announced on 13.05.2014 ii) That Treating the Income of the assessee as chargeable to tax in India U/S 195 of the Act is totally bad in law in view of the following judgment: G.E. Indi .....

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n law in view of the following judgments: (a) I.T.O. ward 11(1) Bangalore Vs Clear Water Technology Services (P) Ltd. ITA 0.1146 (Bang/2013) pronounced on 12.09.2014 (b) Sonata Information Technology Ltd. ITAT Mumbai Bench iv) That ignoring the Article 7 of read with Article 12 of Singapore Treaty is bad in law as the same clearly exempts the Income of the appellant company. As per law income tax is to be charged under Treaty or under the Act whichever beneficial to the assessee. As the software .....

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under: 2.1 The assessee is a private limited company and had made certain remittances amounting to ₹ 53,53,776/- on 09.01.2012 for purchase of software from Salesforce.com Singapore PTE Ltd. The payments were made to a single party for purchase of readymade software which was available in the market. Ld. Assessing Officer during the assessment proceedings observed that no tax was deducted at source on remittances. He held the payment to be royalty u/s 9(1)(vi) of the Act and raised a dema .....

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supplier of software does not have PE in India as defined in DTAA between India and Singapore (Treaty). He further observed that the assessee had purchased software called shrink-wrapped readymade software package used for carrying on business activities of the assessee. The assessee had submitted that it was standard software which was available in the open market for the customers in the world and it was not a package specifically designed for the assessee. Thus, the assessee had submitted th .....

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t for shrink-wrapped readymade software package with deduction of tax at source had been discussed in several cases, and it had been held that such payments do not come under the ambit of royalty and no tax is required to be deducted at source. 4.1 Ld. A.R. submitted that the assessee is covered by Article 5 & 7 of DTAA, whereby any income earned by a non-resident in India can be taxed in India only if the non-resident has a PE in India. He submitted that the assessee ma de an outright purch .....

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nce upon the decision of Hon'ble Jurisdictional High Court in the cases of DIT Vs Infrasoft Ltd. in I.T.A.No. 1034/2009 and DIT Vs Ericsson AB and others reported in 334 ITR 470 wherein the Hon ble Court has held that payment made for copyright article would not be liable to tax deduction at source. Ld. A.R. placed reliance upon the decision of Hon'ble Supreme Court in the case of G E Technologies Centre Pvt. Ltd. Vs CIT reported in 327 ITR 456 wherein the decision of Hon'ble Karnata .....

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shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. [See : Vijay Ship Breaking Corporation and Others Vs. CIT 314 ITR 309] 9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and 10 recovery. Chapter XVII-B deals with deduction at sour .....

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n sum chargeable under the provisions of the Act , which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who .....

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5, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from Section 195(1). While interpreting a Section one has to give weightage to every word .....

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e I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are chargeable to tax under the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income chargeable under the head salaries . Similarly, Sect .....

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on making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law .....

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tion where even when 14 the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the appropriate proportion of such sum so chargeable where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department s contention is based on administrative convenience in support of its interpretation. According to the Departm .....

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remittances he makes to the nonresidents by which the Department is able to keep track of the remittances being made to non-residents outside India. 15 We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression sum chargeable under the provisions of the Act. We need to give weightage to those words. Further, Section 195 uses the word payer and not the word assessee . The payer is not an assessee. The payer becomes an assessee-indefault only when he fails to .....

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aid sum as an expenditure . Under Section 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in 16 respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments ou .....

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1.4.2008 sub-Section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case of Transmission .....

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at payments required to be made by him to the non-resident included an element of income which was exigilble to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TAS was liable to be deducted 18 by the payer .....

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t if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the principle of proportionality . The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India. It is in this context that the Supreme Court stated, If no such applicati .....

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the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all chargeable to tax in India , then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear te .....

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ce.com Singapore PTE Ltd. and assessee are separate independent entities and there has been no evidence brought on record by the authorities below which could reveal that any one of these two entities are dependents on the other, either financially or in any other manner whatsoever. 5.1 It has been further submitted by Ld. A.R. that the Shrink Wrapped Readymade Software has been considered as goods or article vide a judgement of Hon'ble Supreme Court in the case of Tata Consultancy Services .....

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