The Tax PublishersITA No. 453 of 2019
2021 TaxPub(DT) 1807 (Karn-HC)INCOME TAX ACT, 1961
Section 195 Section 9(1)(vi) Section 263
Where distribution agreements/EULAs between resident Indian end-user and foreign software suppliers did not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright, as contained in definition of 'royalty', defined by article 12 of India's DTAA with USA; there was no obligation to withhold taxes under section 195 on amount so paid by resident to non-resident computer software manufacturers/suppliers as consideration for sale of software under distribution agreements. Therefore Tribunal was not justified in holding that CIT was right in invoking jurisdiction under section 263 where AO had failed to make proper and adequate enquiry in regard to the TDS obligation on payments made by the assessee to foreign company.
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Tax deduction at source - Under section 195 - Whether amounts paid to non-resident computer software manufacturers/suppliers as consideration for sale of computer software amount to royalty -
Assessee-company was engaged in business of import and sale of computer software rendering technical support services and software development services. It made payments to its non-resident holding company (USA) for purchase of software licence. According to CIT, the said payments were in nature of royalty and therefore in terms of section 195, the assessee ought to have deducted tax at source on such payments and since the assessee failed to do so, the said amounts, which were claimed as expenditure ought to have been disallowed under section 40(a)(ia). However, as the AO failed to do so and did not make enquiries in that regard, hence, the order of the AO was erroneous and prejudicial to the interest of Revenue. On appeal, Tribunal held that jurisdiction under section 263 was rightly invoked by the CIT as the AO had failed to make proper and adequate enquiry in regard to the TDS obligation on payments made by the assessee to foreign company. Held: In view of decision of Supreme Court in case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. Civil Appeal Nos. 8733-8734/2018, dated 2-3-2021 : (2021) SCC Online SC 159 : 2021 TaxPub(DT) 1208 (SC), when under a non-exclusive licence, an end-user gets the right to use computer software, the end-user only receives a right to use the software and nothing more. The end-user does not get any of the rights that the owner continues to retain under section 14(b) of the Copyright Act, 1957 read with sub-section (a)(i)-(vii) thereof. Thus, since distribution agreements/EULAs (End-User Licence Agreements) between resident Indian end-user and foreign software suppliers did not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright, as contained in definition of 'royalty', defined by article 12 of India's DTAA with USA; there was no obligation to withhold taxes under section 195 on amount so paid by resident to non-resident computer software manufacturers/suppliers as consideration for sale of software under distribution agreements. Accordingly, the order of the Tribunal was quashed.
Followed:Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. (Civil Appeal Nos. 8733-8734/2018, dated 2-3-2021 : (2021) SCC Online SC 159 : 2021 TaxPub(DT) 1208 (SC)
REFERRED :
FAVOUR : In assessee's favour
A.Y. :
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