Ing Vysya Bank Ltd. v. Deputy Director of IT (International Taxation)

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The Tax Publishers2012 TaxPub(DT) 0281 (Bang-Trib) : (2012) 043 (II) ITCL 0500 : (2012) 143 TTJ 0249 : (2011) 061 DTR 0401 : (2012) 016 ITR (Trib) 0296 INCOME TAX ACT, 1961 --Tax deduction at source--Assessee-in-defaultAssessee not having deducted TDS on the ground that payment to non-resident does not constitute royalty--A group company of assessee, based in Switzerland, obtained licence from 'ODB' for using ODB's software and assessee-company purchased this licence to use such software from its group company against a one time lump sum consideration. Assessee did not deduct tax on such payments under section 195 on the ground that payments were made for purchase of software and the same were not liable to tax in India as per treaty between India and Switzerland and Indian Income Tax Act, 1961. Assessing officer treated the assessee as 'assessee-in-default' under section 201(1) on the ground that payment for obtaining licence of ODB software was royalty and, therefore, assessee was required to deduct TDS under section 195. Held: The remittance were in the nature of 'royalty' both under the Indian Income Tax Act as well as the DTAA between India and Switzerland. In such case, the assessee was required to deduct tax at source before making the remittances. As the assessee had failed to do so, the assessee had to be treated as an assessee-in-default under section 201(1) of the Act. Clause (i) of Explanation 2 refers to 'royalty' as the consideration for the transfer of any right including 'the granting of license' in respect of a patent, invention, model, design, secret formula or process or trademark or similar property and clause (v) refers to the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including......'. Thus, the license to use the software developed by Oracle also falls under this category of property. Further, the payment of royalty can be periodical or a lump sum consideration. Thus, it is clear that under the Indian Income Tax Act, the one time payment made by the assessee for obtaining license of 'Oracle Database Software' is royalty and is taxable in India. [Para 6] From a plain reading of the article 12(3) of DTAA it is clear that any payment made for the use of or right to use of the properties mentioned therein would be royalty. Both the definitions are similar and encompass the payment for 'the use of and the right to use of any intellectual property mentioned therein such as copyright of a literary, artistic or scientific work or any patent, trademark, design or model, plan, etc. Thus, the license granted by Oracle Database for use of its software to the assessee-company constitutes royalty. [Para 7.1] Therefore, the remittances were in the nature of 'royalty' both under the India Income Tax Act as well as the DTAA between India and Switzerland. In such case, the assessee was required to deduct tax at source before making the remittances. As the assessee has failed to do so, the assessee had to be treated as an assessee in default under section 201(1). [Para 7.1] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0281 (Bang-Trib) : (2012) 043 (II) ITCL 0500 : (2012) 143 TTJ 0249 : (2011) 061 DTR 0401 : (2012) 016 ITR (Trib) 0296

INCOME TAX ACT, 1961

--Tax deduction at source--Assessee-in-defaultAssessee not having deducted TDS on the ground that payment to non-resident does not constitute royalty--A group company of assessee, based in Switzerland, obtained licence from 'ODB' for using ODB's software and assessee-company purchased this licence to use such software from its group company against a one time lump sum consideration. Assessee did not deduct tax on such payments under section 195 on the ground that payments were made for purchase of software and the same were not liable to tax in India as per treaty between India and Switzerland and Indian Income Tax Act, 1961. Assessing officer treated the assessee as 'assessee-in-default' under section 201(1) on the ground that payment for obtaining licence of ODB software was royalty and, therefore, assessee was required to deduct TDS under section 195. Held: The remittance were in the nature of 'royalty' both under the Indian Income Tax Act as well as the DTAA between India and Switzerland. In such case, the assessee was required to deduct tax at source before making the remittances. As the assessee had failed to do so, the assessee had to be treated as an assessee-in-default under section 201(1) of the Act.

Clause (i) of Explanation 2 refers to 'royalty' as the consideration for the transfer of any right including 'the granting of license' in respect of a patent, invention, model, design, secret formula or process or trademark or similar property and clause (v) refers to the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including......'. Thus, the license to use the software developed by Oracle also falls under this category of property. Further, the payment of royalty can be periodical or a lump sum consideration. Thus, it is clear that under the Indian Income Tax Act, the one time payment made by the assessee for obtaining license of 'Oracle Database Software' is royalty and is taxable in India. [Para 6] From a plain reading of the article 12(3) of DTAA it is clear that any payment made for the use of or right to use of the properties mentioned therein would be royalty. Both the definitions are similar and encompass the payment for 'the use of and the right to use of any intellectual property mentioned therein such as copyright of a literary, artistic or scientific work or any patent, trademark, design or model, plan, etc. Thus, the license granted by Oracle Database for use of its software to the assessee-company constitutes royalty. [Para 7.1] Therefore, the remittances were in the nature of 'royalty' both under the India Income Tax Act as well as the DTAA between India and Switzerland. In such case, the assessee was required to deduct tax at source before making the remittances. As the assessee has failed to do so, the assessee had to be treated as an assessee in default under section 201(1). [Para 7.1]