TDS not deductible on Software Purchased with mere ‘right to use’ 

the payment made for the use of copyrighted article was not royalty. The definition of ‘royalty’ under DTAA had not been amended though there is retrospective amendment to section 9(1)(vi) of the Act but since the provisions which are more beneficial to the assessee are to be applied, then as per un-amended provisions of royalty under DTAA, the assessee having purchased copyrighted article and not having purchased copyright in the article cannot be said in default for non deduction of tax at source out of such payments made to different entities in different countries. The assessee had only purchased internally developed software by the Sweden entity and it had not passed the copyright and only ‘right to use’ had been given to the assessee and as such ‘right to use’ is akin to purchase of copyrighted article and in the absence of purchase of any copyright in the article, the assessee cannot be held liable to deduct tax at source out of such payments. Hence, the assessee has not defaulted in not deducting the tax at source. Accordingly, we hold so in respect of payments made for purchase of software and also in respect of IT support service charges.

FULL TEXT OF THE ITAT JUDGEMENT

This bunch of cross appeals filed by Revenue and assessee are against consolidated order of CIT(A)-IT/TP, Pune, dated 28.07.2014 relating to assessment years 2009-10 to 2011-12 against respective orders passed under section 201(1) and 201(1A) of the Income-tax Act, 1961 (in short ‘the Act’).

2. The cross appeals filed by Revenue and assessee against assessment years 2009-10 to 2011-12 were heard together and are being disposed of by this consolidated order for the sake of convenience.

3. In all these appeals, the issue which arises is against order passed under section 201(1) and 201(1A) of the Act i.e. demand raised and interest charged on failure of assessee to deduct tax at source on different items. So, first we take up the appeal for assessment year 2009-10.

4. The Revenue in ITA No.1857/PUN/2014, relating to assessment year 2009-10 has raised the following grounds of appeal:-

1. On the facts and circumstances of this case, the Ld. CIT(A) was not correct in deleting the additions made on account of payment for design services and technical consultancy charges since the assessee company could not prove whether the recipient was the beneficial owner of the royalties or fees for technical services as per Article 12 of the DTAA with Singapore and Switzerland.

2. The CIT(A) erred in not considering the fact that the payment for design services and technical consultancy charges was rightly treated by the AO as FTS under the Act as well as relevant DTAA.

3. The CIT(A) erred in law by concluding that, if the payment, made for design services and technical consultancy charges, is treated as FTS, the same will not satisfy the “make available” clause without discussing the facts as mentioned by the AO in his order.

4. The CIT(A) erred in law in concluding that sec 206AA is not applicable in case of non-residents as the DTAA overrides the Act as per section 90(2).

5. The decision of the CIT(A) is not according to the law and erred in ignoring the memorandum explaining the provisions of the Finance (No. 2) Bill, 2009 which clearly states that the sec 206AA applies to non­residents and also Press Release of CBDT No.402/92/2006-MC (04 of 2010) dated 20.01.2010 which reiterates that sec. 206AA will also apply to all non-residents in respect of payments/remittances liable to TDS.

6. The CIT(A) is erred in ignoring the decision of the ITAT Bangalore in the case of Bosch Ltd. vs ITO, ITA No.552 to 558 (Bang.) of 2011 dated 11.10.2012, in which it was held that if the recipient has not furnished the PAN to the deductor, the deductor is liable to withhold tax at the higher rates prescribed u/s.206AA.

7. On the facts and circumstances of the case the Ld CIT(A) was not correct in deleting the additions made on account of grossing up u/s 195A of the IT Act, 1961 on account of amounts paid to foreign companies under the head of Royalties/FTS within the meaning of section 9(1)(vi)/9(1)(vii) of the Act as well as Article 12 of the DTAA between India and Switzerland / Singapore as such.

8. On the facts and circumstances of this case, the Ld. CIT(A) was not correct in holding that since the assessee did not produce any agreement regarding to grossing up / non grossing up of the amounts liable for deduction u/s 195 the AO was wrong in grossing up the amounts paid.

9. The Ld CIT(A) erred in not considering the fact that the assessee had not deducted TDS u/s 195 from the payment of Royalty/Fees for technical services which clearly shows that the entire payment was made to the AE and no recovery on account of TDS liability u/s 195 has been made by the assessee from the AE and hence it transpires that the TDS liability is borne by the assessee.

5. The assessee in ITA No.1864/PUN/2014, relating to assessment year 2009-10 has raised the following grounds of appeal:-

The following Grounds are taken without prejudice to each other. On the facts and in law,

1.1 The learned CIT(A) – IT / TP erred in holding that the assessee company should have deducted TDS on the payments made to Tetra Pak Global Information Management, Singapore of Rs.20,29,919/- on account of software license fees and IT support services on the ground that the same was taxable under the Income Tax Act as well as under the DTAA as Royalty.

1.2 The learned CIT(A) erred in not appreciating that the amount of Rs.20,29,919/- was not covered under Royalties and / or fees for technical services of the DTAA between India and Singapore and that the Appellant Company was not required to withhold tax u/s. 195 on above amounts.

1.3 The learned CIT(A) ought to have appreciated that the payments made to Tetra Pak Global Information Management, Singapore was on account of reimbursement of software license fees and IT support services and since there was no income earned by the said entity, no TDS was required to be deducted on such reimbursement of expenditure.

2.1 The learned CIT(A) erred in holding that the assessee company should have deducted TDS on training charges paid of Rs.1,12,05,118/- to various entities without appreciating that the said amount was not taxable in India and accordingly, the assessee was not required to deduct any TDS on the said payments.

2.2 The learned CIT(A) – IT / TP erred in not appreciating that the payment of Rs.1,12,05,118/- for training was not covered under clause “fees for technical services” of the DTAA between India and the respective countries of which the payees were resident and hence the Appellant Company was not required to withhold tax u/s.195 on above amounts;

2.3 The learned CIT(A) – IT / TP erred in not appreciating that in most of the remittances no Technical Knowledge, plan or design is given and hence the amount remitted is not covered under Article “fees for technical services” / “fees for included services” under the respective DTAA’s.

2.4 The learned CIT(A) – IT / TP erred in not appreciating that the remittances towards training were in the nature of reimbursement or alternately charged under cost allocation agreement and that no tax was deductible at source thereon.

2.5  Without prejudice to above, the learned CIT(A) – IT / TP erred in not appreciating that the remittance of Rs.1,12,05,118/- included various reimbursements of air fare, hotel and other actual expenses which were grouped under this head and that the said reimbursements had to be excluded for the purpose of working of the tax deductible at source.

3. The learned CIT(A) – IT / TP erred in not appreciating that the payment of Rs.2,16,944/- for design expenses was not covered under Royalties and / or Fees of Technical Services of the DTAA between India and the respective countries of which the payees were resident and hence the Appellant Company was not required to withhold tax u/s.195 on above amounts;

4. The learned CIT(A) – IT / TP erred in holding that the assessee company should have deducted TDS on the repairs and maintenance payments of Rs.6,49,343/- without appreciating that the said payments were not covered under “Fees for Technical services” of the DTAA between India and the respective countries of which the payees were resident and / or u/s 9(1)(vii) of the Income Tax Act, 1961 and hence the Appellant Company was not required to withhold tax u/s. 195 on above amounts.

6. The learned Authorized Representative for the assessee at the outset pointed out that majority of the issues raised in the present appeals stands covered by the order of Tribunal in the case of John Deere India Pvt. Ltd. (2019) 70 ITR (Trib) 73 (Pune). Referring to grounds of appeal No.1.1 to 1.3 raised in assessment year 2009-10, the learned Authorized Representative for the assessee pointed out that the issue raised was against non deduction of tax on payment for software licenses and IT support services. The assessee had made the aforesaid payments for the acquisition of software licenses, wherein the assessee had acquired copyrighted article and hence, such payments were not taxable as royalty in India, as per DTAA between India and Singapore. He further stated that the CIT(A) in turn, had relied on the decision of Pune Bench of Tribunal in the case of Cummins Inc for assessment years 2004-05 and 2006-07 in ITA Nos.73 & 74/PN/2011, order dated 08.08.2013. The learned Authorized Representative for the assessee submitted that the said issue is squarely covered by the decision in the case of John Deere India Ltd. reported in 70 ITR (Trib) 73 (Pune) and there was no requirement to deduct tax out of such payments and hence, the assessee had not defaulted.

7. Coming to the next issue i.e. grounds of appeal No.2.1 to 2.5, the learned Authorized Representative for the assessee pointed out that the dispute was relating to deduction of tax at source out of training charges paid. The total training charges were ₹ 1.19 crores, out of which the assessee had deducted TDS of ₹ 7,72,418/-, against which the CIT(A) had granted relief and the balance amount was ₹ 1.12 crores. The learned Authorized Representative for the assessee pointing out to the order of CIT(A) at page 32 and then at page 38, stated, that the CIT(A) had referred to India’s DTAA with Malaysia, Thailand, Indonesia, UAE and Saudi Arabia and pointed out that there was no Article on FTS and had observed that in such circumstances, taxability under the DTAA would be as per provisions of the Income Tax Act. In this regard, reliance was placed on the decision of Hon’ble High Court of Calcutta in the case of CIT Vs. Davya Ashmore India Ltd. (1991) 190 ITR 626 (Cal) and Chennai Bench of Tribunal in DCIT Vs. TVS Electronics Ltd. (2012) 52 SOT 287 (Chennai-Trib.). The learned Authorized Representative for the assessee stated that the said decision of Chennai Bench of Tribunal has been reversed by the Hon’ble High Court of Madras. The learned Authorized Representative for the assessee referred to the provisions of section 9(1)(vii) of the Act pointed out that it refers to managerial services and once it is not covered by DTAA, then it would become business income in the hands of assessee. He further pointed out that since all these concerns had no Permanent Establishment (PE), then there no business income arises in India and reliance was placed on Article 7 to the DTAA. The learned Authorized Representative for the assessee pointed out that the issue stands covered in favour of assessee by Pune Bench of Tribunal in the case of Bramhacorp Hotels & Resorts Ltd. Vs. DDIT-(IT) (2015) 61 taxmann.com 186 (Pune-Trib.), Ahmedabad Bench of Tribunal in the case of DCIT-(IT) Vs. Welspun Corporation Ltd. (2017) 77 taxmann.com 165 (Ahmedabad-Trib.) and stressed that in the absence of any PE, there was no question of any taxability under Article 7 of DTAA. The second plea which was connected was that in case there was no Article on FTS, then whether the receipts could be taxed under Article 22 of DTAA, which was the proposition raised by Assessing Officer and CIT(A). In this regard, he again referred to the decision of Ahmedabad Bench of Tribunal in the case of DCIT-(IT) Vs. Welspun Corporation Ltd. (supra) and pointed out that in the said decision, it was also held that Article 22 of DTAA would not apply. He also pointed out that CIT(A) had relied on the decision of Hon’ble High Court of Calcutta and this issue was not there before the Hon’ble High Court.

8. Coming to para 2.5.19 at page 39 of appellate order, wherein the CIT(A) refers to the payments made to companies located in Italy, China, Denmark and Germany and in the DTAAs with these countries, there is an Article providing taxability of FTS without ‘make available’ condition. The CIT(A) thus, observed that the provision taxing FTS under the Income Tax Act and under DTAA with these countries were same and hence, the payments made to companies located in the said countries would be taxable under the DTAA with respective countries. In this regard, the learned Authorized Representative for the assessee relied on its submissions made before the CIT(A).

9. Coming to the list of countries which are referred in para 2.5.20 at page 39 of appellate order by the CIT(A) i.e. India’s DTAA with Singapore, USA, Switzerland and Sweden, wherein the case of CIT(A) was that the same was governed by make available condition. The learned Authorized Representative for the assessee here stressed that the question which arises is whether in providing training, the clause of ‘make available’ was satisfied. He stressed that in the absence of any technology being transferred and where it was case of general training or attending seminar, then the ‘make available’ condition as provided in DTAA does not get satisfied and there is no question of holding the aforesaid payments as liable for tax deduction at source. The learned Authorized Representative for the assessee placed reliance on the decision of Ahmedabad Bench of Tribunal in ITO Vs. Veeda Clinical Research (P.) Ltd. (2013) 35 taxmann. com 577 (Ahmedabad Trib.). He stressed that transfer of technology perse was necessary in order to attract the aforesaid provisions.

10. Vide ground of appeal No.3, the issue raised was with regard to receipts under the head ‘Designing Charges’ of ₹ 2,16,944/- which were held to be ‘Fees for Technical Services’. The learned Authorized Representative for the assessee pointed out that the aforesaid payments were made to entities in Indonesia with which country, India had DTAA but there was no FTS clause. Hence, in the absence of any FTS clause, there was no merit in the orders of authorities below in holding the assessee liable to deduct tax at source.

11. Coming to the last ground of appeal No.4 i.e. with regard to testing, technical consultation charges paid by assessee, it was pointed out that the aforesaid payments were made to Tetra Pak (Philippines) Inc, with which India had DTAA but it had no FTS clause and hence, was category 1 country as argued earlier. In respect of second payment i.e. to an entity in China, it was pointed out that it was a country with which it had DTAA in which FTS clause was there, but without make available condition and hence, was category 2 country as argued earlier.

12. The learned Departmental Representative for the Revenue pointed out that the assessee had failed to submit any details before the Assessing Officer as evident from paras 46 and 50 of assessment order and all these details were filed before the CIT(A). He placed reliance on the order of Assessing Officer / CIT(A).

13. We have heard the rival contentions and perused the record. The assessee is in appeal before us against order passed under section 201(1) r.w.s. 201(1A) of the Act. The assessee during the year under consideration had made certain payments to the non-resident / foreign companies. The Assessing Officer was of the view that provisions of section 195 of the Act were squarely applicable to the payments made by the assessee to non-resident suppliers / foreign companies and the assessee was bound by law to deduct tax before remitting the money to non-residents. However, the assessee had failed to deduct tax or withhold the tax and as such had committed default in terms of section 201(1) and 201(1A) of the Act. The Assessing Officer tabulated the payments made by the assessee, which are annexed to the assessment order and held the assessee liable to deduct tax @ 20% and also grossing up the amount and charged interest under section 201(1A) of the Act. The CIT(A) passed consolidated order for assessment years 2007-08, 2009-10 to 2011-12. The breakup of foreign remittances made by assessee year-wise are tabulated in the appellate order and for assessment year 2009-10, which reads as under:-

AY 2009-10