Case Law Details
ADIT Vs. Tata Communications Ltd. (ITAT Mumbai) (2010-TII-157-ITAT-MUM-INTL)]
Brief :Once the payment of ‘off-the shelf software’ held not to be chargeable to tax as a royalty on the basis of the certificate obtained from a chartered accountant, no penalty and interest can be levied on the grounds that the assessee did not take prior approval of the assessing officer under section 195(2) of the Act.
Facts: Tata Communications Ltd. (‘the assessee’) had made payment for ‘off-the shelf software’ to a company resident in USA without deducting tax at source on the basis of a certificate obtained from a Chartered Accountant under an alternate procedure laid down by the Central Board of Direct Taxes (CBDT). The assessee had not applied to the assessing officer (‘the AO’) under section 195(2) of the Income-Tax Act (‘the Act’) for determining whether or not, the tax was liable to be deducted at source. The AO issued a show-cause notice for raising the demand under section 201 read with section 195 of the Act.
In response to the show-cause notice, the assessee contented that it had purchased ‘off-the shelf software’ and it did not have any tax implications in India as the assessee had not purchased any copyrights in the software; but had purchased only a copyright software. The assessee further submitted that since the USA based company from whom, software was purchased, did not have a Permanent Establishment (PE) in India, the question of income could have arisen only in the event of the payment for purchase of software being treated as royalty, but given the facts of the case and given the fact that purchase was made only of the copyright software and not copyright per se, the amount had not therefore been treated as royalty in the hands of the USA based company.
However, the AO held that it is not open to the assessee to take any unilateral decisions on whether the amounts paid by the assessee are chargeable to income tax or not, and, therefore, the assessee could not have made the payments without deduction of tax at source, without the concurrence of the AO under section 195(2) of the Act. The AO further noted that “provisions of section 195(2) are not provisions of convenience, which the assessee may use or may not use”. The AO held that since the assessee had not made any payment for purchase of software but only for licence to use the software, the amount was paid by the assessee is clearly in the nature of ‘Royalty’. Accordingly, the AO held that the amount paid to USA based company for the purchase of software was taxable under section 9(1)(vi) r.w. Explanation 2(iva) of the Act as also under the India – USA Double Taxation Avoidance Agreement (tax treaty). Since, the assessee failed to discharge the obligation of deducting the tax at source under section .195(1), the assessee was liable to pay the amount of tax along with interest under section 201(1A) of the Act.
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