Income Tax - TDS on Software – the Famous Karnataka High Court Judgement – In TIOL Today
IN March 2005, NASSCOM issued a circular stating, “the Bangalore ITAT has recently examined the issue of taxability of software imports and held that the payments for purchase of shrink-wrap software are not to be considered as royalties and accordingly, should not be subject to Indian taxation.”
The High Court of Karnataka at Bangalore did not agree and in an order delivered on 24/09/2009 reversed the ITAT order and since then we have been getting frantic calls and emails for a copy of the order.
We had to explain to concerned Netizens that once we have a copy of the order, we will not keep it to ourselves and immediately carry it. A certified copy of the order was made available only yesterday and true to our style, we are carrying it today. Even after two months, we are the first to carry it.
Of course by today evening, the whole world will carry it with their exclusive coverage!
The Revenue appeals before the High Court were directed against the orders passed by the Income Tax Appellate Tribunal, Bangalore Bench, where under the Tribunal had allowed the appeals filed by different resident-assessees by holding that the resident assessees were not liable for deduction of any part of the payments made by them to non-resident suppliers as price (for consideration) for the software which the resident-assessees had acquired/purchased from the non-residents for the purposes of the activities/business of the resident-assessees in the background of the nature of their liability/obligation under the provisions of section 195 of the Income Tax Act by holding that the subject payments were not in the nature of royalty payments within the meaning of section 9(1)[vi] of the Act and if it is not royalty it is not income and if it was not income in the hands of the non-resident assessees it is not chargeable to tax even as per section 4 of the Act and if so there is no obligation on the part of the respondents, resident-assessees to deduct any amount in terms of section 195 of the Act and therefore the orders passed under section 201 of the Act calling upon the respondents-assessees to pay the amount by treating them as an assessee in default in respect of the amount as has been contemplated for deduction under section 195 of the Act are all not sustainable.
The High Court observed that:-
The assessing officer should not have embarked upon the exercise of determination of the tax liability of the non-resident assessee on the premise that the payment by the resident payer to the non-resident recipient partakes the character of a royalty payment and therefore applying the relevant provisions of the DTAA and even the exercise of holding that the actual percentage of deduction at source was at 10% or 12% or 15% as the case may be depending upon the country in which the non-resident recipient is assessed and having regard to the terms of the DTAA with that country and even such determination has to be declared to be incorrect, not permitted in law and therefore illegal, we have to accept the determination by the assessing authority and affirmed by the first appellate authority and we do so only for the reason that on this aspect of the matter, the revenue has not joined issue at all and while the revenue from the very beginning had taken this stand of the payment in the hands of the non-resident recipient being in the nature of a royalty payment and was also affirmed by the appellate authority, that was not made an issue or question for determination before the tribunal by the revenue and therefore we do not propose to disturb this factual emergence of facts, particularly, in ascertaining the extent of deduction that was required to be made by the resident payer and therefore we are not disturbing the orders of the assessing authority as affirmed by the first appellate authority and second appellate authority on this aspect of the matter.
The High Court summarised the Substantial questions raised and answered them as:
Q1. "Whether the Tribunal was correct in holding that an appeal was maintainable u/s.248 of the Act, even though there was no adjudication by the Authorities under the Act in accordance with Section 195(3), (4) & (5) read with Section 200 of the Act?
A1: This question has to be necessarily answered in the 'affirmative' holding that the Tribunal was correct in reversing the order passed by the Commissioner of Income Tax (Appeals), who had rejected the appeal under Section 248/249 at the threshold as not maintainable. The assessee who has in fact deducted and remitted the amount in terms of sub-section (1) of Section 195 is definitely entitled to maintain an appeal before the First Appellate Authority. The statutory provisions in the Section is very clear on this aspect and the Tribunal is correct in holding that the appeals were maintainable and could not have been disposed of at the threshold and the Commissioner of Income Tax (Appeals) could not have disposed of the appeals at the threshold, as not maintainable.
Q2: Whether the Tribunal was correct in holding that the payments made by the Assessee Company for purchase of software from Aaymetrix Asia Pacific, Singapore; Peritus Software Service Inc., USA and Astral Computers Pvt. Ltd., Singapore for the amounts of Rs.3,43,095/-, Rs.47,89,419/-and Rs.8,89,611/- was not liable to income tax in India and consequently no TDS as held by the Assessing Officer and confirmed by the Appellate Commissioner needs to have been deducted
A2: Not correct, In the negative, against the assessee and in favour of the revenue
Q3: Whether the Tribunal was correct in merely following the judgment passed by it in the case of Samsung Electronics Co. Ltd. Which has not been accepted by the Revenue and appealed against before this Court where the facts were not entirely identical to one subsisting in the present case and therefore the Tribunal was bound to have recorded an independent finding and therefore the impugned order is perverse?
A3: Definitely wrong, answered in the negative, against the assessee and in favour of the revenue
Q4: Whether the Tribunal based on the fact that the Assessee has imported software from Aaymetrix Asia Pacific, Singapore; Peritus Software Service Inc., USA and Astral Computers Pvt. Ltd., Singapore on payment of Rs.3,43,095/-, Rs.47,89,419/- and Rs.8,89,611/-was bound to have taken into consideration the Ruling of the Advance Ruling Authority; the Double Taxation Agreement between India and USA and India and Singapore, provisions of Section 9(1)(VI) of the Income Tax Act; Indian Copyright Act, 1957, the Revised entry on Article 12 of OECD; the Internal Revenue Service Regulation of USA; the Views of the High Powered Committee on E-Commerce and other facts and circumstances of the present case which could have clearly shown that the payments made by the Assessee was liable to tax in India and consequently the Assessee was bound to deduct tax at source?
A4: In the negative, against the assessee and in favour of the revenue
Q5: Whether the Tribunal should have recorded a finding that it is under section 195(2) and (3) and (4) of the Act, the chargeability to tax or not of the recipient is decided and having failed to obtain such a decision the assessee was bound to deduct tax at source as held by the Apex Court in 239 ITR 587 = ().
A5: In the affirmative, in favour of the revenue and against the assessee.
Q6: Whether the assessee can question the taxability of the recipient in section 201(1) and 201(1A) of the Act proceeding when the assessee has to show only "without good and sufficient reasons failed to deduct and pay tax", which has not been shown in the facts of the present case and non taxability cannot be taken as a sufficient reason, when section 195(2)(3)(4) of the Act certificate is not obtained.
A6: In the negative, against the Assessee and in favour of the revenue.
Q7: Whether the Tribunal was correct in holding that the assessee is not liable to deduct TDS in respect, of payments made for purchase of software as the same cannot be treated as income liable to tax in India as Royalty or Scientific Work under section 9 of the Act read with Double Taxation Avoidance Agreements and treaties.
A7: In the negative, against the Assessee and in favour of the revenue.
Q8: Whether the Tribunal was correct in holding that since the assessee had purchased only a right to use the copyright i.e. the software and not the entire copyright itself, the payment cannot be treated as Royalty as per the Double Taxation Avoidance Agreement and Treaties which is beneficial to the assessee and consequently section 9 of the Act should not take into consideration.
A8: In the negative, against the assessee and in favour of the revenue
Q9: Whether the Tribunal was correct in holding that the payment partakes the character of purchase and sale of goods and therefore cannot be treated as royally payment, liable to Income Tax.
A9: Not correct. Question could not have been answered as done by the tribunal as the question does not even arise in the light of the elucidation of the law as above and therefore answered in the negative, against, assessee favour revenue
An expert who had read the judgement told us,
In a situation where the assessee merely purchases a software and not the copyright of that software, how can that payment made to the non-resident be treated as royalty and thereby income in India and subject to TDS in the hands of the resident. If it were purchase of copyright (for e.g. one of the respondents Sonata Software was in this business of purchase of copyright of software for resale/reproduction etc) then it is agreeable that the further sales made by the resident using this copyright and the consequent payments made for the copyright should be regarded as ‘royalty’ as per s. 9 (1)(vi) of the Act. I am sure this judgment will be appealed against and Revenue’s joy will be short-lived when Apex Court sets aside this Judgment.
Later in the day, we will bring you a scholarly analysis of the High Court Judgement from an expert on International Taxation.
Click Here for the High Court order.