TIOL-DDT 1240 · the untouched capture
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<strong><font color="#663399">TIOL-DDT 1240</font><br>
19.11.2009<br>
Thursday </strong></font> </div>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Income
Tax - TDS on Software – the Famous Karnataka High Court Judgement –
In TIOL Today</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>IN </strong>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.”</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">We
had to explain to <strong>concerned</strong> 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 <strong>first </strong>to
carry it.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Of
course by today evening, the whole world will carry it with their <strong>exclusive</strong>
coverage!</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
High Court observed that:-</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
High Court summarised the <em><strong>Substantial questions raised and answered
them as</strong></em>:</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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?</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A2:
Not correct, In the negative, against the assessee and in favour of the revenue</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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?</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A3:
Definitely wrong, answered in the negative, against the assessee and in favour
of the revenue</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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?</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A4:
In the negative, against the assessee and in favour of the revenue</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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 = <strong>(<a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=37&filename=legal/sc/2002/2002-TIOL-471-SC-IT.htm" target="_blank">2002-TIOL-471-SC-IT</a>)</strong>.</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A5:
In the affirmative, in favour of the revenue and against the assessee. </font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A6:
In the negative, against the Assessee and in favour of the revenue.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A7:
In the negative, against the Assessee and in favour of the revenue.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">A8:
In the negative, against the assessee and in favour of the revenue</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<blockquote>
<p align="justify"><font color="#FF3333" size="2" face="Verdana, Arial, Helvetica, sans-serif">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</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">An
expert who had read the judgement told us,</font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Later
in the day, we will bring you a scholarly analysis of the High Court Judgement
from an expert on International Taxation.</font></p>
<p align="justify"><a href="http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=9968" target="_blank"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Click
Here</strong> for the High Court order.</font></a></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">International
Customs Day - Certificate of Merit from World Customs Organisation (WCO)</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">International
Customs Day is celebrated on our Republic Day – 26th January.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
World Customs Organization is honouring distinguished persons selected by Customs
Administrations by conferring them with Certificates of merit on International
Customs Day.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Each
year the selection is done based on the contributions made by persons towards
a preset theme and this year’s theme is <strong><em>“Customs and
Business: Improving Performance through Partnerships”.</em></strong> </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
CBEC wants the nominations to be sent early, so as to reach the Ministry, latest
by <strong>7th of December, 2009</strong>. The nominations should be accompanied
by a write-up about the officers/private sector representatives justifying the
nomination in terms of the criteria set out. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Advance
copies of the nominations (along with Bio-data) may be e-mailed at Indiacustoms@gmail.com.
</font></p>
<p align="left"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=70&filename=pitara/sernews/order/grant_certificate_WCO.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBEC
F.No. 528/11002/2008-CUS/ICD Dated: November 16, 2009</font></strong></a></p>
<p align="center"><font color="#006600"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Posts
of Deputy Director (Compliance and Enforcement) and Deputy Director (Capacity
Building) in the World Customs Organisation (WCO)- applications called for</font></strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
World Customs Organization has notified the following vacancies:</font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">i)
Deputy Director (Compliance and Enforcement) (Grade A5) in the Compliance
and Facilitation Directorate; and </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">ii)
Deputy Director (Capacity Building) (Grade A5) in the Capacity Building Directorate.
</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Indian
Customs officers may apply to the Board by 24.11.2009.</font></p>
<p align="justify"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=70&filename=pitara/deputation/vacanciesWCO.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBEC
F.No. 528/11008/2008-CUS/ICD Dated: November 16, 2009</font></strong></a></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Jurispruden</font><font color="#FF6633" size="5">tiol</font><font color="#006600"> – Friday's cases</font></strong></font></strong></font></p>
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sans-serif"><strong><strong><strong><strong><strong><strong><strong><b><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" 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color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Central
Excise </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Rule
5 of the Cenvat Credit Rules, 2004 - Appellant manufacturing exempted goods
and goods chargeable to Nil rate under Tariff – no bar on availment of
Cenvat Credit and claiming refund of credit lying un-utilized: CESTAT </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">THE
appellants are engaged in the manufacture of Soya Oil exempted under notification
No. 3/2006-CE dated 1.3.2006 and De-Oiled Cake which is chargeable to nil rate
of duty under Tariff. They exported De-Oiled Cake under Bond. The appellants
filed refund claim of Rs.2,80,053.58 of CENVAT credit on input service i.e.
GTA service, Insurance, Brokerage service, and Travel Agency service under Rule
5 of Cenvat Credit Rules, 2004. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
original authority rejected the refund claim and which order was upheld by the
Commissioner (Appeals). So, the appellant is before the CESTAT. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Income
Tax</font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Revenue
searches premises of husband and wife - undisclosed income assessed only in
wife's name - when warrant is issued in joint name, assessment cannot be done
individually - AO bound to assess them as either AOP or BOI - Revenue's appeal
dismissed: High Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">SEARCH
and seizure are common tools with the Income Tax Department to take tax evaders
to task. Both the tools are very special to the Revenue, and that is why there
is a special procedure for assessment for undisclosed income under Chapter XIV-B.
These tools may be available with the Revenue right from the evolution of the
I-T Act but some of the legal dimensions associated with the assessment in search
cases continue to be a mystery for the assessing officers. And that is why one
may tend to see serious faux pas by the AOs like in this case.</font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Customs</font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Drawback
stopped based on a letter written by a lawyer – Customs not under any
statutory obligation to stop payment on such letter – Ordered to pay drawback
with interest – High Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Counsel
for the customs has clearly conceded that P.J. Khoshy has not issued the letter
dated June 2, 2008 under any statutory provision, and hence customs were not
under any statutory obligation to stop payment of balance duty drawback to the
petitioner. On the basis of the letter dated June 2, 2008 written by P.J.Khoshy
customs could not withhold payment of balance duty drawback to the petitioner.
Within a fortnight from the date of communication of this order, customs, especially
the Assistant Commissioner of Customs who wrote the letter dated July 21, 2008,
shall pay the petitioner the balance duty drawback with interest payable according
to law</font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>See
our columns Tomorrow for the judgements</strong></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until
Tomorrow with more <strong>DDT</strong> </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have
a nice day.</font></p>
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