The Income Tax Appellate Tribunal ( ITAT ) in Pune held that No Tax Deduction at Source ( TDS ) is required on purchases of copyrighted software licenses. So the assessee had not committed default in terms of section 201(1) and 201(1A) of the Income Tax Act.
Facts of the Case
The assessee had made certain payments to the non-resident / foreign companies. The AO 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 AO held the assessee liable to deduct tax @ 20% and also grossing up the amount and charged interest under section 201(1A) of the Act.
Provisions and Interpretation of Law
The assessee submitted that in the light of the judgment in case of John Deere India Pvt. Ltd. (2019) 70 ITR (Trib) 73 (Pune) DCIT-(IT) Vs. Welspun Corporation Ltd. (2017) 77 Bramhacorp Hotels & Resorts Ltd. Vs. DDIT-(IT) (2015) 61 the issue raised was against non-deduction of tax on payment for software licenses and IT support services. He 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 stated that no requirement to deduct tax out of such payments and hence, the assessee had not defaulted. In relation of tax deduction at source (TDS) out of training charges paid, he 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 in the absence of any PE, there was no question of any taxability under Article 7 of DTAA.
The Assessing Officer was of the view that the payments made to AB Tetra Pak, Sweden, which is in respect of purchase of copyrighted software were in the nature of royalty and for non-deduction of tax at source, the assessee was held to be liable and demand was raised under section 201(1) of the Act and interest was charged under section 201(1A) of the Act.
The division bench comprising of Judicial Member Sushma Chowla and Accountant Member D. Karunakara Rao held that 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 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. So no TDS is required to be deducted on purchases of copyrighted software licenses. Considering the training charges paid by the assessee to Tetra Pak group companies, payments made to the entities residents of countries of category III i.e. Singapore, USA, Switzerland and Sweden are not exigible to tax deduction at source. The assessee in such circumstances cannot be held to be in default for not deducting tax out of said payments. The Assessing Officer is directed to apply the said decision and re-compute the demand, if any, under section 201(1) and 201(1A) of the Income Tax Act.
Please refer the order here- Tetra Pak India
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