Income Tax Appellate Tribunal - Bangalore
Synopsys International Limited , ... vs Assessee on 11 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
ITA No.550/Bang/2011
Assessment year : 2006-07
Synopsys International ltd., Vs. The Deputy Director of
Block 1, Blanchardstown Income Tax
Corporate Park, (International Taxation),
Blanchardstown, Circle II(1),
Dublin 15, Ireland. Bangalore.
PAN : AACKS 2663N
APPELLANT RESPONDENT
Appellant by : Shri K.P. Kumar, Sr. Counsel
Respondent by : Shri Farahat Hussain Qureshi, CIT-II(DR)
Date of hearing : 11.10.2012
Date of Pronouncement : 31.10.2012
ORDER
Per N.V. Vasudevan, Judicial Member
This is an appeal by the assessee against the order dated 25.02.2011 of the CIT(Appeals)-IV ,Bangalore, relating to assessment year 2006-07.
2. The grounds No.1 & 2 raised by the assessee are general in nature and also requires no adjudication.
ITA No.550/Bang/2011Page 2 of 6
3. Ground No.3 raised by the assessee is with regard to the issue as to whether the payments received by the assessee on sale & marketing of software licence to the customers is 'royalty' within the meaning of section 9(1)(v) of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"] as well as Article 12 of the DTAA between India and Ireland.
4. The assessee is a non-resident incorporated under the laws of Ireland. The assessee is engaged in the business of sale & marketing of software licences. During the previous year, the assessee sold and marketed software licences to customers who are mainly software companies in India. According to the assessee, the software sold in India were shrink-wrapped software and were like any other goods. The sale of such goods will give rise to income from business. Since the assessee did not have a Permanent Establishment ("PE") in India, such business income will not be taxable.
5. According to the revenue, the consideration received by the assessee on sale of shrink-wrapped software in India was not akin to sale of goods, but was only a right to use computer software and the consideration received for giving such a right to use partakes the character of 'royalty' within the meaning of section 9(1)(v)(a) of the Act as well as Article 12 of the DTAA between India & Ireland.
6. It is not in dispute before us that an identical issue has been considered by the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics co. Ltd. & others 245 CTR (Kar) 481 has held that Payment to non-resident foreign software suppliers for purchase ITA No.550/Bang/2011 Page 3 of 6 of shrink wrapped software was in the nature of royalty. The Hon'ble Court held that what is granted under the licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences while the copyright continues to be with the non-resident as per the agreement. That even as per the agreements entered into with other distributors as also the end-user licence agreement, except as expressly set forth in the agreement, the distributor cannot rent, lease, loan, sell or otherwise distribute the software, documentation or any derivative works based upon the software or documentation in whole or in part. Thus, licence is granted for making use of the copyright in respect of shrink wrapped software/off- the-shelf software under the respective agreements which authorizes the end-user i.e., customer to make use of the copyright in the said software. Hence, the contention of the assessee that there is no transfer of copyright or any part thereof under the agreements entered into by the assessee with the non-resident was held to be not acceptable. The Hon'ble Court further held that for the licence granted to the assessee to make copy of the software into the hard disk of the designated computer and to take a copy for back up purposes, the end-user has no other right and the said back up would have constituted an infringement of copyright. That right to make copy of the software itself is a part of copyright. It was further held that what is transferred is the right to use the software, an exclusive right which the owner of the copyright i.e., the supplier owns. Thus, the amount paid to the non-resident supplier towards the supply of shrink wrapped software or off-the shelf software is not the price of CD alone or software alone or the ITA No.550/Bang/2011 Page 4 of 6 licence but a combination of all. Therefore, the payments constitute 'royalty' within the meaning of art. 12(3) of the Indo-US DTAA and also as per the provisions of s. 9(1)(vi) as the definition of 'royalty' under s. 9(1)(vi) is broader than that under the DTAA. Consequently, assessee was under
obligation to deduct tax at source under s. 195 from the amount paid to the foreign software suppliers.
7. In view of the aforesaid decision of the Hon'ble High Court of Karnataka, we are of the view that the grievance projected by the assessee in ground No.3 cannot be accepted. Ground No.3 is therefore dismissed.
8. Ground No.4 raised by the assessee relates to levying interest u/s. 234B of the Act. It is the contention of the assessee that it was a non- resident. Under section 195 of the Act, there is an obligation on the part of the payer i.e., any person responsible for making any payment to a non- resident has to deduct income tax at source at the rates in force from such payment. It is further the contention of the assessee that interest u/s. 234B of the Act can be levied only if there is any default in making payment of advance tax. The method of determining the advance tax payable is laid down in section 209 of the Act. Under section 209(1)(d) of the Act, income tax has to be calculated after reducing the amount of income tax which would be deductible or collectible at source. Since u/s. 195 of the Act, payments to the assessee are tax deductible at source by the payer, income tax so deductible will have to be reduced while computing advance tax payable u/s. 209 of the Act. If so reduced, there would be no liability on the part of the assessee to pay any advance tax and consequently there ITA No.550/Bang/2011 Page 5 of 6 would be no levy of interest u/s. 234B of the Act. The assessee in support of its contention relied on the following decisions:-
(i) Director of Income-tax v. Maersk Co. Ltd. [2011] 334 ITR 79
(ii) Director of Income-tax v. Jacabs Civil Inc. [2011] 330 ITR 578 (Del)
(iii) Director of Income-tax (International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 (Bom)
(iv) CIT v. Tide Water Marine International Inc. [ 2009] 309 ITR 85 (Utt).
9. The ld. DR, however, submitted that levy of interest u/s. 234B is mandatory and relied on the order of the ld. CIT(Appeals).
10. We have considered the rival submissions. In view of the clear judicial pronouncements by the various High Courts on the issue, levy of interest u/s. 234A cannot be sustained. We may, in this regard, refer to the decision of the Hon'ble Delhi High Court in the case of Jacabs Civil Inc. (2011) 330 ITR 578, wherein the Hon'ble Delhi High Court has explained the legal position as follows:-
"The liability to deduct or collect the tax at source is that of the payer. Therefore, for the purposes of s. 234B, the question would be as to whether the payee, i.e. the assessee in this case, had any role in deducting or collecting the tax. Once that is in the negative, and it was not duty of the payee/assessee, the question of payment of any interest would not arise as it cannot be said, in such circumstances, that the assessee is in default for the purposes of s. 234B. No doubt, if there is a default in making the payment of advance tax, the consequence which is to follow is that the interest becomes payable under s. 234B. But in the instant case, the provisions of s. 234B would not be attracted at all. The scheme of the Act in respect of non- residents is clear. Sec. 195 puts an obligation on the payer, i.e. any person responsible for paying to a non-resident, to deduct income-tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head 'Salaries'. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payer to the non-resident. Sec. 201 lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident ITA No.550/Bang/2011 Page 6 of 6 but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remediless and therefore can take action against the payer under the provisions of s. 201 and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of s. 191 along with s. 209(1)(d). For this reason, it would not be permissible for the Revenue to charge any interest under s. 234B. The Tribunal has rightly held that the assessee was not liable to pay any interest under s. 234B."
11. In view of the above, we hold that levy of interest u/s. 234B of the Act cannot be sustained. Ground No.4 raised by the assessee is accordingly allowed.
12. In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 31st day of October, 2012.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN )
Accountant Member Judicial Member
Bangalore,
Dated, the 31st October, 2012.
Ds/-
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore. 6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.