Income Tax Appellate Tribunal - Bangalore
Sonata Software Ltd. vs Ito on 28 April, 2005
Equivalent citations: [2006]6SOT700(BANG)
ORDER
1. These appeals by assessee are directed against the orders of learned Commissioner (Appeals)-IV, Bangalore.
2. The appeals were filed before Commissioner (Appeals) against order under section 201 (1) for failure to deduct tax as required under section 195 of the Act. The assessee had imported software packages for the purpose of distributing it to ultimate users. The imports had been made from certain non-residents of USA, UK, Singapore, Taiwan and Hongkong. The imports were made in terms of agreement of most cases) entered into with these non-residents. The assessing officer has considered the payments to be in the nature of royalty payments. The appellants however considered the incomes represented by these payments to be 'business profits' of the non-resident taxable only under article 7 of respective Double Taxation Avoidance Agreement (DTAA) if there was a permanent establishment in India of the non-residents in India. Since this was not the case (this fact is undisputed) the appellant considered the payments as not chargeable to tax in India and therefore, outside the purview of tax deduction under section 195. The assessing officer has discussed in detail in the assessment order as to why the payments are in the nature of 'royalty' and therefore, taxable as per article 12 of DTAA which does not contain any conditionality regarding existence of 'permanent establishment.' Further, according to assessing officer the payments are also covered by royalty definition under section 9(1)(vi) and therefore, section 195 applies is this case. The company had sold the software bought in fully packed condition as received from the overseas vendor to various customers in India without opening the package. The appellant did not deduct any tax at source at the time of payment or credit in respect of the above software on the premise that the transactions constitute purchase of software products and in respect of the above payment/credit no income is deemed to accrue or arise to the non-resident vendors in India. It was submitted before the Income Tax Officer that the imported software is in the nature of shrink wrapped software and hence, no tax is required to be deducted at source.
3. Learned counsel for assessee submitted that the Commissioner (Appeals) erred in confirming that the payments made for purchase of software from outside India as royalty. Software is treated as goods under the various sales tax enactments. In the case of Tata Consultancy Services wherein the Hon'ble Andhra Pradesh High Court held that "software that was standardized and marketed for use of certain classes of clients" would constitute goods. The decision has since been approved by Hon'ble Supreme Court in recent decision (Refer Tata Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC). The characteristics of royalty as defined by the Authority for Advance Rulings in ABC, In re (1999) 238 ITR 296 is not satisfied in the present case with reference to determination of payment on the amount of use. In the revised OECD Commentaries wherein it has been held that payments made for acquisition of rights in relation to the copyright which are limited to rights which are necessary to enable the user to operate the programs would classify as business income and not royalty. Learned Departmental Representative on the other hand, supported the orders of authorities below.
4. We have considered the relevant facts and arguments advanced. This Tribunal in the case of Samsung Electronics Co. Ltd. v. Income Tax Officer (IT Appeal Nos. 264 to 266 (Bang.) of 2002, dated 18-2-2005) has recently held that where the software imported which is a shrink wrapped software or off the shelf software, same amounts to purchase of goods and not payment of royalties. The payment is for use of copy rights article and not for acquiring any copy right. This view has been arrived at after considering various decisions on the subject as well as the decision of Hon'ble Supreme Court in Tata Consultancy Services case (supra). We accordingly hold that the payments for import of software do not amount to payment of royalty chargeable under section 9(1)(vi) of the Act. The payments partakes the character of purchase and sale of goods. Actually, the payee has no permanent establishment in India. Hence, it can be concluded that no income is deemed to accrue or arise in India. Accordingly, the provision of section 195 is not applicable to such payment. The assessee therefore cannot be fastened with liability by treating it as in default under section 201 of the Act. We accordingly set aside the order under section 201 (1) as well as charging of interest under section 20 1 (1 A) of the Act.
In the result all the appeals are allowed.