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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: SHRI S. V. MEHROTRA & SMT. BEENA A. PILLAI
Date of hearing: 20.06.2016 Date of Pronouncement: 26.07.2016 ORDER
PER BEENA A. PILLAI, JM:
The present appeal arises from the order dated 07.01.2015 passed by Ld. CIT(A) XXXXII, New Delhi for the Assessment Year 2012-13 on the following grounds of appeal: “That under the facts and circumstances of the case the learned Income Officer has erred in holding the Assessee Company liable for deduction of Tax at source for Rs.I0,70,755/- and raised demand for Rs. 12,95,614/- (including interest Rs. 2,24,859) on payment of Rs.53,53,776/- for purchase of shrink wrapped readymade software from salesforce.com, Singapore as Royalty Income chargeable to tax U/S 195 which is totally bad in law on the following reasons:
2 I.T.A.No.813./Del/2015 i) That treating the payment for shrink wrapped readymade software (which is available in the market for lacks of customers in the world as goods) purchased from salesforce.com, Singapore on furnishing Form No. 15 CA or 15 CB as Royalty income taxable in India u/s 9(1 )(vi) of the Act is totally bad in law in view of the following judgments:
(a) Tata Consultancy Services Vs. State Andhra Pradesh 271 ITR 401 (05.11.2004) (S.C.) (b) Ericsson A.B. and others ( Delhi High Court) (c) Infrasoft Ltd. (ITA 1034/2009) (Delhi High Court) (d) Adit (International Taxation) Hyderabad Vs Batronics India Ltd. ITAT Hyderabad 'A' Bench ITA n 9181 Hyd. 2010 announced on 27.01.2014 (e) Larsen & Tourbo Ltd.- IT AT 'B' Bench Ahmedabad (Ahd.) 2013 announced on 13.05.2014 ii) That Treating the Income of the assessee as chargeable to tax in India U/S 195 of the Act is totally bad in law in view of the following judgment: G.E. India Technology Centre (P) Ltd. iii) That applying the amended provisions introduced by Finance Act, 2012 of Explanation 4 to section 9(1)(vi) of the Act which has been made retrospectively w.e.f. 01.06.1976 and Explanation 2 to 195(1) of the Act which has been made retrospectively w.e.f. 01.04.1962 whereas the assessee company has made the payment prior to insertion of these provisions i.e. on 09.01.2012 which has made impossible for the assessee company to comply with the same and therefore bad in law in view of the following judgments:
(a) I.T.O. ward 11(1) Bangalore Vs Clear Water Technology Services (P) Ltd. ITA 0.1146 (Bang/2013) pronounced on 12.09.2014
(b) Sonata Information Technology Ltd. ITAT Mumbai Bench
3 I.T.A.No.813./Del/2015 iv) That ignoring the Article 7 of read with Article 12 of Singapore Treaty is bad in law as the same clearly exempts the Income of the appellant company. As per law income tax is to be charged under Treaty or under the Act whichever beneficial to the assessee. As the software was purchased after complying the requirements of Rule 37BB and by providing information in Form No. 15CA and 15CB according to which no tax is deductible at source in view of the following judgment:
Kansai Nerolac Paints Ltd. Vs Additional Director of IT (2010) 134 TTJ 342 (Mum.)
That in view of the above grounds/reasons it is prayed that the assessee may not be held liable to deduct tax at source and demand for Rs. 12,95,614/- be cancelled and oblige.
The brief facts of the case are as under: 2.1 The assessee is a private limited company and had made certain remittances amounting to Rs.53,53,776/- on 09.01.2012 for purchase of software from Salesforce.com Singapore PTE Ltd. The payments were made to a single party for purchase of readymade software which was available in the market. Ld. Assessing Officer during the assessment proceedings observed that no tax was deducted at source on remittances. He held the payment to be royalty u/s 9(1)(vi) of the Act and raised a demand of Rs.10,70,755/-. The Assessing Officer made addition u/s 201(1A) read with section195 of the Act for non deduction of TDS. 2.2 Aggrieved by the order of the Assessing Officer, assessee preferred appeal before Ld. CIT(A).
4 I.T.A.No.813./Del/2015 2.3 It was submitted before Ld. CIT(A) that the amount remitted complied with the requirement under Rule 37BB of Form 15CA and certificate in Form 15CB was submitted therein. The assessee contended that no tax was deductible in view of the treaty with Singapore, as the supplier of software does not have PE in India as defined in DTAA between India and Singapore (Treaty). He further observed that the assessee had purchased software called “shrink-wrapped readymade software package” used for carrying on business activities of the assessee. The assessee had submitted that it was standard software which was available in the open market for the customers in the world and it was not a package specifically designed for the assessee. Thus, the assessee had submitted that the payment is covered under Article 12 of the Treaty which clearly exempts the assessee form the liability to deduct tax at source (TDS). Ld. CIT(A) upheld the addition made by the Assessing Officer by relying upon the judgement dated 24.09.2009 of Hon'ble Karnataka High Court in the case of CIT Vs Samsung Electronics Co. Ltd., reported in 320 ITR 209.
Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us now.
Ld. A.R. submitted that the issue relating to payment for “shrink-wrapped readymade software package” with deduction of tax at source had been discussed in several cases, and it had been held that such payments do not 5 I.T.A.No.813./Del/2015 come under the ambit of royalty and no tax is required to be deducted at source. 4.1 Ld. A.R. submitted that the assessee is covered by Article 5 & 7 of DTAA, whereby any income earned by a non-resident in India can be taxed in India only if the non-resident has a PE in India. He submitted that the assessee ma de an outright purchase on their own account of the software. 4.2 He placed his reliance upon the decision of Hon’ble Tribunal at Hyderabad Bench in the case of ADIT Vs Betronics India Ltd. In I.T.A. No. 9181/Hyd/2010. The Hon’ble Tribunal vide order dated 27.01.2014 has considered identical issue and held that payment for readymade software of computer to be used in the business, cannot be treated as royalty. It was further held that such payment does not come under the ambit of Article 12 of DTAA. He placed reliance upon the decision of Hon'ble Jurisdictional High Court in the cases of DIT Vs Infrasoft Ltd. in I.T.A.No. 1034/2009 and DIT Vs Ericsson AB and others reported in 334 ITR 470 wherein the Hon’ble Court has held that payment made for copyright article would not be liable to tax deduction at source. Ld. A.R. placed reliance upon the decision of Hon'ble Supreme Court in the case of G E Technologies Centre Pvt. Ltd. Vs CIT reported in 327 ITR 456 wherein the decision of Hon'ble Karnataka High Court in the case of CIT Vs Samsung Electronics Co. Ltd. (supra) relied upon by Ld.
6 I.T.A.No.813./Del/2015 CIT(A) has been considered and Hon'ble Supreme Court has reversed the ratio laid down by Hon'ble Karnataka High Court and held as under: “8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in Section 195(1). The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. [See : Vijay Ship Breaking Corporation and Others Vs. CIT 314 ITR 309]
One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and 10 recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in Section 195. For example, Section 194C casts an obligation to deduct TAS in respect of “any sum paid to any resident”. Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a nonresident.
7 I.T.A.No.813./Del/2015
Therefore, Section 195 has to be read in 11 conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words “sum chargeable under the provisions of the Act” in Section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “sum chargeable under the provisions of the Act” from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated 12 Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeable to tax” under the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a nonresident any sum “chargeable under the provisions of the Act”,
8 I.T.A.No.813./Del/2015 which expression, as stated above, do not find place in other Sections of Chapter XVII. It is in this sense that we hold that the I.T. Act constitutes one single integral inseparable Code. Hence, the provisions relating to TDS 13 applies only to those sums which are chargeable to tax under the I.T. Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when 14 the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation
9 I.T.A.No.813./Del/2015 requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the nonresidents by which the Department is able to keep track of the remittances being made to non-residents outside India. 15 We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression “sum chargeable under the provisions of the Act.” We need to give weightage to those words. Further, Section 195 uses the word ‘payer’ and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in- default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee- in-default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the I.T. Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an “expenditure”. Under Section 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in 16 respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the I.T. Act. In a given case where the payer is an assessee he will definitely claim deduction under the I.T. Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable
10 I.T.A.No.813./Del/2015 under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-Section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage.
Applicability of the judgment in the case of Transmission Corporation (supra)
In Transmission Corporation case (supra) a nonresident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigilble to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TAS was liable to be deducted 18 by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented “income chargeable to tax
11 I.T.A.No.813./Del/2015 in India”, then it was necessary for him to make an application under Section 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the “principle of proportionality”. The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income- tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 19 ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the I.T. Act.”
On perusal of the facts before us, it is observed that the assessee has made payment on 09.01.2012 for 12 I.T.A.No.813./Del/2015 purchase of software. Admittedly, the assessee had purchased the software for the purpose of its business and the money paid to salesforce.com Singapore PTE Ltd. was the purchase price. Further, it is observed that salesforce.com Singapore PTE Ltd. and assessee are separate independent entities and there has been no evidence brought on record by the authorities below which could reveal that any one of these two entities are dependents on the other, either financially or in any other manner whatsoever. 5.1 It has been further submitted by Ld. A.R. that the Shrink Wrapped Readymade Software has been considered as goods or article vide a judgement of Hon'ble Supreme Court in the case of Tata Consultancy Services Vs State of Andhra Pradesh reported in 271 ITR 401. 5.2 Further it is observed that Explanation (4) to Section 9(1)(vi) has been inserted to include any such payment made in respect of transfer of any right pertaining to any right in property, information or any receipt for use of right to use a computer software (including granting of license) vide Finance Act 2012. It is also observed that Explanation (4) inserted w.e.f. 01.04.1976 but that does not mean that assessee who acted bona fide while making the payment on 09.01.2012, on the basis of law as understood in F.Y. 2011-12 and did not deduct TDS from such payment should be made to suffer by considering him as assessee in default. The Ld. counsel for the 13 I.T.A.No.813./Del/2015 assessee submitted that in any case, even after considering amended provisions, Delhi High Court in the case of Ericsson A.B. (supra) held that still purchase of software is purchase of copyrighted article and not Royalty and hence, not liable to TDS u/s 195. 5.3 We, therefore, considering the totality of facts, discussions hereinabove and circumstances of the case, are of the opinion that the said payment does not fall with the purview of royalty as well as Article 12 of DTAA.
Respectfully following the ratio laid down in the case of DIT Vs Ericsson AB and Others and Infrasoft Ltd. I.T.A.1034/2009 by Hon'ble Jurisdictional High Court, we hold that the purchase of software is not royalty and hence not liable to tax deduction at source.
In the result, appeal filed by the assessee stands allowed. Order pronounced in the open court on 26th July, 2016.
Sd./- Sd./-