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Income Tax Appellate Tribunal, MUMBAI BENCHES “L”, MUMBAI
Before: Shri Shamim Yahya, AM & Shri Ravish Sood, JM
O R D E R Per Shamim Yahya This appeal by the assessee is directed against order of learned CIT(A) dated 17.12.2007 and pertains to assessment year 2008-2009.
The grounds of appeal
read as under:- “Ground No.1 : Remittances of Purchase of software not taxable in India.
1. The Commissioner of Income-tax (Appeals)-XXXIII [“the CIT(A)”] erred in holding that any payment made towards purchase of software, to NumeriX Japan Co. Ltd., Japan as a royalty payment, requiring tax deduction at source @ 10% under Article 2 of Indo-Japan Treaty for Avoidance of Double Taxation.
2. He further erred in holding that such payments are nothing but consideration for license to use a software and hence covered by the definition of royalty both under section 9(1)(vi) of the Income tax Act, 1961 as well as under Article 12 of Indo-Japan Treaty for Avoidance of Double Taxation.
He failed to appreciate and ought to have held that (a) that the payment for software, are towards use of a software product and not for the use of a copyright and hence not taxable as royalty. (b) there is no transfer of any rights including granting of license in respect of property and cannot be considered to have been transferred even though license is granted in respect of such rights. (c) the software is a shrink-wrapped software or off-the-shelf software; it amounts to a purchase of goods and not a payment of Royalty. (d) the payments are for the acquisition of a copyrighted article and the right to use any copyright therein and accordingly, the payments for the supply of the software did not amount to payment of “Royalty”. (e) the payments for use of copyrighted software (as in the instant case) is distinguished from payments for use of copyrights in the software. (f) payments for the rights in relation to the acts of copying, where they do no more than enable the effective operation by the user, will not be characterized as Royalty. (g) The license of software is allowed for use in appellants banking operation i.e. self-use and not for commercial exploitation. (h) The Appellant prays that it be held that any payment in the nature of license fees for software are towards use of the software product requiring no deduction of tax at source. Ground No.2 : Payment towards Support Service 1. The CIT(A) further erred in holding the composite payments towards support service for Advice, consultation, and assistance to address problems as a royalty payment, requiring tax deduction at source @ 10% Article 12 of Indo-Japan Treaty for Avoidance of Double Taxation. 2. He failed to appreciate that the said payments would be made by the Appellant purely for solving problems and difficulties which the . M/s.Kotak Mahindra Bank Limited. Appellant may experience in implementing the software, updating of software, subsequent enhancements, maintenance and support cannot fall within the definition of “Royalty” either under the Act or under the DTA. 3. The Appellant prays that it be held that the said payments towards support service require no deduction of tax at source. The Appellant craves leave to add, alter and / or amend the aforesaid Grounds of Appeal
at or before the time of hearing.”
3. Brief facts of the case are that assessee is a banking company entered into an agreement with M/s.NumeriX Japan Co. Ltd. (hereinafter referred to as “NumeriX”), a company incorporated in Japan and a tax resident in Japan, on 29.09.2006 for the purchase of pricing, risk management software (Pro software modules), for which the assessee-company has remitted US$1,50,000 after paying TDS of US$ 16,666 as under: Invoice date Invoice no. Amount in Date of Remittance in TDS @ Gross US$ remittance INR 10% 8.9.2006 20070802 1,50,000 26.09.2007 59,59,500 6,62,140 56,21,640 The assessee filed an application u/s 195(2) before the Assessing Officer to permit to remit the above mentioned amount without deduction of tax at source as according to the assessee, the payment is not royalty hence there is no need to deduct tax at source. The A.O. did not agree with the contention of the assessee and held that the payment is royalty and directed the assessee to deduct tax at source.
4. Upon assessee’s appeal, learned CIT(A) elaborately considered the issue. He came to the conclusion that assessee was liable to deduct tax at source. His conclusions are as under:-