SHINHAN BANK,MUMBAI vs. DDIT (IT) RG 2(1), MUMBAI

At the outset, the ld.counsel for the assessee submitted that so far as the issue raised in ground no.1, is concerned, that is whether the tax rate should be applied at the rate of 30% or 40%, this issue stands decided against the assessee by the Tribunal in assessee’s own case right from the assessment years 1997-98 to 2006-07. Thus, this issue will be decided against the assessee. Tld.DR also admitted the same.

After considering the aforesaid statement of the assessee’s counsel and on perusal of the Tribunal order in assessee’s own case, 3 for the earlier years, find that this issue has been consistently decided against the assessee wherein it has been held that assessee’s income would be taxed at the rate of 40% plus surcharge and education cess, instead of at the rate applicable to resident tax payers. The Tribunal discussed the entire issue in detail after considering the assessee’s submissions on Article 25 of the DTAA between India and Korea and held that rate of tax would be @ 40%. Accordingly, Ground No.1 is dismissed.

In ground no.2, the assessee is challenging the disallowance of software charges paid by the Bank, amounting to Rs.5,05,715 for non deduction of tax at source under section 40(a)(i) of the Act.

Brief facts of the case are that, the assessee has made payment towards software charges to “Comas Inc”, a Korean entity without deduction of tax at source. “Comas Inc”, is an IT solution provider to Banks and offers solutions in the areas of banking, electronic trading, internet banking, cash and treasury management. It has provided a software option called “Exit Signon” wherein swift messages containing terrorist names are automatically deflected to another queue for the officer to further check about the genuineness of the transaction. The Bank has been provided with Login and 4 password to access the software loaded on servers in Korea. The AO held that the relevant transaction related to a transfer of license to “use” of the software and not sale and accordingly, provisions of clause (vi) to Sub-section (1) to section 9 are attracted that is, any payment made by a resident to any person outside India is deemed to be income of the recipient in India as payment of “Royalty” . He further held that the relevant payments, fall within the category incorporated in Explanation-2 to sec. 9(1)(vi). On the other hand, the assessee’s case for non-deduction of TDS was that, the license was for sale of the software product to the bank and was non- recurring nature and not for provision of services of technical nature. Further, the remittance has been made on account of licence software sold by the non-resident company and is not in the nature of “Royalty”, also therefore, no TDS was deductible. The AO, after detailed discussion and considering the Explanation 4 to sub-section 9(1)(vi) of the Act which has been brought in the statute by the Finance Act, 2012 with retrospective effect from 1.6.1976, held that the said payment falls within the ambit and scope of “Royalty” as defined u/s 9(1)(vi) and accordingly, the assessee was obliged to 5 deduct tax at source at the time of payment and therefore, non deduction of tax at source will entail the disallowance u/s 40(a)(i).

Before us, the ld.counsel for the assessee, submitted that Explanation 4 to section 9(1)(vi) was brought by Finance Act, 2012 with retrospective effect from 1.6.1976, by which the scope of “Royalty” has been expanded, specifically to include the use or right to use computer software including granting of license irrespective of medium through which such right is transferred has also been included in the ambit of “Royalty”. Thus, at the time of making of such payment there was no such provision under the Act and therefore the assessee could not have withheld the tax. In support of this contention that no liability can be fasten on the assessee to deduct tax at source on the basis of subsequent amendment made in the Act, he relied upon the following decisions: a) Channel Guide India Limited V/s ACIT (2013) 153 TTJ 432/(2013) 139 ITD 49 b) New Bombay Park Hotel Pvt Ld V/s ITO (2014) 61 SOT 105 (Mum); c) DCIT V/s iGate Computer Systems Ltd (ITA No.1174/Pn/2013 and d) Sterling Abrasives Ltd V/s ITO He further submitted that at the time of payment there was a decision of Hon’ble Special Bench of the Tribunal in the case of 6 Motorola Inc. V/a ACIT 95 ITD 269 (SB) Delhi, holding that such kind of payment for license of software is not to be treated as “Royalty”. On merits, he relied on the decision of Hon’ble Delhi High Court in the case of DIT vs. Infrasoft Ltd (Delhi High Court) [2013] 39 taxmann.com 88/[2014] 220 Taxman 273.

The ld. DR strongly relied upon the orders of the AO and DRP and submitted that the amendment brought in the statute by which Explantion-4 has been added to section 9(1)(vi), only clarifies the intention of the legislature and that is why, it has been brought with retrospective effect from 1.6.1976. Moreover, here in this case, the assessee has been providing license to use the software for which the payment has been made, therefore, it clearly falls within the ambit of “Royalty”. He further relied upon the decision of the Hon’ble Karnataka High Court in the case of Commissioner of Income-tax V/s Samsung Electronics Co. Ltd. [2012] 17 taxmann.com 250 (Karnataka).

We have heard the rival submissions and also perused the relevant findings given in the impugned order. The payment towards software charges to “M/s Comas Inc” for procurement of software has been treated as “Royalty” by the AO. Revenue’s stand before us 7 is that, now in the wake of Explanation 4 to section 9(1)(vi) the payment on account of computer software including granting of license which has been brought in the statute by the Finance Act, 2012 with retrospective effect from 1.6.1976 brings such type of payment within the scope and ambit of enlarged definition of “Royalty”. Admittedly, at the time of payment to “M/s Comas Inc” for the software charges in May 2008 by the assessee there was no such provision under the Act that transfer of any right for use or right to use the computer software included granting of license irrespective of medium through which such right is transferred was not there in the statute. The case of the assessee has been that it has only purchased software for its banking business and license was given only for using the software. There is no transfer of any copy right albeit it was the transfer of the copy righted article. Without going into the merits whether the said payment will fall within the nature of “Royalty” under the newly amended provision brought with retrospective effect or not, we are of the opinion that, at the time of making of the payment there was no such provision under the law to tax such payment of computer software as “Royalty”. In fact, as pointed out by the ld. CIT(A), the decision of Special Bench in the 8 case of “Motorola Inc” (supra) was there wherein it was held that if the licensees is not allowed to exploit the computer software commercially which they had acquired required under the license agreement and only the copy righted software which by itself was an article and not any copy right therein, then, the payment made for copy righted article which represented the purchase price cannot be considered as “Royalty” under the provisions of section 9(1)(vi) of the Act. Once that is so, then it is very difficult to hold that the assessee should have deducted TDS on such payment when there was no clear cut law that such a payment would be taxable in India. Here, the maxim of "lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by the ITAT Mumbai Bench in the case of Channel Guide India Limited (supra) and catena of other decisions as cited by ld.Counsel, wherein it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, we hold that the assessee was not obliged to deduct TDS at 9 the time of making the payment and the law which has come into statute after four years from the date of payment cannot be held to be applied retrospectively at best for deduction of TDS. Thus, we hold that disallowance u/s 40(a)(i) for non deduction of TDS can not be upheld. So far as the reliance placed by the ld.DR in the decision of Hon’ble Karnataka High Court in the case of “Samsung Electronics Co. Ltd.”(supra), we find that the Hon’ble Delhi High Court in several cases like, DIT V/s Nokia Net works and DIT V/s Infrasoftware Ltd has considered the said issue and has not followed the ratio laid down by the Karnataka High Court in “Samsung Electronics Co. Ltd.” (supra). Since, the Delhi High Court is the latest decision, wherein the decision of Hon’ble Karnataka High Court has been considered, therefore, we are inclined to follow the same. The finding of the Hon’ble Delhi High Court in the case of Infrasoft Ltd (supra) are reproduced below: “97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income.

We are not in agreement with the decision of the Karnataka High Court in the case of Samsung Electronics