Synopsys International Limited, Bangalore V. DDIT, Bangalore

ITA 550/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63775 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 11-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K P KUMAR SR
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 234B

Judgement Text

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., BLOCK 1, BLANCHARDSTOWN CORPORATE PARK, BLANCHARDSTOWN, DUBLIN 15, IRELAND. PAN : AACKS 2663N VS. THE DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE II(1), BANGALORE. 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 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 25.02.2011 OF THE CIT(APPEALS)-IV ,BANGALORE, RELAT ING 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/2011 PAGE 2 OF 6 3. GROUND NO.3 RAISED BY THE ASSESSEE IS WITH REGAR D TO THE ISSUE AS TO WHETHER THE PAYMENTS RECEIVED BY THE ASSESSEE ON SA LE & MARKETING OF SOFTWARE LICENCE TO THE CUSTOMERS IS ROYALTY WITH IN THE MEANING OF SECTION 9(1)(V) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER RE FERRED TO AS THE ACT IN SHORT] AS WELL AS ARTICLE 12 OF THE DTAA BETWEEN I NDIA AND IRELAND. 4. THE ASSESSEE IS A NON-RESIDENT INCORPORATED UNDE R THE LAWS OF IRELAND. THE ASSESSEE IS ENGAGED IN THE BUSINESS O F SALE & MARKETING OF SOFTWARE LICENCES. DURING THE PREVIOUS YEAR, THE AS SESSEE SOLD AND MARKETED SOFTWARE LICENCES TO CUSTOMERS WHO ARE MAI NLY SOFTWARE COMPANIES IN INDIA. ACCORDING TO THE ASSESSEE, THE SOFTWARE SOLD IN INDIA WERE SHRINK-WRAPPED SOFTWARE AND WERE LIKE ANY OTHE R 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 RECE IVED BY THE ASSESSEE ON SALE OF SHRINK-WRAPPED SOFTWARE IN INDI A WAS NOT AKIN TO SALE OF GOODS, BUT WAS ONLY A RIGHT TO USE COMPUTER SOFT WARE AND THE CONSIDERATION RECEIVED FOR GIVING SUCH A RIGHT TO U SE 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 IDENTICA L ISSUE HAS BEEN CONSIDERED BY THE HONBLE KARNATAKA HIGH COURT IN T HE 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 ROY ALTY. THE HONBLE COURT HELD THAT WHAT IS GRANTED UNDER THE LICENCE IS ONLY A LICENCE TO USE THE SOFTWARE FOR INTERNAL BUSINESS WITHOUT HAVING ANY R IGHT FOR MAKING ANY ALTERATION OR REVERSE ENGINEERING OR CREATING SUB-L ICENCES 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 DERIV ATIVE 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 SHRIN K WRAPPED SOFTWARE/OFF- THE-SHELF SOFTWARE UNDER THE RESPECTIVE AGREEMENTS WHICH AUTHORIZES THE END-USER I.E., CUSTOMER TO MAKE USE OF THE COPYRIGH T 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 IN TO BY THE ASSESSEE WITH THE NON-RESIDENT WAS HELD TO BE NOT ACCEPTABLE. TH E HON'BLE COURT FURTHER HELD THAT FOR THE LICENCE GRANTED TO THE ASSESSEE T O MAKE COPY OF THE SOFTWARE INTO THE HARD DISK OF THE DESIGNATED COMPU TER AND TO TAKE A COPY FOR BACK UP PURPOSES, THE END-USER HAS NO OTHER RIG HT 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 SOFTWAR E, 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 SHR INK 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 P AYMENTS CONSTITUTE 'ROYALTY' WITHIN THE MEANING OF ART. 12(3) OF THE I NDO-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 FRO M THE AMOUNT PAID TO THE FOREIGN SOFTWARE SUPPLIERS. 7. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA, WE ARE OF THE VIEW THAT THE GRIEVANCE PR OJECTED 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 LE VYING INTEREST U/S. 234B OF THE ACT. IT IS THE CONTENTION OF THE ASS ESSEE THAT IT WAS A NON- RESIDENT. UNDER SECTION 195 OF THE ACT, THERE IS A N OBLIGATION ON THE PART OF THE PAYER I.E., ANY PERSON RESPONSIBLE FOR MAKING A NY 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 ASSES SEE THAT INTEREST U/S. 234B OF THE ACT CAN BE LEVIED ONLY IF THERE IS ANY DEFAU LT 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. SIN CE U/S. 195 OF THE ACT, PAYMENTS TO THE ASSESSEE ARE TAX DEDUCTIBLE AT SOUR CE BY THE PAYER, INCOME TAX SO DEDUCTIBLE WILL HAVE TO BE REDUCED WH ILE COMPUTING ADVANCE TAX PAYABLE U/S. 209 OF THE ACT. IF SO REDUCED, TH ERE 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 TAXATI ON) 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 INT EREST U/S. 234B IS MANDATORY AND RELIED ON THE ORDER OF THE LD. CIT(AP PEALS). 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 HONBLE DELHI HIGH COURT IN THE CAS E OF JACABS CIVIL INC. (2011) 330 ITR 578, WHEREIN THE HONBLE DELHI HIGH COURT HAS EXPLAINED THE LEGAL POSITION AS FOLLOWS:- THE LIABILITY TO DEDUCT OR COLLECT THE TAX AT SOUR CE IS THAT OF THE PAYER. THEREFORE, FOR THE PURPOSES OF S. 234B, THE QUESTIO N 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 TH E NEGATIVE, AND IT WAS NOT DUTY OF THE PAYEE/ASSESSEE, THE QUESTION OF PAY MENT OF ANY INTEREST WOULD NOT ARISE AS IT CANNOT BE SAID, IN S UCH 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 PROVISI ONS OF S. 234B WOULD NOT BE ATTRACTED AT ALL. THE SCHEME OF THE ACT IN R ESPECT 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 'SALARI ES'. THEREFORE, THE ENTIRE TAX IS TO BE DEDUCTED AT SOURCE WHICH IS PAY ABLE 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 WH ICH 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 L IABILITY 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 COMPUT E THE AMOUNT ACCORDINGLY. NO DOUBT, IF THE PERSON (PAYER) WHO HA D TO MAKE PAYMENTS TO THE NON-RESIDENT HAD DEFAULTED IN DEDUC TING 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 PERMISS IBLE 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 UND ER S. 234B. 11. IN VIEW OF THE ABOVE, WE HOLD THAT LEVY OF INTE REST 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 PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER, 2012. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 31 ST OCTOBER , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.