February 2019

Article 12(1) of India-Israel DTAA and India -Russia DTAA since charge of tax on royalty arises only at the time of payment, tax is not required to be withheld when provisions for payment of royalty is made.

Geeta Jani | Dhishat B. Mehta
Chartered Accountants

20. TS-676-ITAT-2018(Ahd) Sophos Technologies Pvt. Ltd. vs. DCIT Date of Order: 16th November, 2018 A.Y: 2012-13

 

Article 12(1) of India-Israel DTAA and India -Russia DTAA since charge of tax on royalty arises only at the time of payment, tax is not required to be withheld when provisions for payment of royalty is made.

 

FACTS


Taxpayer was a private Indian Company engaged in the business of development of network security software product. As part of its business, Taxpayer procured anti-virus software and anti-spam software from suppliers in Russia and Israel respectively and bundled them with its own software product. This bundled software was sold by the Taxpayer to the end customers.

 

In terms of the understanding with the suppliers, Taxpayer was liable to pay royalty in respect of such anti-virus and anti-spam software only on activation of the license key by the end customer (i.e. the ultimate user of the bundled software). Withholding obligation on such royalty payment was also discharged at the time of actual payment to the suppliers.  Taxpayer recognised the income at the time of sale of the bundled software and correspondingly made a provision for payment of the royalty in its books of accounts. Withholding obligation on such royalty payment was discharged at the time of actual payment to the suppliers and not at the time of making provision in the books.

 

Taxpayer contended that the liability to withhold taxes arises only on the activation of the key by the actual customer.

 

The AO, however, was of the view that Taxpayer was required to withhold taxes at the time of making the provision for royalty and as Taxpayer had failed to withhold taxes at that time, AO disallowed the expenses claimed towards such provision.  Aggrieved, the Taxpayer appealed before the CIT (A) who upheld AOs order.

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