Section 9(1)(vi) of the Act – (i) End user
software license package was a copyrighted article, not license to use the
copyright – payment was not royalty – consequently, payment for ‘support
services’ was also not royalty; (ii) Payment was for internet and bandwidth
services provided by service provider – sophisticated equipment installed by
service provider for providing service – service recipient did not have
exclusive right to use such equipment – payment was not royalty
Facts
The Taxpayer was an Indian company providing
software design, development and testing services to its group companies (its
customers) through its various units in India. The Taxpayer charged
consideration at cost plus 15% for such services.
In respect of AYs 2006-07 to 2009-10, the
tax authority had conducted survey u/s.133A of the Act to examine compliance of
TDS provisions by the Taxpayer.
It was noticed that the Taxpayer had made
several foreign remittances for end user software license packages to companies
in USA, UK, Germany, Japan, Singapore, etc. without deducting tax
u/s.195 of the Act. Since the payments were made for purchase of the
copyrighted article, Assessing Officer (AO) characterised the payment as
royalty for use of copyright, both u/s. 9(1)(vi) of the Act as well as under
respective DTAAs.
Taxpayer also made certain remittances
without deduction of tax to an American Company (USCo) for ‘leased circuit
line’. AO held that the payment being for use of scientific or commercial
equipment was taxable under clause (iva) of section 9(1)(vi) of the Act.
On appeal, CIT(A) confirmed AO’s order.
Aggrieved with the order of CIT(A), the Taxpayer filed appeal before Tribunal.
Held
Taxation of copyrighted software
(i) The Taxpayer had purchased
end user software license packages which provided the Taxpayer with the right
to use the software. The Taxpayer used it for testing working of equipment.
Thus, the Taxpayer used the software as tools of its business.
(ii) Software purchased by the
Taxpayer was a copyrighted article. It could not be construed as license to use
the copyright. This issue was covered by decision of Delhi High Court in PCIT
vs. M. Tech Indian (P) Ltd. (ITA No. 890.2015 dated 19.01.2016). Hence, the
payment could not be termed as royalty.
(iii) Consequently, payment for
‘support services’ also could not be treated as royalty.
Taxation of bandwidth services
(i) USCo had provided
connectivity facility to the Taxpayer which mainly consists of advanced
connectivity network and access equipment. These were connected through
under-sea cable and further connected by the routers and digital circuits.
Connectivity was for voice and data communication. The equipment was technical,
such as, ‘modem’ and ‘routers’. It was installed only at premises of customers
of the Taxpayer in USA and not in India.
(ii) US Co provided internet or
bandwidth services to its customers globally, including to the Taxpayer, as
standard services. The undersea cables and the routers etc., were part
of the equipment used by USCo for rendering services to its customers globally.
It could not be said that the Taxpayer was given exclusive right to use the equipment.
(iii) This issue was covered by
decisions of Delhi High Court in Asia Satellite Telecommunications Co. Ltd.
(332 ITR 340) and Estel Communications (P) Ltd. (318 ITR 185) and decision of
Tribunal in Infosys Technologies Ltd. (45 SOT 157). Accordingly, payment made
to USCo being for providing internet and bandwidth services, was not in the
nature of royalty. Consequently, the Taxpayer was not required to deduct tax at
source.
