By 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 AO’s order.
Aggrieved, the Taxpayer appealed before the
Tribunal.
HELD
- Article 12(1) of
India-Russia DTAA and India-Israel DTAA are identically worded and provide that
“royalty arising in a Contracting State and paid to a resident of the other
Contracting State may be taxed in that other State”. Thus, in terms of the
DTAA, royalty is taxable only at the point of time when the royalty is paid to
the resident of the other Contracting State.
- The liability to deduct tax at source arises
only when the income embedded in the relevant payment is eligible to tax.
- In the present case, royalty
in respect of the bundled product became payable when the product was activated
and not at the point of sale of bundled software. Thus, the taxes were also
required to be withheld only upon activation of license keys.
