By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Ss 9(1)(vi), 9(1)(vii) and 40(a)(i), the Act – payments for import of operations and service manuals relating to equipment being for purchase of copyrighted products, were neither FTS nor royalty and hence withholding of tax was not required.
Facts:
The taxpayer was an Indian Company. The taxpayer was engaged in the business of import and sale of certain visual equipment, such as, projectors, projector lamps, etc. During the relevant previous year, the taxpayer imported manuals and software containing operating and servicing instructions for use of the equipment and separately made payments to the supplier for the same.
Before the AO, the taxpayer contented that manuals and software were copyrighted products and the payments was made for use and sale of copyrighted products and not for acquiring copyrights. Therefore, payments for the services manuals were neither in the nature of FTS nor in the nature of royalty which were subject to withholding of tax. However, the AO concluded that in light of the decisions of Karnataka High Court in Samsung Electronics Company Ltd (ITA No 2988 of 2005) and Sonata Information Technology Ltd (ITA No 3076 of 2005), payment for purchase of software were to be treated as royalty and were subject to withholding of tax. As the taxpayer had not withheld tax from the payments, the AO applied the provisions of section 40 (a)(i)1 of the Act and disallowed the payments.
Held:
The Tribunal held as follows. Service manuals were books containing guidance and instructions for operation, use and after-sale service of equipment and thus were part of the equipment imported by the taxpayer.
While software requires user license, the manuals were copyrighted products that could be used by any person purchasing the equipment. There is a clear distinction between the copyrighted article and equipment which comes with a copyright or license to use the copyright.
In case of Samsung Electronics Company Ltd and Sonata Information Technology Ltd, Karnataka High Court dealt with import of software which required license to use copyright and hence, the Court held the payment was in the nature of royalty. However, the service manuals are not products but they merely provide guidance in using the product. Also, the equipment imported by the taxpayer is not protected by license or copyright and can be used by anyone who purchases them without any restriction on either its transfer or its usage. Therefore, the payment was not subject to withholding of tax.
