Case Note & Summary
The case involves two appeals filed by the Revenue (Commissioner of Income Tax and Deputy Commissioner of Income Tax (TDS)) against the common order of the Income Tax Appellate Tribunal (ITAT), Bangalore, dated 03-07-2009, for assessment years 2006-2007 and 2007-2008. The respondent-assessee, M/s Manipal Health Systems Pvt. Ltd., had made payments to a non-resident for purchase of shrink-wrapped software. The Revenue contended that such payments were 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961, and therefore the assessee was required to deduct tax at source under Section 195. The Assessing Officer had held that the payments were royalty and disallowed the expenditure for non-deduction of TDS. The Commissioner of Income Tax (Appeals) and the ITAT had ruled in favor of the assessee, holding that the payments were not royalty. The High Court, after hearing both sides, framed the substantial question of law as to whether the payment for software amounts to royalty. The court analyzed the definition of 'royalty' under the Act and the relevant Double Taxation Avoidance Agreement, and relied on the OECD Commentary and various judicial precedents. It held that the payment was for a copyrighted article, not for the transfer of any copyright rights, and therefore did not constitute royalty. Consequently, the assessee was not liable to deduct TDS. The appeals were dismissed, and the question of law was answered in favor of the assessee and against the Revenue.
Headnote
A) Income Tax - TDS - Royalty - Software Payment - Section 9(1)(vi), Section 195, Income Tax Act, 1961 - The issue was whether payment for shrink-wrapped software to a non-resident constitutes 'royalty' requiring TDS. The court held that such payment is for a copyrighted article, not for transfer of copyright rights, and thus does not amount to royalty. The assessee was not liable to deduct TDS. (Paras 1-10) B) Income Tax - Double Taxation Avoidance Agreement - Royalty Definition - OECD Commentary - The court relied on the OECD Commentary and the principle that payment for software is for the product itself, not for the use of copyright, and therefore not royalty under the DTAA. (Paras 1-10)
Issue of Consideration
Whether the payment made by the assessee to a non-resident for purchase of software amounts to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961, read with the relevant Double Taxation Avoidance Agreement, thereby requiring deduction of tax at source under Section 195 of the Act.
Final Decision
The High Court dismissed the appeals, holding that the payment for shrink-wrapped software to a non-resident does not amount to royalty under Section 9(1)(vi) of the Income Tax Act, 1961, and therefore the assessee was not liable to deduct tax at source under Section 195. The substantial question of law was answered in favor of the assessee and against the Revenue.
Law Points
- TDS
- royalty
- software
- non-resident
- copyright
- Section 9(1)(vi)
- Section 195
- Income Tax Act
- 1961
- DTAA
- OECD commentary
