Facts
a)
The assessee had purchased software from residents of different
countries for its business of oil and gas exploration. It made payment for such
purchases without deducting tax at source.
b)
Assessing Officer (AO) was of the view that the Explanation 4 has been inserted with retrospective effect in
section 9(1)(vi) which specifically includes computer software in the
definition of royalty. These payments would be liable for TDS deduction u/s
195. Thus, assessee was to be treated as assessee-in-default.
c)
On appeal, the CIT(A) held that the payment made by the assessee for
purchase of software would not amount to royalty.
d)
The aggrieved-revenue filed an instant appeal before the Tribunal.
The
Tribunal held in favour of assessee as under:
1)
A perusal of the definition of royalty as provided in Article 12 of the
India-USA 'DTAA' reveals that it is the payment which is received as
consideration for the 'use of' or the 'right to use' 'any copyright of
literary, artistic, scientific work including….'(emphasis supplied)
2)
Hence, what is relevant is the consideration paid 'for the use of' or
the right 'to use' any 'copyright'. The right to use a computer software
programme has not been specifically mentioned in the DTAA with any country.
3)
However, 'Explanation 4'
inserted in section 9(1)(vi) by the Finance Act, 2012, provides that the
transfer of rights in respect of any right, property or information includes
and has always included the right for use or right to use a computer software
including granting of a license.
4)
Under the circumstances, it cannot be said that the definition of
royalty under the Income Tax Act is in paramateria
with that under the DTAA. Since the definition provided under the head royalty
in the DTAA is more beneficial to the assessee, as per the provisions of
section 90, the definition of royalty as provided under DTAA is to be taken.
5)
One has to understand the difference between the term "use of copy
right in software” and "use of software" itself. To constitute
"royalty" under the DTAA, it is the consideration for transfer of
"use of copyright in the work" and not the "use of work"
itself.
6)
The sale of a CD ROM/diskette containing software is not a license but it
is a sale of a product which, of course, is a copyrighted product and the owner
of the copyright by way of agreement puts the conditions and restrictions on
the use of the product so that his copyrights in such copyrighted article or
the work may not be infringed.
7)
The assessee could not be said to have paid the consideration for use of
or the right to use copyright but had simply purchased the copyrighted work
embedded in the CD-ROM which could be said to be sale of 'goods' by the owner.
The consideration paid by the assessee as per the clauses of the DTAA could not
be said to be royalty and the same would be outside the scope of the definition
of 'royalty' as provided in the DTAA.
8)
Amendment vide which the Explanation 4 has been inserted with
retrospective effect in section 9(1)(vi) has the effect of change in the law.
By the introduction of the said Explanation
4, computer software has been specifically included in the definition of
'right, property or information' which was never assumed to have been included
by any court of law prior to such insertion.
9)
The assessee was under the bonafide
belief that there was no liability to deduct tax in respect of the
consideration paid for the said purchase of software. Hence, assessee was not
supposed to deduct TDS on such purchases- [2016] 69 taxmann.com 311 (Mumbai -
Trib.)
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