Applicability of Withholding TAX - DTA with USA

This query is : Resolved

Adinarayana. T (Querist)
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16 December 2008 Hi,

Can U provide your views on the following:

ABC Ltd., an Indian company has purchased web version software new license from an American company/concern and then is ABC is required to deduct and pay Withoholding Tax or not?

In TCS case it was held canned software which is available and sold off the Shelf is goods and even unbranded software may also be classified as Goods, though Hon'ble Supreme Court has not given its opinion withrespect to uncanned software. Therefore can it be presumed that only canned/pacakged/branded/normal software which is availabe off the Shelf in retail counters only be treated as goods and therefore under DTA with USA such software be treated as Goods and no withholding tax be deducted. Will it make any difference if it is electronically downloadable instead of in the Form a CD or Disc.

Adinarayana
Email:t.adinarayana@yahoo.com

G Muralidharan

G Muralidharan (Expert)
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16 December 2008 Software comes under Goods which are Vattable. In as much as Software are goods, no question of tax under section 195 would arise.

Ravikumar.G

Ravikumar.G (Expert)
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16 December 2008 A copyrighted product is different from a copyright. While the payment for use of copyright of a non resident by a resident is deemed to be received in India u/s 9(1) as it is well covered under the definition of royalty" , the purchase of a copyrighted product falls under the category of sale of goods , which is not covered u/s 9(1) ,.Therefore,the payment for import of software is not an income of non resident taxable under Income Tax Act. That being so , there can not be TDS because for application of TDS provision the payment on which tax is to be withhold has to be taxable under I T Act.

Banglore bench of Income Tax Tribunal was seized of similar issue and it gave verdict in favour of assessee that there is no need to deduct tax at source if there is purchase of copyrighted software and not the copyright. In case of Mphasis BFL Ltd. v. Income-tax Officer (Taxation), Ward 19(2), Bangalore [2006] 9 SOT 756 (Bang.), the Banglore bench of the tribunal considered its own decision in following cases on the same issue
(a) Samsung Electronics Co. Ltd. v. ITO [2005] 94 ITD 91 (Bang.).
(b) Lucent Technologies Hindustan Ltd. v. ITO [2004] 82 TTJ (Bang.) 163. and held

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Ravikumar.G

Ravikumar.G (Expert)
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16 December 2008 This Bench in the case of Samsung Electronics (P.) Ltd. (supra) ruled that a ready made off the shelf computer programme does not grant any right to utilise the copyright of the computer programme and accordingly, the payments for its import would not constitute royalty income in India and no tax needs to be deducted under section 195 of the Act. The Tribunal observed that the appellant had imported off the shelf software from different suppliers in USA, Sweden and France and after observing the agreement between the parties held that, what the appellant had acquired is only a copy of the copyrighted articles, i.e., software, whereas the copyright remains with the owner, i.e., foreign parties. The incorporeal right to software, i.e., copyright remained with the owner and the same was not transferred to the appellant. The right to use of copyright is totally different from right to use the programme embedded in cassette or CD or it may be software. The Tribunal also held that the appellant had acquired a readymade off the shelf computer programme for being used in business. No right was granted to the appellant to utilise the copyright of the computer programme. The appellant had merely purchased a copy of the copyrighted article, namely, a computer programme/software. In view of the above, it was held that the remittances made by the appellant for purchase of software does not give rise to any income in India and no tax needs to be deducted under section 195 of the Act.

Similarly this Bench in the case of Lucent Technologies Hindustan Ltd. (supra) held that there was no liability to deduct tax in India on import of software which is a copyrighted product as distinguished from copyright.

The Special Bench also held that software supplied is goods. Though an information technology product is normally regarded as an intangible asset, once technology is put on a media, then it becomes goods liable to custom duty. Finally, the Special Bench held that the payments for hardware and software were lump-sum payments and no separate consideration should be attributed towards software as “royalty”.

Keeping in view that there should be a consistent approach on an issue, it is held that payments made for import of software is not royalty and tax was not required to be deducted at source. Hence the demand raised under section 201 for non-deduction of tax at source is cancelled.

Ravikumar.G

Ravikumar.G (Expert)
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16 December 2008 Therefore, if you are simply importing software and there is no purchase of right to use the Copyright of computer programme, there is no liability to deduct the tax , as decided by hon'able tribunal in the aforesaid cases.