ITAT: No TDS Deduction for Payments to Non-resident Software Manufactures or Suppliers
The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, on 17 March 2021, in the case titled M/s Altisource Business Solutions Private Limited (Appellant) v. The Asst. Commissioner of Income Tax (Respondent) held that the consideration paid to non-resident software manufacturers or suppliers do not give rise to income taxable in India and was not liable for deduction of tax at source (TDS) under Section 195 of the Income Tax Act, 1961 (IT Act).
The ITAT coram comprising of Accountant Member Chandra Poojari and Judicial Member Shri George K ruled that amounts paid by the assessee to the non-resident computer software manufacturers or suppliers as consideration for the resale or use of computer software is not payment of royalty for use of copyright in the computer software.
The factual background of the case is that the assessee is a private limited company. It dealt with providing contract software development and support services and information technology (IT) enabled services including data analysis, compilation, and transmission of customized software to overseas affiliates.
The assessments were completed by making disallowance of software expenses paid to non-residents by invoking the provisions of Section 40(a)(ia) of the IT Act.
Based on the disallowance under the said provision of the Act in assessments completed, proceedings under Section 201(1) were initiated. The show-cause notice (SCN) was given to the assessee asking as to why it should not be treated as an assessee in default for non-deduction of TDS under Section 195 of the IT Act.
A detailed reply was filed by the assessee giving a response to the SCN. However, proceedings were completed by the Assessing Officer (AO) under Section 201(1) and 201(1A) by treating the assessee as an assessee in default.
An appeal was filed against the order of the AO and it was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. It was stated by the department that the matter needs to be restored to the AO for examination whether a non-resident owner continues to have proprietary rights in the software and use of the software by the Indian company is limited and there is no transfer of copyright.
An appeal was filed before the ITAT wherein it allowed the appeal and deleted the disallowance in the assessment order by invoking Section 40(a)(ia) of the IT Act.
The ITAT relied on the judgment of the Supreme Court in Engineers Analysis Centre of Excellence (P) Ltd. v. CIT. The Apex Court cited the definition of royalties contained in Article 12 of the double taxation avoidance agreements (DTAAs) clarified, "There is no obligation on the persons mentioned in Section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright."