Tds not applicable on Indian Companies for amount Paid to Use Foreign Software : SC

IN THE SUPREME COURT OF INDIA

The Relevant Text of the Order as follows :

165. The conclusions in the aforestated paragraph have no direct relevance to the facts at hand as the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the assessee.

For all these reasons therefore, these submissions of the learned Additional Solicitor General are rejected.

166. At this juncture, it is also important to point out that vide Circular No. 10/2002 dated 09.10.2002, the Revenue, after referring to section 195 of the Income Tax Act and deciding that a No Objection Certificate from the Department would not be necessary if the person making the remittance is to submit an undertaking along with the certificate of an accountant to the Reserve Bank of India [“RBI”], has itself made a distinction in the proforma of the certificate to be issued in Annexure B to the aforesaid Circular, between remittances for royalties (see Row No. 5) and remittances for supply of articles or computer software (see Row No. 7), as follows:

ANNEXURE -B
CERTIFICATE

1 Name and address of the beneficiary of the remittance and the name of the foreign country to which remittance is being made.
2 Amount of remittance is foreign currency indicating the proposed date/month and bank through which remittance is being made.
3 Details of tax deducted at source, rate at which tax has been deducted and date of deduction. Foreign Indian
Amount to be remitted ——  ——
Tax deducted at source  ——  ——
Actual Amount remitted  ——  ——
Rate at which deducted  ——  ——
Date of Deduction  ——  ——
4 In case the remittance as indicated in (2) above is net of taxes, whether tax payable has been grossed up? If so, computation thereof may be indicated.
5 If the remittance is for royalties, fee for technical services, interest, dividend, etc., the clause of the relevant DTAA under which the remittance is covered along with reasons and the rate at which tax is required to be deducted in terms of such clause of the applicable DTAA.
6 In case that tax has been deducted at a rate lower than the rate prescribed under the applicable DTAA, the reasons thereof.
7 In case remittance is for supply of articles or things (e.g., plant, machinery, equipment, etc.) or computer software, please indicate :—
i. Whether there is any permanent establishment in India through which the beneficiary of the remittance is directly or indirectly carrying on such activity of supply of articles or things?
ii. Whether such remittance is attributable to or connected with such permanent establishment?
iii .If so, the amount of income comprised in such remittance which is liable to tax.
iv. If not, the reasons in brief therefor.
8 In case remittance is on account of business income please indicate :—
i. Whether such income is liable to tax in India?
ii. If so, the basis for arriving at the rate of deduction of tax.
iii. If not, the reasons thereof.
9 In case tax is not deducted at source for any other reason, details thereof.

(emphasis supplied)

167. The Revenue, therefore, when referring to “royalties” under the DTAA, makes a distinction between such royalties, no doubt in the context of technical services, and remittances for supply of computer software, which is then treated as business profits, taxable under the relevant DTAA depending upon whether there is a PE through which the assessee operates in India. This is one more circumstance to show that the Revenue has itself appreciated the difference between the payment of royalty and the supply/use of computer software in the form of goods, which is then treated as business income of the assessee taxable in India if it has a PE in India.

CONCLUSION

168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that 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. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.

169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.

170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.

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Author Of this post: Reetubaraik

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