Payment for purchase of software not liable to tax under 195

AIT News Network
MUMBAI. Vide a landmark ruling AIT-2006-218-ITAT; the Tax Tribunal has ruled that the payment made for purchase of software from various concerns abroad are not liable to tax deduction under Section 195 of Income Tax Act.

T H E    F A C T S 

• The assessee was carrying on business of trading in software packages commonly known as ‘shrink wrapped software packages’ or canned software.  The assessee has entered into several agreements in the course of its activity for the purpose of distributing these software packages to its customers.  For the appeals under consideration, the assessee imported shrink wrapped software from various parties.  

• All the appeals by assessee were directed against various orders of Commissioner of Income Tax(Appeals) in the appeals filed under section 248 of the income Tax Act 1961 (the Act).  The assessee filed the appeals under section 248 denying his liability to deduct tax under section 195 in respect of payment made for purchase of software from various concerns abroad.

• The AO on earlier occasion held that the assessee as ‘the assessee in default’ under section 201 for failure to deduct tax on similar payments.  CIT(A)  confirmed the action of AO. 

• According to the AO the payments are covered by definition of ‘Royalty’ under section 9(1)(vi) of the Act and therefore section 195 applies in this case.  The AO thus held these payments, fall within the purview of section 9(1)(vi) of the Act, since the import of software packages does not constitute goods.  Accordingly tax on royalty under section 195 of the Act had to be deducted at the rates specified in the Act or in DTAA. 

T H E  R U L I N G: 

A perusal of the agreement indicates that in all the cases the copyright is retained with the owner and only the copyrighted article has been sold to the Distributor (the Appellant) for distribution in India.

• The question which arises is whether the payments made by the appellant for distribution of the software acquired from the Vendors can at all be considered to be the payment made in respect of ‘Royalty’ within the meaning of explanation 2 to section 9(1)(vi) of the I.T.Act,1961.  The A.O. has held that the payments made by the appellant for the licence use the software is liable for deduction of tax on the premise that the same is royalty.       

·         The assessee submits and rightly so that the payments made by it for the purchase of software are payments for the acquisition of software products and is not consideration for acquisition of any intellectual property rights specific on the aforesaid definitions of the term ‘royalty’ for the reasons mentioned below.

• For ascertaining whether the payment under consideration falls within the scope of royalty under the Act or under the DTAA the reason given by the A.O. is that the payment made by appellant is for the transfer of all or any rights in copyright. 

• There is no doubt that what the assessee has acquired under the various agreements referred to above is computer software.

• The next question, therefore, which arises is what is copyright in a software The question, therefore, for consideration is whether any of the vendors under the agreement with the appellant have transferred to the appellant the right to use any of the rights viz reproduction right, distribution

• None of the exclusive rights in a work have been transferred to the appellant.  The exclusive rights in a work are the reproduction right, distribution right, rental or lending right etc.  These rights have not been transferred to the appellant.  What all the appellant is doing is using the software and/or acting as a distributor of the software.  This brings up the question as to whether there is a distinction between the transfer of a copyright per se and a copyrighted article.

• The copyright in the software is different from any right in the physical manifestation of the software contained in a CD or a floppy or hard disk in which the software is downloaded.  Thus when the appellant is a distributor for Acutate Asia Pacific, Cladera or Microsoft, he has not acquired the distribution right which is a copyright within the meaning of section 14(a)(ii) or the right to sell or give on commercial rental or offer for sale or for commercial rental computer programs which is a right under 14b(ii) which continues to remain with Computer Associates Microsoft.  The appellant has merely obtained the right to distribute the copyrighted material which is a property different from the property in the copyright in the software.  The property contained in copyrighted material and the property contained in the copyright to software are two different rights and when the assessee acts as a distributor for copyrighted material, he has not acquired the distribution right within the meaning of section 14a(ii) read with section 14b(ii) of the Copyright Act 1957.

• In none of the agreement which are under consideration are these features provided for . Therefore, there can be no valid assignment within the provision of Copyright Act, 1957  and therefore, it cannot be contended for the revenue that what was assigned was a copyright, Therefore is an assignment is not made validly there can be no assignment of a copyright.

• Further the controversy whether software is tangible property or intangible property has been set to rest by Supreme Court in the case of TCS Vs State of Andhra Pradesh AIT-2004-01-SC , wherein it has been held that a transaction of sale of computer software packages in the assessee’s case is Clearly a sale of goods within  the meaning of Andhra Pradesh General Sales Tax Act, 1957.

• What the appellant has acquired is copyrighted article, which partakes the character of purchase and sale of goods.  Therefore no tax needs to be deducted under section 195 of the I.T. Act. 

( Click here for full text of ruling AIT-2006-218-ITAT )

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