payment for purchase of software did not fall in the definition of royalty

 

Deputy Commissioner of Income Tax, Circle-1(1)(1) vs ABB Global Industries and Services Pvt Ltd 

Issue: Payments made for purchase of software: Scope of definition of the term 'Royalty' as per India-USA tax treaty

The assessee was a company engaged in the business of software development services. The AO disallowed a sum of Rs.1,10,33,217 which was payment made by the assessee for acquiring software licence. The AO was of the view that payment in question was in the nature of royalty or fees for technical services and therefore taxable in India. Since the assessee had not deducted tax at source on the aforesaid payment, the AO disallowed the claim of assessee for deduction of the aforesaid sum for non-deduction of tax at source u/s. 195 and invoked the provisions of section 40(a)(i). The AO placed reliance on the decision of Hon’ble Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd., wherein the Hon’ble Court held that when licence is granted to make use of software by making copy of the same and store it in hard-disk of designated computer and to take backup copy of the software, it will amount to a transfer of right to use software and would constitute royalty within the meaning of Article 12 of DTAA between India and USA. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. Aggrieved the assessee filed appeal before the Tribunal.