TDS on Foreign Software Payments Deemed Royalty, Taxable in India

Case Name**: COMMISSIONER OF INCOME TAX VS PSI DATA SYSTEM LTD. 

**Key Takeaways**:

1. Payments for software purchases to foreign companies are considered royalty and taxable in India.

2. The court relied on a previous judgment (Samsung Electronics case) to support this decision.

3. Recent amendments to Section 9 of the Income Tax Act, 1961, have retrospective effect, strengthening the tax liability of such transactions.

**Issue**: 

Is the assessee liable to deduct TDS on payments made for software purchases from foreign companies, treating it as royalty taxable in India under Section 9 of the Income Tax Act and relevant Double Taxation Avoidance Agreements (DTAAs)? 

**Facts**:

- The case involves payments made by an Indian company (PSI Data System Ltd.) to foreign companies for software purchases.

- The Tribunal had initially ruled that these payments were not liable for TDS as they couldn't be treated as royalty.

- The revenue department appealed this decision in the High Court. 

**Arguments**:

Revenue's Arguments:

1. The payments should be treated as royalty and thus taxable in India.

2. Recent amendments to Section 9 of the Income Tax Act support this position.

3. The Samsung Electronics case judgment covers the questions raised in this appeal.

Assessee's Arguments:

1. The purchase was only for the right to use the software, not the entire copyright.

2. DTAAs beneficial to the assessee should be considered over Section 9 of the Act. 

**Key Legal Precedents**:

1. COMMISSIONER OF INCOME TAX & ANOTHER vs SAMSUNG ELECTRONICS CO LTD & OTHERS [(2011) 245 CTR (KAR) 481]: This case held that payments for software use rights fall under the definition of royalty as per Section 9(1)(vi) of the Income Tax Act. 

**Judgement**:

The High Court allowed the revenue's appeal and set aside the Tribunal's order, restoring the original assessment order. The court ruled that:

1. The Samsung Electronics case judgment covers the questions raised in this appeal.

2. Recent amendments to Section 9 of the Income Tax Act (Explanations 4 and 5) clarify the tax liability of such transactions, with retrospective effect from 1-6-1976.

3. Payments for software purchases from foreign companies are indeed liable for TDS as royalty taxable in India. 

**FAQs**:

1. Q: What is the main implication of this judgment?

  A: Software purchase payments to foreign companies are now clearly treated as royalty and subject to TDS in India.

2. Q: Does this judgment have a retrospective effect?

  A: Yes, due to the amendments in Section 9 of the Income Tax Act, which are applicable retrospectively from 1976.

3. Q: How does this affect Indian companies purchasing software from foreign vendors?

  A: Indian companies now need to deduct TDS on such payments, treating them as royalty.

4. Q: What was the significance of the Samsung Electronics case in this judgment?

  A: The Samsung case set a precedent that software use rights payments qualify as royalty under the Income Tax Act, which was applied in this case.

5. Q: How do Double Taxation Avoidance Agreements (DTAAs) factor into this decision?

  A: While DTAAs were considered, the court prioritized the amended Section 9 of the Income Tax Act in its decision.

1. This appeal by the revenue had been admitted to examine the following substantial questions of law:

1. Whether the Tribunal was correct in holding that the assessee is not liable to deduct TDS in respect of payments made for purchase of software as the same cannot be treated as income liable to tax in the India as Royalty or Scientific Work under section 9 of the Act read with Double Taxation Avoidance Agreements and treaties.

2. Whether the Tribunal was correct in holding that since the assessee had purchased only a right to use the copyright i.e., the software and the entire copyright itself the payment cannot be treated as Royalty as per the Double Taxation Avoidance Agreement and Treaties which is beneficial to the assessee and consequently section 9 of the Act should not take into consideration.

3. Whether the Tribunal should have recorded a finding that in accordance with section 19(2) and (3) and (4) of the Act, the foreign parties are chargeable to tax or not and having failed to do so the assessee was bound to deduct tax as held by the Apex Court in 239 ITR 587.

2. Sri M V Seshachala, learned senior standing counsel appearing for the appellant-revenue, submits that these questions are now covered by the judgment of this court rendered in the case of COMMISSIONER OF INCOME TAX & ANOTHER vs SAMSUNG ELECTRONICS CO LTD & OTHERS [(2011) 245 CTR (KAR) 481].

3. Sri Seshachala also submits that apart from this judgment of a division bench of this court, even the present statutory position in terms of the amendment to Section 9 of the Income Tax Act, 1961 [for short, the Act] by way of addition of explanations 4 and 5 reading as under:

Explanations 4:- For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.

Explanations 5:- For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. by Finance Act, 2012 and which has been given retrospective effect from 1-6-1976, amply covers the situation in the present case and therefore the questions have to be answered in the negative and in favour of the revenue and the appeal has to be allowed.

4. Sri K S Ramabhadran, learned counsel for the respondent-assessee, while does not dispute that the judgment of this court in the case of SAMSUNG ELECTRONICS CO LTD [supra] does cover the questions raised in this appeal also, but, nevertheless, submits that it is not necessary to go into the amendment to Section 9 of the Act, as independent of this section as amended now, the questions have to be answered in the negative, in view of the legal position prevailing, is only as per the judgment of this court in the case of SAMSUNG ELECTRONICS CO LTD [supra].

5. We answer the questions in the negative and against the assessee. Accordingly, we allow this appeal, set aside the order of the tribunal and restore the assessment order.

SD/-

JUDGE

SD/-

JUDGE