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Section 195 – on facts, amount reimbursed towards allocation, without any mark-up, of cost of off-the-shelf software purchased from vendors, being not chargeable to tax in India, payer was not obliged to deduct tax u/s. 195
Facts:
A company incorporated in USA (“USCo”) had entered into global agreement with certain software vendors for purchase of standard off-the-shelf software to be used by its group entities across the globe including India. USCo made payments to the vendors and allocated the cost of the software, without any mark-up, amongst various group entities based on the number of desktop in each group entity. The Taxpayer, an Indian company, also reimbursed the allocated cost to USCo.
According to the Taxpayer, since the software was purchased off-the-shelf, and was acquired for use, the payment did not result in ‘royalty’ or ‘income’ in the hands of the recipient. Further the payment was merely reimbursement of cost without any mark up.
However, according to the Tax Authority, the payment was in the nature of ‘royalty’.
Held:
USCo had made the allocation at cost without charging any mark-up. There was no dispute about the reimbursement amount paid to USCo being not chargeable to tax in India.
It was not a case where USCo had developed software which was given for use to the Taxpayer. The software was purchased from vendors and cost was allocated. It was a case of pure reimbursement of cost without any mark-up.
Thus, there was no dispute that the amount paid to USCo, being purely a reimbursement, was not chargeable to tax in India. Thus, relying on the decision of the Supreme Court in G E India Centre Technology Ltd vs. CIT [339 ITR 587], it was held that there was no obligation on the Taxpayer to withhold tax u/s. 195
