Definition of ‘royalty’ could not be applied to purchase of software by assessee which did not involve any commercial exploitation thereof
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IN THE ITAT BANGALORE BENCH ‘C’
Deputy Commissioner of Income-tax
WS Atking India (P.) Ltd.
AND ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
IT APPEAL NO. 1467 (BANG.) OF 2014
[ASSESSMENT YEAR 2009-10]
MAY 8, 2015
Dr. K. Shankar Prasad for the Appellant. K.P. Srinivas, CA for the Respondent.
N.V. Vasudevan, Judicial Member – This appeal by the assessee is against the order dated August 19, 2014 of the Commissioner of Income-tax (Appeals)-III, Bangalore relating to the assessment year 2009-10.
2. Ground No. 2 reads as follows :
“2. On the facts and in the circumstances of the case the learned Commissioner of Income-tax (Appeals) erred in law in holding that 10 per cent. of the total telecommunications expenses are to be allowed as telecommunication expenses for delivery of software outside India instead of 50 per cent., without appreciating that the Assessing Officer had given a substantial finding on this issue and the facts were same for the assessment year 2008-09.”
3. The assessee is a company engaged in the business of rendering computer software development services. The assessee is registered with the Software Technology Parks of India (STPI) and has registered office in Bangalore. The assessee was entitled to claim deduction under section 10A of the Income-tax Act, 1961. While computing deduction under section 10A, the assessee excluded from the export turnover 10 per cent. of the telecommunication expenses of Rs. 45,67,877. According to the assessee, as per the definition of “export turnover” as laid down in clause (iv) of Explanation 2 to section 10A of the Act, freight, telecommunication charges or insurance, attributable to delivery of articles or things or computer software outside India have to be excluded. According to the assessee, only 10 per cent. of the telecommunication expenses were attributable to delivery of computer software outside India and accordingly only a sum of Rs. 4,56,788 was excluded. According to the Assessing Officer, in the assessment year 2008-09, 50 per cent. of the telecommunication expenses were considered as expenses attributable to delivery of software outside India and following the same, the Assessing Officer excluded 50 per cent. of telecommunication expenses and thereby the export turnover for the purpose of computing deduction under section 10A was taken at a lower figure.
4. On appeal by the assessee, the Commissioner of Income-tax (Appeals) found on the basis of evidence led before him that only 10 per cent of the telecommunication expenses were to be excluded from the export turnover as attributable to delivery of computer software outside India incurred by the assessee. In this regard, the Commissioner of Income-tax (Appeals) has verified all the documents filed by the assessee to demonstrate the above position and came to the conclusion that the estimate made by the Assessing Officer was without any basis. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue is in appeal before the Tribunal.
5. Before us, the learned Departmental representative relied on the order of the Assessing Officer. We find that as per the agreement between the assessee and its customers overseas, communication expenses were to be borne by the customer. In such circumstances, there could be no expenses incurred by the assessee for delivery of computer software outside India. Nevertheless, the assessee has on his own, on a conservative approach, disallowed 10 per cent. of the telephone expenses as incurred by the STPI unit as attributable to delivery of software outside India. In the given circumstances, we do not find any merit in ground No. 2 raised by the Revenue.
6. Grounds Nos. 3 and 4 are with regard to exclusion of reimbursement of certain expenses from both export turnover and total turnover for the purpose of computing deduction under section 10A of the Act. According to the assessee, whatever is excluded from the export turnover has also to be excluded from the total turnover as laid down by the Hon’ble High Court of Karnataka in CIT v. Tata Elxsi Ltd.  349 ITR 98 The Assessing Officer did not agree with the submissions of the assessee, but the Commissioner of Income-tax (Appeals) allowed the claim of the assessee. The grievance of the Revenue is that the decision of the Hon’ble High Court of Karnataka cited supra has not been accepted by the Department and a special leave petition was pending before the Hon’ble Supreme Court. In our view, this cannot be the basis not to follow the binding decision of the Hon’ble jurisdictional High Court. We therefore confirm the order of the Commissioner of Income-tax (Appeals) and dismiss grounds Nos. 3 and 4 raised by the Revenue.
7. Ground No. 5 reads as follows :
“5. On the facts and in the circumstances of the case the learned Commissioner of Income-tax (Appeals) erred in law in deleting the disallowance under section 40(a)(ia) without appreciating the fact that the assessee had purchased software which is in nature of a licence paid for usage of the software and the consideration for such licences would fall within the definition of the royalty defined in Explanation to section 9(1)(vi) and hence deduction of tax at source under section 194J should have been done by the assessee.”
8. The assessee had during the previous year acquired software by way of purchase. The depreciation on such addition of software was a sum of Rs.32,36,441. The assessee claimed the aforesaid depreciation as an allowable deduction while computing its income from business. The Assessing Officer, however, noticed that on the purchase of software, the assessee had not deducted tax at source. The Assessing Officer was therefore of the view that the provisions of section 40(a)(ia) of the Act were applicable and claim for depreciation had to be disallowed under section 40(a)(ia).
9. Under section 40(a)(ia), deduction on interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or a sub-contractor being a resident for carrying out any work on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted, the same will not be allowed as a deduction. According to the Assessing Officer, the amount paid by the assessee for acquiring software was in the nature of royalty within the meaning of Explanation 2 to section 9(1)(vi) and accordingly the Assessing Officer disallowed the claim of the assessee for depreciation.
10. On appeal before the Commissioner of Income-tax (Appeals), the assessee raised a contention that software has been included in definition of royalty only by amendment of the Finance Act, 2012. Although this amendment is retrospective, there is no liability that can be fastened on the assessee to deduct tax at source. Various decisions were relied upon including the decision of Infotech Enterprises Ltd. v. Addl. CIT  63 SOT 23 of the Hyderabad Bench of the Tribunal wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subsequently become taxable on account of a retrospective legislation.
11. The Commissioner of Income-tax (Appeals) held as follows :
“7.3 In my view there is considerable force in the submissions of the appellant. Even accepting the view of the Assessing Officer that the payment made for obtaining licence for use of software would amount to royalty, it is necessary to note that during the period when the purchase was made, i.e., financial year 2008-09, the assessee did not have the benefit of the clarification brought about by the retrospective amendment that the payment tantamounts to payment for royalty and consequently tax was to be deducted under section 194J. The law as extant on the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. As it is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made, the contentions of the authorised representative for the appellant are valid. This view is supported by the ratio of the following decisions relied on by the authorised representative for the appellant.
|(i)||Infotech Enterprises Ltd. v. Addl. CIT I. T. A. No. 115/HYD/ 2011 dated January 16, 2014  30 ITR (Trib) 542 (Hyd) ;|
|(ii)||Kerala Vision Ltd. v. Asst. CIT  35 ITR (Trib) 81 (Cochin) ; and|
|(iii)||Channel Guide India Ltd. v. Asst. CIT  20 ITR (Trib) 438 (Mum).|
7.4 The Assessing Officer is therefore directed to allow the claim of the appellant. This ground is allowed.”
12. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised ground No. 5 before the Tribunal.
13. We have heard the submissions of the learned Departmental representative, who reiterated the stand of the Revenue as contained in ground No. 5. In our view, the issue raised by the Revenue in the ground of appeal is no longer res integra and has been considered and decided by the Income-tax Appellate Tribunal Delhi Bench in the case of SMS Demag (P.) Ltd. v.Dy. CIT  38 SOT 496 and Sonic Biochem Extractions (P.) Ltd. v. ITO  59 SOT 4 . In Sonic Biochem Extractions (P.) Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations (headnote):
“The assessee purchased software, capitalised the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer invoked the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal :
Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of ‘royalty’. Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilisation in the day-to-day business.”
14. Respectfully following the aforesaid decision of the Tribunal, we uphold the order of the Commissioner of Income-tax (Appeals) and dismiss the ground raised by the Revenue.
15. In the result, the appeal by the Revenue is dismissed.