2010 (2) TMI 1201 - AT - Income Tax

ITAT Hyderabad directs reassessment on software license payments under Income-tax Act

M/s Energy Solutions International (I) Pvt. Ltd., Versus Deputy Commissioner of Income Tax, Cir-2 (2), Hyderabad.

The ITAT Hyderabad sent back the matters to the assessing officer for reconsideration concerning the disallowance of payments made for software licenses ... - ISSUES PRESENTED AND CONSIDERED 1. Whether payments made for acquisition/import of software licence constituted 'royalty' within the meaning of section 9(1)(vi) (including Explanation 2) such that they were taxable in India and attracted withholding obligations under section 195, non-compliance with which would justify disallowance under section 40(a)(i). 2. Whether the assessing officer and the first appellate authority recorded and considered all relevant facts and documents (including paper book) necessary to determine the nature of the software payments, and whether the matter should be remitted for fresh adjudication. 3. Whether additional grounds filed by the taxpayer for the assessment year should be admitted and adjudicated afresh by the assessing officer in the light of remand. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of software payments as 'royalty' under section 9(1)(vi) and consequences under sections 195 and 40(a)(i) Legal framework: Section 9(1)(vi) defines income deemed to accrue or arise in India, with Explanation 2 extending 'royalty' to consideration for transfer of rights in respect of patents, inventions, formulae, processes, or designs or for imparting information concerning technical, industrial, commercial or scientific knowledge. Section 195 obliges withholding on payments to non-residents where chargeable to tax, and section 40(a)(i) permits disallowance of expenditure where tax deductible at source has not been deducted/paid. Precedent treatment: The judgment record does not cite any judicial precedents; the assessing officer applied Explanation 2 to treat the payments as royalty on the basis that the licence included rights enabling development/sale of derived software. No prior decisions were followed, distinguished, or overruled in the available text. Interpretation and reasoning: The assessing officer examined invoices and purchase orders and concluded the licence conveyed rights beyond mere end-user use - specifically, rights to apply and develop the software for sale in India - bringing the consideration within the Explanation 2 definition of royalty. On that basis, the assessing officer treated the payments as chargeable to tax under section 9(1)(vi), held that withholding under section 195 was required and, because no tax was deducted, invoked section 40(a)(i) to disallow the expenditure. The assessee contended it acquired only a licence for use and not copyright or right to copy/sell, asserting that mere import/purchase of a software package without transfer of copyright is not royalty. The first appellate authority examined the contentions and confirmed the assessing officer's disallowance. Ratio vs. Obiter: The Tribunal did not decide the substantive question of whether the payments were royalty on the merits; rather, it refrained from affirming or reversing the tax characterisation because it found that the authorities had not recorded and considered all relevant facts fully and both parties sought remand. Thus, there is no binding ratio on the legal characterisation of such software payments arising from this order; any discussion of the legal tests is obiter to the extent it appears in earlier authorities' reasoning as summarized. Conclusions: The Tribunal did not resolve the legal issue on its merits. It directed that the entire issue - including whether the payments constitute royalty triggering withholding under section 195 and consequent disallowance under section 40(a)(i) - be reconsidered afresh by the assessing officer after hearing the assessee and examining the complete record. Issue 2 - Adequacy of fact-finding and need for remand where paper book and additional materials were submitted Legal framework: Administrative fairness and principles of natural justice require that adjudicating authorities record and consider material facts, documents and submissions placed before them. Where material is not considered or the record is incomplete, a remand is an appropriate remedy to enable fresh decision-making in accordance with law. Precedent treatment: No authorities were cited in the text. The Tribunal relied on parties' agreed position and the record when deciding to remit rather than deciding on the merits. Interpretation and reasoning: Both the assessee and the Revenue representatives urged remand - the Revenue to allow admission and adjudication of additional grounds; the assessee because it alleged that the assessing officer and CIT(A) had not recorded or considered the full facts despite the paper book being submitted. The Tribunal examined the record and, noting the parties' agreement and the incompleteness in adjudication, found it appropriate in the interests of natural justice to remit all issues back to the assessing officer for fresh consideration, including hearing the assessee and considering additional grounds. Ratio vs. Obiter: The decision to remit is ratio decidendi for the specific procedural posture - where authorities have not recorded/considered all material and the parties agree on remand, the Tribunal will remit for fresh adjudication. This is a controlling procedural principle as applied in this case. Conclusions: The Tribunal ordered remand of the matter (including all issues and additional grounds) to the assessing officer for de novo consideration in accordance with law after hearing all contentions and examining the paper book and supporting materials. The appeals were disposed as allowed for statistical purposes to effect the remand. Issue 3 - Admission and adjudication of additional grounds Legal framework: Additional grounds of appeal, once filed and if not previously adjudicated, may require consideration by the relevant authority; where such grounds raise fresh issues and the record has not been fully considered, appropriate remand ensures those grounds are heard and decided in accordance with law. Precedent treatment: The judgment does not reference precedent on admission of additional grounds; the Tribunal addressed the matter on procedural fairness grounds. Interpretation and reasoning: The Revenue requested that additional grounds filed for one assessment year be restored to the file of the CIT(A) for fresh adjudication. Given the parties' consensus and the Tribunal's finding that the lower authorities had not fully recorded all facts despite receipt of the paper book, the Tribunal found it appropriate to remit additional grounds along with substantive issues to the assessing officer for fresh consideration. Ratio vs. Obiter: The direction to remit additional grounds for fresh adjudication forms part of the Tribunal's operative order and is ratio for the procedural remedy adopted here: additional grounds should be adjudicated by the assessing officer when the record is incomplete or the matter is remitted. Conclusions: The Tribunal directed that the additional grounds be sent back to the assessing officer for consideration afresh in accordance with law, to be decided after hearing the assessee and examining the full record. Cross-references 1. Issue 1 (substantive characterisation as royalty) is remitted pursuant to the Tribunal's resolution of Issue 2 (inadequate fact-finding) and Issue 3 (additional grounds), and therefore remains open for fresh determination by the assessing officer. 2. The Tribunal's disposition is procedural: it does not decide the tax character of the payments, but establishes that a fresh, fact-sensitive adjudication is required where full documents and contentions have not been considered.