2016 (1) TMI 812 - HC - Income Tax

Court rules payments for software purchases not royalty, no TDS required.

The Principal Commissioner of Income Tax-6 Versus M. Tech India P. Ltd.

The High Court upheld the ITAT's decision, ruling in favor of the Assessee. The Court held that the payments made for software purchases were not royalty ... Disallowance u/s under Section 40(a)(i) and 40(a)(ia) - TDS on payment for Value Added Reseller (VAR) of software related to healthcare and hospitality. - as per revenue payments made by the Assessee were in the nature of royalty and, therefore, the Assessee was obliged to withhold tax on such payments - According to the Assessee, it had made those payments for the purchase of software and it was asserted that the Assessee is a Value Added Reseller (VAR) of the software in question - ITAT deleted the disallowance - Held that:- The Tribunal held that there was no transfer of rights in respect of the copyright held by the Assessee in the software and it was a case of mere transfer of copyrighted article. This Court concurred with the Tribunal and held that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income. - Decided in favour of assessee. Issues Involved:1. Justification of ITAT in overlooking explanations to Section 9(1)(iv) of the Income Tax Act, 1961.2. Deletion of disallowance under Section 40(a)(i) and 40(a)(ia) of the Act.3. Consideration of payments as royalty subject to TDS.4. Applicability of Section 194C regarding passenger transport as work.5. Requirement of TDS on payments for hiring taxis.Issue-wise Detailed Analysis:1. Overlooking Explanations to Section 9(1)(iv) of the Income Tax Act, 1961:The Revenue questioned whether the ITAT was justified in overlooking explanations 2, 4, and 5 to Section 9(1)(iv) of the Act. However, this issue was not pursued further during the arguments.2. Deletion of Disallowance under Section 40(a)(i) and 40(a)(ia) of the Act:The Revenue challenged the ITAT's decision to delete disallowances of Rs. 72,23,496/- and Rs. 13,78,496/- made by the AO under Section 40(a)(i) and 40(a)(ia) respectively. The Assessee argued that the payments were for the purchase of software and not royalty, thus not requiring TDS. The CIT(A) and ITAT concurred with the Assessee, stating that the payments were for software purchases, not royalty, and hence, no TDS was required.3. Consideration of Payments as Royalty Subject to TDS:The core issue was whether the payments made by the Assessee for software were in the nature of royalty, necessitating TDS. The Assessee had agreements with THPL, Speed Miners, and Intersystems India Pvt. Ltd. for software purchases. The AO treated these payments as royalty, disallowing the expenses under Section 40(a). The CIT(A) and ITAT found that the Assessee was a reseller of software, and the payments were for purchases, not royalty. The Tribunal relied on the decision in CIT v. Dynamic Vertical Software India P. Ltd., which held that payments for software purchases by resellers were not royalty.4. Applicability of Section 194C Regarding Passenger Transport as Work:The Revenue also questioned the deletion of disallowance of Rs. 61,342/- under Section 40(a)(ia) concerning payments for passenger transport, arguing it should be considered work under Section 194C. This issue was not pursued further during the arguments.5. Requirement of TDS on Payments for Hiring Taxis:The Revenue contended that no TDS was deducted on payments for hiring taxis, contrary to the law laid down by the Supreme Court in Associated Cement Co. Ltd. v. CIT. However, this issue was not pursued further during the arguments.Judgment:The High Court upheld the ITAT's decision, stating that the payments made by the Assessee were for software purchases and not royalty. The Court emphasized the distinction between payments for acquiring the right to use software (royalty) and payments for purchasing software as a product. The Court referred to the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh, which held that software sold as a product is considered goods. The Court also noted previous decisions, including Infrasoft Ltd. and Dynamic Vertical Software India P. Ltd., supporting the view that payments for software purchases by resellers are not royalty. The appeal was dismissed, affirming the ITAT's decision in favor of the Assessee.