Tribunal allows software purchase deduction, excludes it from royalty definition under tax law

The Tribunal ruled in favor of the appellant, overturning the disallowance of expenditure for not deducting tax at source on software purchases. It clarified that software purchases without acquiring copyright do not constitute royalty under the Income-tax Act or Double Taxation Avoidance Agreement (DTAA). The Tribunal emphasized the DTAA definition of 'royalty,' excluding payments for copyrighted articles from tax deduction obligations. The appellant's claim of expenditure was allowed, and the default tax deduction status was negated. The decision underscored the primacy of DTAA provisions and the inapplicability of tax deduction requirements in this context.

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Issues involved: Disallowance of expenditure under section 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source on payment made for purchase of software.

Detailed Analysis:

1. Issue of Disallowance of Expenditure: The appellant contested the disallowance of expenditure amounting to &8377; 32,35,518/- by the Deputy Commissioner of Income Tax Circle 3, Pune, under section 40(a)(i) of the Act for failure to deduct tax at source on payment made for purchasing software. The Assessing Officer considered the payment as royalty due to the purchase of licensed software and disallowed the expenditure since tax was not deducted at source. The CIT(A) upheld the disallowance citing precedents like Cummins Inc and DDIT Vs. Reliance Infocom, disregarding the appellant's reliance on the Allianz SE case. The appellant contended that the issue was resolved in their favor in earlier years and referred to the decision in John Deere India Pvt. Ltd. Vs. DDIT to support their case.

2. Judgment Analysis: The Tribunal analyzed whether the purchase of licensed software should be treated as royalty and if the appellant was obligated to deduct tax at source. The Tribunal referred to the Pune Bench's decision in John Deere India Pvt. Ltd. Vs. DDIT, where it was clarified that software purchased off-the-shelf, without acquiring copyright, does not constitute royalty under the Act or DTAA. The Tribunal emphasized that the definition of 'royalty' under DTAA remains unchanged, and the amended domestic law provisions do not extend to DTAA definitions. As per the DTAA definition, royalty pertains to payments for copyright use, excluding purchase of copyrighted articles. Therefore, the appellant was not liable to deduct tax at source for software purchases. Consequently, the Tribunal overruled the CIT(A)'s decision, allowing the appellant's expenditure claim of &8377; 32,35,518/- and negating the default status for tax deduction. The judgment was delivered on May 3, 2019.

3. Conclusion: The Tribunal's verdict favored the appellant, rejecting the disallowance of expenditure for failure to deduct tax at source on software purchases. By clarifying the distinction between royalty and purchase of copyrighted articles, the Tribunal upheld the appellant's position based on the DTAA definition of 'royalty.' The decision highlighted the precedence of DTAA provisions over domestic laws and emphasized the non-applicability of tax deduction obligations in the given scenario, ultimately allowing the appellant's appeal.

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