Software payments to non-residents are not royalty, so reassessment based on Section 147 could not survive.

Consideration paid by resident distributors or end-users to non-resident software suppliers for resale or use of computer software was treated as not constituting royalty for use of copyright, so no income arose in India on that basis and no tax deduction obligation under Section 195 followed. On that legal position, the basis for reopening an assessment under Section 147 could not survive. The Madras High Court therefore treated the reassessment challenge as unsustainable in law and answered the issue in favour of the assessee.

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Issues: Whether the reopening of assessment under Section 147 of the Income-tax Act, 1961 was sustainable in view of the Supreme Court ruling that consideration paid by resident distributors/end-users to non-resident software suppliers for resale/use of computer software is not royalty and does not attract tax deduction at source under Section 195 of the Income-tax Act, 1961.

Analysis: The challenge to reopening depended on the taxability of amounts paid for computer software procured from non-resident suppliers. The Supreme Court has held that such consideration is not royalty for use of copyright in the software, that no income taxable in India arose on that basis, and that the persons covered by Section 195 were not liable to deduct tax at source. Once that legal position was declared, the basis for reopening could no longer survive. The question of reopening therefore became academic, but since the Tribunal had upheld reopening, the validity of the reassessment action had to be decided in the assessee's favour.

Conclusion: The reopening was held to be unsustainable in law and the issue was answered in favour of the assessee.

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