Software purchase payments to US company exempt from TDS under section 195 retrospective amendment cannot create liability

ITAT Chennai ruled in favor of the assessee regarding TDS deduction under section 195 for software purchase payments to a US company. The AO had demanded TDS under section 201(1)/201(1A), citing Finance Act 2012 amendments making software payments taxable income. The Tribunal held that retrospective amendments cannot impose liability when no such requirement existed at the time of payment. Following SC precedent in Engineering Analysis and Madras HC decisions in Saipem India, Dasault, and Financial Software cases, the Tribunal set aside lower authorities' orders and directed deletion of the addition, allowing all grounds of appeal.

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Issues:
Challenge to addition of Rs. 14,44,380 under section 201(1) / 201(1A) regarding purchase of software.

Analysis:

The appeal was filed against the order of the Commissioner of Income Tax (CIT(A)) for the assessment years 2010-11, challenging the addition of Rs. 14,44,380 made by the revenue under section 201(1) / 201(1A) for the purchase of software from a US-based company. The Assessing Officer (AO) held that the payment for the right to use computer software falls under the purview of income as per section 9(1)(vi) of the IT Act, necessitating TDS deduction under section 40(a)(i). The CIT(A) upheld this decision. The assessee contended that the retrospective amendment did not require TDS deduction at the time of payment, citing various case laws, including Supreme Court decisions. The Tribunal noted that no blame could be placed on the assessee due to the retrospective nature of the amendment. Referring to a similar case, the Tribunal held that payment for off-the-shelf software products constitutes cost-to-cost reimbursement, not royalty, and is not subject to TDS. Consequently, the impugned addition was deleted based on the Supreme Court's decision in a similar case.

The Tribunal also considered judgments of the Madras High Court in related cases, Saipem India Pvt Ltd, Dasault, and Financial Software, which aligned with the Supreme Court's decision. In compliance with these decisions, the Tribunal set aside the lower authorities' order and directed the AO to delete the addition. As a result, all grounds of appeal raised by the assessee were allowed, and the appeal was granted in favor of the assessee. The order was pronounced on 27th November 2024 in Chennai.

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