TaxTMI 
TaxTMI 
2018 (1) TMI 1781
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....recipient had not paid taxes or not discharged the tax liability on the income received from the Appellant as required u/s. 191 of the Act. 2. The Appellant prays that the order passed by the AO be quashed / annulled and AO be directed to examine whether the taxes have been paid by the recipient on their income. GROUND II: TDS ON SOFTWARE EXPENSES OF RS. 13.49.952/- AND PURCHASE OF SOFTWARE OF RS. 16,39,419/- 1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Income Tax Officer (TDS) - 2(5) ("the AO") in treating the software expenditure of Rs. 13,49,952/- as in the nature of professional services and thereby hold that tax is required to be deducted at source u/s TDS 194J of the Act without appreciating the fact that the Appellant has correctly, deducted TDS u/s. 194C of the Act. 2. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the AO in treating the expenses incurred on purchase of software of Rs. 16,39,419/- as in the nature of royalty and thereby hold that tax is required to be deducted at source u/s. l94J of the A....
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....notice was issued and asked the assessee as to why the assessee shall not be treated as an assessee in default u/s 201(1) / 201(1A) of the Act. In response to show cause notice, the assessee submitted that expenditure incurred under the head ' software expenses' are in the nature of annual maintenance expenses for routine maintenance and renewal of software for which it has rightly deducted TDS u/s 194C. Therefore, the question of applicability of section 194J by treating the same as fees for technical services is in correct. Insofar as purchase of software, the assessee submitted that it has purchased copyrighted software from its party, next step which does not require rendering of any managerial, technical or even consultancy services, therefore, the question of deduction of tax at source on payment made for purchase of software does not arise. The AO, after considering relevant submissions of the assessee observed that expenses incurred under software expenses and purchase of software are in the nature of fees for technical services and royalty as mentioned in section 194J and, therefore, the assessee ought to have deducted TDS u/s 194J whereas assessee has deducted TDS u/s 194....
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....e nature of annual maintenance expenses for routine maintenance and renewal of software akin to works contract as defined in section 194C, therefore, the assessee has rightly deducted tax u/s 194C. Insofar as alternative arguments of the assessee that the recipients have already paid tax on amount received from the assessee, the CIT(A) in the light of decision of Hon'ble Supreme Court in the case of Hindustan Coco cola Beverages Ltd vs CIT (supra) held that once tax is paid by the deductee, the deductor cannot be treated as assessee in default for the purpose of section 201 of the Act. However, interest u/s 201(1A) will remain payable till the date of payment of taxes by the deductee. Therefore, by following the decision of Hon'ble Bombay High Court in the case of Bennet Coleman Ltd vs ITO 157 ITR 812 (Bom) and in the case of CIT vs Premnath Motors 120 Taxman 584 held that the assessee is liable to pay interest u/s 201(1A) of the Act, therefore, directed the AO to verify the evidence filed by the assessee and grant relief accordingly. 7. The Ld.AR for the assessee submitted that the Ld.AO was erred in treating software expenses and purchase of software fees for technical service....
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....nd further in view of view expressed on the subject by the jurisdictional High Court, the view favourable to the assessee may be taken. In this regard relied upon the decision of Special Bench of ITAT, Mumbai in the case of Narang Overseas Pvt Ltd vs ACIT 114 TTJ 433(Mum)(SB). 8. On the other hand, the Ld.DR strongly supported the order of CIT(A). The Ld.DR further submitted that the AO as well as CIT(A) has brought out clear facts to the effect that expenses incurred by the assessee are in the nature of fees for technical services which is liable for TDS u/s 194J, therefore, the AO was right in treating assessee as an assessee in default u/s 201(1)/ 201(1A insofar as purchase of software in view of the decision of the Karnataka High Court in the case of CIT vs Samsung Electronics Co Ltd (supra), where the law is very clear insofar as purchase of copyrighted software that they are in the nature of royalty and liable for TDS u/s 194J. Though the assessee is liable for TDS, failed to deduct such TDS, therefore, the AO was right in treating assessee in default u/s 201(1) and 201(1A). 9. We have heard both the parties and perused the materials available on record. We also have go....
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....further observe that the assessee has paid amount to Oracle India Pvt Ltd for upgradation and renewal of Oracle database standard edition And project support services for whole year. The assessee also incurred expenditure on training on Oracle 10G forms / reports. All these expenses are in the nature of specialised services rendered by persons possessing special skills, therefore, cannot be considered as routine annual maintenance contracts. Therefore, we are of the considered view that the AO was right in treating the expenses under the head ' fees for technical services' which attracts TDS u/s 194J of the Act. 11. Insofar as purchase of software, the assessee has purchased copyrighted software from Next Step Industries Ltd. On perusal of the invoice copy furnished by the assessee, it is seen that licence for IBM Lotus Sometime Authorised User Annual SW Maintenance Renewal and for other services. On further verification of details filed by the assessee we notice that the assessee has purchased licence to use software but not copyrighted software which involves a copyright under the Copyright Act and is covered under the definition of royalty as defined u/s 9(1)(vi) of the Act. ....
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....interest u/s 201(1A). Therefore, we are of the considered view that the issue needs to be examined by the AO in the light of the evidence filed by the assessee and if the recipient has paid tax on the amount received from the assessee, then the AO is directed to grant relief to the assessee u/s 201(1) for short deduction of TDS. However, interest u/s 201(1A) is still payable and hence, the AO is directed to compute interest u/s 201(1A) of the Act. 13. The next issue that came up for our consideration is non deduction of tax at source on payments made for purchase of copyrights and technical know how. During the year, the assessee has paid a sum of Rs.5,20,00,000 towards acquisition of copyrights and technical know how without deduction of tax at source. The AO treated assessee in default in respect of payment made for purchase of copyrights and technical know how on the ground that since the recipient M/s Hard Castle & Wood Manufacturing Co has not offered the income under the head 'capital gains' and also claimed the same as exempt being capital receipt, the payment made by the assessee towards purchase of copyrights and technical know how did not fall within the scope of exclu....
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.... Creative Infocity Ltd.(82 taxmann.com 356) DCIT v. V. Rama Krishna (41 ITR(T) 157) (Hyd.) (para 15) > DDIT v. Tata Chemicals Ltd, (20 SOT 210) (Mum.)(para 6) > Abhishek Developers v. ITO (24 SOT 45) (Bang.) (para 6.6) Pro-Quip Corporation v. CIT (255 ITR 354) (Delhi AAR) 15. On the other hand, the Ld. DR supported the order of Ld. CIT(A). The Ld. DR further submitted that since the recipients have not paid tax on consideration received for purchase of copyrights and knowhow under the head 'capital gains', payments made are not coming within the exclusion provided under Explanation 2 to section 9(1)(vii) of the Act, therefore, the assessee was required to deduct TDS u/s 194J of the Act. 16. We have heard both the parties and perused the materials available on record. The assessee has made payment for purchase of copyrights and technical know of Rs.5,20,00,000 to M/s Hard Castile & Wood Mfg Co Ltd. As per the deed of assignment of copyrights and technical knowhow, the assessee has purchased copyrights and technical knowhow along with title and interest on outright basis. The AO has treated payment made for purchase of copyrights and technical knowhow as royalty for ac....
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....it of exclusion provided under Explanation 2 to section 9(1)(vii) of the Act. The AO as well as the CIT(A) has given a narrow meaning to the word "chargeable under the head capital gains" so as to mean that if the recipient has offered the income under the head 'capital gains' then the payments are coming within the ambit of exclusion without appreciating the facts that whether or not taxes have been paid on receipts even if such payment is in the nature of capital receipt which is not liable to tax under the provisions of the Act and the assessee has disclosed such a receipt in his books of account, then the AO is incorrect in treating the payments within the meaning royalty as defined u/s 9(1)(vii) of the Act. Therefore, we are of the considered view that the payments made by the assessee for outright purchase of copyright and technical knowhow is not coming within the definition of royalty as defined u/s 9(1)(vii) of the Act and the assessee is not liable to deduct tax u/s 194J of the Act, hence we direct the AO to delete addition made on account of short deduction of tax at source and interest u/s 201(1)/201(1A) of the Act. 18. In the result, appeal filed by the assessee is ....