CIT Vs Mahindra Holidays and Resorts India Ltd. (Madras High Court)
Retrospective Software Royalty Amendment Cannot Create Past TDS Default; Section 40(a)(ia) Covers Both “Paid” and “Payable”
The Controversy
The Madras High Court considered three questions concerning recognition of membership fees, TDS on software licence renewals, and whether section 40(a)(ia) applies to amounts already paid.
The membership-fee issue and the software disallowance were decided in favour of the assessee. However, the Court answered the “paid versus payable” question in favour of the Revenue.
The distinction is important: the assessee succeeded on the software issue because the Court found no sustainable withholding default for the relevant period, rather than because the expenditure had already been paid.
Membership Fees: Receipt Did Not Require Immediate Recognition of the Entire Amount
The first question concerned the deletion of an addition of ₹158,43,81,853 relating to membership fees received from time-share members.
Both parties accepted that the issue was covered in the assessee’s favour by the earlier decision in CIT–LTU v. Mahindra Holidays and Resorts (India) Ltd. [(2026) 186 taxmann.com 146].
The Court followed that decision, which had accepted recognition of membership receipts over the membership period rather than taxation of the entire collection in the year of receipt. The judgment also referred to CIT v. Winner Business Link (P.) Ltd. [(2015) 55 taxmann.com 468 (Gujarat)], recording that it had been upheld by the Supreme Court on 3 October 2026.
Accordingly, the membership-fee question was answered against the Department. The decision concerns the timing of income recognition; it does not treat membership receipts as permanently exempt from tax.
Software Payments and the Department’s Parity Argument
The remaining questions arose from expenditure on software licences purchased from resident and non-resident suppliers.
The Assessing Officer noted that the assessee had deducted tax on payments to non-residents but had not deducted tax on payments to resident suppliers. Proceeding on an argument of parity between domestic and foreign purchases, he invoked section 194J and disallowed the domestic expenditure under section 40(a)(ia).
The CIT(A) confirmed this approach.
The payments in dispute totalled ₹1,04,86,060 and represented renewal of software licences, including Microsoft licences. The High Court therefore examined whether those payments attracted withholding under section 194J for the relevant assessment year.
Tribunal’s Reasoning on “Payable” Could Not Survive
The Tribunal had granted relief by relying on the Special Bench decision in Merilyn Shipping and Transports v. ACIT, concerning the distinction between amounts remaining payable and amounts already paid.
The High Court noted that this reasoning had subsequently been rejected by the Supreme Court in Palam Gas Service v. CIT [(2017) 81 taxmann.com 43].
Consequently, payment before year-end does not, by itself, take expenditure outside section 40(a)(ia). The statutory disallowance can apply to expenditure already paid where an applicable TDS obligation has not been complied with.
The third substantial question of law was therefore answered in favour of the Revenue.
Software Issue Decided Without Another Remand
Although the Tribunal had not adjudicated the software issue on merits, the High Court declined to remand it.
The assessment concerned AY 2008–09, the relevant facts were already on record, and the remaining issue was a pure question of law. The Court accordingly decided the withholding question itself.
It examined the royalty definition and the subsequent insertion of Explanation 4 to section 9(1)(vi) by the Finance Act, 2012, dealing with rights to use computer software, including the granting of a licence.
Relying on Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [(2021) 125 taxmann.com 42], the Court rejected application of the later amendment to impose the disputed withholding obligation for the earlier period. On that reasoning, it answered the software question in favour of the assessee.
The judgment contains references to section 9(1)(vii) while discussing royalty; the provision being discussed is section 9(1)(vi).
TDS Deducted Elsewhere Was Not Proof of Liability Here
The Court also rejected the proposition that the domestic payments became subject to withholding merely because tax had been deducted on payments to foreign suppliers.
Each payment’s tax treatment required independent examination under the applicable law. The assessee’s deduction of tax in one category of transactions could not establish a statutory obligation in another.
The appeal was disposed of with the membership-fee and software questions answered for the assessee and the “paid versus payable” question answered for the Department.
Author’s Comments
A correct outcome can survive even when the original reasoning fails. The Tribunal’s reliance on Merilyn Shipping could no longer support relief after Palam Gas Service, but the High Court sustained the software result on an independent legal ground.
The temporal point deserves careful presentation. A later retrospective amendment should not automatically be used to label an earlier payment as a withholding default. Equally, the judgment should not be read as declaring that every software licence payment after 2012 necessarily attracts TDS.
The Department’s parity argument was also insufficient. TDS follows the legal character of the particular payment, not the taxpayer’s treatment of another transaction.
For membership fees, the practical distinction remains between collection of money and recognition of income over the relevant service period. The Court upheld deferred recognition by following the earlier binding decision.
Cases Discussed
- CIT–LTU Vs Mahindra Holidays and Resorts (India) Ltd. (Madras High Court) – (2026) 186 taxmann.com 146. Followed on the timing of recognition of time-share membership fees.
- CIT Vs Winner Business Link (P.) Ltd. (Gujarat High Court) – (2015) 55 taxmann.com 468. Relied upon concerning recognition of membership fees over the period of continuing services.
- Engineering Analysis Centre of Excellence (P.) Ltd. Vs CIT (Supreme Court) – (2021) 125 taxmann.com 42. Relied upon for the treatment of software licences and royalty.
- Palam Gas Service Vs CIT (Supreme Court) – (2017) 81 taxmann.com 43. Followed on the applicability of Section 40(a)(ia) to amounts already paid.
- Merilyn Shipping and Transports Vs ACIT (ITAT Special Bench) – Earlier distinction between paid and payable amounts; rejected following Palam Gas Service.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The substantial questions of law that arise from the order of the Income Tax Appellate Tribunal (in short ‘Tribunal’) for the assessment year 2008-2009 are as follows:-
“1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the Membership fee received from time shareholders amounting to Rs.158,43,81,853/- is to be deleted?
2. Whether on the facts and circumstances of the case, the Tribunal was right in holding that for disallowance of expenditure made on purchase of software, Section 40(a)(ia) would not apply and therefore the provisions of Section 194J was not attracted?
3. Whether the word “payable” includes the word “paid” while dealing with Section 40(a)(ia) of the Income Tax Act?”
2. We have heard the submissions of Mrs.V.Pushpa, learned Senior Standing Counsel for the appellant/Department and Mr.R.Vijayaraghavan for the respondent/assessee.
3. Both learned counsel accede to the position that the first substantial question is to be decided in favour of the assessee and against the Department following a decision of this Court in Commissioner of Income-tax – LTU vs. Mahindra Holidays and Resorts (India) Ltd. [(2026) 186 taxmann.com 146], where the identical question had been decided adverse to the Department. The Division Bench has encapsulated the facts at paragraph 18 as follows:
“18. The facts of the case is that the assessee company is engaged in the business of providing discount cards to the members on payment of prescribed fees called us membership fees. Being one-time fees and non-refundable valid for specific period from one to thirty years was apportioned over the entire period of their membership. This was not accepted by the Assessing Officer and the entire amount collected as membership fees in the accounting year was treated as receipt of thirty years. The Assessee Company preferred appeal before the Commissioner of Income-Tax (Appeals). The Appellate Authority allowed the assessee appeal and directed the Assessing Officer to follow the method of accounting regularly adopted by the assessee. The order of the Appellate Authority was challenged by the Revenue before the Tribunal. The said appeal was dismissed by the Tribunal confirmed the order of the Appellate Authority, Thereafter, when this matter came up for consideration before the Gujarat High Court in Winner Business Link (supra), one of the substantial questions of law framed was:-
Whether the Appellate Tribunal was right in law and on facts in accepting the method of accounting followed by the assessee ignoring the fact that during the regular assessment proceedings for A.Y.1997-98, the method of accounting followed by the asseessee was rejected by the Assessing Officer?”
4. Following the ratio of various Benches including Gujarat High Court in CIT vs. Winner Business Link (P) Ltd. [(2015) 55 taxmann.com 468], that was upheld by the Hon’ble Supreme Court on 03.10.2026, the issue was answered against the Department. Hence, the substantial question of law No.1 is answered in favour of the assessee.
5. Substantial questions of law 2 and 3 that deal with the issue of non-deduction of tax under Section 40(a)(i) of the Income Tax Act (in short ‘Act’) in respect of expenditure on purchase of software are interconnected.
6. In the course of assessment, the assessing authority had sought particulars of payments made for purchase of software licences, both from resident and non-resident companies. He notes that tax had been deducted under Section 9(1)(vi) read with Section 195 of the Act in respect of purchases made from non-residents. However, no deductions had been made on purchases from residents. On the ground of parity between purchases made from domestic and foreign suppliers and invoking Section 194J of the Act, the assessing authority proceeds to disallow the entirety of the purchases under Section 40(a)(ia) of the Act.
7. An appeal before the Commissioner of Income Tax (Appeals) resulted in confirmation of the assessment as against which, the assessee filed a second appeal before the Tribunal. The order of the CIT (Appeals) had also proceeded on the basis of parity between the tax treatment to be accorded qua payments to domestic and foreign suppliers.
8. The Tribunal held in favour of the assessee based on the decision of the Special Bench of the Income Tax Appellate Tribunal in the case of Merilyn Shipping and Transports vs. ACIT, the ratio of which has been reversed by the Supreme Court in Palam Gas Service vs. Commissioner of Income-tax [(2017) 81 taxmann.com 43.
9. The issue has thus not been decided on merits. However, since the assessment is of 2008-2009 vintage, all facts are on record, and what is to be decided is a pure question of law, we are not inclined to remit the matter back to the Tribunal for consideration.
10. The details of the purchases are set out in paragraph 8 of the assessment order as follows:-
| 14 | IDS Software Pvt. Ltd., -Software licence renewal | 359971 |
| 21 | Veeras Infotech Private Ltd., – Software licence renewal | 250282 |
| 22 | Softecell Trade and Technologies P. Ltd.,- Software licence renewal | 291925 |
| 23 | Softecell Trade and Technologies P. Ltd.,- Software licence renewal | 195372 |
| 26 | Precision Infomatic (M) Pvt. Ltd., – Renewal of Microsoft licence | 4079258 |
| 32 | Precision Infomatic (M) Pvt. Ltd., – Renewal of Microsoft licence | 5309252 |
| Total | 10486060 | |
11. Admittedly, the consideration has been paid towards renewal of software licences. Section 194J requires the assessee to deduct tax at source in respect of payments made for professional and technical services, royalty or any other sum referred to in Clause (va) of Section 28. The term Royalty is to be understood in the context of the Explanation to Section 9(1)(vii) of the Act, that defines the term in the following manner:
“Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for-
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).”
12. It is only vide Explanation 4 to Section 9(1)(vii) inserted vide Finance Act, 2012, with effect from 01.06.1976, that consideration for licences have been brought within the ambit of the term ‘Royalty’. Explanation 4 reads as follows:
“Explanation 4:- For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.”
13. The import of the above Explanation had been considered by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax [(2021) 125 taxmann.com 42] in the context of taxability of licences under End-user Licence Agreement.
14. The argument advanced by the learned Additional Solicitor General that licences would fall within the ambit of ‘Royalty’ by virtue of the retrospective application of Explanation 4, was brushed away by the Supreme Court noting that it was ‘ludicrous’ that the amendment applied from 01.06.1976, as much of the technology referred to in that Explanation had itself been regulated by Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, nearly two decades after 1976. Explanation 4 was therefore held to operate only prospectively, and the inclusion of licences within the ambit of ‘Royalty’ would be operational only for the period post 01.04.2012.
15. We are also not of the considered view that the payments would be taxable merely for the reason that tax has been deducted under Section 40(a)(i) as the circumstances in which taxability have to be decided would have to be examined independently in each scenario, and in light of the applicable law.
16. Substantial question No.2 is answered in favour of the assessee and substantial question No.3 is answered in favour of the Department.
17. This Tax Case (Appeal) is disposed of in the above terms. No costs.
