Applicability of section 40(a)(i) to payment towards off the-shelf software


•        Assessee, a dealer of Microsoft products, purchased software from Microsoft and sold the same in the local market. The AO treated the payment as royalty and on failure to deduct tax from the same, disallowed the expenses in terms of section 40(a)(i)

•        The CIT(A) confirmed the AO’s order but the Tribunal deleted the addition.


•        The High Court held that the ITAT dealt with the transaction of the assessee by examining the true nature of it. The assessee has been purchasing the software from Microsoft and sold it further in Indian market. By no stretch of imagination it would be termed as “royalty”

•        The assessee acted as a dealer of Microsoft and hence Section 40 (a)(i) has no application at all .

Dynamic Vertical Software (2011-TII-08-HC-DEL-INTL)


Payment towards off-the-shelf software – a twist in the tale


•        MS Corp entered into agreement with its subsidiary G to grant exclusive license for marketing MS products.

•        G, in turn, entered into a license agreement with M in Singapore under which M (a group enity) was granted non-exclusive licence to:

–reproduce MS software in Singapore and distribute them to retailers or to MS Corp or to subsidiaries of MS Corp and

— license or sublicense the right to reproduce Microsoft software to certain end users for their internal use, for which M paid consideration to G for each copy.


•        The Delhi Tribunal in the case of Ms Corp held that income for the right to use (“RTU”) of packaged software should be regarded as royalty income taxable in India.

•        It held that the real transaction of the granting of the licence in respect of copyrights in computer programmes had been camouflaged by entering into a chain of the agreements between MS Corp and the group entities. On an in-depth analysis, it was evident that the end users made payments in respect of the granting of licence of copyright in computer programmes. Hence, the payments made by end-users were taxable as royalty in the hands of G.

Gracemac Corporation, M/s. Microsoft Corporation, M/s Microsoft Regional Sales Corporation I. T. vs Asstt. Director of Income-tax ([2011] 8 ITR (Trib) 522)

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June 2021