Purchase of software as a product being a transaction of sale, payment cannot be considered as royalty

Brief of the Case

Delhi High Court held In the case of Principal CIT vs. M. Tech India Pvt. Ltd that in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh: (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as ‘royalty’

Facts of the Case

The Assessee entered into an agreement with M/s Track Health Pty. Limited, Australia (THPL) captioned “VAR Agreement”. The Assessee had also entered into an agreement with M/s Speed Miners, Malaysia which is stated to be similar to the VAR Agreement entered into by the Assessee with THPL. In terms of the agreements, the Assessee had paid a sum of Rs. 66,87,509 and Rs. 9,35,987/- to THPL and M/s Speed Miner respectively. According to the AO, the said payments of Rs 66,87,509/- and Rs.9,35,987/- were in the nature of ‘royalty’ and since the Assessee had not withheld any tax, the AO disallowed the same under Section 40(a)(i).The Assessee had also entered into a similar agreement with M/s Intersystems India Pvt. Ltd., Gurgaon in terms of which the Assessee had paid a sum of Rs. 13,78,496/- without deducting any tax at source. This expenditure was disallowed by the AO under Section 40(a)(ia).

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