Case Law Details

Case Name : Telecomone Teleservices India Private Limited Vs The Deputy Commissioner of Income Tax (ITAT Bangalore)
Appeal Number : ITA No. 1237/Bang/2016
Date of Judgement/Order : 23/03/2018
Related Assessment Year : 2012-13
Courts : All ITAT (5189) ITAT Bangalore (251)

Telecomone Teleservices India Private Limited Vs DCIT (ITAT Bangalore)

Thus the only issue involved is whether the consideration paid for import of software can be capitalised. The amount paid to obtain computer software cannot be added to the block of assets of computer as the jurisdiction High Court has held that the nature of payment for computer software is that of Royalty. Accordingly, the assessing officer is directed to treat the expenditure on royalty as revenue expenditure. Further, since assessee failed to deduct tax at source U/S 195/194J in relation to payments made for the purchase of this computer software, so this purchase amount, which otherwise the assessee could have claimed as expenditure, cannot be allowed as expenditure as provisions of section 40 (a)(ia) of the Act get attracted.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by the assessee is against the order of the CIT(Appeals) inter alia on the following grounds:-

“The grounds of appeal are as under: _

1. The learned CIT(A) has erred in holding that Rs.14,45,760/- paid towards import of software amounts to payment for royalty and tax ought to have been deducted at source u/s 194J/195.

2. The CIT (A) has failed to understand that your appellant was not under any legal obligation to effect TDS on purchase of Computer Software in F.Y. 2011-12 as these were considered as purchase of goods under the then existing provisions of law and subjected to customs duty. Purchase of computer software was brought under the definition of Royalty vide the Finance Act 2012 with retrospective effect.

3. The learned CIT(A) and AO has also erred in contending that expenditure is to be disallowed u/s 40a(ia) since disallowance of payments to non-residents are not covered under this section but covered u/s 40(a)(i).

4. For these and other grounds that may be adduced at the time of hearing, the order of the Commissioner of Income Tax Appeals-7, Bangalore may be modified to the extent appealed against.”

2. Though various grounds are raised by the assessee, but they all relate to the disallowance of Rs.14,45,760 on non-deduction of TDS.

3. The facts in brief borne out from the record are that the assessee has imported software for a sum of Rs.14,45,760 and on its payment no TDS was deducted. The AO accordingly disallowed the entire payment having invoked the provisions of section 40a(ia) of the Act. The assessee preferred an appeal before the CIT(Appeals) with the submission that the assessee has paid the customs duty during the import treating it as goods, which is also a part of Ministry of Finance, Govt. of India and further that sale of goods got completed in the country from where it was purchased hence no income accrues or arises in India. He also placed reliance on the judgment of the Hon’ble Apex Court in the case of Tata Consultancy Services v. State of Andhra Pradesh (271 ITR 401). It was further contended that payment made for transfer of computer software was brought under the definition of royalty vide Finance Act, 2012 with retrospective effect from AY 1976-77. Therefore, the appellant could not have contemplated a change in law during the FY 2011-12 relevant to AY 2012-13 that is to take place in the future, which would require to deduct tax at source while purchasing the computer software. Therefore, the assessee was not under any obligation to deduct TDS on purchase of computer software in FY 2011-12 relevant to AY 2012-13, when all these were considered purchase of goods under the then existing provisions of law. He also placed reliance upon the different orders of the Tribunal.

4. The CIT(Appeals) re-examined the issue in the light of the judgment of the jurisdictional High Court in the case of Samsung Electronics Company Ltd. [2011] 203 Taxman 477 (Kar) in which it was held that the amount paid for supply of software would be construed as ‘royalty’ in terms of the provisions of the I.T. Act and consequently assessee is liable to withhold tax in terms of the relevant provisions of the Act. The CIT(Appeals) accordingly confirmed the disallowance made by the AO.

5. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that amendment came by the Finance Act, 2012, therefore at the relevant point of time assessee was not aware about the law to be introduced in the future. Under these circumstances, the assessee was not required to deduct the TDS.

6. The ld. DR, on the other hand, has contended that before the amendment by the Finance Act, 2012, the jurisdictional High Court in the case of Samsung Electronics Company Ltd. (supra) has expressed its views and categorically held that payment on account of import of software is royalty, therefore assessee is required to deduct the TDS. The judgment was delivered on October 15, 2011 during the relevant financial year in which assessee was required to deduct the TDS. The ld. DR further contended that the Hon’ble High Court only interpret the law and never laid down any new law. Law is to be made by the Parliament. Therefore at the relevant point of time, the Hon’ble High Court made it clear that payment on import of software is a royalty for which the assessee is required to deduct the TDS.

7. Having carefully examined the orders of the authorities below in the light of rival submissions, we find that undisputedly the amendment came by the Finance Act, 2012 with retrospective effect from 1976-77. Before the amendment, the jurisdictional High Court through its judgment in the case of CIT v. Samsung Electronics Company Ltd. reported in [2011] 16 taxmann.com 141 (Kar) vide its judgment dated 15.10.2011 made it very clear that payments for importing software from non-resident is a payment towards royalty and the assessee is required to deduct the TDS. When the Hon’ble High Court has clarified the legal position with regard to nature of payment on account of import of software during the FY 2011-12, the assessee was required to deduct the TDS on making payment towards import of software as it was payment of royalty. In the light of this legal position, we are of the view that the CIT(Appeals) has rightly adjudicated the issue. We, however, for the sake of reference extract the order of the CIT(Appeals) as under:-

“7.4 I have carefully considered the appellant’s submissions and perused the assessment order. In the case of Mis Samsung Electronics Company Ltd., the Hon’ble Karnataka High Court [2011] 203 Taxman 477 (Kar) has held that the amount paid for the supply of software would be construed as ‘royalty’ in terms of the provisions of the Income-tax Act 1961, and consequently, liable to withholding tax in terms of the relevant provisions and therefore the provisions of sec 40(a)(ia) is applicable on it. The court has held that:

“(i) U/s 9(1)(vi) of the Act & Article 12 of the DTAA, “payments of any kind in consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work” is deemed to be “royalty”. Under the Copyright Act, 1957, a software programme constitutes a “copyright”. A right to make a copy of the software and use it for internal business by making copy of the same and storing it on the hard disk amounts to a use of the copyright u/s 14 (1) of that Act because in the absence of such a licence, there would have been an infringement of the copyright. Accordingly, the argument that there is no transfer of any part of the copyright and the transaction involves only a sale of a copyrighted article is not acceptable. The amount paid t0 the supplier for supply of the “shrink-wrapped” software is not the price of the CD alone nor software alone nor the price of licence granted. It is a combination of all. In substance unless a licence was granted permitting the end user to copy and download the software, the CD would not be helpful to the end user;

(ii) There is a difference between a purchase of a book or a music CD because while these can be used once they are purchased, software stored in a dumb CD requires a license to enable the user to download it upon his hard disk, in the absence of which there would be an infringement of the owner’s copyright.”

7.5  Thus the only issue involved is whether the consideration paid for import of software can be capitalised. The amount paid to obtain computer software cannot be added to the block of assets of computer as the jurisdiction High Court has held that the nature of payment for computer software is that of Royalty. Accordingly, the assessing officer is directed to treat the expenditure on royalty as revenue expenditure. Further, since assessee failed to deduct tax at source U/S 195/194J in relation to payments made for the purchase of this computer software, so this purchase amount, which otherwise the assessee could have claimed as expenditure, cannot be allowed as expenditure as provisions of section 40 (a)(ia) of the Act get attracted.”

8. Since no specific infirmity has been pointed out in the order of the CIT(Appeals), we confirm his order.

9. In the result, the appeal of the assessee stands dismissed.

Pronounced in the open court on this 23rd day of March, 2018.

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Category : Income Tax (27621)
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Tags : ITAT Judgments (5372) section 194J (77) section 195 (154)

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