Acer India Private Ltd. Vs DCIT (ITAT Bangalore)
Conclusion: The decision holding that the payments made for purchase of software was in the nature of royalty came to be pronounced on 15.10.2011. Accordingly, assessee could not be treated as an assessee in default for not deducting TDS under section 195 in respect of payments made for purchase of licensed software prior to 15.10.2011.
Held: Assessee company was engaged in the business of manufacture and trading of computer systems and peripherals. It had purchased software from non-residents and it did not deduct TDS from the payments made towards the said purchases. Hence AO had treated the assessee as assessee in default and initiated proceedings under section 201(1). AO held that the payment made for purchase of license to use a software was “royalty” income in the hands of non-resident accordingly, assessee should have deducted tax at source under section 195 from the payments made to the non-residents towards consideration for purchase of license to use software. In the instant case, assessee was under bonafide belief that it was not required to deduct tax at source from the payments made for purchase of software, since there were certain decisions holding so. However, the jurisdictional High Court in Samsung Electronics Co. Ltd held that the payments made for purchase of software was in the nature of royalty and the said decision came to be pronounced on 15.10.2011. Accordingly, assessee could not be treated as an assessee in default in respect of payments made for purchase of licensed software prior to 15.10.2011, being the date of pronouncement of the decision in the case of Samsung Electronics Co. Ltd. Accordingly, the demand raised in the hands of the assessee u/s 201(1) and 201(1A) could not be sustained and the demands raised in respect of payments made prior to 15.10.2011 in assessment year 2012-13 could also not be sustained.
FULL TEXT OF THE ITAT JUDGEMENT
All the appeals filed by the assessee are directed against the orders passed by Ld CIT(A)-12, Bengaluru and they relate to the assessment years 2009-10 to 2012-13. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the demand raised u/s 201(1) of the Income-tax Act,1961 [‘the Act’ for short] and the interest charged u/s 201(1A) of the Act treating the assessee as assessee in default for not deducting tax at source u/s 195 of the Act from the payment made for purchase of licensed software.
2. The Ld A.R of the assessee submitted that the assessee has filed separate appeals for the demand raised u/s 201(1) and the interest charged u/s 201(1A) for each of the years and accordingly eight appeals came to be posted before us for the four years, referred above.
3. At the outset, the Ld A.R submitted that the assessee company is engaged in the business of manufacture and trading of computer systems and peripherals. It also provides marketing support services for Acer brand products. The assessee has purchased software from non-residents and it did not deduct TDS from the payments made towards the said purchases. Hence the assessing officer has treated the assessee as assessee in default and initiated proceedings u/s 201(1) of the Act for assessment years 2009-10 to 2012-13. In this regard, the AO has placed his reliance on the decision rendered by Hon’ble jurisdictional Karnataka High Court in the case of Samsung Electronics Co Ltd (2011) (345 ITR 494) (Kar), wherein it was held that the payment made for purchase of license to use a software is “royalty” income in the hands of non-resident. Accordingly, the AO held that the assessee should have deducted tax at source u/s 195 of the Act from the payments made to the non-residents towards consideration for purchase of license to use software. Accordingly the AO raised demand u/s 201(1) and also charged interest u/s 201(1A) of the Act in all the four years under consideration. The Ld CIT(A) also confirmed the orders passed by the AO.
4. The Ld A.R further submitted that Hon’ble Karnataka High Court has rendered its decision holding that the payments made for purchase of license to use software in the case of Samsung Electronics Co Ltd (supra) on 15.10.2011. Prior to the said decision of jurisdictional High Court, there were decisions holding that the payments for software licenses do not constitute royalty. One such decision is the decision rendered by the Tribunal in the case of Sonata Information Technology Ltd vs. ACIT (103 ITD 324). The Ld A.R submitted that the proceedings under consideration related to failure to deduct tax at source and the assessee did not deduct tax at source under bonafide belief, since there were decisions holding that no TDS is required to be made for payments made for purchase of software. He submitted that the Courts have held that the liability to deduct tax at source cannot be fastened on the basis of retrospective amendment to the Act or a subsequent ruling of a Court. He submitted that, in the following cases, the Tribunal has held that the assessee cannot be fastened with the TDS liability on account of subsequent amendment or subsequent ruling of the Court and accordingly disallowance made u/s 40(a)(i) of the Act was deleted.
(a) Teekays Interior Solutions P Ltd (ITA No.400/Bang/2017)
(b) Infineon Technologies India P Ltd (IT(TP)A No.405/Bang/2015)
(c) GE Medical Systems India P Ltd (ITA 1368/Bang/2019)
(d) WS Atkins India P Ltd (2015)(41 ITR(T) 397)(Bang. Trib) The Ld A.R submitted that the decision of jurisdictional High Court was rendered on 15.10.2011. Accordingly he submitted that the assessee should not be fastened with the TDS liability for the payments made prior to 15.10.2011. Accordingly he prayed that the demand raised u/s 201(1) and 201(1A) for the payments made prior to 15.10.2011 be deleted.
5. We heard Ld D.R and perused the record. We notice that the co-ordinate bench has examined the issue of making disallowance u/s 40(a)(i) of the Act for non-deduction of tax at source on the basis of subsequent amendment/decision of High Court in the case of Infineon Technologies India P Ltd (supra). For the sake of convenience, we extract below the relevant observations made by the co-ordinate bench in the above cited case:-
“25. We have carefully considered the rival submissions. The payment in question was made to the non-resident in the previous year relevant to AY. 10-11. Therefore the law as on 31.3.2010 the last date of the previous year was that payment for purchase of off shelf software was not in the nature of royalty. In Sonata Information Technology Ltd. v. ACIT (103 ITD 324) decision rendered on 31.1.2006, it was held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC IT(TP)A Nos.405 & 474/Bang/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in:
♦ ITO v. Clear Water Technology Services (P.) (52 taxmann.com 115)
♦ Kerala Vision Ltd. v. ACIT (46 com 50)
♦ Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463)
♦ Channel Guide India Ltd. v. ACIT (25 taxmann.com 25)
♦ DCI v. Virola International (20 14(2) TMI 653) ♦ CIT v. Kotak Securities Ltd. (20 taxmann.com 846).
26. The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon’ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra) which was passed on 15.10.2011 transactions carried out on purchase of off the shelf software are not liable to TDS and hence there can be no disallowance u/s.40(a)(ia) of the Act based on subsequent development of law after the date on which payments are made.
27. we are of the view that in the light of law as laid down by this Tribunal in the case of Ingersoll Rand (I) Ltd. (supra), there cannot be a retrospective obligation to deduct tax at source and therefore as on the date when the assessee made payments to the non-resident for acquiring off-the-shelf software cannot be regarded as in the nature of royalty and therefore there was no obligation on the part of assessee to deduct tax at source. The payment would be in the nature of business profits in the hands of non-resident and since admittedly the non-resident does not have a Permanent Establishment in India, the sum in question is not chargeable to tax in the hands of non-resident. Consequently, the disallowance made IT(TP)A Nos.405 & 474/Bang/2015 u/s. 40(a)(ia) of the Act has to be deleted. We direct accordingly. Ground No.14 by the assessee is accordingly allowed.”
6. In the case of M/s Teekays Interior Solutions Pvt Ltd (supra), the co-ordinate has considered the issue of making disallowance u/s 40(a)(ia) of the Act on the basis of subsequent decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra). The decision rendered by the co-ordinate bench is extracted below:-
“9. The next issue contested by the assessee relates to disallowance of expenditure claimed towards software purchase. The assessee had purchased a software named AutoCAD version 2011 at a cost of Rs.1,10,775 and claimed the same as revenue expenditure. The A.O., however, held the same to be capital in nature. The A.O. also noticed that the assessee has not deducted tax at source u/s 194J of the Act. Accordingly, he proceeded to disallow the depreciation by invoking the provisions of section 40(a)(ia) of the Act. In the appellate proceedings, the learned CIT(A) took support of the decision rendered by the Hon’ble Karnataka High Court in the case of M/s.Samsung Electronics Company Limited [(2011) 203 taxmann.com 477 (Kar.)] and held that the payment made for purchase of software is in the nature of royalty. Accordingly, he directed the A.O. to treat the expenditure on purchase of software as revenue in nature. Since the assessee has failed to deduct tax at source on the said payment, the learned CIT(A) confirmed the disallowance made u/s 40(a)(ia) of the Act.
10. Since the revenue has not filed any appeal challenging the order passed by Ld CIT(A), the issue that requires consideration is whether the disallowance of cost of software u/s 40(a)(ia) of the Act is justified or not. The Ld A.R submitted that the decision holding that the payment made towards purchase of software is in the nature of Royalty attracting TDS provisions, was rendered by the Hon’ble Karnataka High Court in the case of Samsung Electronics Company Ltd. (supra) on 15.10.2011, whereas the impugned transaction of purchase of software has taken place before 31.03.2011. The Ld A.R submitted that the law relating to nature of software purchases was pronounced by the Hon’ble High Court only on 15.10.2011, where as the impugned transaction has taken place prior to that. She submitted that before the decision of Hon’ble High Court, the assessee was under bonafide belief with the support of certain case laws that there was no requirement to deduct tax at source from the payment made towards software purchases. Accordingly, by placing her reliance on the decision rendered by the coordinate bench in the case of Allegis Services India Pvt. Ltd. v. DCIT [(2017) 51 CCH 0083], the learned AR submitted that the liability to deduct tax at source, in the facts of the present case, cannot be fastened upon the assessee retrospectively.
11. We heard the learned DR and perused the record. We noticed that an identical issue was considered by the coordinate bench in the case of Allegis Services India Pvt. Ltd. (supra) and identical disallowance made was deleted by the coordinate bench on the reasoning that the TDS liability cannot be fastened upon the assessee retrospectively. For the sake of convenience, we extract below the operating portion of the order passed by the co-ordinate bench:-
“4.Ground Nos.2 to 5 are regarding disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 (in short ‘the Act’) of payment towards software licenses treated by the Assessing Officer as royalty for want of TDS. The assessee has also raised additional grounds which are as under:-
Corporate tax matters
21. “ Without prejudice to the grounds 2 to 4, the Learned CIT(A) has failed to appreciate that during the Financial Year 2008-09 relevant to the Assessment Year 2009-10, the Appellant was not liable to withhold tax on the payments made as there was no provision under the Act mandating the deduction of tax at source on the payments made on purchase of computer software and there were many favorable judicial precedence including the jurisdictional tribunal rulings.
22. Without prejudice to the grounds 2 to 4, the learned CIT(A) erred in not appreciating the fact that explanation 5 to Section 9(1)(vi) was inserted vide Finance Act, 2012 with effect from 1 June 1976 and was hit by the doctrine of ‘impossibility of performance’.”
The additional grounds raised by the assessee are not new issues but an additional plea/argument raised by the assessee regarding the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act. Therefore in view of the fact that the substantial issue has been raised in the main ground, the additional grounds raised by the assessee on the same issue are admitted for consideration and adjudication along with the Ground Nos.2 to 5.
5. The learned Authorised Representative of the assessee has submitted that prior to the decision of Hon’ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd 320 ITR 209, the assessee was under the bona fide belief that the payment on account of software licenses does not fall under the definition of royalty and therefore the assessee was under no obligation to deduct tax at source on the said payment for software license. He has further submitted that there were number of judicial precedents on this issue wherein this Tribunal has held that the payment made for purchase of software does not fall under the definition of royalty provided under Section 9(1)(vi) of the Act. Thus he has submitted that a subsequent amendment or a decision cannot be thrust upon the assessee for deduction of tax in respect of a transaction completed much prior to the said decision. In support of his contention, he has relied upon decision of the co-ordinate bench of this Tribunal dt.23.11.2016 in the case of ACIT Vs. Aurigene learned Authorised Representative has submitted that disallowance made by the Assessing Officer is not justified when there was no such law or declaration of law at the time of payment made by the assessee to cast the duty on the assessee to deduct tax.
6. On the other hand, the learned Departmental Representative has submitted that the decision of Hon’ble jurisdictional High Court in the case ofCIT v. Samsung Electronics Co. Ltd. (supra) though was subsequent to the transaction in question however, the said decision has not brought into statute any new law but it is only a declaration and interpretation of existing law.He has relied upon the orders of the authorities below:
7. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the transaction in question regarding payment of purchase of software was completed in the F.Y.2008-09 whereas the decision of Hon’ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd (supra) was passed on 15.10.2011 much later than the time of transaction carried out by the assessee. It is also not in dispute that this issue of considering the payment for purchase of software as royalty is a highly debatable issue and various High Courts have taken divergent views on this issue. The co-ordinate Bench of this Tribunal in the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd. (supra) has considered an identical issue in paras 3 to 5 as under :
“ 03. We heard the rival submissions and gone through the relevant orders. The assessee resubmitted the plea taken before the lower authorities and placed on the ruling of the Hon’ble Bangalore ITAT in Sonata Information Technology Ltd v. ACIT (103 ITD 324) which had held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. license to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section194J/195 of the Act. It is submitted that liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment thedefinition of royalty with retrospective effect from 01.04.1976) or asubsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in:
