The Principal Commissioner Of Income Tax-6 Vs. M. Tech India P. Ltd.
January, 25th 2016
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 890/2015
THE PRINCIPAL COMMISSIONER OF
INCOME TAX-6 ..... Appellant
Through: Mr Rahul Chaudhary, Senior
Standing Counsel with Mr
Raghvendra Singh, Junior Standing
M. TECH INDIA P. LTD. ..... Respondent
Through: Mr Ved Jain and Mr Pranjal
JUSTICE VIBHU BAKHRU
VIBHU BAKHRU, J
1. The Revenue has filed this appeal under Section 260A of the Income
Tax Act, 1961 (hereafter `Act') assailing an order dated 31st March, 2015
passed by the Income Tax Appellate Tribunal (hereafter `Tribunal') in ITA
No. 3893/Del/2012 and C.O. No. 352/Del/2012. By the aforesaid order, the
Tribunal rejected the appeal and the cross objections preferred by the
Revenue and the Assessee respectively against an order dated 30th April,
2012 passed by the Commissioner of Income Tax Appeals [hereafter
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`CIT(A)'], which in turn was preferred by the Assessee against the
assessment order dated 28th December, 2010 in respect of the assessment
year (AY) 2008-09.
2. In its appeal, the Revenue has projected the following questions of
"2.1 Whether in the facts and circumstances of the case,
ITAT was justified in law in overlooking explanation
2, 4, 5 to section 9(1)(iv) of the Income Tax Act,
2.2 Whether in facts and circumstances of the case, the
ITAT, was justified in law in deleting disallowance of
Rs.72,23,496/- and Rs.13,78,496/- made by the
Assessing officer under section 40(a)(i) and 40(a)(ia)
of the Act respectively by without considering that
payments were in nature of royalty subject to TDS
under section 195 and 194J of the Act respectively?
2.3 Whether in the facts and circumstances of the case,
the ITAT was justified in law in deleting the
disallowance of Rs.61,342/- under section 40(a)(ia) of
the Act by overlooking provision of 194C which
specifically include passenger transport as a work?
2.4 Whether in facts and circumstances of the case, the
ITAT was justified in law in holding that no TDS was
required on the payments of Rs.61,342/- to the
contractor for hiring taxi which was contrary to the
law laid down by Hon'ble Supreme Court in case of
Associated Cement Co. Ltd. v. CIT (1993) 2011
ITR 435 (SC)"
However, the learned counsel for the Revenue has restricted his arguments
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to the deletion of disallowance of Rs. 72,23,496/- and Rs. 13,78,496/- made
by the AO under Section 40(a)(i) and 40(a)(ia) of the Act respectively.
3. The controversy relates to certain payments made by the Assessee.
According to the Assessee, it had made those payments for the purchase of
software and it was asserted that the Assessee is a Value Added Reseller
(VAR) of the software in question. The Revenue on the other hand contends
that the payments made by the Assessee were in the nature of royalty and,
therefore, the Assessee was obliged to withhold tax on such payments. Since
the Assessee had failed to do so, the expenditure incurred by the Assessee
was liable to be disallowed under Section 40(a) of the Act.
4. Briefly stated the relevant facts are as under:-
4.1 The Assessee entered into an agreement with M/s Track Health Pty.
Limited, Australia (hereafter `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.
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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) of the Act.
4.2 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) of the Act.
4.3 Aggrieved by the assessment order, the Assessee preferred an appeal
before the CIT(A). In the appellate proceedings the Assessee submitted that
it was a Value Added Reseller (VAR) of software related to healthcare and
hospitality. The said software was purchased from THPL under the `VAR
Agreement' and the same was resold to various end-users in India. During
the financial year relevant to the AY 2008-09, the Assessee had purchased
software worth Rs. 66,87,509/- from THPL. In addition, the Assessee had
also purchased software from M/s Speed Miners, Malaysia for
Rs. 9,35,987/- and M/s Data Innovation Asia Limited, Hong Kong for Rs.
5,03,894/-. The Assessee claimed that similar purchases made in the
preceding years had been considered as purchases and allowed as a
deduction in computing its taxable income. However, the AO had sought to
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treat such payments as royalty in the AY 2008-09. The Assessee contended
that being a reseller of products, the payments made by the Assessee for
acquiring the products could not be considered as royalty. The Assessee
relied on the decision of this Court in CIT v. Dynamic Vertical Software
India P. Ltd .: (2011) 332 ITR 222 (Del) and also sought to distinguish the
Tribunal's earlier decision in M/s Microsoft Corporation and Ors. v. ADIT:
2011 (8) ITR (Trib) 522 (Delhi), which was relied upon by the AO.
4.4 The CIT(A) took note of the Assessee's submission that while the AO
had treated similar payments to M/s Data Innovation Asia Limited as made
for the purchase of software, it had treated the payments made to THPL and
M/s Speed Miners as royalty and, thus, the decision of the AO was self-
contradictory. The CIT(A) accordingly accepted the Assessee's contention
that the payments made by it for the purchase of software from THPL and
M/s Speed Miners were not royalty. With regard to the disallowance of Rs.
13,78,496/- made under Section 40(a)(ia), the CIT(A) found that the
transactions were identical to the ones entered into by the Assessee with
THPL and M/s Speed Miners and, therefore, the payments made to
Intersystems India Pvt. Ltd., Gurgaon were also held to be on account of
purchases. The CIT(A) accepted the Assessee's contention that it was not
ITA 890/2015 Page 5 of 12
obliged to deduct any tax at source on such payments. Consequently, the
CIT(A) directed the deletion of the additions made by the AO in the sum of
Rs. 76,23,496 under Section 40 (a) (i) and Rs. 13,78,496/- under Section
4.5 Aggrieved by the CIT(A)'s order dated 30th April, 2012, the Revenue
preferred an appeal before the Tribunal. The Tribunal concurred with the
decision of the CIT(A) that the payments in question made to THPL and M/s
Speed Miners, Malaysia were for purchasing software and the payments
made could not be considered as royalty. The Tribunal further held that the
decision of this Court in Dynamic Vertical Software India P. Ltd . (supra)
squarely covered the issue raised and following the aforesaid decision,
rejected the Revenue's contention. For similar reasons, the Tribunal also
rejected the Revenue's contention that the payments made by the Assessee
to Intersystem India Pvt. Ltd., Gurgaon were to be disallowed as deductions
under Section 40(a)(ia) of the Act.
5. In the aforesaid background, the following question arises for
Whether in the facts and circumstances of the case, the Tribunal
was justified in deleting the disallowance of Rs.72,23,496/- and
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Rs.13,78,496/- made by the Assessing Officer under section
40(a)(i) and 40(a)(ia) of the Act. respectively
6. Mr Rahul Chaudhary, Senior Standing Counsel appearing for the
Revenue submitted a copy of the "VAR Agreement" and submitted that the
payments made under the said Agreement were not for the purchase of
software but were in the nature of royalty. He drew the attention of the
Court to clause 4.2 (d) of the Terms and Conditions of the said Agreement
which entitled the Assessee "to customise the Software for the purposes of
End Users". On the strength of the aforesaid Clause, he contended that the
Agreement entitled the Assessee to use the software and, therefore, the
payments were royalty within the meaning of Explanation 2 to Section
9(1)(vi) of the Act. He next referred to Section 14 of the Indian Copyright
Act, 1957 (`CR Act') and contended that the definition of `Copyright' would
mean an exclusive right to do or authorise any of the acts listed in clause (a)
of Section 14 of the CR Act including the right to reproduce the work in any
material form; storing of it in any medium by electronic means; and/or to
make any adaptation of the work. He argued that by virtue of Section
14(b)(i) of the CR Act, all of the acts specified in Section 14(a) would also
be applicable in the case of a computer programme. Mr. Chaudhary then
referred to the decision of the Karnataka High Court in CIT v. Samsung
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Electronics Co. Ltd.: (2012) 345 ITR 494 (Kar.) in support of his
contention that computer software is recognised as a copyright work and the
payments made by an Assessee for import of the software would be
payments for transfer of copyright and the same would fall within the
definition of the term `royalty'. He then referred to the decisions of
Authority for Advance Ruling (AAR) in Citrix Systems Asia Pacific Pty
Ltd., In Re: (2012) 343 ITR 1 (AAR) and Skillsoft Ireland Ltd., In Re:
(2015) 376 ITR 371 (AAR) in support of his contentions.
7. Mr Ved Jain, learned advocate appearing for the Assessee supported
the decision of the CIT(A) and the Tribunal. He also referred to the
decisions of this Court in Dynamic Vertical Software India P. Ltd. (supra)
wherein the payments made by a reseller for purchase of software for sale in
the Indian market was held not to be royalty. He also referred to the
decision of this Court in Director of Income Tax v. Infrasoft Ltd.: (2014)
220 Taxman 273 (Del) and drew the attention of this Court to paragraph 98
of the said judgment wherein this Court had unequivocally expressed that it
was not in agreement with the decision of the Karnataka High Court in the
case of Samsung Electronics Co. (supra).
8. Mr Jain also referred to paragraph 3 of Article 12 of the Double
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Taxation Avoidance Treaty between India and Australia and contended that
the payments made to THPL did not fall within the definition of royalty
under the said Treaty.
9. We have heard the learned counsel for the parties.
10. The Assessee had entered into a "VAR Agreement" with THPL.
Paragraph 1.1 of the said agreement expressly indicates that THPL had
appointed the Assessee (described as VAR) to "market and sell the
products" in the Territory. Article 2 of the said Agreement provides for
"VAR's Obligations". Clause (a) of paragraph 2.1 of Article 2 expressly
provides that the Assessee "Shall promote, market and sell the Products in
accordance with a business plan which shall be submitted to Trak within
three (3) months of the effective date of the Agreement". Paragraph 4.2
entitles the Assessee to, inter alia, use the software and source codes for a
limited purposes to sell and promote the software for use by third parties;
demonstrate the software to third parties; and to customise the software for
the purposes of End Users. The said agreement further contains a number of
covenants to ensure that the Intellectual Property Rights in respect of the
software, related material and source codes remains with THPL. A plain
reading of the aforesaid agreement indicates that the Assessee has been
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appointed for the purposes of reselling THPL's software.
11. The CIT(A) found that the Assessee was engaged in the resale of
software and the payments made by it to THPL and others were on account
of purchases made by the Assessee. The ITAT concurred with the aforesaid
finding. It is also not disputed that in the preceding years, the AO had
accepted the transactions in question to be that of purchase of software. The
limited issue to be addressed is whether in view of these findings the amount
paid by the Assessee could be taxed as royalty.
12. In the cases where an Assessee acquires the right to use a software,
the payment so made would amount to royalty. However 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
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consideration paid for purchase of goods cannot be considered as `royalty'.
Thus, it is necessary to make a distinction between the cases where
consideration is paid to acquire the right to use a patent or a copyright and
cases where payment is made to acquire patented or a copyrighted
product/material. In cases where payments are made to acquire products
which are patented or copyrighted, the consideration paid would have to be
treated as a payment for purchase of the product rather than consideration
for use of the patent or copyright.
13. A Coordinate Bench of this Court has also expressed a similar view in
the case of Infrasoft (surpa). In that case, the Revenue sought to tax the
receipts on sale of licensing of certain software as royalty. The Tribunal
held that there was no transfer of rights in respect of the copyright held by
the Assessee in the software and it was a case of mere transfer of
copyrighted article. This Court concurred with the Tribunal and held that
what was transferred was not copyright or the right to use a copyright but a
limited right to use the copyrighted material and that did not give rise to any
14. Insofar as the reliance placed by the Revenue on the decision of the
Karnataka High Court in Samsung Electronics Co. (supra) is concerned, a
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Coordinate Bench of this Court in Infrasoft (supra) has unequivocally
expressed its view that it was not in agreement with that decision. Thus, the
said decision is of no assistance to the Revenue in this case.
15. In another case, Dynamic Vertical Software India P. Ltd. (supra),
this Court had reiterated the view that payment made by a reseller for the
purchase of software for sale in the Indian market could by no stretch be
considered as royalty.
16. In the aforesaid view, the question framed must be answered in the
affirmative, that is, in favour of the Assessee and against the Revenue.
17. The Appeal is accordingly dismissed. In the circumstances the parties
are left to bear their own costs.
VIBHU BAKHRU, J
JANUARY 19, 2016
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