VISUAL IQ TECHNO SERVICE INDIA P. LTD,ERNAKULAM vs. THE ITO, CORP. WARD-2(5), KOCHI, KOCHI

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ITA 160/COCH/2018Status: DisposedITAT Cochin04 April 2019AY 2012-136 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the assessee was not liable to deduct tax at source on software purchases in FY 2011-12, as Explanation 4 to Section 9(1)(vi) was introduced later with retrospective effect, making it impossible for the assessee to foresee the obligation at the time of purchase. Therefore, Section 40(a)(ia) was not applicable.

What were the facts?

The assessee incurred expenses on software installation, and the CIT invoked Section 263, holding the Assessing Officer's order erroneous for not considering the disallowance under Section 40(a)(ia) regarding TDS on royalty payments for software. The CIT directed re-examination of the issue.

What were the issues?

Whether the assessee was liable to deduct TDS on software purchase expenses when the relevant clarification was introduced retrospectively after the expense was incurred. Whether the disallowance under Section 40(a)(ia) was justified in such circumstances.

Which sections of the Income-tax Act were involved?

Section 40(a)(ia),Section 263,Section 9(1)(vi),Section 194J

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN

For Appellant: Shri P. Sathisan, Adv
For Respondent: Smt. A.S. Bindhu, Sr. DR
Hearing: 03/04/2019Pronounced: 04/04/2019

Per CHANDRA POOJARI, AM:

This appeal filed by the assessee is directed against the order passed by the Pr.

CIT u/s. 263 of the I.T. Act dated 28/12/2017 and pertain to the assessment year

2012-13.

2.

The only issue raised for our consideration is with regard to disallowance made

u/s. 40(a)(ia) of the I.T. Act.

I.T.A. No.160/Coch/2018 3. The facts of the case are that from the perusal of records, the CIT observed that

the assessment order passed u/s. 143(3) of the Act dated 17/03/2016 was

erroneous and prejudicial to the interests of revenue for the following reason:

Omission to consider applicability of section 40(a)(ia) of the Act in respect of a sum of Rs.3,67,294/- deducted as expenses on installation of antivirus programme, skype and other application software having license for a period of maximum 1 year.

3.1 Accordingly, the CIT invoked the provisions of section 263 of the Act. The CIT

found that the Assessing Officer had allowed the expenditure without verifying the

relevant provisions of sections 40(a)(ia) and 9(1)(vi). According to the CIT, as per

Explanation 2(1) to section 9(1)(vi) of the Act, ‘royalty’ means consideration

(including any lump sum consideration but excluding any consideration which would

be the income of the recipient chargeable under the head ‘Capital Gains’ for the

transfer of all or any rights (including granting of a licence) in respect of a patent,

invention, model design, secret formulae or process or trade mark or similar

property. Explanation 4 further includes use or right to use computer software in

the above definition with retrospective effect. Under section 40(a)(ia), deduction on

interest, commission or brokerage, rent, royalty, fees for technical services payable

to a resident or amounts payable to a contractor or a sub-contractor being a

resident for carrying out any work on which tax is deductible at source under

Chapter XVIIB and such tax has not been deducted, the same will not be allowed as

deduction. Since this issue had not been examined by the Assessing Officer, the

CIT held that the assessment order passed by the Assessing Officer was erroneous

I.T.A. No.160/Coch/2018 in so far as it was prejudicial to the interests of the revenue. Therefore, the CIT set

aside the order to the file of the Assessing Officer and directed him to re-examine

the issue raised in the 263 order and to pass a speaking order in accordance with

law after affording due opportunity of hearing to the assessee.

4.

Against this, the assessee is in appeal before us. It was contended before the

CIT that assessee purchased software which cannot be considered as purchase of

copyright and royalty. Explanation 2 to section 9(1)(vi) cannot be applied to

purchase of software. Further, it was contended that software was included in the

definition of royalty only by amendment of the Finance Act, 2012. It was submitted

that although the amendment was retrospective, there is no liability fastened on the

assessee to deduct tax at source for the expenses incurred for the financial year

2011-12. The Ld. AR submitted that during the period when the purchase was

made, the assessee did not have the benefit of the clarification brought about by

the retrospective amendment that payment for software purchase tantamount to

payment of royalty and consequently tax has to be deducted u/s. 194J. According

to the Ld. AR, this law extant on the date when the payment for obtaining the

software was made, has not categorically laid down that tax is required to be

deducted. The Ld. AR submitted that as it was impossible to fasten the liability for

deducting TDS retrospectively as tax is to be deducted at the time when the

payment is credited or made, the Assessing Officer was not justified in disallowing

such amount.

I.T.A. No.160/Coch/2018 5. On the other hand, the Ld. DR relied on the order of the CIT.

6.

We have heard the rival submissions and perused the record. As regards the

disallowance made under section 40(a)(ia), the CIT relied on Explanation 4 to

section 9(1)(vi) of the I.T. Act which reads as under:

“Explanation 4 – for the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.”

6.1 Explanation 4 was inserted by the Finance Act, 2012 with retrospective effect

from 01/06/1976. The Ld. AR took the plea before the CIT that during the period

when the purchase of software was made, the assessee did not have the benefit of

clarification brought about by the amendment that payment made for purchase of

software tantamounts to payment of royalty and consequently, tax was to be

deducted u/s. 194J. As rightly pointed by the Ld. AR, this view is supported by the

following judgments:

1) M/s. Kerala Vision Ltd. vs. ACIT (ITA No.794/Coch/2013 dated 06/06/2014) (ITAT, Cochin Bench)

2) DCIT vs. M/s. Atkins India Pvt. Lt. (ITA No.1467/Bang/2014 dated 08/05/2015) (ITAT, Bangalore Bench)

3) Infotech Enterprises Limited vs. Addl. CIT (ITA Nos.115 and 2184/Hyd/2011 dated 16/01/2014) (ITAT, Hyderabad Bench)

6.2 The crux of the above judgments is that the assessee cannot be held liable to

deduct tax at source by relying on the subsequent amendments made in the

I.T.A. No.160/Coch/2018 relevant provisions with retrospective effect. In our opinion, the assessment year

involved herein is 2012-13 and Explanation 4 to section 9(1)(vi) was inserted by

Finance Act, 2012 with retrospective effect from 01/06/1976. In the case of the

assessee, the financial year ended on 31/03/2012 (2011-12). In the previous year

relevant to assessment year 2012-13, Explanation 4 to section 9(1)(vi) of the Act

was not available. Hence, in our opinion, when the purchase of software was

made, the assessee did not foresee the provision brought by the Finance Act, 2012

where the payment for purchase of software was tantamount to payment of royalty.

As rightly pointed out by the learned counsel for the assessee before us, this view

taken by the assessee is supported by various judicial pronouncements wherein it

was held that the assessee cannot be held to be liable to deduct tax at source by

relying on the subsequent amendments made in the relevant provision with

retrospective effect. Thus, it was impossible for the assessee to deduct tax in the

F.Y. 2011-12 when as per the legal position prevalent in the said F.Y., the obligation

to deduct tax was not on the assessee. In all the judgments relied on by the

assessee, the question was based on the legal Maxim lex non cogit ad impossiblia

meaning thereby that the law cannot be possibly compel a person to do something

which is impossible to perform.

6.3 In view of the above, we find merit in the argument of the Ld. AR and hold

that the assessee was not liable to deduct tax at source on the payment made for

purchase of software in the financial year 2011-12 relevant to the assessment year

2012-13 and there is no liability fastened on the assessee to deduct tax at source

I.T.A. No.160/Coch/2018 for the purchase of software made in the financial year 2011-12 and there is no

question of invoking the provisions of section 40(a)(ia) of the Act. This ground of

appeal of the assessee is allowed.

7.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on this 4th April, 2019

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 4th April, 2019 GJ Copy to: 1. Visual IQ Techno Service India P. Ltd., 3rd Floor, World Trade Centre, Infopark, Kakkanad, Kochi-682 042. 2. The Income Tax Officer, Corporate Ward-2(5), Kochi. 3. The Pr. Commissioner of Income-tax, Kochi. 4. D.R., I.T.A.T., Cochin Bench, Cochin. 5. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin

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