VISUAL IQ TECHNO SERVICE INDIA P. LTD,ERNAKULAM vs. THE ITO, CORP. WARD-2(5), KOCHI, KOCHI
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?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
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.
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.
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.
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.
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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