DCIT, (INT TAXN)-2, HYDERABAD vs. VALUE LABS LLP, HYDERABAD

The assessee is Partnership Firm LLP and engaged in the business of software development. The assessee filed its return of income for the year under consideration on 30.09.2010 declaring total income of Rs.7,67,74,809/- after claiming deduction u/sec.80IB of the Act. The assessment was completed u/sec.143(3) r.w.s.144(5) of the Act whereby an addition of Rs.4,63,99,830/- was made in respect of international transaction of providing software development services to the Associated Enterprise [in short “AE”] viz., Value Lab SDN BHD Malaysia [in short “VSB, Malaysia”]. The said addition made by the Assessing Officer was based on the TP adjustment recommended by the Transfer Pricing Officer [in short “TPO”] was deleted by this Tribunal vide Order dated 27.04.2018 in ITA.No.305/Hyd./2015 and ITA.No.405/ Hyd./2015 for the assessment year 2010-2011. During the financial year 2009-2010 relevant to the assessment year under consideration, the assessee purchased software from its AE VSB, Malaysia for a consideration of Rs.69,40,25,750/- which was also subjected to TP proceedings and the TPO held the Arm’s Length Price [in short “ALP”] of the of the acquisition of the software at Rs.NIL and made the adjustment of the entire amount. However, the Disputes Resolution Panel [in short “DRP”] restricted the adjustment/addition to Rs.19.22 crores which was further challenged before the Tribunal and this Tribunal vide Order dated 27.04.2018 deleted the addition made on account of TP adjustment for acquisition of Software/Intellectual Property [in short “IP”] rights. In the meantime, the Assessing Officer also initiated the proceedings u/sec.201(1)/201(1A) for holding the assessee-in-default for non-deduction of tax at source [in short “TDS”] for the payment of Rs.69.40 crores to its AE i.e., VSB, Malaysia for purchase of software and passed an Order u/sec.201(1)/201(1A) of the Act on 22.03.2027 determining the liability of the assessee due to TDS default including interest u/sec.201(1)/201(1A) at Rs.39,39,27,219. The assessee then filed a rectification petition dated 24.04.2017 challenging the validity of the order passed by the Assessing Officer being barred by limitation as well as raising an issue that the income in the hand of VSB, Malaysia is not taxable in India and therefore, the assessee cannot be held assessee-in-default in view of provisions of sec.5(2)(a) and sec.9 of the I.T. Act, 1961 as well as Article 23 of DTAA between India-Malaysia which was rejected by the Assessing Officer vide Order dated 15.05.2017. The assessee then challenged the order of the Assessing Officer before the learned CIT(A) and contended that the income of the AE as received from the assessee on account of sale and purchase of software is not taxable in India and therefore, the assessee is not liable for deducting the tax at source on the said payment. The learned CIT(A) by following the Judgment of this Tribunal against the assessment order passed u/sec.143(3) r.w.s.144C of the Act has held that the Tribunal has given a finding that the said transaction of purchase of software product along with its copy rights, IP rights from Malaysian AE were subjected to evaluation by the Customs at the time of import and also accepted by the RBI and Other Authorities at the time of payment of the consideration and therefore, the same is treated as business receipts in the hand of the Malaysian entity not liable to tax in India. Therefore, the said business receipt is out of ambit of the provisions of sec.195 of the Act and not taxable under Article- 7 of Indo-Malaysian DTAA. The learned CIT(A) accordingly held that the payment is not in the nature of royalty and therefore, the assessee cannot be held as assessee-in-default u/sec.201(1)/201(1A) of the Act.

Aggrieved by the impugned order of the learned CIT(A), Revenue has filed the present appeal before the Tribunal and raised the following grounds:

“The Ld. CIT(Appeals) erred both in law and on facts of the case in holding that the assessee cannot be treated as 'assessee in default u/s.201(1)/(1A)'. 2. On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in holding that the payments made by the assessee to the foreign entity i.e Value Labs SDN BHD, Malaysia (VSB Malaysia) are not 'other income' when the findings of survey u/s.133A established the work for DSP Software is conducted by the Indian entity ie the assessee alone and there is no logical justification for the payment on account of software to VSB Malaysia? 3. On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in holding that the assessee cannot be treated as 'assessee in default u/s.201(1)/(1A)' on the ground that the remittances made by the assessee to foreign entity i.e Value Labs SDN BHD, Malaysia (VSB Malaysia) are in the nature of business income and also the sum paid for purchase of IP Rights as 'royalty' without appreciating the factual findings recorded in survey u/s.133A of the Act in particular the statement of Sri Sudhir John, Vice President of M/s.Value Labs, India which establishes that the said DSP Software was developed in India itself?

On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in holding that the remittances made by the assessee to foreign entity ie Value Labs SDN BHD, Malaysia (VSB Malaysia) are for product owned by SDN BHD Malaysia, when it had no adequate facility for developing DSP software and the entire development was done by the technical experts of the assessee as evident from the facts on record and also from the fact that for F.Y.2008-09 to 2010-11, no expenditure is incurred by AE i.e Value Labs SDN BHD, Malaysia for setting up a software development facility? 5. On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in holding that the remittances made by the assessee to foreign entity i.e Value Labs SDN BHD, Malaysia (VSB Malaysia) are in the nature of business income which is not taxable in India as there is no PE in India and also the sum paid for purchase of IP Rights as 'royalty', when the issue of existence of PE or otherwise is not considered by the AO nor the factors for establishment of PE were properly discussed by the CIT(A) and hence, the AO should have been asked to examine the facts in this regard? 6. Alternatively, even if it is assumed that the Malaysia AE has developed and owns the DSP Software, whether the CIT(Appeals) is justified in treating only Rs.7,22,44,500/- as royalty while exempting the balance Rs.62,17,81,250/- which is arbitrary and unsustainable, as the entire consideration of Rs.69,40,25,750/- represents payment for the transfer of rights of product and for imparting of information which is classifiable as royalty under section 9(1)(vi) read with Explanation 2 thereto, and taxable in India? 7. On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in ignoring the fact that DSP software is now completely utilized and deployed by the assessee as per the requirements of customers which fulfills the criteria of royalty payment for industrial / commercial equipment or information know-how as per India - Malaysia DTAA and therefore taxable in India? 8. Any other ground of appeal that may be raised with the prior approval of the Hon'ble ITAT during the appellate proceedings.”

The learned DR has submitted that the assessee has made the remittance to the foreign entity which is in the nature of royalty as it was for purchase of IP rights and therefore, as per the provisions of sec.195 the said payment made by the assessee is subjected to TDS however, the assessee has not deducted the TDS on the said payment and therefore, the assessee is to be treated as assessee-in-default u/sec.201(1)/201(1A) of the Act. The learned DR has further submitted that during the course of survey proceedings it was found from the financial statements of VSB, Malaysia for the financial years 2009-2010 and 2010-2011 that the said AE of the assessee introduced computers as fixed assets first time in the financial year 2010-2011 and prior to that the said entity was having only fixed assets consisting of furniture and fixtures and office equipment therefore, when the said AE of the assessee was not having any infrastructure to develop the software which is allegedly purchased by the assessee then, the payment made by the assessee is otherwise falling as other payments not for purchase of any goods or product. The learned DR has further submitted that it is the assessee which developed the software and not the AE and therefore, the payment made by the assessee to the AE is only transfer of money to the AE without receiving any services or products. Thus, the learned DR has submitted that the said transaction does not fall in the Article-7 of the Indo-Malaysian DTAA and liable to tax in India as income of the AE and consequently, the assessee is liable to deduct tax at source on the said amount. Since the assessee has failed to deduct the TDS therefore, the Assessing Officer has rightly held the assessee as assessee-in-default u/sec.201(1)/ 201(1A) of the Act. He has relied upon the order of the Assessing Officer passed u/sec.201(1)/201(1A) of the Act. The learned DR has further submitted that the Tribunal has only deleted the adjustment made by the Assessing Officer/TPO on account of ALP of the said payment and therefore, the said decision of the Tribunal cannot absolve the assessee from its liability of deducting the TDS. Undisputedly, the assessee has purchased the IP rights and therefore, the payment otherwise in the nature of royalty which is assessable to tax in India even as per the DTAA between India and Malaysia as well as per the provisions of secs.5 and 9 of the I.T. Act, 1961. The learned DR has further submitted that the software was otherwise developed by the assessee and therefore, the economic ownership of the intangible in question i.e., DSP software vest with the assessee and the AE VSB, Malaysia did not have the capacity required to develop the software. The assessee failed to prove that the Malaysian AE was having the legal ownership over the said software as nothing is produced to show that the patent/IP rights or copyrights for the software were vested with the AE. The assessee claimed that it has acquired the software from its AE as outright purchase of software product whereas the AE has not disclosed any software product either in the product list or inventory or any work-in-progress neither it is shown on the asset side of the balance sheet for the financial year 2009-2010 nor any capital gain on account of sale of the software mentioned in the financial statement. Therefore, the assessee failed to prove that the AE was legal owner of the software in question which was acquired by the assessee. Thus, the payment made by the assessee towards the alleged acquisition of the DSP software with IP rights constitutes ‘other income’ in the hand of VSB Malaysia which is taxable as per the Income Tax Act and consequently, non- deduction of TDS by the assessee on the said payment attracts the provisions of sec.201(1)/201(1A) of the Act.

On the other hand, the learned Authorised Representative of the Assessee has submitted that the learned CIT(A) has relied upon the Order of this Tribunal in assessee’s own case arising from the assessment order and TP adjustment made by the TPO/Assessing Officer wherein the Tribunal has held that this is a business transaction of transfer of product which is purchased by the assessee along with the IP rights. The learned Authorised Representative of the Assessee has further submitted that the payment made by the assessee towards the IP rights was subjected to TDS and therefore, the assessee already deducted the TDS on the said amount which is 10% of the total cost and also paid to the Government Account and therefore, to the extent of the payment of Rs.7,22,44,500/- towards acquisition of IP rights there is no default on the part of the assessee for TDS. The learned Authorised Representative of the Assessee has further submitted that the Tribunal has given a finding that the transaction of acquisition of software is a business transaction and the income in the hand of the AE is a business income which is not taxable in India as per Article- 7 of Indo-Malaysia DTAA. The learned Authorised Representative of the Assessee has also referred to the agreement for sale of software and submitted that the assessee has acquired the software in question along with IP rights under the two separate agreements i.e., one is for acquisition of software and another is for IP property rights transferred and made the separate payments for these two transactions. The payment made for acquisition of software product is a business income in the hand of the AE therefore, the same is not liable to tax in India whereas the payment made towards IP rights was subjected to TDS and assessee has deducted the TDS on the same and therefore, there is no default on the part of the assessee to that extent. The remittances to the AE were subjected to the valuation by the Customs as well as approval of the Reserve Bank of India [in short “RBI”]. Thus, the learned Authorised Representative of the Assessee has supported the Order of the learned CIT(A). 6. We have considered the rival submissions as well as relevant material on record. The learned CIT(A) has considered and decided this issue in Para no.6.3 as under:

In the result, appeal ITA.No.1828/Hyd./2025 of the Revenue is dismissed.

In the cross objection the assessee has raised the following grounds:

“The Ld. Revenue has erred in filing an appeal against the order of the Ld. CIT(A) dated 13.08.2025 without appreciating the facts and circumstances of the case which is invalid and bad in law. General Ground

The Ld. CIT(A) in its order dated 13.08.2025 has correctly held that the assessee cannot be treated as assessee in default as the payment was for purchase of the software product, which is a capital asset to the assessee and the corresponding income constitutes as business income in the hands of the AE. Technical Ground

The Ld. CIT(A)'s characterization is legally correct that Article 7 of Indo-Malaysian DTAA applies only to business profits and since the assessee's AE has no PE in India, such income is not taxable in India and therefore no TDS obligation arises on part of assessee. Technical Ground

The Ld. Revenue ought to have considered the fact that the Hon'ble ITAT in its earlier order dated 27.04.2018 (ITA No. 305 & 405/Hyd/15) already upheld the genuineness of the transaction and now the Ld. Revenue cannot question the same issue which stands concluded by Hon'ble ITAT. Technical Ground

The Ld. CIT(A) has rightly rejected other income characterization because the survey findings are not conclusive and are overruled by Hon'ble ITAT in the original assessment proceedings. Technical Ground

The Ld. Revenue ought to have considered that the AO's reliance on selective sworn statements ignores the complete statement and the validation of Deputy Commissioner of Customs, which was accepted by RBI and other authorities at the time of payment of consideration, which needs to be treated as a business receipt in the hands of AE. Ground Technical

The Ld. Revenue's contention is factually incorrect as it completely ignores the fact that VL Malaysia has procured infrastructure from MCS, Government of Malaysia as recorded by the DRP and has also availed services from the Indian entity for development of the software and the entire cost is borne by VL Malaysia as evident from its financials. Technical Ground

The Ld. Revenue's alternative argument is untenable because the payment was split into software purchase (Rs. 62.17 crore)-treated as business income and purchase of IP Rights (Rs. 7.22 crore) as the Ld. CIT(A) had correctly applied the DTAA classification. Technical Ground

The Ld. Revenue ignored the fact that the Hon'ble ITAT has already held that the transaction is a purchase of software and IP rights, not a royalty payment for use or right to use of the software. Technical Ground

The respondent may, add or alter or amend or modify or substitute or delete and/or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal. General Ground.”

The assessee has raised the grounds in the cross objection in support of the Order of the learned CIT(A). Therefore, in view of our findings in the Revenue’s appeal, these grounds raised by the assessee in the cross objection becomes infructuous. Accordingly, the cross objections raised by the assessee are dismissed being infructuous.

In the result, C.O.No.6/Hyd./2026 of the Assessee is dismissed being infructuous.