THE PR. COMMISSIONER OF INCOME TAX -6 vs. MIKROZ INFOSECURITY PVT. LTD.

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ITA/1334/2018HC DelhiDLHC01377500201827 November 2018Bench: HON'BLE MR. JUSTICE SANJIV KHANNA,HON'BLE MR. JUSTICE ANUP JAIRAM BHAMBHANI2 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal upheld the deletion of the disallowance made by the Commissioner of Income Tax (Appeals). The Tribunal's decision was primarily based on the judgment of the Delhi High Court in Principal Commissioner of Income Tax vs. M. Tech India Pvt. Ltd. (2016) 381 ITR 31 (Del.). The reasoning was that since the software was embedded in the hardware and not separately purchased, and the assessee did not acquire any copyright, the provisions for tax deduction at source on royalty or fees for technical services were not applicable. Consequently, the disallowance under Section 40(a)(ia) was not justified. The Tribunal found that no substantial question of law arose as the issue was covered by the precedent.

What were the facts?

The assessee, Mikroz Infosecurity Pvt. Ltd., imported hardware, primarily firewalls and virtual private networks, which included pre-installed software. The Assessing Officer (AO) disallowed the entire purchase amount of Rs. 1,73,72,817/- under Section 40(a)(ia) of the Income Tax Act, 1961, holding that tax at source should have been deducted. The Commissioner of Income Tax (Appeals) deleted this disallowance, finding that the software was embedded in the hardware, not separately purchased, and no copyright was acquired by the assessee. The manufacturer had already paid for the software. The Revenue appealed this decision to the Tribunal.

What were the issues?

1. Whether the Tribunal erred in deleting the disallowance of Rs. 1,73,72,817/- made by the Assessing Officer under Section 40(a)(ia) of the Income Tax Act, 1961, on the ground that tax at source was not deducted on the purchase of hardware with pre-installed software. Assessee's Contention: The assessee argued that the software was embedded in the hardware, not separately purchased, and no copyright was acquired. The software did not have a separate identity, and the assessee was not sold any copyright for further sale. The manufacturer had already paid for the software. Revenue's Contention: The Revenue contended that tax at source was required to be deducted on the entire purchase amount as per Explanation 4 to Section 9(1)(iv) of the Act, and its non-deduction warranted disallowance under Section 40(a)(ia).

Which sections of the Income-tax Act were involved?

Section 40(a)(ia),Section 9(1)(iv)

AI-generated summary — verify with the full judgment below

$~47 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 1334/2018 THE PR. COMMISSIONER OF INCOME TAX -6..... Appellant Through: Mr.Ruchir Bhatia, Sr. St. Counsel versus MIKROZ INFOSECURITY PVT. LTD. ..... Respondent Through CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE ANUP JAIRAM BHAMBHANI O R D E R % 27.11.2018 M/s. Mikroz Infosecurity Pvt. Ltd. had imported hardware consisting primarily of fire walls and virtual private networks. The said hardware had pre-installed software. The Assessing Officer, relying upon Explanation 4 to Section 9(1)(iv) of the Income Tax Act, 1961, (‘the Act’ for short) held that the entire purchase amount of Rs.1,73,72,817/- should be disallowed as expenditure under Section 40(a)(ia) of the Act on the ground that tax at source was required to be deducted and had not been deducted. The disallowance was deleted by the Commissioner of Income Tax (Appeals) who observed that the software was embedded in the hardware and had not been separately purchased. Respondent-assessee did not acquire any copyright in the software, as it did not have a separate identity.

The assessee had not been sold any copyright in the software for further sale. Also, the manufacturer of the hardware had already paid for the software. The aforesaid view of the Commissioner of Income Tax (Appeals) has been upheld by the Tribunal, primarily relying upon the judgment of this Court in Principal Commissioner of Income Tax vs. M. Tech India Pvt. Ltd. (2016) 381 ITR 31 (Del.) As the question raised is covered by the aforesaid decision of the High Court, no substantial question of law arises. The present appeal is dismissed. SANJIV KHANNA, J. ANUP JAIRAM BHAMBHANI, J. NOVEMBER 27, 2018 neelam

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