THE COMMSISIONER OF INCOME TAX, vs. M/S.IBM INDIA LIMITED

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ITA/991/2008HC KarnatakaKAHC01041444200830 August 2012Bench: B.MANOHAR,K.SREEDHAR RAO2 pages
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What did the High Court hold?

The High Court held that the purchase of software amounts to a license to use the software for the agreed consideration. Consequently, the amount paid as consideration for such software is considered royalty. The Court explicitly stated that the present appeal involves a similar question of fact and law as in the case of Commissioner of Income Tax & Another Vs. Samsung Electronics Co. Ltd. and others. Therefore, the question is answered in favour of the Revenue. The appeal is allowed, implying that the ITAT's order, which presumably did not treat the payment as royalty, is set aside. The ratio decidendi is that payments for software are royalty if they represent consideration for a license to use the software. The operative direction is to allow the appeal.

What were the facts?

The Commissioner of Income Tax and the Income-Tax Officer (Appellants) have filed an appeal under Section 260-A of the Income Tax Act, 1961, against the order dated May 9, 2008, passed by the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, in ITA No. 1006/BNG/2007. The appeal pertains to the Assessment Year 2002-2003. The ITAT's order is under challenge, and the Revenue seeks to set it aside and confirm the orders of the Appellate Commissioner and the Income Tax Officer. The dispute involves the tax treatment of payments made by M/s. IBM India Ltd. (Respondent) for software.

What were the issues?

1. Whether the purchase of software amounts to a license to use the software for an agreed consideration, and if so, whether such consideration constitutes royalty taxable in India? (Question of law turning on the interpretation of royalty provisions and the nature of software transactions). Contentions: Assessee (IBM India Ltd.): No specific arguments for the assessee are recorded in the judgment. Revenue (Commissioner of Income Tax): The Revenue contends that the payment for software constitutes royalty, as it is a license to use the software for an agreed consideration. They rely on the High Court's decision in Commissioner of Income Tax & Another Vs. Samsung Electronics Co. Ltd. and others reported in (2011) 245 CTR (KAR) 481.

Which sections of the Income-tax Act were involved?

Section 260-A

AI-generated summary — verify with the full judgment below

1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 30TH DAY OF AUGUST 2012 PRESENT THE HON’BLE MR. JUSTICE K. SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B. MANOHAR I.T.A. NO.991/2008 BETWEEN: 1. The Commissioner of Income Tax, C.R. Building, Queens Road, Bangalore. 2. The Income-Tax Officer (Intl., Taxn.) Ward-19(1), C.R. Building, Queens Road, Bangalore. … APPELLANTS (By Sri K.V. Aravind, Adv.) AND: M/s.IBM India Ltd., Subramanya Arcade, No.12, Bannerghatta Main Road, Bangalore-560 029. … RESPONDENT (By Smt. Vani. H., Adv.) THIS ITA IS FILED UNDER SECTION.260-A OF IT ACT, 1961 ARISING OUT OF ORDER DATED 9.5.2008 PASSED IN ITA NO.1006/BNG/2007 FOR THE ASSESSMENT YEAR 2002-2003, PRAYING THAT THIS HON’BLE COURT MAY BE PLEADED TO: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (2) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.1006/BNG/2007 DATED. 9.5.2008 CONFIRM THE ORDERS OF

2 THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE INCOME TAX OFFICER, (INTL. TAXN.) WARD 19(1), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THIS ITA COMING ON FOR HEARING THIS DAY, SRI K. SREEDHAR RAO, J. DELIVERED THE FOLLOWING: J U D G M E N T This court in Commissioner of Income Tax & Another Vs. Samsung Electronics Co. Ltd., and others reported in (2011) 245 CTR (KAR) 481, has held that purchase of software amounts to licence to use software for the agreed consideration and the amount so paid towards consideration, amounts to royalty. 2. In the present appeal, similar question of fact and law is involved. Therefore, the question is answered in favour of the Revenue. Accordingly, the appeal is allowed. Sd/- JUDGE Sd/- JUDGE PL

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