M/S FINANCIAL SOFTWARE & vs. COMMISSIONER OF INCOME TAX

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TCA/409/2015HC Madras03 September 2021Bench: Hon`ble Mr Justice T. S. SIVAGNANAM8 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the challenge to the reopening proceedings under Section 147 of the Income Tax Act had become academic in light of the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax and another. The Supreme Court had ruled that amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers for resale/use of software through EULAs/distribution agreements do not constitute royalty for the use of copyright and do not give rise to income taxable in India. Consequently, persons referred to in Section 195 were not liable to deduct TDS. Therefore, the High Court concluded that the reopening, based on the premise of TDS liability, was unsustainable in law. The substantial question of law was answered in favour of the assessee, and the appeal was allowed.

What were the facts?

The assessee, M/s. Financial Software and Systems Private Limited, filed an appeal against the order of the Income Tax Appellate Tribunal, Madras "A" Bench, dated 05.06.2014, which was passed in ITA No.2190/Mds/2013 for Assessment Year 2003-04. The appeal was admitted on the substantial question of law concerning the validity of reopening the assessment under Section 147 of the Income Tax Act, 1961, by the Assessing Officer. The core of the dispute, as revealed during the proceedings, revolved around whether the assessee was liable to deduct Tax at Source (TDS) on payments made for computer software procured from a non-resident and sold in the Indian market.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that reopening the assessee under Section 147 of the Income Tax Act, made by the Assessing Officer is valid? (Question of law) Assessee's Contention: The assessee argued that the validity of the reopening proceedings under Section 147 of the Act had become academic in light of a subsequent Supreme Court decision. The assessee relied on the Supreme Court's ruling in Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax and another. Revenue's Contention: The judgment records no specific arguments from the Revenue regarding the validity of the reopening itself, beyond the fact that the Tribunal had upheld it. However, the underlying issue for reopening was the alleged liability to deduct TDS.

Which sections of the Income-tax Act were involved?

Section 147,Section 195,Section 9(1)(vi)

AI-generated summary — verify with the full judgment below

Tax Case Appeal No.409 of 2015 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 03.09.2021 CORAM : THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM AND THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP Tax Case Appeal No.409 of 2015 M/s. Financial Software and Systems Private Limited, “Saradha” Ground Floor, No.42, Third Main Road, Gandhi Nagar, Adyar, Chennai. ... Appellant Vs.

Commissioner of Income Tax I, Chennai. ... Respondent

Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras "A" Bench, dated 05.06.2014 passed in I.T.A.No.2190/Mds/2013. For Appellant : Mr.N.V.Balaji

For Respondent : Mr.Karthik Ranganathan Senior Standing Counsel

Page 1/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015 J U D G M E N T (Judgment was delivered by T.S. SIVAGNANAM, J.) This Tax Case Appeal filed by the assessee under Section 260A of the Income Tax Act, 1961 ('the Act' for brevity), is directed against the order of the Income Tax Appellate Tribunal, Madras "A" Bench, dated 05.06.2014 passed in I.T.A.No.2190/Mds/2013 for the Assessment Year 2003-04. 2.The appeal has been admitted on 06.07.2015 on the following substantial question of law : “Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that reopening the assessee under Section 147 of the Income Tax Act, made by the Assessing Officer is valid?” 3.We have heard Mr.N.V.Balaji, learned counsel for the appellant/assessee and Mr.Karthik Ranganathan, learned Senior Standing Counsel for the respondent/Revenue. Page 2/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015 4.Though the appeal filed by the assessee pertains to a challenge to the validity of reopening of the assessment for the relevant Assessment Year under Section 147 of the Act, the question of law which is involved is with regard to whether the assessee was liable to deduct Tax at Source in respect of the Computer Software which was dealt with by them, procured from a Non-Resident and sold in the Indian Market. This legal issue has been decided by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax and another reported in (2021) SCC Online SC 159. 5.In the said decision, there were four categories of cases as mentioned below : “4.The appeals before us may be grouped into four categories: i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by Page 3/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015 purchasing computer software from foreign, nonresident suppliers or manufacturers and then reselling the same to resident Indian end-users. iii)The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, nonresident seller, resells the same to resident Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.” 6.After elaborately considering the entire issues, the Hon'ble Supreme Court held as follows : “172. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Page 4/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015 Income Tax Act (section 9 (1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 173. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 174. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.” Page 5/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015 7.In the light of the above decision, the challenge to the reopening proceedings has become academic. Nevertheless, since the Tribunal has upheld the validity of the reopening proceedings, we have to necessarily decide this case against the Revenue and in favour of the assessee, or else, the reopening proceedings may continue to remain valid, though the basis for reopening was held to be unsustainable, as the question of law has been answered in favour of the assessee in the case of Engineering Analysis Centre of Excellence Private Limited (supra). 8.Therefore, for such reasons, this Tax Case Appeal is allowed and the reopening is held to be unsustainable in law in the light of the decision rendered by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra). For such reason, the substantial question of law stands answered accordingly. No costs. (T.S.S., J.) (S.S.K., J.) 03.09.2021 mkn (9/14) Page 6/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015

Internet : Yes

Index : Yes / No To The Commissioner of Income Tax-I, Chennai. Page 7/8 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.409 of 2015 T.S. SIVAGNANAM, J. and SATHI KUMAR SUKUMARA KURUP, J. mkn Tax Case Appeal No.409 of 2015

03.09.2021 (9/14) Page 8/8 https://www.mhc.tn.gov.in/judis/

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