THE COMMISSIONER OF INCOME T vs. M/S.FINANCIAL SOFTWARE AND S

Tax Case Appeal No.419 of 2021 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.419 of 2021 The Commissioner of Income Tax, Chennai. ... Appellant Vs.

M/s. Financial Software and Systems (P) Ltd G-4, I Cross Street, SIPCOT IT Park, Rajiv Gandhi Salari, Siruseri, Navallur, Chennai - 603 103. ... 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 22.06.2016 passed in I.T.A.No.823/Mds/2016. For Appellant : Mr.Karthik Ranganathan Senior Standing Counsel For Respondent : Mr.N.V.Balaji

Page 1/7 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.419 of 2021 J U D G M E N T (Judgment was delivered by T.S. SIVAGNANAM, J.) This Tax Case Appeal filed by the Revenue 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 22.06.2016 passed in I.T.A.No.823/Mds/2016 for the Assessment Year 2009-10. 2.The appellant/Revenue has raised the following substantial questions of law in this appeal : “1.Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceeding u/s.201(1) holding the assessee in default was not applicable to Foreign remittance made towards purchase of software without effecting withholding tax under Section 195 is proper? 2.Whether the foreign remittance made to Companies by the assessee without deducting, withholding taxes under Section 195 of the I.T.Act, 1962 in respect of purchase of software can be treated as royalty on which TDS is to be made? Page 2/7 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.419 of 2021 3.Whether the disallowance made under Section 40(a)(i) and the order passed under Section 201(1)/201(1A) are independent and different proceedings?” 3.We have heard Mr.Karthik Ranganathan, learned Senior Standing Counsel for the appellant/Revenue and Mr.N.V.Balaji, learned counsel for the respondent/assessee. 4.It is not disputed before us that the substantial questions of law, which have been raised in this appeal, have been answered in favour of the assessee in the decision of 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 Page 3/7 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.419 of 2021 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 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 Page 4/7 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.419 of 2021 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 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 Page 5/7 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.419 of 2021 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.” 7.Following the above decision, this Tax Case Appeal filed by the Revenue is dismissed and the substantial questions of law are answered against the Revenue. No costs. (T.S.S., J.) (S.S.K., J.) 03.09.2021 (14/14)

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Index : Yes / No To The Commissioner of Income tax, Chennai. Page 6/7 https://www.mhc.tn.gov.in/judis/ Tax Case Appeal No.419 of 2021 T.S. SIVAGNANAM, J. and SATHI KUMAR SUKUMARA KURUP, J. mkn Tax Case Appeal No.419 of 2021

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