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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 81/JP/2016
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 81/JP/2016 fu/kZkj.k o"kZ@Assessment Year : 2011-12 cuke M/s Isys Softech Private Limited, The ITO, Vs. 11, Mohan Bari, outside Surajpole Ward 5(4), gate, Jaipur Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACI7859J vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri G.M. Mehta (C.A.) jktLo dh vksj ls@ Revenue by : Shri P.P. Meena lquokbZ dh rkjh[k@ Date of Hearing : 31/10/2017 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 13/11/2017
vkns'k@ ORDER
PER: VIJAY PAL RAO, J.M.
This appeal by the assessee is directed against the order dated
26.11.2015 of CIT(A) for the Assessment year 2011-12. The assessee
has raised the following grounds as under:-
“ (1) The ld. CIT(A) has erred in law and on facts in sustaining addition of Rs. 1,14,68,383/- by application of provisions of section 40(a)(ia) of IT Act on account of non-deduction of tax at source on purchases of computer software from USA based two sellers, ignoring the fact that income of the US sellers ( not having place of business or any controlling authority in India) is
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
not chargeable to tax under section 195 of IT Act to whom benefit of DTAA between India and USA is also available. (2) That ld. CIT(A) was not justified is sustaining disallowance of Rs. 3,06,563/- under section 10A of IT Act for the bank interest from the deposits out of business surplus.”
Ground No. 1 is regarding disallowance made u/s 40(a)(ia) of the
Act on account of non deduction of tax at source on purchase of
software. The assessee is an exporter of computer software in the field
of medical billing for which the assessee is eligible and also allowed
deduction u/s 10A of the Act by the AO. The assessee purchased the
main/master copy of the software to produce new software for medical
billing from USA based seller. By using the said master copy and
carrying out the necessary charges as per requirement of the clients
the assessee is exporting the computer software. The AO noted that
the assessee has not deducted tax at source in respect the amount paid
for purchases of the master copy of Rs. 1,14,68,382/-. Accordingly, the
AO invoked the provisions of section 40(a)(ia) of the Act and disallowed
the said amount. The assessee challenged the action of the AO before
the ld CIT(A) but could not succeed because both the AO as well as ld.
CIT(A) have held that the payment made by the assessee for purchase
of software is royalty and therefore the income in the hands of the 2
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
none resident is chargeable to tax in India. Aggrieved by the orders of
the authorities below the assessee filed the present appeal.
Before us, the ld. AR of the assessee has submitted that the
purchase of software is like goods or product which is subjected to
sales tax @ 7% in USA, if sold locally. Therefore such purchases
cannot be equated to royalty or a taxable service and consequently
not chargeable to tax in India. He has further contended that the
subsequent amendment in section 9(1)(vi) by introduction of
explanation 4 by Finance Act 2012 with retrospective effect cannot be
applied to the case of the assessee when this provision of not in statute
at the time of transaction of purchase of software. He has further
contended that even otherwise the payment for purchase of software
cannot be treated as royalty as per the definition provided under Indo
US DTAA. Thus the ld. AR of the assessee has submitted that the
amendment in the provisions of the act cannot override provision of
DTAA which is beneficial to the assessee. Thus the ld. AR has submitted
that the purchase of software is a purchase of product and the
purchase consideration cannot be held as royalty. In support of his
contention he has relied upon the following decisions:-
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
(i) Tata Consultancy Services Vs. State of Andhra Pradesh 271 ITR 401. (ii) Pr. CIT Vs. M. Tech India P. Ltd. 381 ITR 31. (iii) Wipro Ltd. Vs Dy. DCIT 382ITR 179 (Karn) . He has also relied upon the various decisions of the Tribunal on the
point that the payment made to the foreign party for purchase of
software for internal use cannot be said to be considered for use or
right to use and therefore will not fall in the ambit of the definition of
royalty as provided Indo US DTAA.
Alternatively ld. AR has submitted that the disallowed u/s
40(a)(ia) would result enhanced of profit of the assessee derived from
export of computer software eligible for deduction u/s 10A and
therefore no additional tax liability can be fasten on the assessee. In
support of his contention he has relied upon the decision of the
Bangalore Benches of Tribunal in case of ITA vs. Cerner Healthcare
Solutions (P) Ltd. 176 TTJ 63.
On the other hand, the ld. DR has submitted that it is not a
simple purchase of software as product for assessee’s own internal use
but the assessee has purchased the master copy of the software with a
right to modify, alter, amend are make changes for the purpose of
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
further developing the improved software as per requirements of the
clients. Thus the payment by the assessee for purchase of the master
copy along with the copy rights is royalty in nature as per the
provisions of section 9(1)(vi) of the Act as well as the definition
provided under Indo-US DTAA. He has relied upon the orders of the
authorities below.
We have considered the rival submissions as well as relevant
material on record. In the case on hand the assessee has purchased the
master copy of software from BJW Consultancy Services LLC USA vide
agreement dated 16.04.2010 along with certain rights for modification,
alteration, amendments or changes and then resell and export the
improved modified version of the software. For ready reference we
reproduced the agreement/MOU as under:-
“Memorandum of understanding This agreement is made on April 16, 2010 between BJW consulting Service LLC, 5700 Midnight pass Road STE 4 Sarasota FL 34342 and Isys Softech Private Limited, F-139 Chatrala Circle, Sitapura Jaipur. We are the largest producer, seller and exporter of medical software of all types and categories in US. As per proposal we assign the following rights to the customer:
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur • We are selling the software which is copy righted in US and after selling the product, customer is authorized to re-sell it in any manner as per its own requirement. • Charges for sale of software and hardware configurations. • You will be authorized to resale or export the software purchased from US with or without modification, alteration, amendments or changes by using the key provided by us. • Time limit or validation of sold software for re-sale with or without amendment(s) or changes will be unlimited till new improved version of software produced by us is sold to you. This is confidential information provided as an initial “Sample Proposal”
Thus it is clear that the assessee purchase a copy righted software
along with the right to resale export the said software with or without
modification, alteration, amendments or changes by using the key
provided by the US supplier. The terms and conditions of the agreement
clearly manifest that it is not a mere purchase and sale of a copy
righted product but the assessee purchase the master copy of the
software with the right to use the key provided by the supplier for
modification, alteration, amendment or changes. The assessee is
undisputedly exporting the software by using the master copy and with
necessary modification, alteration, amendment or changes as per the
requirement of the clients. Thus it is not the purchase of software by 6
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
the assessee for its own internal use but the software was purchaded
along with the copy rights to be used by the assessee for development
of a new software as per customized requirement of the clients. As far
as the decisions relied upon by the assessee there is no quarrel on the
point that the purchase of copy righted product being a software will
not fall in the category of the royalty in the absence of any transfer of
acquiring of any right to use the copy right. However, in the case of the
assessee the assessee is using the copy right as well as the software for
development of the new software with the necessary modifications. The
Hon’ble Delhi High Court in case of Pre. CIT Vs. M.Tech India P. Ltd.
(supra) has observed in paras 12 and 13 as under:-
In the cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty'. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. 13. A Coordinate Bench of this Court has also expressed a similar view in the case of Infrasoft Ltd. (surpa). In that case, the Revenue sought to tax the receipts on sale of 7
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
licensing of certain software as royalty. The Tribunal held that there was no transfer of rights in respect of the copyright held by the Assessee in the software and it was a case of mere transfer of copyrighted article. This Court concurred with the Tribunal and held that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income. Thus the Hon’ble High Court after considering the decision of Hon’ble
High Court in case of Tata Consultancy Services Vs. State of Andhra
Pradesh (supra) has held that it is necessary to make a distinction
between the cases where the consideration is paid to acquire the right
to use patented or a copy right and cases were payment is made to
acquire patented or copy righted product/goods. In the case of the
assessee it is not an acquisition of copy righted product being software
but the assessee has acquired the software along with the right to use
it for further development/production. Accordingly, in the facts and
circumstances of the case the payment made by the assessee for
acquisition of the software as well as right to use the key provided by
the supplier for making necessary modification, alteration, amendments
or changes which amounts to acquiring the right to use the copy right
and therefore the payment will fall in the definition of royalty as defined
u/s 9(1)(vi) as well as under Article 13(2) of Indo-US DTAA.
Now we take up the alternative plea of the assessee that the
disallowance made u/s 40(a)(ia) would result enhanced of business
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
income of the assessee derived from export of software eligible for
deduction u/s 10A.
Having considering the rival submissions as well as relevant
material on record at the outset we note that this issue is covered by a
series of decisions of the Coordinate Benches of this Tribunal. The
Bangalore Benches of the Tribunal in case of ITO Vs. Cerner Healthcare
Solutions (P) Ltd.(supra) has held in paras 16,19 & 20 as under:-
We have given a very careful consideration to the rival submissions. In our view it would be unnecessary to go into the question whether the payment in question is reimbursement of expenses or in the nature of FTS or the question whether the services rendered made available technology to the Assessee in terms of Article 12(4) of the India USA DTAA, because even assuming the sum in question is to be disallowed u/s.40(a)(ia) of the Act, the disallowance will only go to enhance the profits derived by the Assessee from the business of export of computer software and on such enhanced profits deduction u/s.10A of the Act has to be allowed, thereby rendering tax implication on the Assessee insignificant. Therefore the prayer made in the application under Rule 27 of the ITAT Rules requires consideration. 19. As rightly contended on behalf of the Assessee the consequence of disallowance u/s.40(a)(ia) of the Act will be that the business profits of the Assessee to that extent will stand enhanced. In the case of Gem Plus Jewellery India Ltd. (supra), the Hon'ble Bombay High Court had to answer the following question of law: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the Assessing Officer to grant the exemption u/s.10A of the Act on the assessed income, which was enhanced due to disallowance of employer's as well as employee's contribution towards PF/ ESIC;" The Hon'ble Bombay High Court held on the above question of law as follows: "12. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that 9
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards Provident Fund /ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the Assessing Officer to grant the exemption under Section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the 4 (2009) 319 ITR 306 unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the Provident Fund/ ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and Section 36(v) read with Section 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund/ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee." 20. In view of the aforesaid decision of the Hon'ble Bombay High Court which has been followed in several decisions rendered by ITAT Benches of Delhi, Hyderabad and Bangalore referred to in the submissions made by the learned counsel for the Assessee, we are of the view that the order of the CIT(A) on this issue does not call for any interference. Consequently, grounds Nos. 5 to 8 raised by the revenue are dismissed.
Thus it is clear that the Coordinate Benches while deciding this issue
has followed the decision of Hon’ble High Courts including the decision
of Hon’ble Mombay High Court in case of the Jem Plus Jewellery India
Ltd. 330 ITR 175. We further noted that the CBDT vide circular No. 37
of 2016 has accepted this position that the disallowance made u/s 32,
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur
40(a)(ia), 40A(3), 43B etc. of the Act relates to the business activity
against which chapter VI-A deduction has been claimed, resulting in
enhancement of the profits of eligible business and that deduction
under chapter VI-A is admissible on the profits so enhanced by the
disallowance. Following the decision of Coordinate Benchs as well as the
Hon’ble High Court on this issue and further in view of the Circular no.
37 of 2016 we hold that the disallowance u/s 40(a)(ia) would result
enhancement of profit of the eligible business of the assessee for
deduction u/s 10A and accordingly the assessee would be entitled for
the claim of deduction on enhanced profit. The AO is directed to
allowed the claim of the assessee.
Ground No. 2 is regarding disallowance of 10A or bank interest
from deposit. At the time of hearing the ld. AR of the assessee has
stated at bar that assessee does not pressed this ground due to
smallness of the amount and therefore the same may be dismissed has
not pressed. The ld. DR has raised no objection if ground No. 2 of the
assessee appeal is dismissed has not pressed. Accordingly ground No.
2 of the appeal is dismissed being not presses.
In the result, the appeal of the assessee is partly allowed.
ITA No. 81/JP/2016 M/s Isys Softech Pvt. Ltd. v. ITO, Jaipur Order pronounced in the open court on 13/11/2017
Sd/- Sd/- ¼fot; iky jko½ ¼foØe flag ;kno½ (Vikram Singh Yadav) (Vijay Pal Rao) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member
Tk;iqj@Jaipur fnukad@Dated:- 13/11/2017. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Isys Softech Private Limited, 11, Mohan Bari, outside Surajpole gate, Jaipur. 2. izR;FkhZ@ The Respondent- ITO Ward 5(4), Jaipur. 3. vk;dj vk;qDr@ CIT vk;dj vk;qDr@ CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 5. xkMZ QkbZy@ Guard File {ITA No. 81/JP/2016} 6. vkns'kkuqlkj@ By order,
सहायक पंजीकार@Aेेज. त्महपेजतंत