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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI G. MANJUNATHA
आदेश /O R D E R
PER G. MANJUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the learned CIT(A)-3, Chennai, dated 30.08.2017 and pertains to assessment year 2014-15.
:-2-: ITA. No: 104/Chny/2018 2. The ld.AR for the assessee at the time of hearing submitted that there is a delay of 12 days in filing appeal before the Tribunal for which necessary petition for condonation of appeal along with affidavit has been filed explaining the reasons for delay in filing the appeal. The ld.AR further submitted that the delay was unintentional on account of administrative activities associated with the merger activities in making ready the appeal papers and submits that substantive issues of law and facts are involved in the appeal against the assessment. The delay in filing the appeal was not intentional and that there is no undue benefit in delay in filing the appeal by 12 days. The Ld. DR opposed condonation of appeal. Having heard both sides, we are of the considered view that reasons given by the assessee for not filing the appeal within the time allowed under the Act comes under reasonable cause as provided under the Act for condonation of delay and hence, delay in filing of above appeal is condoned and appeal filed by the assessee is admitted for adjudication.
The assessee has raised the following grounds of appeal:-
:-3-: ITA. No: 104/Chny/2018 “ 1. The order dated 30.08.2016 of the Learned CIT(A)- Appeals-3, Chennai in ITA No. 193/2016-17 for the Assessment year AY 2014-15 is contrary to facts, opposed to law and untenable. Whether Depreciation on Software purchase is 60% or 25% 2. The Learned Commissioner of Income Tax (Appeals) erred in rejecting the claim of Depreciation on Software License at 60% and allowing depreciation at 25%. 2.1 The Ld CIT(A) grossly erred in not following the Rule 5 governing the Rate of depreciation of Software. 2.2 The Ld CIT(A) further erred in following the word the word License was mentioned in the documents and the word license and the right to use the software do not alter the purchase of Software. Non deduction of TDS on Purchase of Software is Royalty 3. The Learned Commissioner of Income Tax (Appeals) grossly erred in following the ratio of the case law in M/s. Poompuhar Shipping Corporation ltd Vs ITO International taxation –II Chennai dated 09.10.2013. 3.1 The Learned Commissioner of Income Tax (Appeals) grossly erred in following case laws which are distinguishable. Addition on Depreciation and on Royalty has been considered twice: 4. Ld CIT(A) grossly erred in not verifying the fact the Cost of the software disallowed in both u/s. 32(2) and u/s. 40a(i). For these and other grounds that may be permitted to be adduced before or during the course of hearing, the Appellant prays that the appeal be allowed and the order of Learned Commissioner of Income Tax (Appeals) be deleted.”
The brief facts of the case are that the assessee company is engaged in the business of providing software
:-4-: ITA. No: 104/Chny/2018 solutions, filed its return of income for assessment year 2014- 15 on 29.11.2014 declaring total income of Rs. 79,54,530/-. The case has been taken up for scrutiny and the assessment has been completed u/s. 143(3) of the Income Tax Act, 1961 (herein after “the Act”) on 21.12.2016 and determined total income of Rs. 2,09,01,140/-, inter alia, making additions towards disallowance of excess depreciation claimed on computer software amounting to Rs. 69,14,390/- and addition towards payment to a non-resident for purchase of software u/s. 40(a)(i) of the Act, for non deduction of tax at source u/s. 195 of the Act, 1961. The assessee carried matter in appeal before the first authority, but could not succeed. The Ld. CIT(A) for the reasons stated in the appellate order dated 30.08.2017, confirmed additions made by the AO towards disallowance of excess depreciation on computer software and disallowance of payment made to non-resident for purchase of software for non-deduction of TDS u/s. 195 of the Act. Aggrieved by the CIT(A), the assessee is in appeal before us.
The first issue that came up for consideration from ground no. 2 of assessee appeal is disallowance of excess depreciation on computer software amounting to Rs.
:-5-: ITA. No: 104/Chny/2018 69,14,390/-. The facts with regard to impugned dispute are that the assessee had purchased software being operating system for Windows etc amounting to Rs. 1,92,79,450/- and claimed depreciation as per Rule 5 of IT Rules, 1962 @ 60% as applicable to computer and computer software. The AO restricted depreciation claimed on computer software @ 25% as applicable to intangible assets being patent, license etc on the ground that payment made by the assessee for acquiring license for software is nothing but an intangible asset which is eligible for depreciation @ 25% as applicable to intangible assets like copyrights, patent and license etc.
The Ld. AR for the assessee submitted that the Ld. CIT(A) has erred in sustaining the additions made by the AO towards disallowance of excess depreciation on computer software without appreciating the fact that any computer software embaded with computer system is an integrated computer system which is eligible for depreciation @ 60% as applicable to computer and computer software as per Rule 5 of the IT Rules, 1962. The CIT(A) without appreciating the fact, has simply disallowed depreciation by holding that the assessee has purchased a license in computer software which
:-6-: ITA. No: 104/Chny/2018 is nothing but an intangible asset which is eligible for depreciation @ 25% as applicable to intangible assets.
The Ld. DR on the other hand strongly supporting the order of the CIT(A) submitted that what was purchased by the assessee is a license in software which is nothing but a Right which is intangible asset eligible for depreciation @ 25% as applicable to intangible assets.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee had purchased computer software like Windows, MS Office, Solaris and other operating system etc which are used in the computer systems. As per Appendix –I to IT Rules, 1962, it has prescribed rate of depreciation for various assets, including computer and computer software, as per which software is eligible for higher depreciation at 60%. The computer software has not been defined in the Act, but in Appendix –I to the IT Rules, 1962, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore, computer software (whether canned form or
:-7-: ITA. No: 104/Chny/2018 uncanned form) is goods and a tangible asset by itself. Further Rule 5 of IT Rules, 1962 governing the rate of depreciation for software, has prescribed 60% depreciation on computer and computer softwares. Since, the assessee has purchased software like Windows, MS Office and other operating system which is embaded in computer system and thus, the same is construed as an integrated part of computer system which is eligible for depreciation @ 60% as claimed by the assessee, but not 25% as applicable to intangible asset as considered by the Ld. AO. Therefore, we are of a considered view that the AO as well as CIT(A) were erred in restricting depreciation on software to 25% as against 60% as claimed by the assessee. Hence, we direct the AO to allow depreciation @ 60% as claimed by the assessee.
The next issue that came up for consideration from ground no. 3 of the assessee appeal is disallowance of payment made to a non-resident for purchase of software u/s. 40(a)(i) of the Act, for non-deduction of tax at source u/s. 195 of the IT Act, 1961. The assessee has purchased copyrighted software from a service provider from USA. The assessee has not deducted TDS u/s. 195 of the IT Act, 1961 for the reason
:-8-: ITA. No: 104/Chny/2018 that software license purchased from non-resident supplier is not in the nature of Royalty as defined u/s. 9(1)(vi) of the IT Act, 1961. The assessee further claimed that it has acquired only a copyrighted article, but not a copyright itself. The AO disallowed payment made to a non-resident for purchase of software on the ground that when assessee has deducted TDS on payment made to another supplier on similar nature, failed to offer any explanation for non-deduction of tax at source on payment made for purchase of software from USA supplier. The AO has also taken support from the decision of Hon’ble High Court of Karnataka in the case of CIT vs Rational Software Corporation of India P Ltd., to observe that payment for purchase of software amount to royalty and TDS has to be deducted.
The Ld. AR for the assessee submitted that the Ld. CIT(A) has erred in sustaining additions made by the AO towards disallowance of payment made to non-resident supplier from USA for purchase of software for non-deduction of tax at source u/s. 195 of the Act, 1961, without appreciating the fact that what is purchased by the assessee is a copyrighted article but not a copyright itself and thus, it is
:-9-: ITA. No: 104/Chny/2018 outside the scope of definition of Royalty as defined u/s. 9(1)(vii) of the Act, 1961.
The Ld. DR supported order of the ld. CIT(A).
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Undisputed fact are that, the assessee had purchased a copyrighted article from an USA supplier and made payment without deducting tax at source u/s. 195 of the IT Act, 1961. The AO disallowed sum paid by the assessee u/s. 40(a)(i) of the Act, for deduction of tax at source u/s. 195 by holding that, amount paid by the assessee for acquiring license in a software is in the nature of Royalty as defined u/s. 9(1)(vi) of the IT Act, 1961. We have gone through reasons given by the AO, in light of arguments advanced by the Ld. AR for the assessee, and we ourselves do not subscribe to the reasons given by the AO for disallowance of sum paid by the assessee for purchase of software u/s. 40(a)(i), for the simple reason that what is purchased by the assessee is a copyrighted article but not a copyright itself. There is a clear definition between copyright and copyrighted article. Further, various courts
:-10-: ITA. No: 104/Chny/2018 consistently held that copyrighted article is different from copyright itself.
The Proviso to section 9(1)(vii) deals with copyrights as per which any payment made for acquiring copyright is in the nature of Royalty and income embaded in such payments to a non-resident is taxable in India. If any amount made for copyrighted article, then the proviso to section 9(1)(vii) is not attracted. This legal principle is supported by the decision of the Hon’ble High Court of Madras in the case of CIT vs Vinzas Solutions India (P) Ltd, where the Hon’ble High Court clearly opined that there is the distinction between copyrighted article and one of the copyright and further held that proviso to section 9(1)(vii) as a whole is not applicable to payment made for purchase of copyrighted article. A similar issue has been considered by the coordinate bench of ITAT, Mumbai in the case of DDIT vs Reliance Communication Ltd [2018] 90 Taxmann.com 358, where it was held that consideration paid by assessee to non-resident supplier for acquiring copy of software was actually made for copyrighted article and not for use of copyright or transfer of right to use of copyright and thus, payment made by the assessee to vendors of software
:-11-: ITA. No: 104/Chny/2018 could not be taxed as royalty. The Hon’ble Supreme Court in the recent judgment of Engineering Analysis Center of Excellence P. Ltd. Vs CIT (2021) 125 Taxmann.com42 (SC) has put an end to all controversies with regard to deduction of tax at source on payment to non-resident for purchase of computer software and held that amount 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 a payment of royalty for the use of copyright in the computer software, and thus, same does not give rise to any income taxable in India. Similarly, the Hon’ble High Court of Madras in the case of CIT vs M/s. Dassault Systems Simulia P Ltd., (2021) 127 Taxmann.com 27 (madras) had considered an identical issue and held that whether assessee had purchased only a right to use copyright, i.e., software and not entire copyright itself, 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 payment of royalty for the use of copyright in the computer software, and same does
:-12-: ITA. No: 104/Chny/2018 not give rise to any income taxable in India, as a result of which the persons referred to in section 195 were not liable to deduct any TDS u/s. 195 of the Act, 1961. In this case, the assessee has purchased software from supplier in USA and said software is a copyrighted article. Therefore, we are of the considered view that payment made by the assessee for purchase of software to non-resident supplier is outside the scope of the definition of Royalty as defined u/s. 9(1)(vii) and thus, the assessee does not required to deduct TDS u/s. 195 of the Act, 1961 and consequently, payment made for purchase of software cannot be disallowed u/s. 40(a)(i) of the Act for non-deduction of tax at source. Hence, we direct the AO to delete the additions made towards disallowance of payments made to non-resident for purchase of software.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the court on 27th October, 2021 at Chennai.
Sd/- Sd/- (धु�वु� आर. एल रे�डी) (जी. मंजुनाथ) (G. MANJUNATHA) (DUVVURU RL REDDY) �या�यकसद�य/Judicial Member लेखासद�य/Accountant Member
:-13-: ITA. No: 104/Chny/2018
चे�ई/Chennai, �दनांक/Dated, the 27th October, 2021 JPV आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF