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Income Tax Appellate Tribunal, G Bench, Mumbai
Before: Shri B.R. Baskaran & Shri Ravish Sood
O R D E R
Per Ravish Sood, JM
1. The present appeal filed by the assessee is directed against the order passed by the CIT(A)-24, Mumbai, dated 23.01.2017 which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 09.02.2016 for A.Y 2013-14. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal: “1.0 On the facts and circumstances of the case and in law, the Learned Commissioner of Income tax (Appeals) ('the Ld. CIT(A)') erred in upholding disallowance under section 40(a)(ia) of the In co me tax Act, 19 6
1. ( th e Act') in r es pe ct of payme n ts mad e to M /s Crea tiv e Infotech amounting to Rs.99,000/- without considering the facts that payee had considering said amount as income while filing the return of income and paid taxes thereon.
P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax 2.0 On the f acts and circu ms tances of the case and in law, the Ld. CIT(A) erred in upholding the disallowances u/s 40(a)(ia) of the Act in respect of amount paid Rs. 13,39,065/- to Microsoft Singapore, towards purchased of packaged software, treating the same as Royalty without considering the facts that the Appellant had purchased software in the form of copyrighted product and it was purchase of goods for the Appellant, on which no tax is required to be withheld. 3.0 On the f acts and circu ms tances of th e case and in law, the Ld. CIT(A) erred in upholding the disallowances u/s 40(a)(ia) of the Act in respect of amount paid to Odyssey Technologies Ltd amounting to Rs. 72,450/- and Speedo Communication amounting to Rs.65,100/- towards purchased of packaged software treating the same as Royalty without considering the facts that the Appellant had purchased software in the form of copyrighted product and it was purchase of goods for the Appellant, on which no tax is required to be deducted. 3.1 Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding disallowance under section 40(a)(ia) of the Act in respect of payments made to Odyssey Technologies Ltd and Speedo Communication without considering the facts that payee had considering said amount as income while filing the return of income and paid taxes thereon. 4.0 On the f acts and circu ms tances of the case and in law, the Ld. CIT(A) erred in disallowing under section 40(a)(ia) of the Act in respect of payments made to various parties amounting to Rs. 15,75,615/- without considering the facts that the amount of Rs. 15,75,615/-was paid during the year and was not payable at the end of the year. 5.0 The appellant craves leave to add, alter delete or substitute any of the grounds urged above.”
Briefly stated, the assessee company which is engaged in the business of providing IT consultancy and other IT enabled services had e-filed its return of income for A.Y 2013-14 on 24.09.2013, declaring total income of Rs.17,45,94,750/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
The A.O while framing the assessment noticed that the assessee had paid an amount of Rs.99,000/- towards fees for professional or technical services, without deduction of tax at source as required under Sec. 194J of the Act. On the basis of his aforesaid observations the A.O disallowed the amount of Rs.99,000/- under Sec. 40(a)(ia) of the Act. Further, it was P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax observed by the A.O that during the year under consideration the assessee had imported/purchased software, but no tax was deducted at source while making payments to the offshore companies, as under:
Sr. Name of the Company Nature of Software Amount No.
Microsoft Singapore SQL packaged software-standard Rs. 13,39,065 product 2. Speedo Communications Purchase of EPABX to upgrade to Rs. 65,100 version 8 The A.O observed that the softwares purchased by the assessee were customised softwares and shrink wrapped software/license, which being a copyrighted product, obligated the assessee company to deduct tax at source at the time of making of payment to the aforementioned supplier companies. In the backdrop of his aforesaid observations, the A.O was of the view that as the assessee had failed to deduct tax at source on the aforementioned payments made for purchase of the shrink wrapped software/license, thus the same was liable to be disallowed under Sec. 40(a)(ia) of the Act. On the basis of his aforesaid deliberations, the A.O disallowed the amount of Rs. 13,39,065/- and Rs. 65,100/- under Sec. 40(a)(ia) of the Act.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). However, the CIT(A) not being persuaded to subscribe to the contentions advanced by the assessee before him, upheld the aforesaid additions/disallowances made by the A.O.
The assessee being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee, at the very outset of the hearing of the appeal submitted that the amount of Rs.99,000/- was paid by the assessee to M/s Creative Infotech towards fee for professional or technical services. It was submitted by the ld. A.R, that as the said amount was offered as income and brought to tax in the hands of the aforementioned payee viz. M/s Creative Infotech, thus as per the second proviso to Sec. 40(a)(ia) r.w. the first proviso P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax to Sec. 201(1), no disallowance was called for in the hands of the assessee. It was averred by the ld. A.R that in all fairness the matter may be restored to the file of the A.O, with a liberty to the assessee to place on record the requisite documentary evidence to substantiate the aforesaid factual position. Further, it was averred by the ld. A.R that as the payments made by the assessee to the aforementioned offshore companies viz. (i) Microsoft Singapore; and (ii) Speedo Communications were for purchase of shrink wrapped software/license which was a copyrighted product, thus, no obligation was cast upon the assessee to deduct tax at source while making of the respective payments to them. In support of his aforesaid contention the ld. A.R relied on the order passed by a coordinate bench of the Tribunal viz. ITAT “L” Bench, Mumbai in the case of Reliance General Insurance Company ltd. Vs. ITO (IT) TDS-2, Mumbai [ITA No. 8184/Mum/2011; dated 23.08.2018]. It was submitted by the ld. A.R, that the Tribunal in its aforesaid order by relying on the judgment of the Hon‟ble High Court of Delhi in the case of DIT Vs. Infrosoft Ltd. (2014) 264 CTR 329 (Del) has held, that where an amount is received pursuant to granting of a license to use the copyrighted software for the licensees own business, the same could not be brought to tax as “royalty” under Article 12(3) of the India-USA Tax Treaty. On the basis of his aforesaid contention, it was submitted by the ld. A.R that the lower authorities had erred in characterising the payment made by the assessee for purchase of shrink wrapped software/license as “royalty”, and therein holding the assessee as being in default for not having withheld the tax at source while making the payments to the aforementioned respective parties. Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that the Hon‟ble High Court of Karnataka in the case of CIT Vs. Samsung Electronics Company Ltd.(2012) 345 ITR 494 (Kar) has held that the amount paid for the supply of off-the-shelf software was to be construed as “royalty” in terms of the provisions of the Act, and the applicable tax treaty. The ld. D.R taking support of the aforesaid judicial pronouncement submitted, that as it was obligatory on the part of the assessee to have deducted tax at source, which it had failed to do, thus the P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax lower authorities had rightly disallowed the respective amounts under Sec. 40(a)(ia) of the Act.
We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We shall first advert to the disallowance by the A.O of the payment of Rs. 99,000/- made by the assessee to M/s Creative Infotech. The ld. A.R has averred before us that the aforesaid amount had been taken into account, and subjected to tax by aforementioned payee viz. M/s Creative Infotech in its return of income for the year under consideration. We find, that as per the second proviso to Sec. 40(a)(ia) r.w. first proviso to Sec. 201(1) of the Act, in a case where though the assessee had failed to deduct the whole or any part of tax in accordance with the provisions of Chapter XVII of the Act, on the sum paid to a resident or on the sum credited to the account of a resident, then he shall not be deemed to be an assessee in default in respect of such tax, if such resident payee carries out a conjoint satisfaction of certain conditions viz. (i) has furnished his return of income under Sec. 139; (ii) has taken into account such sum for computing income in his return of income; and (iii) has paid the tax due on the income declared by him in the return of income. Further, it would also be obligatory for the assessee to furnish a certificate in Form No 26A r.w. Rule 31ACB from an accountant, therein certifying satisfaction of the aforesaid conditions. On a cumulative satisfaction of the aforementioned conditions, no disallowance under Sec. 40(a)(ia) of the Act would be called for in the hands of the assessee.
We have deliberated at length on the issue under consideration and find substantial force in the contention advanced by the ld. A.R. In the backdrop of the claim of the ld. A.R, that the conditions contemplated in the second proviso to Sec. 40(a)(ia) r.w. first proviso to Sec. 201(1) are satisfied in context of the payment of Rs. 99,000/- made by the assessee to M/s Creative Infotech, the matter, in our considered view requires to be revisited by the A.O. We thus, restore the matter to the file of the A.O for readjudicating the same after verifying the aforesaid claim of the assessee. In case the claim of the assessee is found to be in order, then the P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax disallowance Rs.99,000/- made under Sec. 40(a)(ia) shall stand vacated. Needless to say, the A.O shall during the course of the set aside proceedings afford reasonable opportunity of being heard to the assessee. Further, the assessee in order to substantiate its aforesaid claim shall remain at a liberty to place on record requisite certificate/documents during the course of the set aside proceedings.
We shall now advert to the disallowance of Rs. 13,89,065/- and Rs.72,450/- made by the A.O in respect of the amount paid by the assessee for purchase of shrink wrapped software/licence. We find that the A.O while making the aforesaid disallowance had relied on the judgment of the Hon‟ble High Court of Karnataka in the case of CIT Vs. Samsung Electronics Company Ltd.(2012) 345 ITR 494 (Kar), and had concluded that the payment made by the assessee for purchasing the off-the-shelf software was to be construed as “royalty” under the Act. On the basis of his aforesaid observations, the A.O was of the view that it was obligatory on the part of the assessee to have deducted tax at source while making the aforesaid payments. We are unable to persuade ourselves to subscribe to the aforesaid observations of the lower authorities. We find, that the Hon‟ble High Court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Del), after considering the aforesaid judgment in the case of Samsung Electronics Company Ltd. (supra), had concluded that the amount received pursuant to granting of licence to use the copyrighted software for the licensees own business could not be brought to tax as “royalty”. Further, the aforesaid order of the Hon‟ble High Court of Delhi has been followed by a coordinate bench of the Tribunal viz. ITAT “L” bench, Mumbai, in the case of Reliance General Insurance Company Ltd. Vs. ITO (IT), TDS-2, Mumbai [ITA No. 8184/Mum/2011; dated 23.08.2018]. We find, that the Tribunal in the aforementioned case, respectfully following the view taken by the High Court of Delhi in the case of Infrasoft Ltd. (supra), has observed as under:
“8. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We shall first advert to the remittance of USD 100,000 made by the assessee towards licence fees to M/s Fair Isaac International Corpn. We have perused the copy of the agreement P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax entered into by the assessee with M/s Fair Isaac International Corpn i.e “Fair Isaac Order Form-Blaze Advisor”, dated 31.03.2008. We find that the assessee had entered into the aforesaid agreement with M/s Fair Isaac International Corpn. for acquiring a non-exclusive, non-transferable, non-assignable and a non-sublicenseable license to use the Fair Isaac Software Product viz. “Blaze Advisor” software for its internal business purposes, subject to host of additional terms and limitations contemplated in the body of the said agreement. We are of the considered view that from a perusal of the agreement it can safely be gathered that the assessee had made the remittance of USD 100,000 to M/s Fair Isaac International Corpn. for grant of license to use its copyrighted software viz. “Blaze Advisor” software for its internal business purposes. We further find from a perusal of the agreement that the assessee was clearly divested of all its rights to either transfer, assign and sub-license the said software. We are of the considered view that there is a clear distinction between royalty paid on transfer of copyright right and consideration for copyrighted articles. In our considered view the right to use of copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. Rather, we are of a strong conviction that for enjoyment of some or all the rights which the copyright owner has is necessary to invoke the royalty definition. In the backdrop of our aforesaid observations we are of the considered view that a non- exclusive and non-transferable license enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of India-USA DTAA. Rather, where the purpose of the license or the transaction is only to restrict the use of the copyrighted product for internal business purpose of the licensee, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. We thus, finding ourselves to be in agreement with the contention advanced by the ld. A.R that as the assessee had only been granted a non-exclusive and non-transferable license to use the copyrighted article i.e “Blaze advisor” software by M/s Fair Isaac International Corpn. which had retained with itself the copyrights of the same, therefore, the amount received by the licensor viz. M/s Fair Isaac International Corpn. from the assessee did not give rise to any royalty income within the meaning of Article 12(3) of the India-USA tax treaty. We find that our aforesaid view stands fortified by the judgment of the Hon’ble High Court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Del), wherein it has been held that the amount received pursuant to granting of license to use the copyrighted software for the licensees own business could not be brought to tax as “royalty” under Article 12(3) of the India-USA tax treaty. Still further, we find that the aforesaid view of the Hon’ble High Court of Delhi In the case of Infra soft Ltd. (supra) had recently been followed by a coordinate bench of the Tribunal viz. ITAT “C” bench, Mumbai in the bunch matters in the case of a group concern of the assessee i.e DDIT, Mumbai Vs. Reliance Communications Ltd. (ITA No. 837/Mum/2007; dated 02.02.2018). In the aforementioned case the Tribunal had observed that as the payment made by the assessee was for copyrighted article i.e software and there was no transfer of copyright of the software in any manner, thus the same did not amount to royalty within the definition of Article 12/13(3) of the respective tax treaties and resultantly the assessee remained under no obligation to deduct tax at source while making the remittances. We thus respectfully following the view taken by the Hon’ble High court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Del), therein conclude that the remittance of USD 100,000 made by the assessee to M/s Fair Isaac International Corpn. for grant of license to the assessee to use its copyrighted product viz. “Blaze Advisor” software for its internal business purposes only could not be brought to tax as “royalty” under Article 12(3) of the India-USA DTAA. We thus, in terms of our aforesaid observations conclude that as no liability was cast upon the assessee to deduct tax at source at the time of making of the aforesaid remittance, hence the latter cannot be held as being an assessee in default within the meaning of Sec 201 of the Act. The Grounds of appeal No. 1 and 2 raised by the assessee are resultantly allowed.”
P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax We thus, in terms of our aforesaid observations restore the matter to the file of the A.O. The A.O is directed to readjudicate the issue as regards the exigibility to tax of the amount paid by the assessee for purchase of shrink wrapped software/licence to the aforementioned parties viz. (i) Microsoft Singapore: Rs.13,39,065/-; and (ii) Speedo Communications: Rs. 65,100/-, after considering the aforesaid order of the Tribunal in the case of Reliance General Insurance Company Ltd. (supra). We thus, restore the matter to the file of the A.O, who shall readjudicate the same in terms of our aforesaid observations. Needless to say, the A.O shall during the course of the set aside proceedings afford reasonable opportunity of being heard to the assessee.
The appeal of the assessee is allowed for statistical purpose in terms of our aforesaid observations. Order pronounced in the open court on 10.10.2018 Sd/- Sd/- (B.R.Baskaran) (Ravish Sood) ACCOUNTANT MEMBER JUDICIAL MEMBER भ ुंफई Mumbai; ददन ुंक 10.10.2018 Ps. Rohit आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : 1. अऩीर थी / The Appellant 2. प्रत्मथी / The Respondent. आमकय आम क्त(अऩीर) / The CIT(A)- 3. आमकय आम क्त / CIT 4. विब गीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भ ुंफई / 5. DR, ITAT, Mumbai 6. ग र्ड प ईर / Guard file. सत्म वऩत प्रतत //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar)
P a g e | Saraswat Infotech Pvt. Ltd. Vs. Ranjan Kumar Singh Dy. Commissioner of Income Tax आयकर अिीऱीय अधिकरण, भ ुंफई / ITAT, Mumbai.