ASST.C.I.T., BANGALORE vs. M/S AURIGENE DISCOVERY TECHNOLOGIES LTD.,, BANGALORE

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

the following softwares during the a y 2011-12:

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Sl Vendor Rupees No 1 CCDC Software Limited 23,463 2 Altoris Inc 68,709 3 Molecular Networks GMBH 2,84,406 4 Schrodinger LLC 26,42,049 5 Symyx Software Inc 51,259 6 Polmon Instruments Pvt Ltd 46,361 Total 31,16,247 So, the AO sought the reasons for non-deduction of taxes on such payments in accordance the judgment of Karnataka High Court in the case of Samsung Electronics Co. Ltd. The assessee submitted that the transactions were made towards renewal of the software licenses purchased in the earlier years, the softwares were in the nature of off the shelf software i.e., the copyrighted articles sold by the overseas vendor, the impugned payments were made during the financial year 2010-11, recognized as prepaid expenses as on 31.03.2011 and was debited to the profit and loss account in the financial year 2011-12.

The assessee submitted that the Samsung judgment shall not be applicable since it was pronounced on 15.10.2011 whereas the liability to deduct tax in the referred instances happened in financial year 2010-11 i.e., the year in which credit to the account of the vendor was recognized and for this relied on the judgments of Cochin Tribunal in ITA.1479/ Bang/2013 Page - 3 Kerala Vision Ltd (46 taxmann.com 50) and Agra Tribunal in Virola International (ITA No 2561/Agra/2013) . It pleaded that it had determined the rate of tax to be deducted at Nil following the judgments that were prevalent at the time of tax deduction i.e., FY 2010-11 viz Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh, jurisdictional tribunal in Samsung Electronics Co.

Ltd & Velankani Mauritius Ltd which held that remittance towards copyrighted article is in ,the nature of business profits and not royalty and such proposition was also confirmed by the Form 15CBs obtained from the Chartered Accountants in accordance with sections 195(6) of the Act.

However, the AO held that the consideration paid by the assessee for the import of software was in the nature of Royalty , therefore it constitute income chargeable u/s 9(1)(vi) read with relevant Articles of the DTAA , thus was chargeable u/s 195, the assessee was duty bound to deduct TDS on the impugned payment of Rs. 31,16,247/- under sections 195 & 194 J , respectively . Since it failed to deduct TDS on the impugned payments, the AO disallowed Rs. 30,69,886/- u/s 40(a)(i) & Rs.46,361/- u/s 40(a) (ia), respectively. On an appeal, the CIT(A) allowed the assessee’s appeal in this regard and hence the Revenue filed this appeal with the following grounds of appeal :

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(ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the ITA.1479/ Bang/2013 Page - 5 closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. license to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment.

As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section 194J/195 of the Act. It is submitted that liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15, 2011). Courts have consistently upheld this principle as seen in:

• ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) • Kerala Vision Ltd v. ACIT (46 taxmann.com 50) • Sonic Biochem Extractions (P.) Ltd v. ITO (35 taxmann.com 463) • Channel Guide India Ltd v. ACIT (25 taxmann.com 25) • DCIv. Virola International (20 14(2) TMI 653) • CIT v. Kotak Securities Ltd. (20 taxmann.com 846).

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“ Disallowance of expenses under 40(a)(i) / 40(a)(ia) :

5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., whereas the liability to deduct tax for the appellant was the F.Y. 2010-11. The appellant has relied on the judgment of Cochin Tribunal in the case of Kerala Vision Ltd and Agra Tribunal in the case of Virola International, wherein it was held that –

"The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to have clairvoyance of knowing how the law will change in future."

Further, software payment was included in definition of royalty only vide Explanation to section 9(1)(vi)inserted retrospectively vide Finance Act, 2012 and when the purchase was made, the appellant did not have the benefit of clarification brought by the retrospective amendment. It is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. This view has been upheld by the Bangalore Tribunal in the case of DCIT vs M/s WS Atkins India Pvt Ltd (ITA No 14671Bang12014 and the Mumbai Tribunal in the case of Channel Guide India Ltd. vs ACIT ([2012] 25 taxmann.com 25).

5.2 The ITAT 'C' Bench in the case M/s WS Atkins India Pvt. Ltd and in the case of Infotech Enterprises Ltd of the Hyderabad Bench of the Tribunal wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subsequen tly beco me taxable on acco unt o f a retrospective legislation. It has also referred to in the case of Sonic Biochem Extractions Pvt. Ltd. (supra), identical issue was considered and decided by ITA.1479/ Bang/2013 Page - 7 the Mumbai Tribunal. Following were the relevant observations:- "The assessee purchased software, capitalized the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer involved the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business."

5.3 Relying on the above decision, the ITAT 'C' Bench, Bangalore upheld the order of the CIT(A) who had observed t h a t t h e a s s e s s e e d i d n o t h a v e t h e b e n e f i t o f t h e clarification brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be deducted u/s 194J. The law as extant on the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability for deducting tax at source retrospectively.

5.4 In view of the above decisions, it is correct to say that it is not possible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of the clarific ation brou ght abou t by the retros pective amendment. The contention of the appellant is correct that the software payment disallowed by the AO did not warrant withholding of the tax u/s ITA.1479/ Bang/2013 Page - 8

40(a)(ia) and 40(a)(ia) (by an order of corrigendum dt 20.11.2015) of the Act. Therefore disallowance made by the AO on account of software payment want of withholding of tax is hereby deleted.”

The CIT(A) followed the decision of this Tribunal in M/s WS Atkins 05.

India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises Ltd in ITA 115/HYD/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and s ubsequen tly become taxable on accoun t of a retrospective legislation. It has also referred to the decisions of the Delhi & Mumbai Tribunal in SMS Demag Pvt Ltd , 132 ITJ 498 & Sonic Biochem Extractions Pvt. Ltd. 23 ITR (Trib) 447, respectively. We uphold the decision of the CIT(A) and dismiss the grounds raised by the Revenue.

Order pronounced in the open court on 23rd November, 2016.