PIDILITE INDUSTRIES LTDE,MUMBAI vs. ITO TDS 2(5), MUMBAI

This appeal has been preferred by the assessee against impugned order dated 28/01/2014 passed by the CIT(Appeals)-14, Mumbai, for the Asst. year 2006-07, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee against order dated 25/03/2011 passed u/s 201(1)/201(1A)/206C/206C (6)/6(A)/206C(7) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

Brief facts of the case are that survey action was carried out at the premises of the assessee company on 26/09/2008 u/s 133A of the Act. During the course of survey, various aspects of TDS compliance were examined /verified, pertaining to the F.Y. 2008-09 (up to 25/09/2008) and earlier financial years 2005-06 to 2007-08. It was noticed that the assessee company had not deducted tax at source in respect of purchase of trading goods on payment made to various parties and contract payments during the financial year 2005-06. On the basis of details submitted by the assessee in response to the notices u/s 201(1) and 201(1A) of the Act, the A.O declared the assessee company as assessee in default under section 201(1) r.w.s. 194C for non deducting of the TDS of payment made on account of purchase of trading goods of Rs. 28,95,41,788/- and computed tax at Rs. 65,61,017/-. The AO further held that the company is also liable to pay interest u/s 201(1A) of the Act. Similarly, since the assessee company had sold scrap worth Rs. 2,60,74,278/-, the AO asked to explain whether tax was collected at source as per the provisions of section 206C and further asked to furnish the details thereof. On the basis of explanation furnish by the assessee, A.O held the assessee liable to pay the balance tax of Rs. 43,715/- on the sale value of manufacturing scrap of Rs. 93,71,514/-u/s 206C(6)/(6A) of the Act. The assessee company is further liable to pay interest u/s 206C (7) on the tax payable. The A.O also noticed during the course of assessment proceedings that the assessee had not deducted tax at source u/s 194J of the Act on purchased software of Rs. 19,00,250/-. Accordingly the A.O calculated the tax at Rs. 1,06,604/- and also held the assessee liable to pay interest u/s 201(1A) on the tax payable.

Before us, the Ld. Counsel for the assessee submitted that the assessee does not want to press ground No I of the appeal. Accordingly, we dismiss ground No 1 as not pressed. As regards ground No II the Ld. Counsel submitted that the Ld. CIT (A) has wrongly upheld the action of the A.O as the tax at source was not required to be deducted on purchase of software during the financial year relevant to the assessment year under consideration. The Ld. Counsel further pointed out that royalty was brought within the ambit of section 194J of the Act by Taxation Laws (Amendment) Act 2006 w.e.f. 13/07/2006, applicable from Financial year 2007-08 and the assessee’s appeal pertains to the financial year 2006-07. Since, the amended provision was not applicable during the relevant previous year the impugned order is erroneous and liable to be set aside.

On the other hand the Ld. Departmental Representative (DR) relying on the concurrent findings of the authorities below submitted that since royalty comes under 194J of the Act, the assessee was required to deduct the tax at source. However, the Ld. DR did not produce any case law to rebut the contention of the assessee.

We have heard the rival submissions and also perused the material placed on record in the light of the rival submissions. The assessee has challenged the findings of the Ld. CIT(A) that purchase of software is in the nature of royalty and TDS was required to be deducted. We notice that the Ld. CIT(A) has relied on the judgment of Hon’ble Karnataka High Court passed in M/s Synopsys International Ltd. 212 taxman 454 (karnataka), wherein it has been held that payment made for software purchase are for certain rights in copyright and it meets the definition of royalty under the Act. No doubt as per the said judgment purchase of software falls within the ambit of royalty, however, the said decision pertains to the post amendment period i.e., after bringing royalty under section 194J of the Act. Thus there is merit in the contention of the Ld. Counsel for the assessee that since, financial year relevant to the assessment year under consideration pertains to the pre amendment period, the assessee was not required to deduct the tax at source on purchase of software during the relevant financial year. We notice that royalty was brought under section 194J of the Act by Taxation Laws (Amendment) Act 2006 w.e.f. 13/07/2006, applicable from financial year 2007-08 and the assessee’s appeal pertains to the financial year 2006-07. Since, royalty was not there under section 194J of the Act in the financial year relevant to the assessment year under consideration, the Ld. CIT(A) was not supposed to determine the question whether the purchase of software meets the definition of royalty or not. Hence in our considered view the impugned order passed by the Ld. CIT(A) is erroneous and not sustainable in law. We, therefore, hold that the assessee was not required to deduct tax at source u/s 194J of the Act on purchase of software and accordingly decide this ground of appeal in favour of the assessee.

In the result appeal filed by the assessee for the A.Y. 2006-07 is allowed.