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Income Tax Appellate Tribunal, AHMEDABAD “I” BENCH, AHMEDABAD
Per Pramod Kumar AM:
This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals), Gandhinagar, Ahmedabad dated 07.10.2013 passed for Assessment Year 2009-10.
Grievances raised by the assessee appellant are as follows:-
The Id. CIT (A) erred in law and on facts in upholding the AO's decision that the amounts paid by the Appellant towards purchase of software was 'Royalty' within the meaning of section 9(1)(vi) and therefore the same was liable for deduction of tax under section 195 of the Act.
The Id. CIT(A) failed to appreciate the real nature of the transaction and wholly misinterpreted the ITAT, Mumbai's decision in the case of DDIT(IT),
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2(1) v/s Reliance Infocom Ltd. The facts are wholly distinguishable in as much as the non resident seller of software to the Appellant has no PE in India and there was no transfer of any license to use any copyright belonging to the non-resident. 3. The Id. CIT(A) failed to appreciate that the provision contained in DTAA between contracting and other contracting states overrides the provision of the IT Act and Article 13 (of DTAA with Korea) inter alia defines royalty as payment towards use of copyright and not sale of copyrighted articles. 4. The Id. CIT(A) failed to appreciate that your Appellant had not acquired any right or license to exploit commercially any item of scientific work and it had only purchased off the shelf software and therefore the payment made towards such purchases cannot be termed as royalty within the meaning of Article 13 of the DTAA with Korea.
Briefly stated, the relevant material facts are like this. During the relevant previous year, the assessee made certain payments, aggregating to US$5,180, in consideration of purchase of software, to Suprema Inc., Korea and Chiyu Technology Co. Ltd., Taiwan. The Assessing Officer was of the view that the payments so made are taxable in India, as royalty under Section 9(1)(vii) of the Act, and that the assessee, therefore, had a liability to deduct tax at source @ 10% from the same. Accordingly, a tax withholding demand under Section 201 r.w.s. 195, for an amount of Rs.35,366/- was raised by the Assessing Officer. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Relying upon a decision of this Tribunal, in the case of DDIT vs. Reliance Infocom Ltd [(2014) 64 SOT 137 (Mum)], learned CIT(A) confirmed the action of the Assessing Officer. The assessee is aggrieved and is in further appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
We find that the Tribunal decision relied upon by the learned CIT(A) has been, vide order dated 18th November 2016, recalled. It is thus a legal nullity as on now. The issue is now covered, in favour of the assessee, by a subsequent decision of the Tribunal in the case of DDIT vs. Reliance Industries Ltd [(2016) 159 ITD 208 (Mum)], wherein the Tribunal has, inter alia, observed as follows:-
“54. We have considered the above submissions of the Ld. Representatives of the parties. Admittedly, as noted in 4th column of the table drawn in para 4 of this order, the purchase orders were made by the assessee for the softwares as mentioned in column No.5, prior to the bringing of amendment vide Finance Act, 2012, though the amendment has been made with retrospective effect from 01.06.1976. However, we find that the said amendment vide which the Explanation 4 has been inserted to section 9(1)(vi)
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has the effect of change in the law as was existing and even interpreted by the various higher courts of the country prior to the insertion of Explanation 4 in the said provision. By the introduction of the said Explanation 4, computer software has been specifically included in the definition of 'right, property or information' which was never assumed to have been included by any court of law prior to the insertion of Explanation 4 vide amendment of Act of 2012. The Hon'ble Supreme Court in the case of Sedco Forex International Drill INC.(supra) has held that if an Explanation added to a provision changes the law, then it is not to be presumed to be retrospective irrespective of the fact that the phrase used are 'it is declared' or 'for the removal of doubts'. As it is an admitted position that in the earlier years, not only the various High Courts but also the Tribunal in the cases of the assessee has taken a view that the consideration paid for the purchase of the software cannot be treated as royalty; the assessee was, thus, under the bona fide belief that no TDS/withholding of tax was required to be done in respect to said purchases. The assessee had no reason to believe or to foresee a subsequent event vide which the definition of royalty has been extended to include the consideration for the use of or right to use the software has been included in the definition of royalty under the Act. As per the existing law which was in operation at the time of purchase of software, the assessee was under the bona fide belief that there was no liability to deduct tax in respect of the consideration paid for the said purchase of software. It may be further observed that as the definition as was in existence before the insertion of Explanation 4, there was a remote possibility to give a broad interpretation to the definition of 'right, property or information' so as to include the right to use or right for use of the software in the said definition. The Explanation 4 has brought and added a further meaning to the provision which was not supposed to be foreseen by the assessee. The co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. (supra), while relying upon various other decisions of the Tribunal, has held that the disallowance cannot be made under section 40(a)(ia) on the basis of a subsequent amendment brought into the Act with retrospective effect. In view of this, even otherwise, the Explanation 4 inserted vide Finance Act, 2012 cannot be applied retrospectively to the case of the assessee as the said Explanation 4 has the effect of change in law and the assessee was not expected to foresee such change at the time of making the remittance in consideration of purchase of the software in question. Hence, under such circumstances, even otherwise, the assessee was not supposed to deduct TDS on such purchases.
We may mention here that in cases of ITA Nos.5264 & 5829/M/2009 before us, there is no treaty/DTAA of India with 'Hong Kong,' from the resident of which country, the assessee had made purchase of software in the above two cases. In the light of the law laid down by the Hon'ble Supreme Court in the case of Sedco Forex International Drill INC. (supra) and in view of the observations made above, we hold that the assessee during the relevant period prior to the insertion of Explanation 4 to section 9(1)(vi) of the I.T. Act,
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was not liable to deduct TDS even in above said two cases also even though there was no DTAA with the countries from the residents of whom the assessee had made the purchases.”
Clearly, therefore, even under the provisions of the Act, as are applicable for the relevant point of time, software payments cannot be taxed as royalties. Respectfully following the esteemed views of the co-ordinate bench, we uphold the grievance of the assessee and cancel the impugned tax withholding liability of Rs.35,366/-.
In the result, the appeal is allowed. Pronounced in the open court today on the 19th day of September, 2017.
Sd/- Sd/-
Mahavir Prasad Pramod Kumar (Judicial Member) (Accountant Member) Ahmedabad, the 19th day of September, 2017 **bt
Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order