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2017 (11) TMI 1070 - AT - Income TaxDisallowance u/s 40(a)(ia) - non deduction of tax at source on purchase of software - CIT(A) have held that the payment made by the assessee for purchase of software is royalty and therefore the income in the hands of the none resident is chargeable to tax in India - Held that:- The assessee purchase a copy righted software along with the right to resale export the said software with or without modification, alteration, amendments or changes by using the key provided by the US supplier. The terms and conditions of the agreement clearly manifest that it is not a mere purchase and sale of a copy righted product but the assessee purchase the master copy of the software with the right to use the key provided by the supplier for modification, alteration, amendment or changes. The assessee is undisputedly exporting the software by using the master copy and with necessary modification, alteration, amendment or changes as per the requirement of the clients. Thus it is not the purchase of software by the assessee for its own internal use but the software was purchased along with the copy rights to be used by the assessee for development of a new software as per customized requirement of the clients. As far as the decisions relied upon by the assessee there is no quarrel on the point that the purchase of copy righted product being a software will not fall in the category of the royalty in the absence of any transfer of acquiring of any right to use the copy right. However, in the case of the assessee the assessee is using the copy right as well as the software for development of the new software with the necessary modifications. Hon’ble High Court in case of Tata Consultancy Services Vs. State of Andhra Pradesh (2004 (11) TMI 11 - Supreme Court) has held that it is necessary to make a distinction between the cases where the consideration is paid to acquire the right to use patented or a copy right and cases were payment is made to acquire patented or copy righted product/goods. In the case of the assessee it is not an acquisition of copy righted product being software but the assessee has acquired the software along with the right to use it for further development/production. Accordingly, in the facts and circumstances of the case the payment made by the assessee for acquisition of the software as well as right to use the key provided by the supplier for making necessary modification, alteration, amendments or changes which amounts to acquiring the right to use the copy right and therefore the payment will fall in the definition of royalty as defined u/s 9(1)(vi) as well as under Article 13(2) of Indo-US DTAA. Disallowance u/s 40(a)(ia) would result enhanced of business income of the assessee derived from export of software eligible for deduction u/s 10A - Held that:- CBDT vide circular No. 37 of 2016 has accepted this position that the disallowance made u/s 32, 40(a)(ia), 40A(3), 43B etc. of the Act relates to the business activity against which chapter VI-A deduction has been claimed, resulting in enhancement of the profits of eligible business and that deduction under chapter VI-A is admissible on the profits so enhanced by the disallowance. Following the decision of Coordinate Benchs as well as the Hon’ble High Court on this issue and further in view of the Circular no. 37 of 2016 we hold that the disallowance u/s 40(a)(ia) would result enhancement of profit of the eligible business of the assessee for deduction u/s 10A and accordingly the assessee would be entitled for the claim of deduction on enhanced profit. The AO is directed to allowed the claim of the assessee.
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