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The Principal Commissioner of Income Tax-6 Versus M. Tech India P. Ltd.

2016 (1) TMI 812 - DELHI HIGH COURT

Disallowance u/s under Section 40(a)(i) and 40(a)(ia) - TDS on payment for Value Added Reseller (VAR) of software related to healthcare and hospitality. - as per revenue payments made by the Assessee were in the nature of royalty and, therefore, the Assessee was obliged to withhold tax on such payments - According to the Assessee, it had made those payments for the purchase of software and it was asserted that the Assessee is a Value Added Reseller (VAR) of the software in question - ITAT delete .....

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-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr Rahul Chaudhary, Senior Standing Counsel with Mr Raghvendra Singh, Junior Standing Counsel For the Respondent : Mr Ved Jain and Mr Pranjal Srivastava, Advocates ORDER Vibhu Bakhru, J 1. The Revenue has filed this appeal under Section 260A of the Income Tax Act, 1961 (hereafter Act ) assailing an order dated 31st March, 2015 passed by the Income Tax Appellate Tribunal (hereafter Tribunal ) in ITA No. 3893/Del/2012 and C.O. No. 352 .....

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facts and circumstances of the case, ITAT was justified in law in overlooking explanation 2, 4, 5 to section 9(1)(iv) of the Income Tax Act, 1961? 2.2 Whether in facts and circumstances of the case, the ITAT, was justified in law in deleting disallowance of ₹ 72,23,496/- and ₹ 13,78,496/- made by the Assessing officer under section 40(a)(i) and 40(a)(ia) of the Act respectively by without considering that payments were in nature of royalty subject to TDS under section 195 and 194J o .....

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aw laid down by Hon ble Supreme Court in case of Associated Cement Co. Ltd. v. CIT - (1993) 2011 ITR 435 (SC) However, the learned counsel for the Revenue has restricted his arguments to the deletion of disallowance of ₹ 72,23,496/- and ₹ 13,78,496/- made by the AO under Section 40(a)(i) and 40(a)(ia) of the Act respectively. 3. The controversy relates to certain payments made by the Assessee. According to the Assessee, it had made those payments for the purchase of software and it w .....

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agreement with M/s Track Health Pty. Limited, Australia (hereafter THPL ) captioned VAR Agreement . The Assessee had also entered into an agreement with M/s Speed Miners, Malaysia which is stated to be similar to the VAR Agreement entered into by the Assessee with THPL. In terms of the agreements, the Assessee had paid a sum of ₹ 66,87,509 and ₹ 9,35,987/- to THPL and M/s Speed Miner respectively. According to the AO, the said payments of ₹ 66,87,509/- and ₹ 9,35,987/- we .....

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before the CIT(A). In the appellate proceedings the Assessee submitted that it was a Value Added Reseller (VAR) of software related to healthcare and hospitality. The said software was purchased from THPL under the VAR Agreement and the same was resold to various end-users in India. During the financial year relevant to the AY 2008-09, the Assessee had purchased software worth ₹ 66,87,509/- from THPL. In addition, the Assessee had also purchased software from M/s Speed Miners, Malaysia fo .....

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essee relied on the decision of this Court in CIT v. Dynamic Vertical Software India P. Ltd .: (2011) 332 ITR 222 (Del) and also sought to distinguish the Tribunal s earlier decision in M/s Microsoft Corporation and Ors. v. ADIT: 2011 (8) ITR (Trib) 522 (Delhi), which was relied upon by the AO. 4.4 The CIT(A) took note of the Assessee s submission that while the AO had treated similar payments to M/s Data Innovation Asia Limited as made for the purchase of software, it had treated the payments m .....

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ments made to Intersystems India Pvt. Ltd., Gurgaon were also held to be on account of purchases. The CIT(A) accepted the Assessee s contention that it was not obliged to deduct any tax at source on such payments. Consequently, the CIT(A) directed the deletion of the additions made by the AO in the sum of ₹ 76,23,496 under Section 40 (a) (i) and ₹ 13,78,496/- under Section 40(a)(ia). 4.5 Aggrieved by the CIT(A) s order dated 30th April, 2012, the Revenue preferred an appeal before th .....

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enue s contention that the payments made by the Assessee to Intersystem India Pvt. Ltd., Gurgaon were to be disallowed as deductions under Section 40(a)(ia) of the Act. 5. In the aforesaid background, the following question arises for consideration: Whether in the facts and circumstances of the case, the Tribunal was justified in deleting the disallowance of ₹ 72,23,496/- and ₹ 13,78,496/- made by the Assessing Officer under section 40(a)(i) and 40(a)(ia) of the Act. respectively 6. .....

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ment entitled the Assessee to use the software and, therefore, the payments were royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the Act. He next referred to Section 14 of the Indian Copyright Act, 1957 ( CR Act ) and contended that the definition of Copyright would mean an exclusive right to do or authorise any of the acts listed in clause (a) of Section 14 of the CR Act including the right to reproduce the work in any material form; storing of it in any medium by electronic .....

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re would be payments for transfer of copyright and the same would fall within the definition of the term royalty . He then referred to the decisions of Authority for Advance Ruling (AAR) in Citrix Systems Asia Pacific Pty Ltd., In Re: (2012) 343 ITR 1 (AAR) and Skillsoft Ireland Ltd., In Re: (2015) 376 ITR 371 (AAR) in support of his contentions. 7. Mr Ved Jain, learned advocate appearing for the Assessee supported the decision of the CIT(A) and the Tribunal. He also referred to the decisions of .....

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t in the case of Samsung Electronics Co. (supra). 8. Mr Jain also referred to paragraph 3 of Article 12 of the Double Taxation Avoidance Treaty between India and Australia and contended that the payments made to THPL did not fall within the definition of royalty under the said Treaty. 9. We have heard the learned counsel for the parties. 10. The Assessee had entered into a VAR Agreement with THPL. Paragraph 1.1 of the said agreement expressly indicates that THPL had appointed the Assessee (descr .....

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and promote the software for use by third parties; demonstrate the software to third parties; and to customise the software for the purposes of End Users. The said agreement further contains a number of covenants to ensure that the Intellectual Property Rights in respect of the software, related material and source codes remains with THPL. A plain reading of the aforesaid agreement indicates that the Assessee has been appointed for the purposes of reselling THPL s software. 11. The CIT(A) found .....

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see acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh: (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relat .....

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