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2016 (4) TMI 123 - ITAT BANGALORE

2016 (4) TMI 123 - ITAT BANGALORE - TMI - TDS u/s 194J - Non deduction of tds - Held that:- It is amply clear that none of the clauses of Explanation 2 to section 9(1)(vi) is attracted to the granting of economic interest of first refusal to the assessee-company by Shri Mohan Raju in any new business initiative. The right envisaged in the agreement is only acquiring the controlling interest in the new initiative of MR. We are unable to discern from the perusal of the agreement, transfer of any r .....

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s have already been paid by the payee, there was no need to recover the same demand from the person responsible for deducting at source. In the present case, though no taxes have been paid by the payee on the amount, it serves no purpose to enforce demand from the tax deductor as the assessment in the hands of the payee is completed, the demand, if any, can be recovered from the payee under due process of law. - Decided in favour of assessee - IT Appeal Nos. 1624 to 1627 (Bang.) of 2012 - Dated: .....

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r passed by the Tribunal is not proper. It violates principles of natural justice. The Tribunal has a jurisdiction to decide the appeals on the ground which is not urged by both the parties. But the parties should be given an opportunity to have their say. 6. In that view of the matter, we deem it proper to set aside the order impugned herein and remand back the matter to the Tribunal and Tribunal shall consider the appeals on the ground urged by the assessee as well as the additional ground the .....

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he assessee-company on 26/2/2010 by the DCIT (TDS), [hereinafter referred to as TDS Officer'] Bangalore. During the course of survey proceedings, the TDS officer had noticed that no tax deduction was made on the payment of technical fee made to one Shri Mohan Raju, who is also the managing director of the assessee-company. 3. The background leading to the payment of technical fee is as under: Majority of the shares of the assessee-company are held by the said Shri Mohan Raju. In fact, he is .....

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educed into writing in the form of share subscription and shareholders agreement dated 12/9/2006, providing for (a) proper management and conduct of business of the assessee-company; (b) setting out the manner and exercise of control of the assessee-company by the shareholders; and (c) regulate the relationship between the parties and to provide for all other incidental matters in connection with the assessee-company and its members. The said agreement also provided for non-compete clause in ter .....

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eas. The same clause provided that Shri Mohan Raju should offer 74% of the economic interest to the assessee-company in the new business initiative which he may promote either as a shareholder or as a partner in the field of telecommunication, digital media and convergence other than those specified in clause 2(b) of the agreement. The said clause reads as under: "XIV. Right of first refusal to the Company and WHPL in respect of future business initiatives of MR in specified areas: (a) Any .....

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rst offer 74% economic interest in such 'specified business' to the Company and if the Company for any reason is unable to offer, then the right shall shift to WHPL and if WHPL too declines to accept the offer, MR may proceed with the special business as if this agreement were never entered into. (c) In consideration for granting the aforesaid right to participate up to a level of 74% economic interest in any future initiative of MR in 'specified business', the Company shall pay .....

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on to taking punitive action against MR available to the Company under law. Where however the Company does not exercise the right and if WHPL accepts the offer, WHPL shall pay to the Company a sum equal to 10% of the total payment by the Company till then to MR, every time such offer is made to WHPL under this clause." 4. In consideration of granting the above said right to the assessee-company by Shri Mohan Raju, assessee-company paid a consideration of ₹ 5 crores on various dates du .....

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e notice, assessee-company submitted that TDS provisions are not applicable to the payments made to said Shri Mohan Raju, as payments are made for acquisition of intellectual property rights and heavily relied on the decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of AP [2004] 271 ITR 401/141 Taxman 132 in support of the contention that intellectual property rights are only in the nature of goods. Therefore, the provisions of TDS are not applicable. Th .....

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#8377; 26,08,433/- aggregating to ₹ 70,16,433/- for the financial year 2006-07. 6. Being aggrieved by this order, appeals were preferred before the ld.CIT(A). It was contended before the ld.CIT(A) that the payments in question are not in the nature of royalty. As lump sum payment was made to acquire a future right to participate up to 75% of the economic interest in any business initiative of said Shri Mohan Raju, payment was not as recurring nature. Therefore, the payment was outright acq .....

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s of the assessee-company, dismissed the appeals of the assessee- company vide para.3.6 in his order dated 5/12/2012 as under: "3.6 To summarise the facts, in the appellant's case, the amount of ₹ 5 crores was made by it to Shri Mohan Raju towards the right of first refusal made due to his knowledge of process related to technology in the field of networking and by agreeing to give the right of first refusal in favour of the company Shri Mohan Raju has parted with his right relate .....

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rnational Ltd. (in short 'CSIL') v. DCIT, Circle-l(1), Bangalore wherein in respect of payment for antivirus software the assessee was held not liable to action 201(1) of the Act. The case cited can be distinguished by the fact, that the assessee provided ....'simulation software products and solutions across the globe (emphasis supplied)' and was not confined to one entity unlike in the case of Shri Mohan Raju vis-a-vis the appellant- company. The facts of the appellant's ca .....

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sment years in question is upheld." 7. Being aggrieved by this order of the ld.CIT(A), appeals were filed before this Tribunal. This Tribunal, after considering the rival submissions, had allowed the appeals filed by the assessee-company vide order dated 21/6/2013 by holding that the provisions of sec.l94J were not applicable to the payments in question as the term 'royalty' was inserted under the provisions of sec.l94J only w.e.f. 13/07/2006 and since the amounts in question were a .....

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to the parties to the case. The Hon'ble High Court, being satisfied with the contention of the revenue, restored this matter to the Tribunal for fresh disposal before this Tribunal again. The Hon'ble High Court made it very clear that the Tribunal shall consider the appeals on the ground urged by the assessee-company as well as the additional grounds the Tribunal found relevant to decide the appeals after recording the finding on both the counts. 9. Pursuant to the order of the Hon' .....

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9;royalty' was inserted in the provisions of sec.l94J only w.e.f. 13/7/2006, obligation to deduction tax at source does not arise. On the other hand, learned DR urged that payments are only in the nature of royalty. Therefore, provisions of sec. 194J are squarely applicable to the facts of the case. 10. We heard rival submissions and perused the material on record. The issue in appeals that is to be adjudicated is whether payment made by the assessee-company to Shri Mohan Raju, who is also t .....

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terest in the new business initiatives to be promoted by him. The specified business has been defined to mean 'telecommunication, digital media and convergence. In consideration of granting of the aforesaid right to the company, it was agreed that the company shall pay to Shri Mohan Raju a lump sum consideration of ₹ 5 crores which shall be discharged by the company (i) on or before 31/3/2006 ₹ 1 crore, (ii) on or before 30/9/2006 ₹ 2 crores (iii) on or before 31/3/2007 2 c .....

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y'. The whole case of the TDS officer is that MR has granted the intellectual property rights in respect of software of which he is the owner and transferred certain rights for use of such software in favour of the assessee-company and therefore held that consideration was paid only for the use of intellectual copy rights in software which is nothing but a royalty. The ld.CIT(A) also upheld the action of the TDS officer by holding that by grant of right of first refusal Shri Mohan Raju had p .....

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tion. TDS provisions are only tentative. In such circumstances, it is not open for revenue authorities to re-characterize the transaction for the purpose of holding assessee as assessee in default for non-deduction of tax at source. Clause (ba) of Explanation to section 194J specifies that the definition of term 'royalty' shall have the same meaning as assigned in Explanation 2 to clause (vi) of sub-section (1) of section 9 of the Act. The term 'royalty is defined in Explanation 2 to .....

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ng of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not in .....

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in sub-clauses (i') to (iv), (iva) and (v).' 11. The Finance Act, 2012 has expanded the scope of the term 'royalty' by insertion of Explanations 4, 5 and 6 with retrospective effect from l/6/1976. Those Explanations are as under: "Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a comput .....

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property or information is in India. Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret; " From the above, it is clear that the definition of the term 'royalty', income of recipie .....

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perty; (iii) use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44AB ; (vi) transfer of all or any rights in respect of any copyright literary, artistic or Scientific work including films .....

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e of the clauses of Explanation 2 to section 9(1)(vi) is attracted to the granting of economic interest of first refusal to the assessee-company by Shri Mohan Raju in any new business initiative. The right envisaged in the agreement is only acquiring the controlling interest in the new initiative of MR. We are unable to discern from the perusal of the agreement, transfer of any rights or use of intellectual property. Therefore, considering the definition given in the Explanation 2 to sec.9(1)(vi .....

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