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TMI Blog2016 (6) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of trading in software, software maintenance and manpower services filed its return of income on 30.09.2011 for the assessment year 2011-12 declaring income of Rs. 29,95,250/-. Subsequently, the assessment was completed under section 143(3) of the Act on 21.03.2014, wherein the learned Assessing Officer made certain additions. During the course of assessment proceedings, it was noticed by the learned Assessing Officer that assessee had purchased computer software from various companies like Ingram Micro (India) Ltd., Redington India Ltd., K & S Vivid India Ltd., etc., and failed to deduct TDS on the payments made to them in accordance with section 194J of the Act. Therefore, the learned Assessing Officer invoked the provisions of section 40(a)(ia) of the Act and disallowed Rs. 4,52,93,242/- for non-deduction of TDS against purchase of software/royalty. While doing so, the learned Assessing Officer observed as follows:- "Explanation 4 has been inserted in section 9(1) (vi) to clarify that the consideration for use or right to use of computer software is royalty by clarifying that transfer of all or any rights in respect of any right, property by clarifying that tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Further, on appeal the learned Commissioner of Income Tax (Appeals) sustained the order of the learned Assessing Officer observing as follows:- Remarks of CIT(Al on AR's submission: It is true that when it comes to the definition of 'Royalty' U/s 194J and 40a(ia), it is referred to Explanation 2 of Sec. 9(1 )(vi), reproduced hereunder for ready reference: Reproduced Explanation 2 of Sec,9( 1 )(vi): "Explanation 2.-For the purposes of this clause, "royalty" means consideration (Including any lump sum consideration but excluding any consideration which would be the Income of the recipient chargeable under the head "Capital gains") for- (I) the transfer of all Qr any rights (Including the granting of a licence) in respect of a patent, Invention, model, design, secret formula or process or trade mark or similar property; (II) the Imparting 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; (ill) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty or information is used directly by the payer; (c) the location of such right, property or Information is in India." (emphasis supplied) 7.7 The above Explanation 4 & 5 were inserted by the Finance Act, 2012 with retrospective effect from 01.06.1976. The Explanation 4 & 5 begin with the phrase 'For the removal of doubts, it is hereby clarified ",' Therefore, the AO has rightly held that the Explanation 4 & 5 which are clarificatory in nature should be read with Explanation 2. If the AR's contention is to be accepted, it will defeat the purpose of the legislative amendment with retrospective effect to bring the transfer of rights along with software under 'royalty'. 7.8 I place reliance on the decision of Hon'ble High Court of Karnataka in (the case of CIT, International Taxation Vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar). The conclusion of the Hon'ble High Court is reproduced hereunder : Reproduced from (2012) 345 ITR 494 (Kar): "On facts and circumstances of the case, the Tribunal was not justified in holding that the amounts) paid by the assessee to the foreign software suppliers was not 'royalty' and that the same did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meant for the use of its buyer without any right to modify the same. The assessee is acting only in the capacity as a dealer for purchase and sale of the software, hence the question of royalty does not arise. The software purchased and resold can be only installed and used by the buyer for whom it is customized. The customer who purchases the software is given secret code for installation and usage. Until the user installs and uses the software, no right is acquired. Further the software is just a non-usable dump CD till installed. It was therefore submitted that provisions of tax deducted at source will not be applicable in the case of the case. 6. The learned Departmental Representative on the other hand, argued in support of the orders of the Revenue. 7. We have heard the rival submissions and carefully perused the materials available on record. From the facts of the case is it is apparent that the assessee is only buying the software and selling the same in the open market, thus he is acting only in the capacity as distributor/agent or as trader. The end user of the software obtains the code from the software developer for using the software embedded in the CD. Thus, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright. 13. A Coordinate Bench of this Court has also expressed a similar view in the case of Infrasoft (surpa). In that case the Revenue sought to tax the receipts on sale of licensing of certain sof ..... X X X X Extracts X X X X X X X X Extracts X X X X
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