TMI Blog2016 (6) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... Koli, JCIT O R D E R Per A. Mohan Alankamony, AM:- This appeal is filed by the assessee aggrieved by the order of the learned Commissioner of Income Tax (Appeals)- 11, Chennai dated 14.09.2015 in ITA No.123/2014-15/ CIT(A)-11 passed under section 143(3) r.w.s.250(6) of the Act . 2. The assessee has raised several grounds in its appeal however, the crux of the issue is as follows:- The learned Commissioner of Income Tax (Appeals) has erred in sustaining the disallowance made by the learned Assessing Officer amounting to ₹ 4,52,93,242/- by invoking the provisions of section 40(a)(ia) of the Act being the cost of purchase of software against which tax is not deducted at source under section 194J of the Act. 3. Brief facts are that the assessee is a company engaged 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 ₹ 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment for any previous transfer of such software; or (b) Under section 195 on payment for any previous transfer of such software from a non-resident, and (iii) The transferee obtains a eclaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor. This notification shall come into force from the 1st day of July, 2012.Since these changes in the section 194 J applicable for the software purchased after 1.7.2012 subject to the conditions mentioned in the notification. Assessee cannot take shelter under the content of the notification. The assessee has failed to deduct TDS in purchase of software i.e. royalty. Hence, Rs. 4,52,93,242/- is disallowed u/s.40(a)(ia) and added back to the total income. 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 referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This contention does not hold water while referring to Explanation 4 5 of Sec. 9( l)(vi) reproduced hereunder: Reproduced Explanation 4 5 of Sec.9(1)(vi): [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 computer software (including granting of a-llcence) Irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to A.Y. 2011-12 under consideration as the said notification shall come into force from 0 l.07 .2012. 8.1 It is also pertinent to note that the appellant has effected TDS on the payment towards renewal of licence for software which attracts 10% service tax whereas no TDS was done on the purchase ?f software which attracted VAT of 4% / 5%. Therefore, I am of the considered opinion that the appellant ought to have deducted TDS u(s 194J r.w.s. 9(1)(vi). 5. Before us, the learned Authorized Representative relying on the decision of the Hon ble Delhi High Court in the case of the Principal CIT Vs. M.Tech India P.Ltd., in ITA No.89/2015, order dated 19.01.2016, argued by stating that, the assessee is not liable to deduct tax at source as per provisions of section 194J of the Act because the assessee has only purchased a customized software 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g THPL s software. 11.The CIT(A) found that the Assessee was engaged in the resale of software and the payments made by it to THPL and others were on account of purchases made by the Assessee. The ITAT concurred with the aforesaid finding. It is also not disputed that in the preceding years the AO had accepted the transactions in question to be that of purchase of software. The limited issue to be addressed is whether in view of these findings the amount paid by the Assessee could be taxed as royalty. 12. In the cases where an Assessee 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 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 wit ..... 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