2014 (5) TMI 77 - AT - Income Tax

Disallowance of Expenditure - Disallowance u/s 40(a)(i) of Act - TDS not deducted on payment of royalty u/s 195(1) Held that - Following CIT v. Dynamic Vertical Software India (P.) Ltd. 2011 (2) TMI 77 - DELHI HIGH COURT - in case of payment towards purchase and sale of software by an assessee who acted merely as a dealer cannot be termed as royalty so as to require deduction of tax at source u/s 40(a)(i) of the Act - the assessee is required to establish the fact on record by producing supporting evidence that it was merely a distributor of software to the Indian customer by procuring from the overseas associated enterprise - The assessee is required to prove that the payment made was not for royalty as defined in explanation 2 to section 9(1)(vi) read with India-US DTAA - thus, the matter is remitted back to the AO for fresh adjudication - Decided in favour of Assessee.

Summary

Issues:
1. Disallowance made under section 40(a)(i) of the Income Tax Act for failure to deduct tax at source on royalty payments.

Analysis:
The appeals were filed against orders of the CIT (A)-III, Hyderabad for the assessment years 2007-08 and 2008-09, concerning disallowance under section 40(a)(i) of the Act for not deducting tax at source on royalty payments. The learned AR did not press grounds related to natural justice violations. The main issue in both appeals was the disallowance under section 40(a)(i) for failure to deduct tax at source on royalty payments. The assessee, a private limited company, procured software licenses from its associate enterprise in the U.S. and sold them to clients. The Assessing Officer considered these payments as royalty and disallowed them. The CIT (A) upheld the disallowance. The AR argued that the assessee was a distributor and not liable for TDS. The Tribunal noted the Delhi High Court's decision and remitted the issue back to the Assessing Officer for fresh consideration.

The AR contended that the assessee acted as a distributor of software procured from its AEs, making back-to-back sales without modifying the software. The AR argued that the payment to AEs did not constitute royalty. The Delhi High Court's decision was cited to support this argument. The Tribunal emphasized the need for the assessee to prove it was a distributor and not liable for TDS. The Tribunal noted that previous orders were based on the CIT (A)'s decision, which was later remitted back for reconsideration. Following this, the Tribunal remitted the issue back to the Assessing Officer for fresh consideration, allowing the assessee to raise additional contentions.

The Tribunal, considering the facts and the Delhi High Court's decision, remitted the issue back to the Assessing Officer for fresh consideration. The Tribunal directed the Assessing Officer to examine all facts and materials, including any decisions relied upon by the assessee. The Tribunal allowed the assessee to raise all contentions regarding TDS liability. The issue was remitted back to the Assessing Officer for a fresh decision. The same decision was applied to another appeal for the assessment year 2008-09, remitting the issue back to the Assessing Officer for fresh consideration.

In conclusion, both appeals were treated as allowed for statistical purposes, and the matter was remitted back to the Assessing Officer for fresh consideration in accordance with the Tribunal's directions and the Delhi High Court's decision.

Order pronounced on 06-01-2014.