2020 (11) TMI 210 - AT - Income Tax

TDS u/s 195 - software expenses - whether this amount debited by the assessee company to its P L Account as Software expenses is purchase of software by the assessee company or it is mere reimbursement by the assessee company to its AE being the cost incurred by the AE after retaining 15% of cost incurred by the AE - HELD THAT - Price realised may differ on day to day basis and customer to customer basis in view of difference in timing or payment terms and hence, we have to accept that cost of the same product is different. Hence, it is not established that the letter dated 03.01.2009 is being acted upon by the assessee company and its AE. About reimbursement of various expenses as per this letter also, no detail is brought on record that this condition of this letter is being acted upon by the assessee company and its AE. As per this letter dated 03.01.2009, the assessee company is authorised by its AE to sell Kaseya VSA within the geographical territory of India and no one can sell any thing if it is not purchased or produced by that person. This product is produced by the AE of the assessee company and not by the assessee company and therefore, the amount payable by the assessee company to its AE in this regard is nothing but purchase price of the computer software and various judgments followed by the lower authorities are applicable and simply because specific detailed Distribution Agreement is not executed between the assessee company and its AE, it cannot be said that these judgments are not applicable when the understanding between the assessee company and its AE is similar. Assessee company obtains the purchase order from the Indian Customers in respect of certain IT Monitoring Software Products of Kaseya International Limited, Jersey as per agreed price for which the assessee company is acting as a distributor for distributing keys of such software. Under these facts, in our considered opinion, the arrangement of the assessee company with its AE is of purchase of computer software at agreed price i.e. sale price to the Indian customers minus margin of the assessee company equal to 15% of cost as specified in letter dated 03.01.2009 although we have seen that actually, it is 15% of the purchase price paid by the assessee company to its AE.. No hesitation in holding that this fact that the assessee company is a distributor does not change the nature of the transaction and it is still a purchase as accounted for by the assessee company and issue is covered against the assessee we decline to interfere in the order of CIT (A). - Decided against assessee.

Summary

Issues Involved:
1. Applicability of TDS under Section 195 on software expenses.
2. Disallowance under Section 40(a)(ia) for non-deduction of TDS.
3. Reliance on judicial precedents by CIT(A).
4. Consideration of the assessee as an intermediary rather than a purchaser of software.

Issue-wise Detailed Analysis:

1. Applicability of TDS under Section 195 on Software Expenses:
The assessee contended that TDS under Section 195 was not applicable as it was merely acting as a distributor without rights to the software. However, the CIT(A) upheld the Assessing Officer's (AO) decision, stating that the payments for software were subject to TDS under Section 195. The Tribunal found that the assessee had debited the amount as "purchase of software licenses" in its Profit & Loss account, indicating a purchase rather than a mere intermediary transaction. Therefore, the Tribunal concluded that TDS was applicable.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The AO disallowed the deduction of ?213,03,772 under Section 40(a)(ia) due to non-deduction of TDS under Section 195. The assessee argued that the payments were for software licenses and should be considered as royalty, which would change the nature of the transaction. However, the Tribunal noted that the assessee had accounted for these expenses as software purchases, and the judicial precedents cited by the AO and CIT(A) supported the disallowance. Therefore, the Tribunal upheld the disallowance.

3. Reliance on Judicial Precedents by CIT(A):
The CIT(A) relied on decisions from the Karnataka High Court, specifically in the cases of CIT vs. Samsung Electronics Co. Ltd. and Synopsis International Ltd. The assessee argued that these precedents were not applicable to its case. However, the Tribunal found that the facts of the case were similar to those in the cited judgments, where software payments were considered as royalty and subject to TDS. Thus, the Tribunal agreed with the CIT(A)'s reliance on these judicial precedents.

4. Consideration of the Assessee as an Intermediary Rather than a Purchaser of Software:
The assessee claimed it was an intermediary, not a purchaser, and thus the payments were not subject to TDS. The Tribunal examined the letter dated 03.01.2009 and the audited Profit & Loss account, which showed the assessee was authorized to sell the software within India and retain a 15% margin. The Tribunal concluded that this arrangement did not alter the nature of the transaction as a purchase. The assessee's accounting treatment and the lack of evidence to support the intermediary claim led the Tribunal to reject this argument.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT(A)'s order that TDS under Section 195 was applicable on software expenses, and the disallowance under Section 40(a)(ia) for non-deduction of TDS was justified. The Tribunal found that the assessee's arrangement with its AE was essentially a purchase of software, and the judicial precedents cited were applicable.