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2021 (9) TMI 78 - AT - Income TaxTDS u/s 195 - non deduction of tax at source on payment made towards purchase of software - whether the assessee had made the payment towards purchase of a copyrighted article for resale in India or a copyright for use according to its own will and convenience? - HELD THAT - Payment made is not towards royalty for use of the copyright in the computer software. Therefore, there is no requirement for deducting tax at source under section 195 of the Act, keeping in view Article 12 of India USA DTAA. A reading of the case of ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT would make it clear that the view expressed by the Hon ble Karnataka High Court in case of Samsung Electronics Co. Ltd 2011 (10) TMI 195 - KARNA TAKA HIGH COURT have not been accepted. If the ratio laid down in Engineering Analysis Centre of Excellence (P) Ltd vs CIT (supra) is applied to the facts of the present case, it will definitely lead to the conclusion that the assessee having paid the amount of ₹ 23,50,466/- towards purchase of a copyrighted article for distribution in India without having any right to use the copyright, the payment made is not in the nature of royalty as per Article 12 of India USA DTAA. Therefore, there is no requirement for deduction of tax at source under section 195 - disallowance made by the assessing officer and sustained by the learned Commissioner (Appeals) is hereby deleted. These grounds are allowed. Deduction u/s 10B - Disallowance of loss - apportioned the employee related expenses / benefits in proportion of turnover relating to EOU and non EOU unit - claim of the assessee that separate books of account are maintained for EOU and non EOU units - HELD THAT - Departmental authorities have not properly examined the issue factually - direct the assessing officer to verify the books of account maintained, both, for EOU and non EOU units and if the salary paid to the employees of both the EOU and non EOU units, is found to be on actual basis as per the separately maintained books of account, no disallowance can be made. Thus, the issue is restored back to the assessing officer for the limited purpose of verifying the salary expenditure as per the separately maintained books of account and computing the deduction under section 10B of the Act. These grounds are allowed for statistical purpose.
Issues Involved:
1. Disallowance under section 40(a)(i) for non-deduction of tax on payment made towards the purchase of software. 2. Disallowance on account of the difference of loss on non-export oriented unit (EOU). 3. Disallowance under section 36(1)(va) on account of delayed remittance of employees’ contribution to Provident Fund. Issue-wise Detailed Analysis: 1. Disallowance under section 40(a)(i) for non-deduction of tax on payment made towards the purchase of software: The assessee challenged the disallowance of ?23,50,466 due to non-deduction of tax at source on payment made towards the purchase of software. The assessing officer viewed the payment as royalty under section 9(1)(vi) of the Act, requiring tax deduction at source under section 195. The officer relied on the Karnataka High Court decision in CIT vs Samsung Electronics Co Ltd, concluding that the payment for software was royalty. The assessee argued that it was a reseller of software, not using it internally, and the payment was not royalty under the India-USA DTAA or section 9(1)(vi). The Tribunal examined the reseller agreement, noting that the assessee was only a distributor of a copyrighted article, not the copyright itself. The Tribunal referred to the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd vs CIT, which clarified that payments for software distribution are not royalties. Consequently, the Tribunal deleted the disallowance. 2. Disallowance on account of the difference of loss on non-export oriented unit (EOU): The assessee claimed a deduction under section 10B for its EOU. The assessing officer observed discrepancies in the allocation of employee expenses between EOU and non-EOU units, leading to a disallowance of ?48,54,215. The officer apportioned expenses based on turnover, reducing the profit of the EOU unit. The assessee argued that it maintained separate books for EOU and non-EOU units and allocated common staff salaries based on actual work. The Tribunal noted that the departmental authorities did not properly examine the issue and directed the assessing officer to verify the books of accounts. If the salary expenses are found to be accurately allocated, no disallowance should be made. The issue was restored to the assessing officer for verification. 3. Disallowance under section 36(1)(va) on account of delayed remittance of employees’ contribution to Provident Fund: The original assessment included a disallowance of ?6,69,035 for delayed remittance of employees' provident fund contributions. The Commissioner (Appeals) had deleted this disallowance, and the revenue did not appeal this decision. The Tribunal restored other issues to the assessing officer but not this specific disallowance. Despite this, the assessing officer re-imposed the disallowance in the fresh assessment. The Tribunal found this action unjustified and beyond the Tribunal's directions, thus deleting the disallowance. Conclusion: The appeal was partly allowed. The Tribunal deleted the disallowance of ?23,50,466 for non-deduction of tax on software purchase and ?6,69,035 for delayed provident fund remittance. The issue of disallowance of ?48,54,215 for the non-EOU unit was remanded to the assessing officer for verification. The order was pronounced on 30/08/2021.
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