2024 (8) TMI 432 - HC - Income Tax

Taxability of income in India - royalty receipts - TDS u/s 195 - remittance made by the respondent/assessee to a foreign party in relation to the procurement by the assessee of software used in the business of the assessee - CIT(A) and the Tribunal have returned concurrent findings that considering the nature of the transaction and the placement of the assessee and the foreign suppliers, the payments as made by the assessee are not in the nature of royalty and for such reason, it would not be incumbent for the assessee to deduct tax at source u/s 40 (a) (i) HELD THAT - As rightly pointed out on behalf of the assessee, the issue of law as raised on behalf of the revenue, in our opinion, would be required to be held to be no more res integra, as the view taken by this Court in M/s. NGC Networks (India) Pvt. Ltd. 2018 (5) TMI 1148 - BOMBAY HIGH COURT on non-retrospective amendment of Explanation 6 to Section 9 (1) (vi) of the Act, was subject matter of consideration of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd 2021 (3) TMI 138 - SUPREME COURT The Supreme Court affirming the decision of this Court in M/s. NGC Networks (India) Pvt. Ltd. 2018 (5) TMI 1148 - BOMBAY HIGH COURT has held that Explanation 6 cannot have retrospective effect/application. As in our considered opinion, the Revenue s endeavour to retrospectively apply Explanation 4 introduced by Finance Act, 2012 to Section 9 (1) (iv) so as to tax the assessee under such provision cannot be accepted. Decided in favour of assessee.

Issues Involved:
1. Whether the payment for the supply of software constitutes "royalty" under Section 9(1)(vi) of the Income-tax Act, 1961.
2. The applicability of Explanation 4 to Section 9(1)(vi) of the Act retrospectively.
3. The obligation of the assessee to deduct tax at source under Section 40(a)(i) of the Act.

Detailed Analysis:

1. Whether the payment for the supply of software constitutes "royalty" under Section 9(1)(vi) of the Income-tax Act, 1961:

The primary issue revolves around whether the payments made by the assessee for the procurement of software from foreign entities are taxable as "royalties" under Section 9(1)(vi) of the Act. The Assessing Officer (AO) held that the payments were in the nature of royalty because the assessee had only secured a license to use the software, and no title or interest in the software was transferred. Consequently, the AO directed the assessee to deduct tax at source under Section 40(a)(i) of the Act.

However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income-tax Appellate Tribunal (ITAT) disagreed with the AO. They found that the payments were not in the nature of royalty because the software was used solely for the assessee's internal business purposes and not for any commercial exploitation. The Tribunal emphasized that the transactions occurred before the introduction of Explanation 4 by the Finance Act, 2012, which specifically included computer software in the definition of 'right, property or information.'

2. The applicability of Explanation 4 to Section 9(1)(vi) of the Act retrospectively:

The Tribunal observed that Explanation 4, introduced by the Finance Act, 2012, had the effect of changing the law and could not be presumed to have retrospective operation. This view was supported by the Supreme Court's decision in Sedco Forex International Drill Inc. Vs. Commissioner of Income-tax, which held that an explanation that changes the law cannot be applied retrospectively unless explicitly stated.

The Tribunal further noted that various High Courts and the Tribunal itself had previously held that payments for the purchase of software were not taxable as royalties. Therefore, the assessee was under a bona fide belief that TDS was not required to be deducted for these payments.

3. The obligation of the assessee to deduct tax at source under Section 40(a)(i) of the Act:

The Tribunal held that the assessee was not liable to deduct TDS for the relevant period, which was before the insertion of Explanation 4. This conclusion was based on the principle that the law to be applied is the one in force during the relevant assessment year, as affirmed by the Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. V. Commissioner of Income Tax.

The High Court agreed with the Tribunal's observations, noting that the retrospective application of Explanation 4 could not be contemplated by the assessee when the payments were made. The Court cited the legal maxim "lex non cogit ad impossibilia," meaning the law does not compel a person to do the impossible, to support its decision. The Court also referenced its own decision in The Commissioner of Income Tax 11 v/s. M/s. NGC Networks (India) Pvt. Ltd., which held that retrospective amendments could not impose new obligations on past actions.

Conclusion:

The High Court concluded that the payments made by the assessee for the procurement of software were not in the nature of royalties under Section 9(1)(vi) of the Act. It also held that Explanation 4, introduced by the Finance Act, 2012, could not be applied retrospectively to impose a tax deduction obligation on the assessee for the relevant assessment years. Consequently, the appeal filed by the revenue was dismissed, and no costs were awarded.

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