2015 (9) TMI 710 - AT - Income Tax

Disallowance under section 40(a)(ia) - non deduction of TDS - assessee has paid a sum as licence fee in respect of two softwares named MBIL Star Diagnostics and MBIL E-Deale - retrospectivity of amendment - Held that - The view entertained by the assessee is supported by the decision of the hon ble Delhi High Court in the case of Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT . Since the assessee was held to be liable to deduct tax on the basis of subsequent amendment brought in with retrospective effect, in view of various decisions referred to above, we have to hold that the assessee cannot be held responsible for violation of TDS provisions on the basis of a subsequent amendment. Accordingly, we are of the view that the Assessing Officer was not justified in disallowing the licence fee/service charges paid for use of softwares by invoking the provisions of section 40(a)(ia) of the Act - Decided in favour of Assessee.

Issues:
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax at source on licence fee paid for software use.

Detailed Analysis:

1. Issue of Disallowance under section 40(a)(ia):
The appeal concerned the disallowance of Rs. 23,43,598 by the Assessing Officer under section 40(a)(ia) of the Income-tax Act, 1961. The disallowance was related to the non-deduction of tax at source by the assessee on the payment made as licence fee for two softwares named MBIL Star Diagnostics and MBIL E-Dealer supplied by M/s. Mercedes-Benz India P. Ltd. The Assessing Officer disallowed the amount as the assessee did not deduct tax at source under section 194J of the Act. The learned Commissioner of Income-tax (Appeals) upheld the disallowance, leading to the appeal before the Appellate Tribunal ITAT COCHIN.

2. Contentions of the Parties:
The authorised representative argued that the payments were service charges for using the software, and the assessee did not acquire ownership but only a licence to use the software. Citing the agreement and relevant sections of the Act, it was contended that the payments did not fall under the definition of royalty. On the other hand, the Departmental representative argued that the payments were for the use of software and thus constituted royalty, necessitating tax deduction at source.

3. Judgment and Reasoning:
The Tribunal analyzed the definitions of "royalty" under Explanation 2 and the clarifications provided in Explanation 3 and Explanation 4 of section 9(1)(vi) of the Act. It was observed that the Legislature intended to include computer software under "patent or invention." The agreement between the parties indicated that the assessee had obtained the right to use the software, making the licence fee/service charges fall under the definition of royalty. The Tribunal noted the retrospective amendment to section 9(1)(vi) by the Finance Act, 2012, and the insertion of Explanation 4 clarified the transfer of rights for use of computer software as royalty.

4. Precedents and Interpretation:
The Tribunal referred to previous cases where subsequent amendments with retrospective effect were not considered for disallowance under section 40(a)(ia). It highlighted the decision of the hon'ble Delhi High Court in the case of Infrasoft Ltd., supporting the assessee's position until the retrospective amendment. The Tribunal also cited the case of Kerala Vision Ltd., where the view supported by a High Court decision was considered in the context of tax deduction.

5. Conclusion and Decision:
Based on the analysis and precedents, the Tribunal held that the assessee could not be held responsible for TDS violation based on subsequent amendments. Therefore, the disallowance of licence fee/service charges for software use under section 40(a)(ia) was set aside, and the Assessing Officer was directed to delete the addition. Consequently, the appeal filed by the assessee was allowed, and the judgment was pronounced on 8th May 2015 by the Appellate Tribunal ITAT COCHIN.

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