2017 (1) TMI 1102 - HC - Income Tax

TDS u/s 194J - Royalty - applicability of provisions of section 9 1 vi - Tribunal held that the provisions of Tax Deducted at Source will not be applicable in the asessee case - Held that - It is an admitted fact that the assessee in the present case is a dealer engaged in buying and selling software in the open market. The transaction in question is thus one of purchase and sale of a product and nothing more. We are of the view that the provisions of section 9 1 vi dealing with and defining Royalty cannot be made applicable to a situation of outright purchase and sale of a product. Courts have consistently noted the difference between a transaction of sale of a copyrighted article and one of copyright itself. The provisions of section 9(1)(vi) as a whole, would stand attracted in the case of the latter and not the former. Explanations 4 and 7 relied by the authorities would thus have to be read and understood only in that context and cannot be expanded to bring within its fold transaction beyond the realm of the provision. The Tribunal has relied on the decision of the Division Bench of the Delhi High Court in the case of The Principal Commissioner of Income Tax-6 V. M.Tech India Pvt Ltd 2016 (1) TMI 812 - DELHI HIGH COURT , which supports our view as above. It is brought to our notice that the decision of the Delhi High Court has not been accepted by the Department and an SLP is pending. Be that as it may, in view of the facts and circumstances as observed above, we have no hesitation in dismissing the Departmental Appeal answering the questions of law in favour of the assessee

Summary

Issues involved:
1. Interpretation of provisions related to Tax Deducted at Source under section 9(1)(vi) of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(ia) for payments treated as Royalty subject to TDS under section 194J.

Analysis:

Issue 1: Interpretation of provisions related to Tax Deducted at Source under section 9(1)(vi) of the Income Tax Act, 1961:
The case involved a challenge by the Income Tax Department against an order of the Income Tax Tribunal regarding the applicability of Tax Deducted at Source provisions. The Tribunal had held that TDS was not applicable in the assessee's case, overlooking specific provisions of the Income Tax Act. The High Court examined the nature of the transaction, which was a purchase and sale of software products by the assessee. The Court analyzed the definition of 'Royalty' under section 9(1)(vi) and emphasized that such provisions cannot be applied to a straightforward purchase and sale scenario. It referenced legal interpretations of 'Royalty' to support its conclusion, distinguishing between transactions involving copyrighted articles and copyright itself. The Court highlighted the exclusivity of rights as a key factor in determining whether a payment qualifies as 'Royalty.' Additionally, it referenced past judgments to reinforce its interpretation of the law. Ultimately, the Court dismissed the Departmental Appeal, ruling in favor of the assessee and against the Revenue.

Issue 2: Disallowance under section 40(a)(ia) for payments treated as Royalty subject to TDS under section 194J:
The assessee, a dealer in Computer Software, faced a disallowance under section 40(a)(ia) due to the Assessing Officer treating the consideration for purchase as Royalty subject to TDS under section 194J. The Commissioner of Income Tax (Appeals) upheld this disallowance, citing provisions of the Income Tax Act related to Royalty. However, the Income Tax Appellate Tribunal reversed the decision, leading to the present appeal by the Income Tax Department. The High Court analyzed the details of the agreement between the assessee and the software provider to understand the nature of the transaction. It noted that the agreement did not grant the assessee any rights in the software, emphasizing the limited, non-assignable, and non-sub-licensable nature of the license provided. The Court further referenced the Madras High Court's explanation of Royalty and various legal precedents to support its conclusion that the provisions of section 9(1)(vi) regarding Royalty should not be extended to a simple purchase and sale transaction. Ultimately, the Court dismissed the Departmental Appeal, ruling in favor of the assessee.

By carefully analyzing the issues related to the interpretation of TDS provisions and disallowance under section 40(a)(ia), the High Court provided a detailed judgment that clarified the application of the Income Tax Act in the context of the case, ultimately deciding in favor of the assessee.