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TMI Blog2017 (11) TMI 1070X X X X Extracts X X X X X X X X Extracts X X X X ..... the copy rights to be used by the assessee for development of a new software as per customized requirement of the clients. As far as the decisions relied upon by the assessee there is no quarrel on the point that the purchase of copy righted product being a software will not fall in the category of the royalty in the absence of any transfer of acquiring of any right to use the copy right. However, in the case of the assessee the assessee is using the copy right as well as the software for development of the new software with the necessary modifications. Hon’ble High Court in case of Tata Consultancy Services Vs. State of Andhra Pradesh (2004 (11) TMI 11 - Supreme Court) has held that it is necessary to make a distinction between the cases where the consideration is paid to acquire the right to use patented or a copy right and cases were payment is made to acquire patented or copy righted product/goods. In the case of the assessee it is not an acquisition of copy righted product being software but the assessee has acquired the software along with the right to use it for further development/production. Accordingly, in the facts and circumstances of the case the payment made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the bank interest from the deposits out of business surplus. 2. Ground No. 1 is regarding disallowance made u/s 40(a)(ia) of the Act on account of non deduction of tax at source on purchase of software. The assessee is an exporter of computer software in the field of medical billing for which the assessee is eligible and also allowed deduction u/s 10A of the Act by the AO. The assessee purchased the main/master copy of the software to produce new software for medical billing from USA based seller. By using the said master copy and carrying out the necessary charges as per requirement of the clients the assessee is exporting the computer software. The AO noted that the assessee has not deducted tax at source in respect the amount paid for purchases of the master copy of ₹ 1,14,68,382/-. Accordingly, the AO invoked the provisions of section 40(a)(ia) of the Act and disallowed the said amount. The assessee challenged the action of the AO before the ld CIT(A) but could not succeed because both the AO as well as ld. CIT(A) have held that the payment made by the assessee for purchase of software is royalty and therefore the income in the hands of the none resident is charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , amend are make changes for the purpose of further developing the improved software as per requirements of the clients. Thus the payment by the assessee for purchase of the master copy along with the copy rights is royalty in nature as per the provisions of section 9(1)(vi) of the Act as well as the definition provided under Indo-US DTAA. He has relied upon the orders of the authorities below. 5. We have considered the rival submissions as well as relevant material on record. In the case on hand the assessee has purchased the master copy of software from BJW Consultancy Services LLC USA vide agreement dated 16.04.2010 along with certain rights for modification, alteration, amendments or changes and then resell and export the improved modified version of the software. For ready reference we reproduced the agreement/MOU as under:- Memorandum of understanding This agreement is made on April 16, 2010 between BJW consulting Service LLC, 5700 Midnight pass Road STE 4 Sarasota FL 34342 and Isys Softech Private Limited, F-139 Chatrala Circle, Sitapura Jaipur. We are the largest producer, seller and exporter of medical software of all types and categories in US. As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty'. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary to go into the question whether the payment in question is reimbursement of expenses or in the nature of FTS or the question whether the services rendered made available technology to the Assessee in terms of Article 12(4) of the India USA DTAA, because even assuming the sum in question is to be disallowed u/s.40(a)(ia) of the Act, the disallowance will only go to enhance the profits derived by the Assessee from the business of export of computer software and on such enhanced profits deduction u/s.10A of the Act has to be allowed, thereby rendering tax implication on the Assessee insignificant. Therefore the prayer made in the application under Rule 27 of the ITAT Rules requires consideration. 19. As rightly contended on behalf of the Assessee the consequence of disallowance u/s.40(a)(ia) of the Act will be that the business profits of the Assessee to that extent will stand enhanced. In the case of Gem Plus Jewellery India Ltd. (supra), the Hon'ble Bombay High Court had to answer the following question of law: Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the Assessing Officer to grant the exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee. 20. In view of the aforesaid decision of the Hon'ble Bombay High Court which has been followed in several decisions rendered by ITAT Benches of Delhi, Hyderabad and Bangalore referred to in the submissions made by the learned counsel for the Assessee, we are of the view that the order of the CIT(A) on this issue does not call for any interference. Consequently, grounds Nos. 5 to 8 raised by the revenue are dismissed. Thus it is clear that the Coordinate Benches while deciding this issue has followed the decision of Hon ble High Courts including the decision of Hon ble Mombay High Court in case of the Jem Plus Jewellery India Ltd. 330 ITR 175. We further noted that the CBDT vide circular No. 37 of 2016 has accepted this position that the disallowance made u/s 32, 40(a)(ia), 40A(3), 43B etc. of the Act relates to the business activity against which chapter VI-A deduction has been claimed, resulting in enhancement of the profits of eligible business and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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