section 40(a)(ia) Payer not liable for TDS default due to retrospective amendments

By | September 28, 2015

Whether disallowance under section 40(a)(ia) should be made on the basis of subsequent amendment brought into the Act with retrospective effect.?

Summary of Case on section 40(a)(ia) :-

Where Assessing Officer on basis of amendments introduced in section 9(1)(vi) with retrospective effect held that assessee was liable to deduct tax at source from licence fee paid for use of softwares and disallowed payments by invoking provisions of section 40(a)(ia), assessee could not be held responsible for violation of TDS provisions on basis of subsequent amendments introduced in section 9(1)(vi)

Full Judgement of case on  section 40(a)(ia):-

section 40(a)(ia)

IN THE ITAT COCHIN BENCH

Rajasree Motors (P.) Ltd.

v.

Assistant Commissioner of Income-tax

V. DURGA RAO, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER

IT APPEAL NO. 535 (COCH.) OF 2014
[ASSESSMENT YEAR 2009-10]

MAY  8, 2015

A.S. Narayanamoorthy for the Appellant. K.K. John for the Respondent.

ORDER

B.R. Baskaran, Accountant Member – The appeal filed by the assessee is directed against the order dated September 30, 2014 passed by the learned Commissioner of Income-tax (Appeals)-II, Kochi and it relates to the assessment year 2009-10.

2. The assessee is aggrieved by the decision of the learned Commissioner of Income-tax (Appeals) in confirming the disallowance of Rs. 23,43,598 made by the Assessing Officer under section 40(a)(ia) of the Income-tax Act, 1961.

3. We heard the parties and perused the relevant materials on record. The facts relating to the said disallowance are that the Assessing Officer noticed that the assessee has paid a sum of Rs. 23.43 lakhs as licence fee in respect of two softwares named MBIL Star Diagnostics and MBIL E-Dealer. The assessee is a dealer of Mercedes-Benz cars and the abovesaid two softwares have been supplied by M/s. Mercedes-Benz India P. Ltd. for the non-exclusive use by the assessee. Since the assessee did not deduct tax at source from the abovesaid payments under section 194J of the Act, the Assessing Officer disallowed the same by invoking provisions of section 40(a)(ia) of the Act. The learned Commissioner of Income-tax (Appeals) also confirmed the order of the Assessing Officer and hence, the assessee has filed this appeal before us.

4. The learned authorised representative submitted that the assessee has paid only service charges to M/s. Mercedes-Benz India P. Ltd., for using the softwares. He submitted that the ownership of the software, which was a copyrighted article, vested with M/s. Mercedes-Benz India P. Ltd., and it has only granted the right to use the same. He further submitted that since M/s. Mercedes-Benz India P. Ltd. has not transferred the rights over the softwares and further the payments were made only as service charges, the same will not fall under the definition of royalty as given in Explanation 2 under section 9(1)(vi) of the Act. In this regard the learned authorised representative invited our attention to Explanation 3 given under section 9(1)(vi) wherein the expression computer software is defined. The learned authorised representative also invited our attention to the agreement entered into between the assessee and M/s. Mercedes-Benz India P. Ltd. to substantiate his contentions that the assessee was only given licence to use the software and not the ownership. He further submitted that the assessee is not entitled to share the software with any other person. Accordingly, he submitted that the assessee is not liable to deduct tax at source under section 194J of the Act from the service charges paid by it. The learned authorised representative further placed his reliance on the decision of the hon’ble Delhi High Court in the case of DIT v. Infrasoft Ltd.[2013] 39 taxmann.com 88/[2014] 220 Taxman 273 wherein it was held that the licence granted for use or right to use of any copyrighted article will not amount to transfer of any rights over the same and hence, it cannot be considered as royalty.

5. The learned Departmental representative however submitted that the assessee has made the payment for use of software and hence it will squarely fall under the definition of royalty as given under Explanation 2 to section 9(1)(vi) of the Income-tax Act. The learned Departmental representative invited our attention to Explanation 4 wherein it has clarified that the transfer of all or any rights always included transfer of all or any right for use or right to use a computer software. Further, inviting our attention to the agreement entered into between the assessee and M/s. Mercedes-Benz India P. Ltd. The learned Departmental representative submitted that the assessee has obtained the right to use the abovesaid two softwares and hence the payment cannot be considered as mere service charges as contended by the learned authorised representative. Accordingly he submitted that the payment made by the assessee is liable for deduction of tax at source under section 194J of the Act. Further the agreement between the parties itself clearly states that the applicable tax should be deducted at source. Accordingly, he submitted that the learned Commissioner of Income-tax (Appeals) was justified in confirming the disallowance made under section 40(a)(ia) of the Act.

6. We have heard the rival contentions and carefully perused the record. Admittedly, the impugned amount paid by the assessee was for use of two types of software which has been supplied by M/s. Mercedes-Benz India P. Ltd. The terms royalty is defined under Explantion 2 given under section 9(1)(vi) of the Act which, inter-alia, includes consideration paid for transfer of all or any rights including granting of a licence in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property. Under Explanation 4, a reference is made about computer software and for the sake of convenience ; we extract Explanation 4 as under :

Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.”

7. A combined reading of definition of “royalty” given in Explanation 2, Explanation 3 and Explanation 4 would, in our view, show that the Legislature has intended to include a computer software under “patent or invention” and hence further the Legislature has clarified the same further by inserting Explanation 3 and Explanation 4. Further the agreement entered into between the parties would show that the assessee is a nonexclusive user without any right to transfer the same to any other person and the assessee is required to pay rent or charges for use of the software. Since the right to use the softwares has been transferred to the assessee under the agreement, we are of the view that the licence fee/service charges paid by the assessee to M/s. Mercedes-Benz India P. Ltd. would fall under the definition of royalty and hence the assessee is liable to deduct tax at source.

8. The decision in the case of Infrasoft Ltd. (supra) has been rendered by the hon’ble Delhi High Court in the context of Double Taxation Avoidance Agreement provisions and in the context of section 9(1)(vi) also, it was held that the payment made for right to use a copyrighted article was not “royalty”. However, the Finance Act, 2012 has brought in amendments to section 9(1)(vi) of the Act with retrospective effect from June 1, 1976.

9. We have noticed that Explanation 4 referred to above was inserted by the Finance Act, 2012 with retrospective effect from June 1, 1976. In the following cases, the co-ordinate Benches of the Tribunal has taken the view that the disallowance under section 40(a)(ia) should not be made on the basis of subsequent amendment brought into the Act with retrospective effect.

(a) Sonata Information Technology Ltd. v. Dy. CIT (LTU) [2012] 54 SOT 233/25 taxmann.com 125 (Mum.) ;
(b) Infotech Enterprises Ltd. v. Addl. CIT [2014] 63 SOT 23/41 taxmann.com 364 (Hyd.); and
(c) Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITD 49/25 taxmann.com 25 (Mum.).

10. In the case of Infrasoft Ltd. (supra), the hon’ble Delhi High Court has held that the price paid for a copyrighted article represents purchase price of an article and cannot be considered as royalty. Thus, it is seen that the view taken by the assessee gets support from the decision of the hon’ble Delhi High Court, referred to above, till Explanation 4 was inserted in section 9(1)(vi) of the Act by Finance Act, 2012 with retrospective effect from June 1, 1976.

section 40(a)(ia)

11. The Cochin Bench of the Tribunal has dealt with an identical issue in the case of Kerala Vision Ltd. v. Asstt. CIT [2014] 64 SOT 328/46 taxmann.com 50. In this case, Kerala Vision Ltd. (supra) was engaged in the business of distribution of cable signals. The activity of transmission of signals by satellite was included in the expression “Process”, vide Explanation 6 inserted by the Finance Act, 2012, with retrospective effect from June 1, 1976 and hence it fell within the ambit of “royalty”. Hence, the assessee was liable to deduct tax at source on the pay channel charges paid by it. Earlier, the hon’ble Delhi High Court has taken the view in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168 that the transmission of television signals through satellite/transponders would not fall in the category of “royalty” as defined under Explanation 2 to section 9(1)(vi) of the Act. Under these set of facts, the co-ordinate bench noticed that the various benches of the Tribunal (referred to above) have held that the assessee cannot be held to be liable to deduct tax at source on the basis of subsequent amendment brought in with retrospective effect. Further the Tribunal held as under (page 86) :

“10. In the instant case, the view entertained by the assessee that the pay channel charges cannot be considered as royalty, which in fact gets support from the decision rendered by the hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332 ITR 340 (Delhi). Though Explanation 6 to secion 9(1)(vi) inserted by the Finance Act, 2012 is clarificatory in nature, yet in view of the fact that the view entertained by the assessee gets support from the decision of the Delhi High Court, referred above, we are of the view that the assessee cannot be held to be liable to deduct tax at source from the pay channel charges. Hence, we are of the view that the Assessing Officer was not justified in disallowing the claim of pay channel charges by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue and direct the Assessing Officer to delete the impugned disallowance.”

section 40(a)(ia)

12. In the instant case also, the view entertained by the assessee is supported by the decision of the hon’ble Delhi High Court in the case of Infrasoft Ltd. (supra). 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, since the view taken by the assessee was supported by the decision of the hon’ble Delhi High Court. Accordingly, we set aside the order of learned Commissioner of Income-tax (Appeals) on this issue and direct the Assessing Officer to delete the impugned addition.

13. In the result, the appeal filed by the assessee is allowed.

 

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