Asst.C.I.T., Bangalore V. M/s Aurigene Discovery Technologies Ltd., Bangalore

ITA 1479/BANG/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9242 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 29-09-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 18-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: L BHARATH
• Keywords: Depreciation; Double taxation relief; Retrospective amendment; Non-deduction of tax

Judgement Text

ITA.1479/ BANG/2013 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER I.T.A NO.1479/BANG/2015 (ASSESSMENT YEAR : 2012-13) ASST. COMMISSIONER OF INCOME TAX, CIRCLE -1(1)(1), BENGALURU .. APPELLANT V. M/S. AURIGENE DISCOVERY TECHNOLOGIES LTD, NO.39-40, KIDB INDUSTRIAL AREA, ELECTRONIC CITY PHA SE II, HOSUR ROAD, BENGALURU .. RESPONDENT PAN : AADCA2387A ASSESSEE BY : SHRI. L. BHARATH, CA REVENUE BY : SHRI. SANJAY KUMAR VERMA, CIT - DR HEARD ON : 29.09.2016 PRONOUNCED ON : 23.11.2016 O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THE REVENUE FILED THIS APPEAL AGAINST THE ORDER OF THE CIT (A) I, BENGALURU, DT.09.09.2015, FOR THE ASSESSMENT YEAR 2 012-13. 02. DURING THE ASSESSMENT, THE A O FOUND THAT THE ASSESSEE PURCHASED THE FOLLOWING SOFTWARES DURING THE A Y 2011-12: ITA.1479/ BANG/2013 PAGE - 2 SL VENDOR RUPEES NO 1 CCDC SOFTWARE LIMITED 23,463 2 ALTORIS INC 68,709 3 MOLECULAR NETWORKS GMBH 2,84,406 4 SCHRODINGER LLC 26,42,049 5 SYMYX SOFTWARE INC 51,259 6 POLMON INSTRUMENTS PVT LTD 46,361 TOTAL 31,16,247 SO, THE AO SOUGHT THE REASONS FOR NON-DEDUCTION OF TAXES ON SUCH PAYMENTS IN ACCORDANCE THE JUDGMENT OF KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD. THE ASSESSEE SUBMITTED THAT THE TRANSACTIONS WERE MADE TOWARDS RENEWAL OF THE SOF TWARE LICENSES PURCHASED IN THE EARLIER YEARS, THE SOFTWARES WERE IN THE NATURE OF OFF THE SHELF SOFTWARE I.E., THE COPYRIGHTED ARTICLES S OLD BY THE OVERSEAS VENDOR, THE IMPUGNED PAYMENTS WERE MADE DURING THE FINANCIAL YEAR 2010-11, RECOGNIZED AS PREPAID EXPENSES AS ON 31.03 .2011 AND WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT IN THE FINAN CIAL YEAR 2011-12. THE ASSESSEE SUBMITTED THAT THE SAMSUNG JUDGMENT SH ALL NOT BE APPLICABLE SINCE IT WAS PRONOUNCED ON 15.10.2011 WH EREAS THE LIABILITY TO DEDUCT TAX IN THE REFERRED INSTANCES HAPPENED IN FINANCIAL YEAR 2010-11 I.E., THE YEAR IN WHICH CREDIT TO THE ACCOU NT OF THE VENDOR WAS RECOGNIZED AND FOR THIS RELIED ON THE JUDGMENTS OF COCHIN TRIBUNAL IN ITA.1479/ BANG/2013 PAGE - 3 KERALA VISION LTD (46 TAXMANN.COM 50) AND AGRA TRIBUNAL IN VIROLA INTERNATIONAL (ITA NO 2561/AGRA/2013) . IT PLEADED THAT IT HAD DETERMINED THE RATE OF TAX TO BE DEDUCTED AT NIL FO LLOWING THE JUDGMENTS THAT WERE PREVALENT AT THE TIME OF TAX DE DUCTION I.E., FY 2010-11 VIZ SUPREME COURT IN TATA CONSULTANCY SERVI CES V. STATE OF ANDHRA PRADESH, JURISDICTIONAL TRIBUNAL IN SAMSUNG ELECTRONICS CO. LTD & VELANKANI MAURITIUS LTD WHICH HELD THAT REMI TTANCE TOWARDS COPYRIGHTED ARTICLE IS IN , THE NATURE OF BUSINESS PROFITS AND NOT ROYALTY AND SUCH PROPOSITION WAS ALSO CONFIRMED BY THE FORM 15C BS OBTAINED FROM THE CHARTERED ACCOUNTANTS IN ACCORDANCE WITH SECTIO NS 195(6) OF THE ACT. HOWEVER, THE AO HELD THAT THE CONSIDERATION PAID BY THE ASSESSEE FOR THE IMPORT OF SOFTWARE WAS IN THE NATURE OF ROYALTY , THEREFORE IT CONSTITUTE INCOME CHARGEABLE U/S 9(1)(VI) READ WITH RELEVANT A RTICLES OF THE DTAA , THUS WAS CHARGEABLE U/S 195, THE ASSESSEE WAS DUT Y BOUND TO DEDUCT TDS ON THE IMPUGNED PAYMENT OF RS. 31,16,247/- UNDER S ECTIONS 195 & 194 J , RESPECTIVELY . SINCE IT FAILED TO DEDUCT TDS ON THE IMPUGNED PAYMENTS, THE AO DISALLOWED RS. 30,69,886/- U/S 40(A)(I) & RS.46, 361/- U/S 40(A) (IA), RESPECTIVELY. ON AN APPEAL, THE CIT(A) ALLOWED TH E ASSESSEES APPEAL IN THIS REGARD AND HENCE THE REVENUE FILED THIS APPEAL WITH THE FOLLOWING GROUNDS OF APPEAL : ITA.1479/ BANG/2013 PAGE - 4 03. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT ORDERS. THE ASSESSEE RESUBMITTED THE PLEA TAKEN BEF ORE THE LOWER AUTHORITIES AND PLACED ON THE RULING OF THE HON'BL E BANGALORE ITAT IN SONATA INFORMATION TECHNOLOGY LTD V. ACIT (103 ITD 324) WHICH HAD HELD THAT PAYMENTS FOR SOFTWARE LICENSES DO NOT CON STITUTE ROYALTY UNDER THE PROVISIONS OF THE ACT AND HENCE DISALLOWA NCE UNDER SECTION 40(A) (IA) OF THE ACT WOULD NOT BE APPLICABLE. THE CHANGE IN THE LEGAL POSITION ON TAXATION OF COMPUTER SOFTWARE WAS ON ACCOUNT OF THE RULING OF THE KARNATAKA HIGH COURT IN CIT V. SAMSUNG ELECTRONICS CO. LTD. (320 ITR 209), WHICH WAS PRONOUNCED ON 15.10.11 THAT IS MUCH LATER THAN THE ITA.1479/ BANG/2013 PAGE - 5 CLOSURE OF THE FY 2010-11. SUBSEQUENTLY, THE FINAN CE ACT 2012 ALSO INTRODUCED, RETROSPECTIVELY, EXPLANATION 4 TO SECTI ON 9(1 (VI) OF THE ACT TO CLARIFY THAT PAYMENTS FOR, INTER ALIA. LICENSE T O USE COMPUTER SOFTWARE WOULD QUALIFY AS ROYALTY. DURING THE FY 10-11, THE ASSESSEE DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RE SPECTIVE AMENDMENT. AS SUCH, FOR THE FY 2010-11, IN LIGHT OF THE PROVIS IONS OF SECTION 9(1)(VI) OF THE ACT READ WITH JUDICIAL GUIDANCE ON THE TAXATION OF COMPUTER SOFTWARE PAYMENTS, TAX WAS NOT REQUIRED TO BE DEDUCTED AT SOURCE. GIVEN THE PRACTICE IN PRIOR ASSESSMENT YEAR S, THE ASSESSEE WAS OF THE BONA FIDE VIEW THAT THE PAYMENT OF SOFTWARE LICENSE FEE WAS NOT SUBJECT TO TAX DEDUCTION AT SOURCE UNDER SECTION 19 4J/195 OF THE ACT. IT IS SUBMITTED THAT LIABILITY TO DEDUCT TAX AT SOURCE CANNOT BE FASTENED ON THE ASSESSEE ON THE BASIS OF RETROSPECTIVE AMEN DMENT TO THE ACT (FINANCE ACT 2012 AMENDMENT THE DEFINITION OF ROYAL TY WITH RETROSPECTIVE EFFECT FROM 01.04.1976) OR A SUBSEQUE NT RULING OF A COURT (THE KARNATAKA HC IN CIT V SAMSUNG ELECTRONIC S CO. LTD. (16 TAXMANN.COM 141) WAS PASSED ON OCTOBER 15, 2011). COURTS HAVE CONSISTENTLY UPHELD THIS PRINCIPLE AS SEEN IN: ITO V. CLEAR WATER TECHNOLOGY SERVICES (P.) LTD. (52 TAXMANN.COM 115) KERALA VISION LTD V. ACIT (46 TAXMANN.COM 50) SONIC BIOCHEM EXTRACTIONS (P.) LTD V. ITO (35 TAXMANN.COM 463) CHANNEL GUIDE INDIA LTD V. ACIT (25 TAXMANN.COM 25) DCIV. VIROLA INTERNATIONAL (20 14(2) TMI 653) CIT V. KOTAK SECURITIES LTD. (20 TAXMANN.COM 846). ITA.1479/ BANG/2013 PAGE - 6 04. THE RELEVANT PORTION OF THE CIT(A) ORDER IS EXT RACTED AS UNDER : DISALLOWANCE OF EXPENSES UNDER 40(A)(I) / 40(A)(I A) : 5.1. AS REGARDS DISALLOWANCE OF EXPENSES UNDER 40(A )(I)/40(A)(IA), IT HAS BEEN SUBMITTED THAT THE COMPANY HAD DETERMIN ED THE RATE OF TAX TO BE DEDUCTED AND FOLLOWING THE JUDGMENTS THAT WERE PREVALENT AT THE TIME OF TAX DEDUCTION, SUPREME COU RT IN THE CASE OF TATA CONSULTANCY SERVICES AND JURISDICTIONAL TRI BUNAL IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD, THE APPELLANT SUBMI TTED THAT THE SAID JUDGMENT SHALL NOT BE APPLICABLE SINCE IT WAS PRONOUNCED ON 15/10/2011 AND VELANKANI MAURITIUS LTD., WHEREAS TH E LIABILITY TO DEDUCT TAX FOR THE APPELLANT WAS THE F.Y. 2010-11. THE APPELLANT HAS RELIED ON THE JUDGMENT OF COCHIN TRIBUNAL IN TH E CASE OF KERALA VISION LTD AND AGRA TRIBUNAL IN THE CASE OF VIROLA INTERNATIONAL, WHEREIN IT WAS HELD THAT 'THE LAW AMENDED WAS UNDOUBTEDLY RETROSPECTIVE IN N ATURE BUT SO FAR AS TAX WITHHOLDING LIABILITY IS CONCERNE D, IT DEPENDS ON THE LAW AS IT EXISTED AT THE POINT OF TI ME WHEN PAYMENTS, FROM WHICH TAXES OUGHT TO HAVE BEEN WITHH ELD, WERE MADE. THE TAX-DEDUCTOR CANNOT BE EXPECTED TO HAVE CLAIRVOYANCE OF KNOWING HOW THE LAW WILL CHANG E IN FUTURE.' FURTHER, SOFTWARE PAYMENT WAS INCLUDED IN DEFINITIO N OF ROYALTY ONLY VIDE EXPLANATION TO SECTION 9(1)(VI)IN SERTED RETROSPECTIVELY VIDE FINANCE ACT, 2012 AND WHEN THE PURCHASE WAS MADE, THE APPELLANT DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RETROSPECTIVE AMENDMEN T. IT IS IMPOSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVELY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN THE PAYMENT IS CREDITED OR MADE. THIS VIEW HAS BEEN UPHELD BY THE BANGALORE TRIBUNAL IN THE CASE OF DCI T VS M/S WS ATKINS INDIA PVT LTD (ITA NO 14671BANG12014 AND THE MUMBAI TRIBUNAL IN THE CASE OF CHANNEL GUIDE INDIA LTD. VS ACIT ([2012] 25 TAXMANN.COM 25). 5.2 THE ITAT 'C' BENCH IN THE CASE M/S WS ATKINS INDIA PVT. LTD AND IN THE CASE OF INFOTECH ENTERPRISES LTD OF THE HYDERABAD BENCH OF THE TRIBUNAL WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOULD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT DONE AND SUBSEQUENTLY BECOME TAXABLE ON ACCOUNT OF A RETROSPECTIVE LEGISLATION. IT HAS ALSO REFERRED TO IN THE CASE OF SONIC BIOCHEM EXTRA CTIONS PVT. LTD. (SUPRA), IDENTICAL ISSUE WAS CONSIDERED AND DE CIDED BY ITA.1479/ BANG/2013 PAGE - 7 THE MUMBAI TRIBUNAL. FOLLOWING WERE THE RELEVANT OBSERVATIONS:- 'THE ASSESSEE PURCHASED SOFTWARE, CAPITALIZED THE PAYMENT TO THE COMPUTERS ACCOUNT AS THE SOFTWARE CA ME ALONG WITH THE HARDWARE OF COMPUTERS AND CLAIMED DEPRECIATION. ON THE GROUND THAT PURCHASE OF SOFTWA RE IS ESSENTIALLY PURCHASE OF COPYRIGHT WHICH ATTRACTS TA X DEDUCTION AT SOURCE UNDER SECTION 194J, THE ASSESSING OFFICER INVOLVED THE PROVISIONS OF SECTION 40(A)(IA) AND DISALLOWED THE DEPRECIATION CLAIMED. THE COMMISSIONER (APPEALS), C ONFIRMED THE ACTION OF THE ASSESSING OFFICER ON THE GROUND T HAT THE PURCHASE OF SOFTWARE AMOUNTED TO ACQUISITION OF INT ANGIBLE ASSET AND THEREFORE, THE PAYMENT WAS ROYALTY AND DI SALLOWABLE. ON APPEAL: HELD, (I) THAT MERE PURCHASE OF SOFTWARE, A COPYRIG HTED ARTICLE, FOR UTILISATION OF COMPUTERS CANNOT BE CON SIDERED AS PURCHASE OF COPYRIGHT AND ROYALTY. THE ASSESSEE DID NOT ACQUIRE ANY RIGHTS FOR MAKING COPIES, SELLING OR ACQUIRING WHICH GENERALLY COULD BE CONSIDERED WITHIN THE DEFINITION OF 'ROYAL TY'. EXPLANATION 2 TO SECTION 9(1)(VI) CANNOT BE APPLIED TO PURCHASE OF A COPYRIGHTED SOFTWARE, WHICH DOES NOT INVOLVE ANY COMMERCIAL EXPLOITATION THEREOF. THE ASSESSEE SIMPL Y PURCHASED SOFTWARE DELIVERED ALONG WITH COMPUTER HA RDWARE FOR UTILIZATION IN THE DAY-TO-DAY BUSINESS.' 5.3 RELYING ON THE ABOVE DECISION, THE ITAT 'C' BEN CH, BANGALORE UPHELD THE ORDER OF THE CIT(A) WHO HAD OBSERVED THAT THE ASSESSEE DID NOT HAVE THE BENEFIT OF THE CLARIFICATION BROUGHT ABOUT BY THE RETROSPECTIVE AMENDMENT THAT THE PAYMENTS TANTAMOUN T TO PAYMENT FOR ROYALTY AND CONSEQUENTLY TAX WAS TO BE DEDUCTED U/S 194J. THE LAW AS EXTANT ON THE DATE WH EN THE PAYMENT FOR OBTAINING THE SOFTWARE WAS MADE, HA S NOT CATEGORICALLY LAID DOWN THAT TAX IS REQUIRED TO BE DEDUCTED. IT IS IMPOSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVELY. 5.4 IN VIEW OF THE ABOVE DECISIONS, IT IS CORRECT TO SAY THAT IT IS NOT POSSIBLE TO FASTEN LIABILITY FOR DEDUCTING T AX AT SOURCE RETROSPECTIVELY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN THE PAYMENT IS CREDITED OR MADE. WHEN PURCHASE OF SOFTWARE WAS MADE THE ASSESSEE DID NOT HAVE THE BENEFIT OF THE CLARIFICATION BROUGHT ABOUT BY THE RETROSPECTIVE AMENDMENT. THE CONTENTION OF THE APPELLANT IS CORRECT THAT THE SOFTWARE PAYMENT DISA LLOWED BY THE AO DID NOT WARRANT WITHHOLDING OF THE TAX U/ S ITA.1479/ BANG/2013 PAGE - 8 40(A)(IA) AND 40(A)(IA) (BY AN ORDER OF CORRIGENDU M DT 20.11.2015) OF THE ACT. THEREFORE DISALLOWANCE MAD E BY THE AO ON ACCOUNT OF SOFTWARE PAYMENT WANT OF WITHHOLDING OF TAX IS HEREBY DELETED. 05. THE CIT(A) FOLLOWED THE DECISION OF THIS TRIBU NAL IN M/S WS ATKINS INDIA PVT. LTD, SUPRA, WHICH REFERRED THE DECISIONS OF HYDERABAD BENCH OF THE TRIBUNAL IN INFOTECH ENTERPRISES LTD IN ITA 115/HYD/2011 WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOU LD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT DONE AND SUBSEQU ENTLY BECOME TAXABLE ON ACCOUNT OF A RETROSPECTIVE LEGISL ATION. IT HAS ALSO REFERRED TO THE DECISIONS OF THE DELHI & MUMBA I TRIBUNAL IN SMS DEMAG PVT LTD , 132 ITJ 498 & SONIC BIOCHEM EXTRACT IONS PVT. LTD. 23 ITR (TRIB) 447, RESPECTIVELY. WE UPHOLD THE DECISIO N OF THE CIT(A) AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 06. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD NOVEMBER, 2016. SD/- SD/- (VIJAY PAL RAO) (S. JAYARAMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR ITA.1479/ BANG/2013 PAGE - 9 6. GF, ITAT, BANGALORE