ITO, New Delhi V. M/s. Mikroz Infosecurity Pvt. Ltd., New Delhi

ITA 5691/DEL/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5961 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 21-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S R SENAPTI SENIOR
• Assessee Lawyers: ANOOP SHARMA SHRI DHURV DUA
• Keywords: Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) BEFORE HONBLE PRESIDENT, SHRI G.D. AGRAWAL AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5691/DEL./2014 (ASSESSMENT YEAR : 2010-11) ITO, WARD 6 (4), VS. M/S. MIKROZ INFOSECURITY PVT. LTD., NEW DELHI. 403, DLF CENTRE, GREATER KAILASH-II, NEW DELHI 110 048. (PAN : AACCG0375M) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ANOOP SHARMA, ADVOCATE SHRI DHURV DUA, CA REVENUE BY : SHRI S.R. SENAPTI, SENIOR DR DATE OF HEARING : 16.05.2018 DATE OF ORDER : 25.05.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, INCOME-TAX OFFICER, WARD 6 (4), NEW DELHI (HEREINAFTER REFERRED TO AS THE REVENUE) BY FILIN G THE PRESENT APPEAL, SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATE D 20.08.2014 PASSED BY LD. CIT (APPEALS)-IX, NEW DELHI QUA THE A SSESSMENT YEAR 2010-1 ON THE GROUNDS INTER ALIA THAT :- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE & IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO U/S 40(A)(IA) & 40(A)(I) AMOUNTING TO RS.1,73,72 ,817/- ON ACCOUNT OF NON-DEDUCTION OF TDS U/S 194J OF THE I.T ACT ON THE PAYMENTS MADE FOR OBTAINING LICENSES OF THE SOFTWAR E? ITA NO.5691/DEL./2014 2 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE & IN LAW, THE LD.CIT(A) HAS NOT GIVEN ANY COGENT REASONI NG AS TO HOW THE PAYMENT TOWARDS FIREWALL & SECURITY SOFTWARE SH OULD NOT BE TREATED AS ROYALTY AS PER EXPLANATION 2 TO SECTION 9(1) (VI) OF THE ACT? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE & IN LAW, THE LD.CIT(A) HAS INCORRECTLY APPLIED THE DECI SION OF HON'BLE DELHI COURT DECISION IN THE CASE OF CIT VS. DYNAMIC VERTICAL SOFTWARE INDIA PVT. LTD. EVEN THOUGH THE T AXABILITY OF SOFTWARE WAS CLARIFIED BY LEGISLATURE BY FINANCE AC T, 2012, SUBSEQUENT TO THE SAID DECISION? 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE & IN LAW, THE LD.CIT(A) HAS ERRED IN IGNORING THE FACT T HAT ASSESSEE ITSELF WAS DEDUCTING TAX ON CERTAIN SIMILAR PAYMENT S AND, THEREFORE WAS FULLY AWARE OF ITS LIABILITY TO DEDUC T TAX UNDER THE LAW? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE & IN LAW, THE LD.CIT(A) FAILED TO APPRECIATE THE CBDT IN STRUCTION VIDE NOTIFICATION NO. 21/2012 [F.NO.142/10/2012-SO (TPL)] S.O. 1323(E), DATED 13.06.2012, WAS MEANT TO GRANT CONCE SSION TO THE ASSESSEE AND DOES NOT ANYWAY RESTRICT THE APPLICATI ON OF LAW. CBDT HAS CLARIFIED THAT ONLY IN PARTICULAR CIRCUMST ANCES, TDS ULS.194J OR 195 ON PAYMENT OF ROYALTIES SHOULD NOT BE MADE? 6. THAT THE ORDER OF THE LD.CIT(A) IS ERRONEOUS AND IS NOT TENABLE ON FACTS AND IN LAW. 7. THAT THE GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO EACH OTHER. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICA TION OF THE CONTROVERSY AT HAND ARE : THE ASSESSEE IS INTO THE BUSINESS OF SALE OF SOFTWARE AND SERVICES. ASSESSING OFFICER NOTICED F ROM THE FINANCIAL STATEMENT OF THE ASSESSEE THAT IT HAS PUR CHASED SOFTWARE WORTH RS.1,73,72,817/- FROM VARIOUS PARTIES INCLUDI NG ASSOCIATE CONCERNS BUT HAS NOT DEDUCTED TAX AT SOURCE (TDS) U NDER SECTION 194J OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE AC T). ITA NO.5691/DEL./2014 3 DISAGREEING WITH THE CONTENTIONS RAISED BY THE ASSE SSEE THAT OUT OF AMOUNT OF RS.1,73,72,817/-, AN AMOUNT OF RS.1,52,60 ,159/- PERTAINS TO PURCHASE OF HARDWARE AND THE SAME IS IN THE NATURE OF GOODS PURCHASES BY THE ASSESSEE AND NOT A SOFTWARE, AND AS SUCH, TDS IS NOT DEDUCTIBLE, AO PROCEEDED TO MAKE DISALLO WANCE OF THE GOODS PURCHASED AMOUNTING TO RS. 1,73,72,817/- ON A CCOUNT OF NON-DEDUCTION OF TAX BY INVOKING EXPLANATION 4 TO S ECTION 9(1)(VI) OF THE ACT. 3. ASSESSEE CARRIED THE MATTER BY WAY OF APPEAL BEF ORE THE LD. CIT (A) WHO HAS DELETED THE ADDITION IN QUESTION BY PARTLY ALLOWING THE APPEAL. FEELING AGGRIEVED, THE REVENUE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT AP PEAL. 4. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. UNDISPUTEDLY, THE ASSESSEE HAS MADE PURCHASES OF HARDWARE PRIMARILY FIREWALLS / VPNS UNDER THE BRAND NAME FOR TIGATE AND NEO ACCEL SGX. IT IS ALSO NOT IN DISPUTE THAT THE SOFTWARE WAS EMBEDDED WITH THE HARDWARE PURCHASED BY THE ASSESSE E. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE IS A TRADER AND TH E NET USER IS THE PURCHASER WHO HAS PURCHASED THE HARDWARE EMBEDDED W ITH ITA NO.5691/DEL./2014 4 SOFTWARE FROM THE ASSESSEE. IT IS THE CASE OF THE ASSESSEE THAT OUT OF AMOUNT OF RS.1,73,72,817/- DISALLOWED BY THE AO, RS.1,52,60,159/- PERTAINS TO PURCHASE OF HARDWARE A ND THE ASSESSEE HAS NOT RETAINED ANY COPYRIGHT BUT SOLD THE SAME AS RECEIVED FROM THE MANUFACTURER. 6. IN THE BACKDROP OF THE AFORESAID FACTS AND CIRCU MSTANCES OF THE CASE, ARGUMENTS ADDRESSED BY THE LD. AR FOR THE PARTIES TO THE APPEAL AND THE RESPECTIVE CASE LAWS RELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW, THE SOLE QUESTION ARISES FOR DETERMINATION IN THIS CASE IS :- AS TO WHETHER SOFTWARE EMBEDDED IN THE HARDWARE PU RCHASED BY THE ASSESSEE AND THE PAYMENT MADE FOR PURCHASE OF S UCH SOFTWARE CAN BE CONSIDERED AS PAYMENT TOWARDS ROYALTY SO AS TO ATTRACT PROVISIONS CONTAINED U/S 194J OF THE ACT? 7. FIRST OF ALL, IT IS NOT IN DISPUTE THAT THE ASSE SSEE IS A TRADER OF THE COMPUTER SOFTWARE AND SERVICES AND THE NET USER OF HARDWARE AND SOFTWARE SOLD BY THE ASSESSEE IS THE PURCHASER WHO HAS PURCHASED THE SAME FROM THE ASSESSEE. IT IS ALSO N OT IN DISPUTE THAT THE ASSESSEE DOES NOT RETAIN ANY COPYRIGHT NOR DOES IT ACQUIRE ANY SUCH COPYRIGHT, RATHER SELL THE GOODS AFTER PURCHAS ING THE SAME FROM MANUFACTURER AND DISTRIBUTOR. 8. WHEN THE HARDWARE PURCHASED AND SOLD INCLUDES TH E EMBEDDED SOFTWARE IS BILLED AS GOODS WITH DVAT/CST LEVIED ON ITA NO.5691/DEL./2014 5 ITS PRICE AND THERE IS NO LEVY OF SERVICE TAX ON IT S PRICE AND THE SAME HAS BEEN BILLED TO THE CUSTOMER IN A CONSOLIDATED M ANNER; THAT THERE IS NO CLIENT OR CLIENT LICENSING COMPONENT OF THE H ARDWARE IN QUESTION THAT NEEDS TO BE INSTALLED AT DESKTOP OR E ND-USER PC, LAPTOPS, SERVERS; THAT IT IS NEITHER PROCURING THE HARDWARE FROM THE ORIGINAL MANUFACTURER NOR IMPORTING THIS HARDWARE D IRECTLY RATHER PURCHASING THE SAME FROM RESIDENT DISTRIBUTOR FOR R ESALE TO ITS CUSTOMERS PAYMENT MADE FOR PURCHASE OF SUCH HARDWAR E EMBEDDED WITH SOFTWARE CANNOT BE TREATED AS PAYMENT FOR ROYA LTY, AS ALL THESE CONTENTIONS RAISED BY THE ASSESSEE REMAINED UNCONTR OVERTED BY THE AO. 9. SO, WHEN THE HARDWARE EMBEDDED WITH NETWORK SECU RITY EQUIPMENT (FIREWALLS / VPNS) HAVE BEEN PURCHASED BY THE ASSESSEE HAVING NO COPYRIGHT NOR HAVING RIGHT TO TRANSFER TH E COPYRIGHT, THE SOFTWARE WAS NOT HAVING ANY SEPARATE ENTITY. MOREO VER, HARDWARE EMBEDDED WITH SOFTWARE IS BILLED TO THE CUSTOMER TH ROUGH A SINGLE INVOICE CLASSIFIED AS GOODS WITH DVAT/CST LEVIABLE ON SALE PRICE, THE SAME CANNOT BE PUT UNDER THE CATEGORY OF SOFTWA RE. THE PAYMENT THEREOF CANNOT BE CONSIDERED AS PAYMENT TOW ARDS ROYALTY TO ATTRACT THE PROVISIONS CONTAINED U/S 194J. 10. IDENTICAL ISSUE IN CONTROVERSY HAS BEEN SETTLED BY THE HONBLE DELHI HIGH COURT IN CASE CITED AS CIT VS. DYNAMIC ITA NO.5691/DEL./2014 6 VERTICAL SOFTWARE INDIA (P.) LTD. 332 ITR 222 (DE LHI) WHEREIN IT IS HELD THAT, WHEN THE ASSESSEE HAS BEEN PURCHASING SOFTWARE FRO M MICROSOFT AND SOLD IT FURTHER IN INDIAN MARKET, BY NO STRETCH OF IMAGINATION, IT CAN BE TREATED AS ROYALTY. HONBLE DELHI HIGH COURT IN CASE CITED AS PR.CIT VS. M. TECH INDIA (P.) LTD. 381 ITR 31 (DELHI) HELD THAT, WHERE PAYMENTS WERE MADE FOR PURCHASE OF SOFTWARE AS A PRODUCT CONSIDERING PAID WOULD HAVE TO BE TREATED AS PAYMENT FOR PURCHASES OF SOFTWARE RAT HER THAN CONSIDERATION FOR USE OR RIGHT TO USE OF SOFTWARE S O AS TO BE TERMED AS ROYALTY. 11. SO, IN VIEW OF THE LAW LAID DOWN BY HONBLE HIG H COURT IN CASES CITED AS CIT VS. DYNAMIC VERTICAL SOFTWARE INDIA (P.) LTD. AND PR.CIT VS. M. TECH INDIA (P.) LTD. THAT WHEN ASSESSEE HAS PURCHASED HARDWARE EMBEDDED WITH SOFTWARE COMPONENT FOR RESALE WITHOUT RETAINING ANY COPYRIGHT IN THE GOODS, IT IS A COPYRIGHTED ARTICLE AND DOES NOT ATTRACT THE PROVISIONS CONTAIN ED U/S 194J. 12. SO FAR AS THE QUESTION OF APPLICABILITY OF CBDT INSTRUCTIONS VIDE NOTIFICATION NO.21/2012 (F.NO.142/10/2012-SO ( TPL)] S.O. 1323 (E) DATED 13.06.2012 IS CONCERNED, THE SAME IS APPLICABLE W.E.F 01.07.2012 AND IS NOT APPLICABLE TO THE YEAR UNDER ASSESSMENT. MOREOVER, THE COST OF HARDWARE AND SOF TWARE ITA NO.5691/DEL./2014 7 EMBEDDED THEREIN IS NOT SEPARABLE. THE ADDITION MA DE BY THE AO HAS BEEN RIGHTLY DELETED BY THE LD. CIT (A). 13. SO FAR AS QUESTION OF APPLICABILITY OF EXPLANAT ION 4 TO SECTION 9(1)(VI) IS CONCERNED, THE SAME IS ALSO NOT APPLICA BLE TO THE CASE AT HAND BECAUSE THE SOFTWARE EMBEDDED IN THE HARDWARE PURCHASED BY THE ASSESSEE HAVING BEEN MADE PARTICULARLY FOR A MA CHINE AND NOT TRANSFERABLE OR CAN BE FITTED WITH OTHER MACHINE/HA RDWARE. SO, EXPLANATION 4 TO SECTION 9 INSERTED BY FINANCE ACT, 2012 IS ONLY APPLICABLE TO TRANSFER OF ANY RIGHT TO USE COMPUTER SOFTWARE AND DOES NOT APPLY TO SOFTWARE THAT COMES WITH EMBEDDED SOFTWARE. 14. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, FINDI NG NO ILLEGALITY OR PERVERSITY IN THE IMPUGNED ORDER PASS ED BY LD. CIT (A), PRESENT APPEAL FILED BY THE REVENUE IS HEREBY DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 25 TH DAY OF MAY, 2018. SD/- SD/- (G.D. AGRAWAL) (KULDIP SINGH ) PRESIDENT JUDICIAL MEMBER DATED THE 25 TH DAY OF MAY, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-IX, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.