SYSTEMATICS INFOTECH P.LTD, MUMBAI V. ITO 7(2)(4), MUMBAI

ITA 6468/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3439 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 31-08-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 23-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VISHWAS JADHAV
• Assessee Lawyers: KERAL S SHAH
• Keywords: Cost of acquisition
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL E BE NCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER / I .TA NO. 6468/MUM/2012 ( / ASSESSMENT YEAR: 2009-10 M/S. SYSTEMATICS INFOTECH PVT. LTD., 249, KIRPA NIWAS, NEXT TO PREMIER HIGH SCHOOL, SION EAST, MUMBAI-400 022 / VS. THE ITO - 7(2)(4), MUMBAI ./ ./ PAN/GIR NO. AAFCS 2583Q ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI KERAL S. SHAH / RESPONDENT BY: SHRI VISHWAS JADHAV / DATE OF HEARING :14.03.2016 ! / DATE OF PRONOUNCEMENT :18.05.2016 / O R D E R PER C.N. PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF THE LD. CIT(A)-13, MUMBAI DATED 18.7.2012 PERTAINING TO AS SESSMENT YEAR 2007-08. 2. THE ONLY ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT WHETHER THE PAYMENT MADE TO PURCHASE OF SOFTWARE IS ROYALTY OR TOWARDS PURCHASE OF GOODS. ITA NO.6468/M/12 2 3. BRIEF FACTS ARE THAT THE ASSESSEE COMPANY IS ENG AGED IN THE BUSINESS OF DEALERS IN COMPUTER PERIPHERALS FILED I TS RETURN OF INCOME ON 28.10.2007 DECLARING INCOME OF RS. 13,03,680/-. THE ASSESSMENT WAS COMPLETED U/S. 143(3) ON 12.12.2009 DETERMINING INCOME AT RS. 30,99,610/-. WHILE COMPUTING THE INCOME, THE ASSESS ING OFFICER MADE DISALLOWANCE OF RS. 17,95,687/- U/S. 40(A)(I) ON AC COUNT OF PURCHASE OF SOFTWARE. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PURCHASE OF SOFTWARE IS ESSENTIALLY PURCHASE OF COPY RIGHT , THEREFORE PAYMENT MADE AGAINST THE PURCHASES IS IN THE NATURE OF ROYA LTY AND THIS WILL ATTRACT TDS U/S. 194J OF THE ACT. 4. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) AND THE CIT(A) HELD THAT SOFTWARE PURCHASE IS NOT A REAL P RODUCT BUT ONLY A LICENCE/RIGHT GIVEN TO THE ASSESSEE TO USE THE SAI D SOFTWARE. HE HAS HELD THAT ASSESSEE HAS NO RIGHT TO RE-SELL THE SAID SOFTWARE TO ANY OTHER PERSON IN THE OPEN MARKET. THEREFORE, HE CON CLUDED THAT IT IS ONLY A LICENCE TO USE THE SOFTWARE FOR THE BUSINESS OF THE ASSESSEE AND HENCE THE PURCHASE OF SOFTWARE AMOUNTS TO ACQUISITI ON OF INTANGIBLE ASSETS IN THE FORM OF RIGHTS/LICENCES. 5. THE LD. COUNSEL FOR THE ASSESSEE APPEARING BEFOR E US SUBMITS THAT THE FINDINGS OF THE LD. CIT(A) THAT ASSESSEE I S NOT SELLING THE SOFTWARE AND USING THEM IN ITS BUSINESS IS FACTUALL Y WRONG. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO PAGE-1 OF THE ASSESSMENT ORDER SUBMITS THAT IT IS THE FINDING OF THE ASSESSING OFF ICER THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE COMPANY HAS TRADE D THE PURCHASED SOFTWARE. THEREFORE, HE SUBMITS THAT IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS INTO TRADING OF SOFTWARE. THE LD. COUNSEL FOR ITA NO.6468/M/12 3 THE ASSESSEE SUBMITS THAT THE ASSESSEE PURCHASES BR ANDED SOFTWARE IN THE OPEN MARKET AND SELLS THEM TO ITS CUSTOMERS ALONGWITH COMPUTER PERIPHERALS. THE LD. COUNSEL FOR THE ASSE SSEE SUBMITS THAT SINCE THE ASSESSEE IS PURCHASING THE BRANDED SOFTWA RE AND SELLING THE SAME TO ITS CUSTOMERS, THE PURCHASE COST PAID ON SU CH SOFTWARE IS NOT ROYALTY. THEREFORE, HE SUBMITS THAT SINCE THE PAYM ENT DOES NOT FALL WITHIN THE DEFINITION OF ROYALTY, THE QUESTION OF T DS U/S. 194J DOES NOT ARISE CONSEQUENTLY NO DISALLOWANCE U/S. 40(A)(I ) IS WARRANTED. 6. THE LD. COUNSEL FOR THE ASSESSEE PLACING RELIANC E ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF PRINCIP AL COMMISSIONER OF INCOME TAX VS M.TECH INDIA PVT. LTD. (2016) 95 CCH 0013 SUBMITS THAT IF THE PAYMENTS WERE MADE FOR PURCHASE OF SOFT WARE AS PRODUCT, THE CONSIDERATION PAID COULD NOT BE CONSIDERED AS R OYALTY. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITS THAT EVEN IF IT IS ASSUMED THAT THE PAYMENT AMOUNTS TO ROYALTY, THE PROVISIONS OF SEC. 40(A)(IA) HAVE NO APPLICATION SINCE THE DEFINITION OF ROYALTY AS REFERRED TO IN SEC. 40(A)(I) READ WITH EXPLANATION 2 TO CLAUSE (V I) OF SUB-SECTION (1) OF SEC. 9 IS NOT APPLICABLE SINCE THIS EXPLANATION IS NOT REFERRED TO IN THE PROVISIONS OF SEC. 40(A)(I) OF THE ACT. FOR THI S PROPOSITION, HE PLACES RELIANCE ON THE DECISION OF MUMBAI BENCH IN THE CASE OF SONATA INFORMATION TECHNOLOGY LTD., VS DCIT IN ITA NO. 1507/M/2012 DATED 7.9.2012 REPORTED IN (2012-TIOL-7 21-ITAT- MUM). 7. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY S UPPORTS THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.6468/M/12 4 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE ASSESSING OFFICER AND LD. CIT(A) AND THE CASE LAWS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE. THE ASSESSING OF FICER WHILE COMPLETING THE ASSESSMENT DISALLOWED COST FOR PURCH ASE OF SOFTWARE AMOUNTING TO RS. 17,95,687/- U/S. 40(A)(I) OF THE A CT FOR THE REASON THAT ASSESSEE DID NOT DEDUCT TDS ON SUCH PAYMENTS. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PROVISIONS OF SEC. 194J ARE ATTRACTED TO SUCH PAYMENTS SINCE THE PAYMENTS ACCORDING TO HI M ARE NOTHING BUT ROYALTY SINCE PURCHASE OF SOFTWARE ESSENTIALLY PURCHASE OF COPY RIGHT AND THEREFORE THE PAYMENTS WOULD FALL UNDER T HE DEFINITION OF ROYALTY AND THE PROVISIONS OF SEC. 194J ARE ATTRACT ED. WE FIND FROM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER IS NOT DISPUTING THE FACT THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF TR ADING I.E. BUYING AND SELLING OF COMPUTER RELATED PRODUCTS. HE ALSO OBSE RVED IN THE ASSESSMENT ORDER THAT DURING THE YEAR UNDER CONSIDE RATION, THE ASSESSEE COMPANY HAS TRADED THE PURCHASED SOFTWARE. THEREFORE NOTHING HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT THE ASSESSEE HAS PURCHASED SOFTWARE FOR ITS OWN USE OR THERE IS NO F INDING OF THE ASSESSING OFFICER THAT ASSESSEE HAS ACQUIRED ANY RI GHT TO USE SOFTWARE BY THE ASSESSEE ITSELF AND IT CANNOT BE RESOLD. RA THER HE HAS ACCEPTED THAT THE ASSESSEE IS INTO TRADING OF SOFTWARE. THE LD. CIT(A)S FINDING THAT ASSESSEE PURCHASED SOFTWARE FOR ITS OWN BUSINE SS IS ALSO NOT CORRECT AND IT IS NOT BORN OUT FROM RECORD AND TH EREFORE WE ARE AT LOSS TO UNDERSTAND AS TO HOW THE PURCHASE AND SALE OF BRANDED SOFTWARE BY THE ASSESSEE WOULD FALL UNDER THE DEFIN ITION OF ROYALTY. THE DELHI HIGH COURT IN THE CASE OF M.TECH INDIA PVT. LTD (SUPRA) CONSIDERED MORE OR LESS SIMILAR SITUATION WHERE THE ASSESSEE PURCHASED AND SOLD SOFTWARE. IN OTHER WORDS, ASSES SEE HAS TRADED IN ITA NO.6468/M/12 5 SOFTWARE PRODUCTS. THE HONBLE HIGH COURT AFTER C ONSIDERING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F TATA CONSULTANCY SERVICES VS STATE OF ANDHRA PRADESH (2 71 ITR 401) HELD THAT PAYMENTS MADE FOR PURCHASE OF SOFTWARE AS A PR ODUCT IN THE INDIAN MARKET CANNOT BE CONSIDERED AS ROYALTY OBSER VING AS UNDER: IN THE CASES WHERE AN ASSESSEE ACQUIRES THE RIGHT TO USE A SOFTWARE, THE PAYMENT SO MADE WOULD AMOUNT TO ROYAL TY. HOWEVER, IN THE CASES WHERE THE PAYMENTS ARE MADE FOR PURCHA SE OF SOFTWARE AS A PRODUCT, THE CONSIDERATION PAID CANNOT BE CONS IDERED 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 SA LE OF GOODS. IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH : (2004) 271 ITR 401(SC) , THE SUPREME COURT EXAMINED THE TRANSACTION RELATING TO THE PURCHASE AND SALE O F SOFTWARE RECORDED ON A CD IN THE CONTEXT OF THE ANDHRA PRAD ESH GENERAL SALES TAX ACT. THE COURT HELD THE SAME TO BE GOODS WITHIN THE MEANING OF SECTION 2(B) OF THE SAID ACT AND CONSEQU ENTLY EXIGIBLE TO SALES TAX UNDER THE SAID ACT. CLEARLY, THE CONS IDERATION PAID FOR PURCHASE OF GOODS CANNOT BE CONSIDERED AS ROYALTY . THUS, IT IS NECESSARY TO MAKE A DISTINCTION BETWEEN THE CASES W HERE CONSIDERATION IS PAID TO ACQUIRE THE RIGHT TO USE A PATENT OR A COPYRIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIR E PATENTED OR A COPYRIGHTED , THE CONSIDERATION PAID WOULD HAVE T O BE TREATED AS PAYMENT FOR PURCHASE OF THE PRODUCT RATHER THAN CON SIDERATION FOR USE OF THE PATENT OR COPYRIGHT. A COORDINATE BENCH OF THIS COURT HAS ALSO EXPRES SED A SIMILAR VIEW IN THE CASE OF INFRASOFT (SUPRA). IN THAT CASE, THE REVENUE SOUGHT TO TAX THE RECEIPTS ON SALE OF LICEN SING OF CERTAIN SOFTWARE ON ROYALTY. THE TRIBUNAL HELD THAT THERE WAS NO TRANSFER OF RIGHTS IN RESPECT OF THE COPYRIGHT HELD BY THE A SSESSEE IN THE SOFTWARE AND IT WAS A CASE OF MERE TRANSFER OF COPY RIGHTED ARTICLE. THIS COURT CONCURRED WITH THE TRIBUNAL AND HELD THA T WHAT WAS TRANSFERRED WAS NOT COPYRIGHT OR THE RIGHT TO USE A COPYRIGHTED MATERIAL AND THAT DID NOT GIVE RISE TO ANY ROYALTY INCOME. IN SOFAR AS THE RELIANCE PLACED BY THE REVENUE ON THE DECISION OF THE KARNATAKA HIGH COURT IN SAMSUNG ELE CTRONICS CO.(SUPRA) IS CONCERNED, A COORDINATE BENCH OF THIS COURT IN ITA NO.6468/M/12 6 INFRASOFT (SUPRA) HAS UNEQUIVOCALLY EXPRESSED ITS V IEW THAT IT WAS NOT IN AGREEMENT WITH THAT DECISION. THUS, THE SAI D DECISION IS OF NO ASSISTANCE TO THE REVENUE IN THIS CASE. IN OTHER CASE, DYNAMIC VERTICAL SOFTWARE INDIA P. LTD.(SUPRA), THIS COURT HAD REITERATED THE VIEW THA T PAYMENT MADE BY A RESELLER FOR THE PURCHASE OF SOFTWARE FOR SALE IN THE INDIA MARKET COULD BY NO STRETCH BE CONSIDERED AS ROYALTY . RESPECTFULLY FOLLOWING THE SAID DECISION, WE ALLOW THE GROUNDS OF APPEAL OF THE ASSESSEE AND HOLD THAT THE PAYMENT S MADE FOR PURCHASE OF SOFTWARE BY THE ASSESSEE DOES NOT FALL UNDER ROYALTY SO AS TO ATTRACT PROVISIONS OF SEC. 194J R.W. SEC. 40( A)(I) OF THE ACT, SINCE ASSESSEE PURCHASED SOFTWARE AS A PRODUCT AND SOLD I N THE MARKET BUT DID NOT ACQUIRE ANY RIGHT TO USE SUCH SOFTWARE FOR ITSELF. THUS, WE DELETE THE DISALLOWANCE MADE U/S. 40(A)(I) OF THE A CT. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MAY, 2016. SD/- SD/- (RAMIT KOCHAR) (C.N. PRASAD ) / ACCOUNTANT MEMBER $ % /JUDICIAL MEMBER MUMBAI; ( DATED : 18 TH MAY, 2016 . % . ./ RJ , SR. PS ITA NO.6468/M/12 7 !'#$#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ) ( ) / THE CIT(A)- 4. ) / CIT 5. *+ ,%%-. , -.! , / DR, ITAT, MUMBAI 6. , /01 / GUARD FILE. / BY ORDER, *% //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI