Deputy Commissioner of Income Tax v. WS Atking India (P.) Ltd.  61taxmann.com 372 (Bangalore Tribunal Bench C)
In a recent decision, the Hon’ble Bangalore Tribunal has held that the definition of royalty could not be applied to purchase of software which did not involve any commercial exploitation thereof and therefore, the same could not be disallowed under section 40(a)(ia) of the Act for non-deduction of TDS.
Facts of the case:
• The assessee had purchased software and claimed depreciation on the same.
• The Assessing Officer was of the view that the amount paid by the assessee for acquiring software was in the nature of royalty within the meaning of Explanation 2 to section 9(1)(vi) of the Act and accordingly the Assessing Officer disallowed the claim of the assessee for depreciation under section 40(a)(ia) of the Act for non-deduction of tax.
• The assessee contended that software has been included in definition of royalty only by amendment vide Finance Act, 2012. Although this amendment is retrospective, there is no liability that can be fastened to deduct tax at source.
• The assessee further placed reliance on various decisions including the decision of Infotech Enterprises Ltd. v. Addl. CIT  41 taxmann.com 364 (Hyderabad Tribunal) wherein it has been held that section 40(a)(ia) of the Act would not apply to disallow payments on which there was no liability to deduct tax but subsequently becomes taxable on account of a retrospective amendment.
Decision of the learned CIT(A)
• The learned CIT(A), by holding in favour of the assessee, held that during the period when the purchase was made, i.e., financial year 2008-09, the assessee did not have the benefit of the clarification brought about by the retrospective amendment that the payment is in the nature of royalty and consequently tax was to be deducted under section 194J of the Act. The law which existed as on the date when the payment for obtaining the software was made, had not categorically laid down that tax is required to be deducted.
• The above view has also been supported by the ratio of the following decisions:
o Kerala Vision Ltd. v. Asst. CIT  35 ITR (Trib) 81 (Cochin)
o Channel Guide India Ltd. v. Asst. CIT  20 ITR (Trib) 438 (Mum)
Decision of the Tribunal
• The Hon’ble Tribunal, upheld the order of the learned CIT(A), and by placing reliance on the decision of Hon’ble Delhi ITAT in the case of SMS Demag (P.) Ltd. v. Dy. CIT  38 SOT 496 and on the decision of Hon’ble Mumbai ITAT in the case of Sonic Biochem Extractions (P.) Ltd. v. ITO  59 SOT 4, held that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and consequently, cannot be considered as royalty.
• The Tribunal held that the assessee did not acquire any rights for making copies which generally could be considered within the definition of 'royalty'.
Explanation 2 to section 9(1)(vi) of the Act cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased the software which was delivered along with computer hardware for utilisation in its day-to-day business.
The aforesaid decision is based on the definition of royalty which existed before the amendment made vide Finance Act 2012 even though the amendment is retrospective in nature. It is pertinent to note here that even after the amendment in the definition of royalty, vide Finance Act 2012, various courts, including the Hon’ble Delhi High Court in the case of DIT v. Nokia Networks OY  358 ITR 259 and Hon’ble Delhi ITAT in the case of Convergys Customer Management Group Inc. v. ADIT  159 TTJ 42, have taken this view that purchase of software, being in the nature of copyrighted article, is not covered under the definition of royalty and thereby, not liable for tax deduction.
Sanjay Vasudeva Partner S.C. Vasudeva & Co. Chartered Accountants