The Commissioner Of Income Tax Company Circle-3 [4] Chennai v. M/S.vinzas Solutions India Private Limited W-97, New

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 04.01.2017 CORAMTHE HONOURABLE MR. JUSTICE M.SATHYANARAYANANANDTHE HONOURABLE DR. JUSTICE ANITA SUMANTH Tax Case Appeal No.861/2016 The Commissioner of Income TaxCompany Circle-3 [4]Chennai...Appellant/RespondentVs M/s.Vinzas Solutions India Private LimitedW-97, New No.23, Second Street,Anna Nagar, Chennai 600 040.PAN:AACCV 7736 K..Respondent/Appellant Prayer:-Appeal Memorandum preferred under section 260A ofthe Income Tax Act, 1961 against the order of the Income TaxAppellate Tribunal 'B' Bench, Chennai, dated 15.06.2016 inITA.No.2048/MDS/2015.Against the order of the Commissioner of Income-Tax(Appeals)II, Chennai-34 dt.14.9.15 and made in ITA.No.123/14-15 CIT(A)II for the Assessment year 2011-12 and against theorder of the Assistant Commissioner of Income-Tax, CompanyCircle-III(4),Chennai-34dt.21.3.14andmadeinGIR.No./PAN. for the Assessment year 2011-12.For Appellant: Mr.M.Swaminathan The Department / Income Tax challenges the order of theIncomeTaxTribunaldated15.06.2016madeinITA.No.2048/MDS/2015 on the following substantial questions oflaw:- “(1) Whether on the facts and in thecircumstances of the case the Tribunal isjustified in holding that the provisions ofTax Deducted at Source will not be applicablein the asessee case by overlooking theprovisions of explanation 2, 4 and 5 tosection 9[1][vi] of the Income Tax Act, 1961? https://hcservices.ecourts.gov.in/hcservices/ (2)Whether on the facts and in thecircumstance of the case the Tribunal wascorrect in deleing the disallowance u/s.40(a)(ia) without considering that the paymentswere in the nature of Royalty subject to TDSunder section 194J?” 2The admitted facts are as follows:- [a]The assessee / respondent is a dealer inComputer Software, having purchased the same from variouscompanies such as Redington India Limited, Ingram Micro[India] Limited etc. In the course of assessment, a dis-allowance was effected in terms of 40(a)(ia) of the IncomeTax Act, 1961, [hereinafter referred to as the Act] by theAssessing Officer, on the ground that consideration forpurchase was of the nature of “Royalty” and tax ought to havebeen deducted at source in accordance with the provisions ofsection 194J of the Act. [b]The Appeal of the Assessee before theCommissioner of Income Tax [Appeals] was rejected, confirmingthe order of assessment invoking the provisions of section 40(a)(ia) of the Act to the effect that the consideration paidwould come within the ambit of the definition of 'Royalty'under Explanations 4 and 5 of section 9(1)(vi) of the Act. [c]The matter was further assailed in Appeal bythe assessee before the Income Tax Appellate Tribunal, whichreversed the order of the lower authorities. Hence, thepresent Appeal by the Income Tax Department.3It is an admitted fact that the assessee in thepresent case is a dealer engaged in buying and sellingsoftware in the open market. The transaction in question isthus one of purchase and sale of a product and nothing more.The explanation tendered before the officer at the time ofassessment is thus:- “Agreement:- “Software purchased is that of AutoDeskAsia Pte Ltd. The assessee company has beenappointed by AutoDestk, the owner of theSoftware brought and sold by the assesseecompany, as Value Added Reseller [Dealer] topurchase, market, distribute, sell and supportthe authorised products made available byAutoDesk. The above principal company hasappointed companies like Redington, IngramMicro as distributors. The assessee company procures orders forthe AutoDesk authorised produces from the endusers and place back to back orders on thedistributors for supply of customized softwarehttps://hcservices.ecourts.gov.in/hcservices/meant only for that particular customer. The “Agreement:- “Software purchased is that of AutoDeskAsia Pte Ltd. The assessee company has beenappointed by AutoDestk, the owner of theSoftware brought and sold by the assesseecompany, as Value Added Reseller [Dealer] topurchase, market, distribute, sell and supportthe authorised products made available byAutoDesk. The above principal company hasappointed companies like Redington, IngramMicro as distributors. The assessee company procures orders forthe AutoDesk authorised produces from the endusers and place back to back orders on thedistributors for supply of customized softwarehttps://hcservices.ecourts.gov.in/hcservices/meant only for that particular customer. The software,boughtfromtheResidentdistributors, being customized for the endusers who has placed orders on the assesseecompany it cannot be unsed by another customeror by the assessee company. The right to usethe software lies absolutely with the end useonly the assessee company does not acquire anyright in the software whatsoever whether touse, modify, download or install. Theagreement between the principal and theassessee company clearly mentions in clause 2as to what the VAR is authorized to do. Clause 5 of the Confidentiality and Non-Disclosure Agreement excludes the following:- 1. Receiving Party [Assessee Company]acquires no rights or licenses in theintellectualpropertyofAutoDeskincluding but not limited to Patents,Trademarks, Copyrights or Service marksunder this agreements or throughdisclosures hereunder......” 2. AutoDesk hereby grants Receiving Party anon-exclusive, personal, limited, non-assignable, non-sub-licensable, ROYALTY-FREE license to use a single copy of anysoftware provided at Receiving Party'sprincipal office in a secure location,solely in connection with and for purposeof evaluation and providing feedback.” 4We are of the view that the provisions ofsection 9[1][vi] dealing with and defining 'Royalty' cannot bemade applicable to a situation of outright purchase and saleof a product. The Corpus Juris Secundum understands Royaltythus: “The word 'royalty' means a share of theproduct or profit reserved by the owner forpermitting another to use the property, theshare of the production or profit paid theowner ; a share of the product or proceedstherefrom reserved to the owner for permittingthe another to use the property ; the share ofthe produce reserved to the owner forpermitting another to exploit and use theproperty ; a share of the profit, reserved bythe owner for permitting another to use theproperty ; the amount reserved or the rentalto be paid the original owner of the wholeestate.”https://hcservices.ecourts.gov.in/hcservices/ 5The Madras High Court in CIT Vs. NeyveliLignite Corporation Ltd., reported in 243 ITR 458 states thusexplaining the concept of Royalty:- “The term “'royalty' normally connotesthe payment made by a person who has exclusiveright over a thing for allowing another tomake use of that thing which may be eitherphysical or intellectual property or thing.The exclusivity of the right in relation tothe thing for which royalty is paid should bewith the grantor of that right. Mere passingof information concerning the design of amachine which is a tailor-made to meet therequirement of a buryer does not by itselfamount to transfer of any right of exclusiveuser, so as to render the payment madetherefor being regarded as 'royalty' . 5The Madras High Court in CIT Vs. NeyveliLignite Corporation Ltd., reported in 243 ITR 458 states thusexplaining the concept of Royalty:- “The term “'royalty' normally connotesthe payment made by a person who has exclusiveright over a thing for allowing another tomake use of that thing which may be eitherphysical or intellectual property or thing.The exclusivity of the right in relation tothe thing for which royalty is paid should bewith the grantor of that right. Mere passingof information concerning the design of amachine which is a tailor-made to meet therequirement of a buryer does not by itselfamount to transfer of any right of exclusiveuser, so as to render the payment madetherefor being regarded as 'royalty' . 6Courts have consistently noted the differencebetween a transaction of sale of a 'copyrighted article' andone of 'copyright' itself. See Tata Consultancy Services Vs.State of Andhra Pradesh [2004] 271 ITR 401 ; SundwigerEMFG [2004] 266 ITR 110 ; Dassault Systems K.K., In Re,(2010) 229 CTR 125 ; ISRO Satellite Centre , InRe [2008] 307 ITR 59 ; and Asia SatelliteTelecommunications Co. Vs. DIT [2011] 332 ITR 340 [Delhi]. 7The provisions of section 9(1)(vi) as a whole,would stand attracted in the case of the latter and not theformer. Explanations 4 and 7 relied by the authorities wouldthus have to be read and understood only in that context andcannot be expanded to bring within its fold transaction beyondthe realm of the provision. The Tribunal has relied on thedecision of the Division Bench of the Delhi High Court in thecase of The Principal Commissioner of Income Tax-6 V. M.TechIndia Pvt Ltd, which supports our view as above. It isbrought to our notice that the decision of the Delhi HighCourt has not been accepted by the Department and an SLP ispending. Be that as it may, in view of the facts andcircumstances as observed above, we have no hesitation indismissing the Departmental Appeal answering the questions oflaw in favour of the assessee and against the Revenue. Nocosts.Sd/- Asst.Registrar (CS IV ) Sub Asst. Registrar To The Commissioner of Income TaxCompany Circle-3 [4]Chennai. +1 cc to Mr.M.Swaminathan, advocate,sr.517 nmi(co)krd 13/2 TCA.No.861/2016