Import of Shrink wrapped software--Not subject to Tax Withholding

One more favorable decision on no tax withholding on import of software. Recently a similar decision was pronounced in Sonata Information Technology case by ITAT..

THE ASST CIT,CIRCLE 12(4), BANGALORE
Vs
M/s RATIONAL SOFTWARE CORPORATION (INDIA) PVT LTD# 12, SUBRAMANYA ARCADE, BANNERGHATTA MAIN ROADBANGALORE-560 029

These appeals by the Revenue relate to the assessment years 2000-01 to 2002-03 and since they involve a single common issue, they were heard together and are also disposed of by a single order.

2. The respondent-assessee is a company engaged in development and marketing of software. While completing the assessments, the Assessing Officer noticed that the assessee had made the payments to M/s. Rationale Software, Netherlands towards purchase of Software.

3. The Assessing Officer took the view that the payments amounted to royalty and since the assessee did not deduct tax from the same, it was not allowable as a deduction. He relied on section 40(a)(i) of the Income-tax Act, which says that any royalty which is payable outside India or in India to a non-resident is allowable as a deduction in computing the business income only if tax has been deducted at source and paid to the Government as required by Chapter XVII-B of the Act. He accordingly proposed to disallow the aforesaid payments. The assessee pointed out that the Tribunal Bangalore Bench has in proceedings u/s. 195 held for the very same assessment years that the assessee was not liable to deduct tax from the aforesaid payments u/s. 195 of the Act as the payments did not represent royalty, but represented purchase price of goods or articles. Relying on this order, the assessee contended that the payments should be allowed as a deduction. The Assessing Officer remarked that the order of the Tribunal has not been accepted by the department and a further appeal has been preferred to the High Court on the ground that the judgment of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh (271 ITR 401), which was relied upon by the Tribunal, was rendered in the context of sales-tax law and was not applicable to the present case. He accordingly disallowed the above payments in the assessments for all the three years.
4. On appeal, the assessee questioned the reassessments on the ground of lack of jurisdiction as also challenged the merits of the disallowance. The CIT (Appeals) dismissed the ground relating to the jurisdiction to reopen the assessments. However, as regards the merits of the disallowance, he agreed with the assessee and following the order of the Tribunal in the assessee's own case, directed the Assessing Officer to allow the payments as a deduction without applying section 40(a)(i) of the Act.

5. The Revenue is in appeal. We find that the issue stands squarely covered in favour of the assessee by the order of the Tribunal dated 4.5.2005 in the assessee's own case in ITA Nos.3038 to 3040/Bang/2004 for the assessment years 2000-01 to 2002-03. This order has also been followed by the Tribunal in the assessee's own case for the assessment years 2000-01 to 2003-04 in ITA Nos. 58 to 61/Bang/2005, while dealing with the assessee's liability to pay interest u/s. 201(1) read with section 201(1A) of the Act. It has been held that since there was no liability to deduct tax at source, there was no question of the assessee being treated as an assessee in default and charged interest. The Tribunal has passed an order on 11.1.2008 in ITA No. 172/Bang/2007 for the A.Y. 2003-04 in which following its earlier orders cited supra, the Assessing Officer has been directed to allow the remittance of the purchase price as a deduction, on the ground that it does not represent royalty, but represents cost of purchases. Thus, the issue stands covered in favour of the assessee by the aforesaid orders by the Tribunal passed in the assessee's own case. It is common ground that the facts for the years under appeal are the same. Therefore, respectfully following these orders, we uphold the orders of the CIT(Appeals) deleting the disallowance for all the three years made by invoking section 40(a)(i) of the Act. The appeals of the Revenue are dismissed with no order as to costs.