Madras High Court
M/S. Financial Software And vs Commissioner Of Income Tax I on 3 September, 2021
Tax Case Appeal No.409 of 2015
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 03.09.2021
CORAM :
THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP
Tax Case Appeal No.409 of 2015
M/s. Financial Software and
Systems Private Limited,
“Saradha” Ground Floor,
No.42, Third Main Road,
Gandhi Nagar, Adyar,
Chennai. ... Appellant
Vs.
Commissioner of Income Tax I,
Chennai. ... Respondent
Tax Case Appeal filed under Section 260A of the Income Tax Act,
1961 against the order of the Income Tax Appellate Tribunal, Madras "A"
Bench, dated 05.06.2014 passed in I.T.A.No.2190/Mds/2013.
For Appellant : Mr.N.V.Balaji
For Respondent : Mr.Karthik Ranganathan
Senior Standing Counsel
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Tax Case Appeal No.409 of 2015
JUDGMENT
(Judgment was delivered by T.S. SIVAGNANAM, J.)
This Tax Case Appeal filed by the assessee under Section 260A of the
Income Tax Act, 1961 ('the Act' for brevity), is directed against the order of
the Income Tax Appellate Tribunal, Madras "A" Bench, dated 05.06.2014
passed in I.T.A.No.2190/Mds/2013 for the Assessment Year 2003-04.
2.The appeal has been admitted on 06.07.2015 on the following
substantial question of law :
“Whether on the facts and in the circumstances of the
case, the Appellate Tribunal was right in holding that
reopening the assessee under Section 147 of the Income Tax
Act, made by the Assessing Officer is valid?”
3.We have heard Mr.N.V.Balaji, learned counsel for the
appellant/assessee and Mr.Karthik Ranganathan, learned Senior Standing
Counsel for the respondent/Revenue.
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Tax Case Appeal No.409 of 2015
4.Though the appeal filed by the assessee pertains to a challenge to the
validity of reopening of the assessment for the relevant Assessment Year
under Section 147 of the Act, the question of law which is involved is with
regard to whether the assessee was liable to deduct Tax at Source in respect
of the Computer Software which was dealt with by them, procured from a
Non-Resident and sold in the Indian Market. This legal issue has been
decided by the Hon'ble Supreme Court in the case of Engineering Analysis
Centre of Excellence Private Limited v. Commissioner of Income Tax and
another reported in (2021) SCC Online SC 159.
5.In the said decision, there were four categories of cases as
mentioned below :
“4.The appeals before us may be grouped into four categories:
i) The first category deals with cases in which computer
software is purchased directly by an end-user, resident in
India, from a foreign, non-resident supplier or
manufacturer.
ii) The second category of cases deals with resident Indian
companies that act as distributors or resellers, by
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Tax Case Appeal No.409 of 2015
purchasing computer software from foreign, nonresident
suppliers or manufacturers and then reselling the same to
resident Indian end-users.
iii) The third category concerns cases wherein the
distributor happens to be a foreign, non-resident vendor,
who, after purchasing software from a foreign,
nonresident seller, resells the same to resident Indian
distributors or end-users.
iv) The fourth category includes cases wherein computer
software is affixed onto hardware and is sold as an
integrated unit/equipment by foreign, non-resident
suppliers to resident Indian distributors or end-users.”
6.After elaborately considering the entire issues, the Hon'ble Supreme
Court held as follows :
“172. Given the definition of royalties contained in
Article 12 of the DTAAs mentioned in paragraph 41 of this
judgment, it is clear that there is no obligation on the persons
mentioned in section 195 of the Income Tax Act to deduct tax
at source, as the distribution agreements/EULAs in the facts of
these cases do not create any interest or right in such
distributors/end-users, which would amount to the use of or
right to use any copyright. The provisions contained in the
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Tax Case Appeal No.409 of 2015
Income Tax Act (section 9 (1)(vi), along with explanations 2
and 4 thereof), which deal with royalty, not being more
beneficial to the assessees, have no application in the facts of
these cases.
173. Our answer to the question posed before us, is that
the amounts paid by resident Indian end-users/distributors to
non-resident computer software manufacturers/suppliers, as
consideration for the resale/use of the computer software
through EULAs/distribution agreements, is not the payment of
royalty for the use of copyright in the computer software, and
that the same does not give rise to any income taxable in India,
as a result of which the persons referred to in section 195 of
the Income Tax Act were not liable to deduct any TDS under
section 195 of the Income Tax Act. The answer to this question
will apply to all four categories of cases enumerated by us in
paragraph 4 of this judgment.
174. The appeals from the impugned judgments of the
High Court of Karnataka are allowed, and the aforesaid
judgments are set aside. The ruling of the AAR in Citrix
Systems (AAR) (supra) is set aside. The appeals from the
impugned judgments of the High Court of Delhi are
dismissed.”
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Tax Case Appeal No.409 of 2015
7.In the light of the above decision, the challenge to the reopening
proceedings has become academic. Nevertheless, since the Tribunal has
upheld the validity of the reopening proceedings, we have to necessarily
decide this case against the Revenue and in favour of the assessee, or else,
the reopening proceedings may continue to remain valid, though the basis for
reopening was held to be unsustainable, as the question of law has been
answered in favour of the assessee in the case of Engineering Analysis
Centre of Excellence Private Limited (supra).
8.Therefore, for such reasons, this Tax Case Appeal is allowed and the
reopening is held to be unsustainable in law in the light of the decision
rendered by the Hon'ble Supreme Court in the case of Engineering Analysis
Centre of Excellence Private Limited (supra). For such reason, the
substantial question of law stands answered accordingly. No costs.
(T.S.S., J.) (S.S.K., J.)
03.09.2021
mkn (9/14)
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Tax Case Appeal No.409 of 2015
Internet : Yes
Index : Yes / No
To
The Commissioner of Income Tax-I,
Chennai.
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Tax Case Appeal No.409 of 2015
T.S. SIVAGNANAM, J.
and
SATHI KUMAR SUKUMARA KURUP, J.
mkn
Tax Case Appeal No.409 of 2015
03.09.2021
(9/14)
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