Income Tax Appellate Tribunal - Delhi
Ito, New Delhi vs M/S. Mikroz Infosecurity Pvt. Ltd., New ... on 25 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'E' : NEW DELHI)
BEFORE HON'BLE PRESIDENT, SHRI G.D. AGRAWAL
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.5691/Del./2014
(ASSESSMENT YEAR : 2010-11)
ITO, Ward 6 (4), vs. M/s. Mikroz Infosecurity Pvt. Ltd.,
New Delhi. 403, DLF Centre, Greater Kailash-II,
New Delhi - 110 048.
(PAN : AACCG0375M)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Anoop Sharma, Advocate
Shri Dhurv Dua, CA
REVENUE BY : Shri S.R. Senapti, Senior DR
Date of Hearing : 16.05.2018
Date of Order : 25.05.2018
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The appellant, Income-tax Officer, Ward 6 (4), New Delhi (hereinafter referred to as 'the Revenue') by filing the present appeal, sought to set aside the impugned order dated 20.08.2014 passed by Ld. CIT (Appeals)-IX, New Delhi qua the assessment year 2010-1 on the grounds inter alia that :-
"1. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition made by the AO u/s 40(a)(ia) & 40(a)(i) amounting to Rs.1,73,72,817/- on account of non-deduction of TDS u/s 194J of the I.T Act on the payments made for obtaining licenses of the software?2 ITA No.5691/Del./2014
2. Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) has not given any cogent reasoning as to how the payment towards firewall & security software should not be treated as royalty as per Explanation 2 to Section 9(1) (vi) of the Act?
3. Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) has incorrectly applied the decision of Hon'ble Delhi Court decision in the case of CIT Vs. Dynamic Vertical Software India Pvt. Ltd. Even though the taxability of software was clarified by legislature by Finance Act, 2012, subsequent to the said decision?
4. Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) has erred in ignoring the fact that assessee itself was deducting tax on certain similar payments and, therefore was fully aware of its liability to deduct tax under the law?
5. Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) failed to appreciate the CBDT instruction vide Notification No. 21/2012 [F.No.142/10/2012-SO (TPL)] S.O. 1323(E), dated 13.06.2012, was meant to grant concession to the assessee and does not anyway restrict the application of law. CBDT has clarified that only in particular circumstances, TDS uls.194J or 195 on payment of royalties should not be made?
6. That the order of the Ld.CIT(A) is erroneous and is not tenable on facts and in law.
7. That the grounds of appeal are without prejudice to each other."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : The assessee is into the business of sale of software and services. Assessing Officer noticed from the financial statement of the assessee that it has purchased software worth Rs.1,73,72,817/- from various parties including associate concerns but has not deducted tax at source (TDS) under section 194J of the Income-tax Act, 1961 (for short 'the Act'). 3 ITA No.5691/Del./2014 Disagreeing with the contentions raised by the assessee that out of amount of Rs.1,73,72,817/-, an amount of Rs.1,52,60,159/- pertains to purchase of hardware and the same is in the nature of goods purchases by the assessee and not a software, and as such, TDS is not deductible, AO proceeded to make disallowance of the goods purchased amounting to Rs. 1,73,72,817/- on account of non-deduction of tax by invoking Explanation 4 to section 9(1)(vi) of the Act.
3. Assessee carried the matter by way of appeal before the ld. CIT (A) who has deleted the addition in question by partly allowing the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
4. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
5. Undisputedly, the assessee has made purchases of hardware primarily Firewalls / VPNs under the brand name Fortigate and Neo Accel SGX. It is also not in dispute that the software was embedded with the hardware purchased by the assessee. It is also not in dispute that the assessee is a trader and the net user is the purchaser who has purchased the hardware embedded with 4 ITA No.5691/Del./2014 software from the assessee. It is the case of the assessee that out of amount of Rs.1,73,72,817/- disallowed by the AO, Rs.1,52,60,159/- pertains to purchase of hardware and the assessee has not retained any copyright but sold the same as received from the manufacturer.
6. In the backdrop of the aforesaid facts and circumstances of the case, arguments addressed by the ld. AR for the parties to the appeal and the respective case laws relied upon and orders passed by the Revenue authorities below, the sole question arises for determination in this case is :-
"as to whether software embedded in the hardware purchased by the assessee and the payment made for purchase of such software can be considered as payment towards royalty so as to attract provisions contained u/s 194J of the Act?"
7. First of all, it is not in dispute that the assessee is a trader of the computer software and services and the net user of hardware and software sold by the assessee is the purchaser who has purchased the same from the assessee. It is also not in dispute that the assessee does not retain any copyright nor does it acquire any such copyright, rather sell the goods after purchasing the same from manufacturer and distributor.
8. When the hardware purchased and sold includes the embedded software is billed as goods with DVAT/CST levied on 5 ITA No.5691/Del./2014 its price and there is no levy of service tax on its price and the same has been billed to the customer in a consolidated manner; that there is no client or client licensing component of the hardware in question that needs to be installed at desktop or end-user PC, laptops, Servers; that it is neither procuring the hardware from the original manufacturer nor importing this hardware directly rather purchasing the same from resident distributor for resale to its customers payment made for purchase of such hardware embedded with software cannot be treated as payment for royalty, as all these contentions raised by the assessee remained uncontroverted by the AO.
9. So, when the hardware embedded with network security equipment (Firewalls / VPNs) have been purchased by the assessee having no copyright nor having right to transfer the copyright, the software was not having any separate entity. Moreover, hardware embedded with software is billed to the customer through a single invoice classified as goods with DVAT/CST leviable on sale price, the same cannot be put under the category of software. The payment thereof cannot be considered as payment towards royalty to attract the provisions contained u/s 194J.
10. Identical issue in controversy has been settled by the Hon'ble Delhi High Court in case cited as CIT vs. Dynamic 6 ITA No.5691/Del./2014 Vertical Software India (P.) Ltd. - 332 ITR 222 (Delhi) wherein it is held that, "when the assessee has been purchasing software from Microsoft and sold it further in Indian market, by no stretch of imagination, it can be treated as royalty." Hon'ble Delhi High Court in case cited as Pr.CIT vs. M. Tech India (P.) Ltd. - 381 ITR 31 (Delhi) held that, "where payments were made for purchase of software as a product considering paid would have to be treated as payment for purchases of software rather than consideration for use or right to use of software so as to be termed as royalty."
11. So, in view of the law laid down by Hon'ble High Court in cases cited as CIT vs. Dynamic Vertical Software India (P.) Ltd. and Pr.CIT vs. M. Tech India (P.) Ltd. that when assessee has purchased hardware embedded with software component for resale without retaining any copyright in the goods, it is a copyrighted article and does not attract the provisions contained u/s 194J.
12. So far as the question of applicability of CBDT Instructions vide Notification No.21/2012 (F.No.142/10/2012-SO (TPL)] S.O. 1323 (E) dated 13.06.2012 is concerned, the same is applicable w.e.f 01.07.2012 and is not applicable to the year under assessment. Moreover, the cost of hardware and software 7 ITA No.5691/Del./2014 embedded therein is not separable. The addition made by the AO has been rightly deleted by the ld. CIT (A).
13. So far as question of applicability of Explanation 4 to section 9(1)(vi) is concerned, the same is also not applicable to the case at hand because the software embedded in the hardware purchased by the assessee having been made particularly for a machine and not transferable or can be fitted with other machine/hardware. So, Explanation 4 to section 9 inserted by Finance Act, 2012 is only applicable to transfer of any right to use computer software and does not apply to software that comes with embedded software.
14. In view of what has been discussed above, finding no illegality or perversity in the impugned order passed by ld. CIT (A), present appeal filed by the Revenue is hereby dismissed.
Order pronounced in open court on this 25th day of May, 2018.
sd/- sd/-
(G.D. AGRAWAL) (KULDIP SINGH)
PRESIDENT JUDICIAL MEMBER
Dated the 25th day of May, 2018
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-IX, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.