Recently, in CIT v. M/s.Vinzas Solutions India Private Limited, the division bench of the Madras High Court held that the consideration on the sale and purchase of computer software by a dealer cannot be treated as “royalty” under the provisions of the Income Tax Act and therefore, TDS provisions under s. 194 is not applicable to such payments.
The assessee, a dealer in computer software, filed its income tax returns for the relevant assessment year. The AO, by invoking section 40(a)(ia) of the Income Tax Act disallowed the consideration for the purchase of computer software by holding that the same would constitute “royalty” under s. 9(i)(iv) of the Income Tax Act and therefore, tax ought to have been deducted at source in accordance with the provisions of section 194J of the Income Tax Act. On second appeal, the Tribunal reversed the assessment order.
The bench comprising of Justice Satyanarayanan and Justice Anita Sumant found that the assessee in the present case is a dealer engaged in buying and selling software in the open market. The transaction in question is thus one of purchase and sale of a product and nothing more.It was further noted that the provisions of section 9[1][vi] dealing with and defining ‘Royalty’ cannot be made applicable to a situation of outright purchase and sale of a product.
Citing a catena of decisions, the bench noted that “Courts have consistently noted the difference between a transaction of sale of a ‘copyrighted article’ and one of ‘copyright’ itself.”
“The provisions of section 9(1)(vi) of the Income Tax Act as a whole, would stand attracted in the case of the latter and not the former. Explanations 4 and 7 relied by the authorities would thus have to be read and understood only in that context and cannot be expanded to bring within its fold transaction beyond the realm of the provision. The Tribunal has relied on the decision of the Division Bench of the Delhi High Court in the case of The Principal Commissioner of Income Tax-6 V. M.Tech India Pvt Ltd, which supports our view as above.”
Read the full text of the Judgment below.
