Pre-2012 software licence payments are not royalty subject to TDS under Section 194J.

The Revenue appealed against the Income Tax Appellate Tribunal’s order for AY 2008–09.

The dispute concerned (i) the assessee’s apportionment of membership fees received from time-share members over the membership period and (ii) its failure to deduct tax at source on payments to resident suppliers for software licence renewals, which the Assessing Officer disallowed under Section 40(a)(ia) by treating the payments as subject to Section 194J

The Tribunal had decided the software issue in the assessee’s favour based on Merilyn Shipping and Transports v. ACIT; the High Court noted that the Supreme Court had reversed that decision in Palam Gas Service v. Commissioner of Income-tax

1. Whether the membership fees received from time-share members, amounting to Rs. 158,43,81,853, were to be excluded from the assessee’s income for the year

2. Whether the software licence renewal payments to resident suppliers attracted tax deduction under Section 194J and consequent disallowance under Section 40(a)(ia)

3. Whether “payable” in Section 40(a)(ia) includes amounts already “paid”

Section 194J requires tax deduction at source on specified payments, including royalty; Section 40(a)(ia) provides for disallowance where tax required to be deducted at source is not deducted or paid as prescribed

Explanation 4 to Section 9(1)(vi), inserted by the Finance Act, 2012, states that the transfer of rights in computer software includes the grant of a licence, but the Court relied on Engineering Analysis Centre of Excellence (P.) Ltd. v. Commissioner of Income-tax to hold that this expansion of “royalty” operates prospectively and does not apply to the assessment year at issue

On the “payable” issue, the Court noted that Palam Gas Service v. Commissioner of Income-tax had reversed the contrary rule in Merilyn Shipping and Transports v. ACIT

For membership fees, the Court followed its decision in Commissioner of Income-tax – LTU v. Mahindra Holidays and Resorts (India) Ltd., which relied on CIT v. Winner Business Link (P) Ltd.

On membership fees, the parties agreed that the issue was governed by the High Court’s decision in the assessee’s favour; the Court accordingly applied that precedent

On software payments, the Court found that the payments were for renewals of software licences.

For AY 2008–09, the prospective operation of Explanation 4 meant that such licence consideration was not brought within “royalty” on that basis; the Court therefore answered the Section 194J/Section 40(a)(ia) issue for the assessee.

The Court separately answered the “payable” question for the Department, consistent with its statement that Palam Gas Service had reversed the Tribunal’s reliance on Merilyn Shipping.

The appeal was disposed of on those terms, with no order as to costs.