INCOME TAX ACT, 1961

Section 9(1)(vi), Expln. 4 Section 194J

Tax deduction at source - Under section 194J - Royalty - Payment to Indian party towards Annual licence fee for renewal of Microsoft software licence.

Assessee claimed deduction of payment made to Indian party towards annual licence fee for renewal of Microsoft software licence. AO treated the payment as in the nature of royalty and accordingly, disallowed deduction for want of TDS under section 194J. Held: The instant case was that of a resident making payment to another resident, there was no need to examine any DTAA from the angle of taxability or otherwise of royalty in the hands of the recipient as same stood established under the Act. Finance Act, 2012 has carried out an amendment to section 9(1)(vi) dealing with 'income by way of royalty' through insertion of Expln. 4 with read effect from 1-6-1976. Retrospectively covering the year under consideration. It clearly provides that transfer of any rights in respect of 'any right, property or information', being the same expression as used in the clause (b) of section 9(1)(vi) which attracts taxation of income from royalty payable by a resident, would include transfer of all or any right for use or right to use a computer software, which also covers within its ambit the granting of a licence. It is not only that the expression 'rights in respect of any right, property or information' would 'include' use or right to use a computer software, but it would 'always' be considered to have been so included, which gives further strength to the retrospective effect of insertion of Explanation 4. The net effect of the insertion of the Explanation 4 read with Explanation 2 to section 9(1)(vi) is that the legislature has made it clear beyond an iota of doubt that consideration for the use or right to use a computer software in any form, including a mere granting of licence, would be considered under the Act as income from royalty in the hands of the recipient. Clause (ba) to Explanation to section 194J further provides that 'royalty' for the purpose of this section shall have the same meaning as given in section 9(1)(vi). Thus, it is clear that where income in the nature of royalty was payable to a resident-payee, then payer was liable to deduct tax at source under section 194J. Failure to deduct and pay such tax in the Government exchequer entailed, inter alia, disallowance under section 40(a)(ia) as had been made by AO.

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