Following the Supreme Court’s ruling in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax [(2021) 125 taxmann.com 42], the Madras High Court has held that Explanation 4 to Section 9(1)(vii) operates only prospectively from April 01, 2012, and that taxability cannot be inferred merely from deduction under Section 40(a)(i) of the Income Tax Act. Further, the High Court upheld the assessee’s method of apportioning one-time, non-refundable membership fees (valid for 1 to 30 years) over the membership period.
The High Court clarified that payments towards renewal of software licences from resident suppliers were held not to attract Section 194J, as the consideration did not fall within the definition of ‘royalty’ under Explanation 2 to Section 9(1)(vii) for the relevant period. Further, Explanation 4 to Section 9(1)(vii), inserted by the Finance Act, 2012 with retrospective effect from June 01, 1976, was held to operate only prospectively from April 01, 2012, following the Supreme Court in Engineering Analysis Centre of Excellence vs. CIT [(2021) 125 taxmann.com 42].
The principle of parity invoked by the Assessing Officer to extend Section 194J to domestic software payments, on the ground that tax was deducted on non-resident payments under Section 9(1)(vi) read with Section 195, was rejected, and the Court clarified that taxability cannot be presumed merely because tax was deducted under Section 40(a)(i).
Briefly, the respondent-assessee is M/s. Mahindra Holidays and Resorts India Ltd., engaged in the business of providing discount cards to members on payment of prescribed membership fees. The appeal raised three substantial questions of law. The first related to the treatment of membership fees of Rs. 158.43 crores received from time-shareholders. The second and third questions concerned whether Section 40(a)(ia) of the Act would apply to disallow expenditure on purchase of software from resident suppliers on the ground of parity with non-resident suppliers, and whether the word ‘payable’ in Section 40(a)(ia) includes the word ‘paid’.
The Division Bench comprising Dr. Justice Anita Sumanth and Justice S. Raveekumar observed that followed the decision of the Gujarat High Court in CIT vs. Winner Business Link (P) Ltd. [(2015) 55 taxmann.com 468], and held that the assessee’s method of accounting for membership fees was to be accepted. The Court noted that although the issue had not been decided on merits, the matter was a pure question of law on the 2008-2009 record and did not warrant remission.
Referring to Section 194J and Explanation 2 to Section 9(1)(vii) defining ‘royalty’, the Court observed that Explanation 4 to Section 9(1)(vii), inserted by the Finance Act, 2012 with effect from June 01, 1976, brought consideration for licences within the ambit of ‘royalty’. However, following the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. CIT [(2021) 125 taxmann.com 42], the Court held that Explanation 4 operates only prospectively, and the inclusion of licences within ‘royalty’ would be operational only for the period post April 01, 2012.
