Maintenance Charges of Courier Tracking Software, allowable as revenue expenditure and does not amount to Royalty

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In M/s. World Courier (India) Pvt. Ltd. v.  The Assistant Commissioner of Income Tax, Circle- 7(1)(2), Bengaluru [ITA Nos. 1727, 1577/Bang/2017 dated August 11, 2021], M/s. World Courier (India) Pvt. Ltd. (“the Appellant”) has filed an appeal against order dated April 24, 2017 of Commissioner of Income Tax (Appeals) (“CIT(A)”) on the issue whether Revenue authorities were justified in disallowing sum paid by the Appellant as software maintenance charges to its overseas group companies by invoking section 40a(ia) of the Income Tax Act, 1961 (“the IT Act”).

The Assessing Officer (“AO”) relying on the decision in CIT and Anr. v Samsung Electronics Co. Ltd. [345 ITR 495 (Karn) dated October 15, 2011] disallowed the claim of maintenance charges in the income tax return of the Appellant on the ground that payment in the form of software maintenance charges was in the nature of royalty as it was the payment for a right to use the software and therefore is taxable in India.

The Hon’ble Income Tax Tribunal, Bangalore (“ITAT”) held that payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty because the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) read with sub-section 14(a) (i)-(vii) of the Copyright Act, 1957.

Further, reliance was placed on the case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, [Civil Appeal Nos. 8733 and 8734/2018  dated March 02, 2021] where in the matter was remanded to the AO to examine the terms of the agreement under which right was granted to the Appellant in the light of the provisions of the Indo-US Double Taxation Avoidance Agreement (“DTAA”) as to whether the same would amount to royalty.

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