COMMISSIONER OF INCOME TAX AHMEDABAD Vs. MASTEK LIMITED

LAWS(SC)-2010-2-71

SUPREME COURT OF INDIA (FROM: GUJARAT)

Decided on February 10,2010

COMMISSIONER OF INCOME TAX, AHMEDABAD Appellant

VERSUS

MASTEK LIMITED Respondents

JUDGEMENT

- (1.) DELAY condoned.
(2.) LEAVE granted. Heard learned advocates on both sides. These two civil appeals are filed by the Department against the order dated 2nd September, 2008, of the Gujarat High Court refusing to formulate, inter alia, the following question of law: "Whether the Income Tax Appellate Tribunal, in the facts and circumstances of this case, was right in confirming the order passed by the Commissioner of Income Tax (Appeals) deleting the additions made by the Assessing Officer on account of royalty expenses?" In the lead matter, which is civil appeal arising out of S.L.P. (C) No.18545 of 2009, the facts are as under: Assessee carries on the business of development of Software Package and Packaged Software Products divisible into four groups, namely, (i) Customized Software; (ii) Packaged Software Products; (iii) Agency Products; and (iv) Exports. In the lead matter, we are concerned with Assessment Year 1996-1997 and with the Agency Products. In that year, assessee claimed deduction under Section 37 of the Income Tax Act, 1961 [`Act', for short] in respect of royalty expenses of Rs.3,23,28,158/-. The Assessing Officer held that, only one-sixth of the amount was allowable in view of Section 35AB of the Act and, accordingly, after allowing the benefit under Section 35AB of the Act, the Assessing Officer made a disallowance of Rs.1,12,12,352/-, which was added back to the income of the assessee. On appeal filed by the assessee, the Commissioner of Income Tax (Appeals) deleted the additions made by the Assessing Officer, which view was confirmed by the Income Tax Appellate Tribunal [`Tribunal', for short] following it's earlier decision in the assessee's own case in I.T.A. No.4968/1995 and others dated 25th November, 1999. Being aggrieved by the decision of the Tribunal, the Department instituted Tax Appeal No.606 of 2008 in the High Court which, as stated hereinabove, refused to formulate the above proposed question, hence, these civil appeals.
(3.) DURING the year under consideration, the assessee claimed that it had paid royalty as below: JUDGEMENT_96_TLPRE0_2010Html1.htm In respect of the said payments, the assessee claimed deduction under Section 37 of the Act on the ground that the assessee had made the said payments towards royalty for "duplicating" the software by the name `Ingres' in India and supplying the same to the end-users. According to the assessee, the ownership of the said software was retained by Ingres Corporation [which is an American based Multi-National Company in United States]; that for each copy, which stood duplicated and sold to the customers in India, the assessee had paid royalty to the Corporation based on its sale value and, thus, such payment towards royalty formed part of the expenditure incurred by the assessee in making the sales. Before us, it was argued on behalf of the assessee that the payment of royalty was for duplicating the software `Ingres' in India and for supplying the same to the end-users. In this connection, it was pointed out that there is a vital difference between payment of consideration for acquisition of a software and payment for acquisition of the right to use the said software. According to the assessee, in the former case, the payment would constitute capital expenditure whereas, in the latter case, it would constitute an expenditure under Section 37 of the Act.;

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