Income Tax Act | Payment For IPLC Services Not 'Royalty' U/S 9; Assessee Entitled To Deduction U/S 40(a)(i): Madras High Court

Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan examined whether the payment made by the assessee for IPLC services constitutes 'royalty' under Section 9 of the Income Tax Act, and whether the assessee is entitled to claim a deduction under Section 40(a)(i) of the Act, in respect of a payment made to a foreign-based company.

Section 40(a)(i) of the Income Tax Act, 1961 deals with the disallowance of certain expenses incurred by the assessee for which Tax Deducted at Source (TDS) was required to be deducted but was not, or if deducted, was not paid to the government on time.

In this case, the assessee/appellant is engaged in the business of software development and export.

The assessee has made payments to a foreign-based company, namely, Sprint USA, for availing services of international private leased circuits, as it is engaged in the business of software development and export, and is also rendering related services.

The assessee claimed a deduction under Section 40(a)(i) of the Income Tax Act. The Assessing Officer found that the assessee was not entitled to any such deduction claimed by it and concluded that the amounts paid by the assessee to Sprint USA were without making a deduction of tax at source.

The Assessing Officer held that the amount paid by the assessee to Sprint USA, for International Private Leased Circuits (IPLC), was without deduction of tax at source, and disallowed it under Section 40(a)(i) of the Act.

The assessee approached the Commissioner of Income Tax (Appeals) [CIT(A)] by filing appeals, which were rejected.

However, in respect of interest under Section 234D of the Act, the CIT(A) relied upon an earlier decision of ITAT and allowed the ground of appeal for the assessment year 20032004 and dismissed the claim for the assessment year 2004-2005.

The assessee as well as the revenue filed appeals before the ITAT. The ITAT dismissed the grounds of appeal of the assessee on the issue of set off of losses of the STPI units against the income of other taxable units.

The bench opined that for the application of newly inserted Explanations 4, 5 and 6 under Finance Act, 2012, the payment made by the assessee to Sprint USA for IPLC would not constitute 'royalty' within the meaning of that expression as provided under clause (iva) to Explanation 2 to Section 9(1)(vi) of the Act, in as much as it does not partake nature of consideration for the use or right to use a scientific equipment……

The bench opined that all profits and gains of the undertaking, including the incidental income by way of interest on bank deposits or staff loans, would be entitled to 100% exemption or deduction under Section 10A/10B of the Act, as such interest income arises in the ordinary course of export business of the undertaking, even though not as a direct result of export.

In view of the above, the bench allowed the appeal.

Regarding the interest under Section 234D, the bench opined that the assessee is liable to pay interest under Section 234D of the Act on the excess refund paid.

Case Title: Cognizant Technology Solutions India Private Limited v. Commissioner of Income Tax

Citation: 2025 LiveLaw (Mad) 455

Case Number: TCA Nos.277 to 280 of 2016

Counsel for Appellant/Assessee: N.V. Balaji

Counsel for Respondent/Department: Karthik Ranganathan

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