(Prayer: Tax Case filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Chennai Bench ‘A’ dated 31st December 2007 in ITA.No.1159/MDS/2007.)

1. The Appeal by Cognizant Technology Solution India Pvt. India., being aggrieved by the order dated 31.12.2007 passed by the Income Tax Appellate Tribunal, Chennai Bench ‘A’ in I.T.A.No.1159/MDS/2007.

2. The assessee, engaged in the business of software development and export, claimed exemption under Section 10B of Income Tax Act. A sum of Rs.149.47 crores from out of the total income, for the assessment year 2002- 2003.

3. The Assessing Officer reduced the exemption in respect of expenditure incurred in foreign currency and part of telecommunication charges, which was attributable to the delivery of software outside India. Particularly, the assessee had made a remittance of Rs.5,42,18,347/- for hiring ‘International Private Leased Circuits’, (IPLC) on which tax was not deducted at source under Section 195. The deduction sought for the revenue expenditure was disallowed, terming it as ‘Royalty’ and citing Section 40(a)(ii) of the Income Tax Act.

4. The impugned order passed by the Commissioner of Income Tax under Section 263 of Income Tax Act was challenged by the appellant but was unsuccessful before the Appellate Authority and before ITAT.

5. This Court admitted the appeal to decide the following substantial questions of law:

               "1.Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in rejecting the Appellant's contention that the provisions of Section 263 of the Income Tax Act are not applicable to the assessment made under Section 143(3) of the Income Tax Act in respect of Assessment Year 2002-2003?

               2.Whether on the facts and in the circumstances of the case the Income Tax appellate Tribunal is right in law in not holding that when the foreign currency expenditure is excluded from the "export turnover" based on the principle of parity, the same should also be excluded from "total turnover" for the purpose of computing exemption/deduction under Section l0A/l0B?

               3.Whether on the facts and in the circumstances of the case the Income Tax appellate Tribunal is right in law in making observations on the merits of the issue pertaining to disallowance under Section 40(a)(ia) of the Income Tax Act relying on Case Law that is distinguishable on facts and in law, particularly since the issue has only been remitted to the file of the Assessing Authority for consideration by the Commissioner of Income Tax?

               4.Whether on the facts and in the circumstances of the case the Income Tax appellate Tribunal is right in law in holding that tax has to be deducted under Section 195 in respect of payments made to entitles having business/Permanent establishment outside India irrespective of the fact whether such recipient is subject to tax in India or not?

6. The Learned Counsel appearing for the appellant submitted that, insofar as the substantial questions of law 2 & 3 are concerned, the assessment has been re-computed, therefore those two questions of law are not pressed. Insofar as the 4th substantial question of law, the issue is covered by the judgment of this Court in the appellant’s own case in Tax Case Appeal Nos.277 to 280 of 2016, by order dated 25.11.2025, in respect of the assessment years 2003-2004 and 2004-2005. It was further submitted that a sum of Rs.5,45,21,468/- is the payment made to the M/s.Sprint Communications, USA, as revenue expenditure. The payment in respect of facilities that had been extended by M/s.Sprint Communications, USA, in the absence of a Permanent Establishment (‘PE’) of M/s.Sprint Communications, USA in India, the amount was not taxable in India. Accordingly, no tax had been deducted at source (TDS) under Section 195. The said expenditure does not fall within the definition of ‘Royalty’, as contended by the Department.

7. The Division Bench of this Court, while considering an identical issue, had read in Explanation 6 to Section 9(1) of the Act and Section 40(a)(i) and held that the expenditure in respect of payment to non-resident company for providing internet services to the customers will not fall within the ambit of the term ‘Royalty’ as defined under Section 9 of the Act.

8. The Learned Counsel representing the department contended that the Explanation to Section (2) to Section 9(1)(vi) of the Act, simpliciter would mean that consideration paid to a non-resident company has to be considered as ‘royalty’. The removal of any doubts Explanations 4, 5 & 6 was inserted as a clarification. Therefore, the remittance to M/s.Sprint Communications has to be considered as royalty and not as expenditure simpliciter.

9. From the Division Bench in the assessee’s case referred above, this Court understand that following the judgment of the Hon’ble Supreme Court rendered in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT reported in (2021) 432 ITR 471 (SC), which overruled its earlier view in M/s.Verizon Communications Singapore PTE Ltd v. ITO (International Taxation) reported in 261 ITR 575 (Mad), the Madras High Court has held that the explanation brought into the Act by virtue of the Finance Act, 2012, cannot have retrospective application.

10. The following observations of the Hon’ble Supreme Court were relied and extracted by the Division Bench in its order.

               “77. It is equally difficult to accept the learned Additional Solicitor General's submission that Explanation 4 to Section 9(1)(vi) of the Income Tax Act is clarificatory of the position as it always stood, since 1-6- 1976, for which he strongly relied upon CBDT Circular No. 152 dated 27-11-1974. Quite obviously, such a circular cannot apply as it would then be explanatory of a position that existed even before Section 9(1)(vi) was actually inserted in the Income Tax Act vide the Finance Act, 1976. Secondly, insofar as Section 9(1)(vi) of the Income Tax Act relates to computer software, Explanation 3 thereof, refers to “computer software” for the first time with effect from 1-4-1991, when it was introduced, which was then amended vide the Finance Act, 2000. Quite clearly, Explanation 4 cannot apply to any right for the use of or the right to use computer software even before the term “computer software” was inserted in the statute. Likewise, even qua Section 2(o) of the Copyright Act, the term “computer software” was introduced for the first time in the definition of a literary work, and defined under Section 2(ffc) only in 1994 (vide Act 38 of 1994).

               78. Furthermore, it is equally ludicrous for the aforesaid amendment which also inserted Explanation 6 to Section 9(1)(vi) of the Income Tax Act, to apply with effect from 1-6-1976, when technology relating to transmission by a satellite, optic fibre or other similar technology, was only regulated by Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, much after 1976. For all these reasons, it is clear that Explanation 4 to Section 9(1)(vi) of the Income Tax Act is not clarificatory of the position as of 1-6-1976, but in fact, expands that position to include what is stated therein, vide the Finance Act, 2012.”

11. While concluding, the Division Bench of this Court, in the assessee’s own case, answered the issue in favour of the assessee with the following observations:

               “12.8.1. The view taken in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra) is that even if the assessee does not have an effective control over the equipment, the use of process will render payment liable to be treated as royalty was based on application of Explanations 4, 5 and 6 added by way of Finance Act, 2012 and we see from a reading of the said judgment, that the assessee's case based on decision in the case Asia Satellite Telecommunications Private Limited v. DIT (2011) 332 ITR 340 (Delhi) and various rulings of the Authority on Advance Rulings was rejected by holding that such decisions are of no assistance in view of the amendment which was introduced by Finance Act, 2012 by insertion of Explanations 5 and 6.

               12.8.2. In Verizon Communications Singapore PTE Ltd v. ITO (supra), the decision in the case of Poompuhar Shipping Corporation Limited v. ITO (2013) 38 taxmann.com 150 (Madras), was relied upon, wherein for the purposes of determining whether the payments made constituted royalty, recourse was had to the meaning assigned to it by taking into consideration newly inserted Explanations 4 and 5 under the Finance Act, 2012.

               12.8.3. It was precisely on application of the newly inserted Explanations vide Finance Act, 2012, whereafter it became irrelevant whether or not the assessee has control or possession of the scientific equipment, that the claim of the assessee therein that payment made was for service and it was not a case of transfer was rejected. Therefore, to that extent, the decision in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra), in our considered opinion, stands overruled and cannot be relied upon as a precedent.”

12. In view of the above facts by following the judgment of the Hon’ble Supreme Court rendered in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra) as well as the Division Bench judgment of this Court in Cognizant Technology Solutions India Private Limited v. Commissioner of Income Tax, (T.C.A.Nos.277 to 280 of 2016, dated 25.11.2025), the substantial questions of law are answered in favour of the assessee.

13. Having held the fourth substantial question of law in favour of the assessee, the first question of law had become only academic.

14. As a result, the Tax Case is allowed.

               (i) The first substantial question of law had become only academic and hence it is left open.

               (ii) The second and third substantial questions of law are given up by the appellant/assessee.

               (iii) The fourth substantial question of law is answered in favour of the assessee.

              There shall be no order as to costs.