Madras High Court Rules In Favour Of Mahindra Holidays On ₹158 Crore Membership Fees, Software Licence Tax Dispute

The Madras High Court has ruled in favour of Mahindra Holidays and Resorts India Ltd. on its accounting treatment of membership fees worth ₹158.43 crore.

It also held that expenditure on domestic software licence renewals could not be disallowed merely because the company had deducted tax on software purchases from foreign suppliers.

A Division Bench of Justice Anita Sumanth and Justice S. Raveekumar observed that the company could apportion membership fees over the membership period instead of treating the entire amount received during the accounting year as income.

Mahindra Holidays collected one-time, non-refundable membership fees from customers for discount cards valid for periods ranging from one to 30 years. The company apportioned the fees over the respective membership periods.

However, the Assessing Officer rejected this accounting method and treated the entire membership fees collected during the relevant accounting year as income. The dispute involved membership fees of ₹158.43 crore.

The Department also disallowed expenditure of approximately ₹1.05 crore incurred on software licence renewals from domestic suppliers, stating that the company should have deducted tax at source under Section 194J of the Income Tax Act, 1961.

The disallowance was made under Section 40(a)(ia). The ITAT ruled in favour of the company on both issues, prompting the Department to approach the High Court.

On the membership fee issue, the Court noted that an identical question had already been decided in favour of Mahindra Holidays in an earlier case. Following that ruling, the Bench answered the question in favour of the company and against the Income Tax Department.

On the software licence issue, the Court noted that the Assessing Officer had sought to disallow the expenditure because the company had deducted tax on software purchases from foreign suppliers but had not done so for purchases from domestic suppliers.

The Bench referred to the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax, which held that Explanation 4 to Section 9(1)(vi), inserted by the Finance Act, 2012, could not be applied retrospectively to treat software licence payments as royalty for the period before April 1, 2012.

The High Court further observed that payments could not be treated as taxable merely because tax had been deducted in other transactions involving software licences. Their taxability had to be examined independently under the applicable law.

"...the payments would be taxable merely for the reason that tax has been deducted under Section 40(a)(i) as the circumstances in which taxability have to be decided would have to be examined independently in each scenario, and in light of the applicable law", the Court said.

Accordingly, the Court answered the second question of law concerning the software licence expenditure in favour of Mahindra Holidays.

However, on the third question concerning whether the word “payable” under Section 40(a)(ia) includes amounts already “paid”, the Court ruled in favour of the Income Tax Department.

The tax case appeal was disposed of in these terms, with no order as to costs.

For the Income Tax Department: Senior Standing Counsel V. Pushpa.

For Mahindra Holidays and Resorts India Ltd.: R. Vijayaraghavan, instructed by Subbaraya Aiyar Padmanabhan.