Division Bench upholds Tribunal's deletion of full-year taxation on time-share membership fees and rules against TDS disallowance on resident software license renewals for AY 2008-09
In a significant judgment delivered on October 5, 2026, the Division Bench of the Madras High Court, comprising Justices Dr. Anita Sumanth and S. Raveekumar, resolved key income tax disputes involving M/s. Mahindra Holidays and Resorts India Ltd., marking an important precedent in the taxation of membership fees and software license payments.
The case arose from the Commissioner of Income Tax's appeal challenging the Tribunal's decision to delete the addition of Rs. 158.43 crore from the assessee's income, which related to one-time, non-refundable membership fees collected from time-share members. The Assessing Officer had treated the entire membership fees received during the accounting year as income of that year, disregarding the assessee's method of apportioning the fees over the membership tenure, which could extend up to thirty years.
Upholding the Tribunal's deletion, the Court relied on its earlier Division Bench ruling in the same company's case and the Gujarat High Court decision in CIT v. Winner Business Link (P) Ltd., which were also affirmed by the Supreme Court. The Court clarified that the membership fees should be recognized as income over the period of membership, not entirely in the year of receipt, thereby favoring the assessee's accounting treatment.
The second issue dealt with the disallowance of payments made by the assessee to resident suppliers for renewal and purchase of software licenses. The Assessing Officer disallowed these expenses under Section 40(a)(ia) of the Income Tax Act on the ground that tax was not deducted at source (TDS) under Section 194J, equating the tax treatment of payments to residents with those made to non-residents.
However, the Court found that the renewal payments for software licenses in assessment year 2008-09 did not constitute "royalty" under the Income Tax Act as understood at that time. The relevant Explanation 4 to Section 9(1)(vi), which includes computer software licenses within "royalty," was held by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT to operate only prospectively from April 1, 2012. Therefore, the disallowance of expenses under Section 40(a)(ia) for failure to deduct TDS was not sustainable for the year in question.
While the Court answered the substantial question of whether the word "payable" in Section 40(a)(ia) includes "paid" in the affirmative, favoring the Department, it nonetheless ruled in favor of the assessee on the merits of the non-applicability of TDS provisions for software license renewal payments in AY 2008-09.
This judgment clarifies that membership fees for time-share facilities must be accounted for over the membership duration and that TDS provisions related to software license payments to resident suppliers must be interpreted in line with the prospective application of legal amendments. The decision thus provides important guidance for taxpayers and tax authorities on the proper tax treatment of similar transactions.
Bottom Line:
Income Tax - Membership fee received for time-share membership and apportioned over membership period cannot be taxed entirely in year of receipt - For assessment year 2008-09, payments made to resident suppliers towards renewal/purchase of software licences were not liable for TDS under Section 194J as such licence payments did not constitute royalty prior to prospective operation of Explanation 4 to Section 9(1)(vi) - Though word "payable" in Section 40(a)(ia) includes "paid", disallowance was not attracted on facts.
Statutory provision(s):
Income Tax Act, 1961 - Sections 9(1)(vi), 40(a)(ia), 194J, 195
