The Madras High Court has ruled in favour of Mahindra Holidays and Resorts India Ltd. on two critical tax issues, holding that the company's treatment of ₹158.43 crore in membership fees was proper and that expenditure on domestic software licence renewals could not be disallowed merely because tax was deducted on similar purchases from foreign suppliers. The decision, delivered by a Division Bench of Justice Anita Sumanth and Justice S. Raveekumar, partially allowed the Income Tax Department's appeal while affirming the Income Tax Appellate Tribunal's order on these points.

The dispute centred on how Mahindra Holidays accounted for one-time, non-refundable membership fees collected from customers for discount cards valid for periods ranging from one to 30 years. The company apportioned these fees over the respective membership periods, a method the Assessing Officer rejected by treating the entire amount collected in the relevant accounting year as income. The Bench noted that an identical question had already been decided in favour of the company in an earlier case and, following that precedent, answered the issue against the Department.

Membership Fees Apportionment Upheld

The court observed that the company's accounting treatment—recognising income over the membership period rather than upfront—was consistent with the matching principle and had been accepted in prior years. The Assessing Officer's approach would have distorted the true profit for the year, especially given that the fees were non-refundable but related to services to be rendered over many years. The ruling reinforces that companies may defer revenue recognition when there is a clear linkage to future service obligations.

The Bench emphasised that the earlier decision of the court on the same assessee for a different assessment year was binding. As a result, the first question of law was answered in favour of Mahindra Holidays, confirming that the membership fees could be apportioned.

Software Licence TDS Disallowance Set Aside

The second issue involved a disallowance of approximately ₹1.05 crore incurred on software licence renewals from domestic suppliers. The Department argued that Mahindra Holidays should have deducted tax at source under Section 194J of the Income Tax Act, 1961, and since it did not, the expenditure was liable to be disallowed under Section 40(a)(ia). The company had, however, deducted tax on software purchases from foreign suppliers, leading the Assessing Officer to infer that the domestic payments were also taxable as royalty.

The High Court rejected this reasoning, pointing to the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax . That ruling 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 periods before April 1, 2012. Since the payments in question fell in earlier years, they were not taxable as royalty, and consequently no TDS was required.

The Bench further clarified that the mere fact that tax had been deducted in other transactions involving software licences did not automatically make the domestic payments taxable. "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 stated. This observation underscores that each transaction's taxability must be assessed on its own merits, not inferred from unrelated deductions.

Third Issue Decided Against Assessee

The Department also raised a third question concerning the interpretation of the word "payable" under Section 40(a)(ia)—whether it includes amounts already "paid". On this point, the court ruled in favour of the Income Tax Department, holding that the disallowance provision applies even when the payment has been made without deducting tax at source. This ruling aligns with the broader interpretation that the provision aims to ensure compliance with TDS obligations, regardless of the timing of payment.

The appeal was disposed of with no order as to costs. For Mahindra Holidays, the outcome provides clarity on two recurring tax disputes, particularly the treatment of membership fees and software licence expenditure. The Department, while succeeding on the interpretation of "payable," must now accept the company's accounting method and the non-applicability of TDS on domestic software renewals for the relevant period.

The decision reinforces that courts will examine the substance of transactions rather than rely on mechanical inferences from tax deductions on other payments. For legal professionals, the case offers guidance on revenue recognition for multi-year service contracts and the boundaries of TDS obligations on software licence payments in the pre-2012 era.