Deputy Commissioner of Income Tax, Circle -1(1)(1), Surat V. M/s. Lemon Technomist Pvt. Ltd., Surat

ITA 117/SRT/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 4817 (ITAT-SURAT)
• Duration Of Justice: 3 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2014-2015
• Appeal Filed On: 08-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA SINGHLA
• Keywords: Gross profit estimation; Business income; Depreciation; Double taxation relief; Corroborative evidences; TDS; Set aside
• Section: 143(3); 40(a)(ia); 43; 145(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM ./ITA NO.117/SRT/2017 ( [ [ / ASSESSMENT YEARS: (2014-15) (VIRTUAL COURT HEARING) THE DCIT, CIRCLE-1(1)(1), SURAT. VS. M/S. LEMON TECHNOMIST PVT. LTD., F-02 TO F-06, DTA SECTION, GUJARAT HIRA BOURSE, GEMS & JEWELLERY PARK, ICHCHHAPORE, SURAT. ./ ./ PAN/GIR NO.: AABCL4698R (ASSESSEE) (RESPONDENT) ASSESSEE BY : SHRI DEVEN KAPADIA, AR REVENUE BY : MS ANUPAMA SINGHLA, SR. DR / DATE OF HEARING : 27/04/2021 /DATE OF PRONOUNCEMENT : 17/05/2021 / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER: CAPTIONED APPEAL FILED BY THE REVENUE, IS DIRECTED AGAINST THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-1 [IN SHORT THE LD. CIT(A)], SURAT, IN APPEAL NO.CAS-1/11416/2016-17, DATED 23.06.2017, WHICH IN TURN ARISES OUT OF AN ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE ACT (HEREINAFTER REFERRED TO AS THE ACT),DATED 30.12.2016. 2. GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS FOLLOWS: 1. WHETHER ON THE FACT AND THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION OF G.P OF RS.2,86,01,036/- WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS FAILED TO PROVE THE REASONS FOR FALL IN GP WITH SUPPORTING EVIDENCES. THE AO HAD RIGHTLY INVOKED THE PROVISIONS OF SECTION 145(3) OF THE I.T. ACT IN THIS CASE? 2. WHETHER ON THE FACT AND THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF RS. 9,12,600/- U/S. 40(A)(IA) OF THE IT ACT WITHOUT APPRECIATING THE ASSESSEE IS LIABLE TO DEDUCT TDS OF PAYMENT MADE TO NON-RESIDENT FOR PURCHASE OF SOFTWARE BECAUSE SAME WOULD CONSTITUTE 'ROYALTY' UNDER SECTION 9 OF THE ACT ? PAGE | 2 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 4. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF ASSESSING OFFICE MAY BE RESTORED TO THE ABOVE EXTENT. 3. NOW, WE SHALL TAKE GROUND NO.1 RAISED BY REVENUE WHICH RELATES TO DELETING THE ADDITION OF GROSS PROFIT OF RS.2,86,01,036/-. 4. BRIEF FACTS QUA THE ISSUE ARE THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO FURNISH COMPARATIVE CHART OF THE GROSS PROFIT RATIO (GP RATIO) AND NET PROFIT RATIO(NP RATIO) FOR THE LAST THREE YEARS AND THE REASONS FOR NOTABLE VARIATION, IF ANY IN GP RATIO AND NP RATIO FOR THE YEAR UNDER CONSIDERATION. IN RESPONSE, THE ASSESSEE, VIDE HIS SUBMISSION DATED 09.05.2016 FURNISHED THE REQUISITE DETAILS BEFORE THE ASSESSING OFFICER. THE GROSS PROFIT FOR THE YEAR IS RS. 2.77 CRORES AS AGAINST OF RS.6.15 CRORE AND RS.4.03 CRORE FOR THE PRECEDING TWO ASSESSMENT YEARS. THE NET PROFIT FOR THE YEAR IS RS. 20.14 LAKHS AS AGAINST RS.2.74 CRORE AND RS. 2.59 CRORE IN THE PRECEDING TWO ASSESSMENT YEARS. THE GROSS PROFIT RATIO FOR THE YEAR IS 8.39% AS AGAINST 9.44% AND 33.28% IN THE PRECEDING TWO PREVIOUS YEARS. THE NET PROFIT RATIO FOR THE YEAR IS 0.61% AS AGAINST 4.21% AND 21.37 % FOR THE IMMEDIATELY PRECEDING TWO PREVIOUS YEARS. BOTH THE GP AND NP RATIO SHOWS NEGATIVE GROWTH. THE ASSESSEE WAS ASKED TO FILE EXPLANATORY NOTE ALONG WITH DOCUMENTARY EVIDENCE TO JUSTIFY THE HUGE SHORTFALL IN GP AND NP RATIOS AS COMPARED TO THE IMMEDIATELY PRECEDING TWO YEARS. IN RESPONSE, THE ASSESSEE COMPANY HAS SUBMITTED EXPLANATION ON THE ISSUE OF FALL IN GP AND NP RATIO, WHICH IS REPRODUCED BELOW: AS PER THE ATTACHED SHEET, THE OPERATING PROFIT OF THE ASSESSEE FOR AY 2014-15 WAS 8.39% AS COMPARED TO THE PRECEDING YEAR'S OPERATING PROFIT OF 9.44%. THE MAIN REASON FOR DECREASE IN THE AFORESAID PROFIT WAS THE DRASTIC FALL IN REVENUES IN AY 2014-15 COMPARED TO AY 2013-14 FROM RS.65 CRORES TO RS.33 CRORES. SINCE MOST OF THE COSTS OF THE ASSESSEE ARE FIXED COSTS, THE ECONOMIES OF SCALE HAVE WORKED AGAINST THE ASSESSEE AND HENCE THE RATIOS HAVE TAKEN A BEATING. AS CAN BE SEEN FROM THE ANNEXURE ATTACHED, THE SALARY COST HAS RISEN BY ABOUT 11.12% SINCE SOME MINIMUM QUANTUM OF INCREMENTS HAD TO BE GIVEN TO THE FIXED TEAM TO MEET THEIR RISING COST OF LIVING DUE TO INFLATION. THUS, ALTHOUGH THE SALARY COST HAS INCREASED BY ONLY BY 11.12%, AS A PERCENTAGE OF REVENUES, IT HAS GONE UP FROM 2.72% TO 6.01% WHICH IS QUITE HIGH AS THIS IS AN INFLEXIBLE FIXED COST AND NOT VARIABLE COST. PAGE | 3 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. SIMILARLY, DEPRECIATION IS ALSO A FIXED AND NON-VARIABLE COST AND HAS NOT GONE DOWN WITH THE REDUCTION IN REVENUE. AS PERCENTAGE OF REVENUES THEREFORE, IT HAS GONE UP AS CAN BE SEEN IN THE ANNEXURE. THE NET PROFIT SHOWS A MORE DRASTIC FALL DUE TO REDUCTION IN OTHER INCOME FROM RS. 80.40 LAKHS TO 5.69 LAKHS. IN SPITE OF THE REDUCTION IN THE OPERATING PROFITS, THE SAME ARE AMONGST THE HIGHEST IN THE DIAMOND INDUSTRY SINCE WE ASSUME THAT ALL OTHER DIAMOND COMPANIES OPERATE ON A GROSS MARGIN OF NOT MORE THAN 6-7%. THE CASE OF THE ASSESSEE IS GENUINE AND THERE IS ONLY A MARGINAL DROP IN MARGINS DUE TO EXTREMELY POOR BUSINESS CONDITIONS, INCREASED COMPETITION AND GLOBAL SLOWDOWN DUE TO WHICH THE BUSINESS WAS VERY BADLY IMPACTED RESULTING IN DRASTIC REDUCTION IN THE TURNOVER.' 5.THE ABOVE EXPLANATION OF THE ASSESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER NOTICED THAT THE GP, FOR THE YEAR UNDER CONSIDERATION, HAS SHOWN NEGATIVE GROWTH OF 1.05% AND NP HAS FALL DRASTIC 3.60% OF THE TOTAL TURNOVER. ON ANALYZING THE ABOVE IT APPEARS TO THE ASSESSING OFFICER THAT THERE IS HUGE INCREASE IN INDIRECT EXPENSES AND DIRECT EXPENSE. IN THE EXPLANATION SO FILED BY THE ASSESSEE DOES NOT JUSTIFY THE CONTINUOUS FALL OF GP AND NP FOR THE LAST THREE PREVIOUS YEARS INCLUDING THE CURRENT YEAR. ON PERUSAL OF THE AUDITED FINANCIAL STATEMENT, IT IS OBSERVED THAT THERE IS FALL IN THE TOTAL TURNOVER OF THE ASSESSEE FROM 65.17 CRORE TO 33.12 CRORE, HOWEVER, MANUFACTURING AND OPERATING COST IS REMAINED THE SAME, IN FACT, THERE IS RISE AROUND OF RS. 10.00 LAKHS WHICH CAN BE SEEN FROM THE FOLLOWING CHART: A.Y. 2014-15 A.Y. 2013-14 SALES AND OTHER OPERATING INCOME 33,12,06,153 65,17,96,563 MFG. AND OPERATIONAL EXPENSES 2,57,26,449 2,47,95,784 ANOTHER DISCREPANCY, THAT THE ASSESSING OFFICER FOUND IN THE BOOKS OF THE ASSESSEE COMPANY WAS THAT, IN PREVIOUS YEAR RELATED TO AY 2013-14 THERE IS A SIZEABLE MARGIN IN SALES AND COST OF MATERIAL SOLD (SALES - COST OF MATERIAL - INCREASE/DECREASE IN INVENTORY), HOWEVER, DURING THE YEAR THERE IS ALMOST NO DIFFERENCE IN THE SALES PRICE AND COST OF MATERIAL SOLD. CHART IS REPRODUCED HERE IN BELOW: - A. Y. 2014-15 A. Y. 2013-14 SALES 27,76,87,344 58,77,61,373 PAGE | 4 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. COST OF MATERIAL CONSUMED 28,77,48,609 51,83,00,739 INCREASE / DECREASE IN INVENTORY (-) 1,00,42,365 4,71,50,420 PROFIT 18,900 2,23,10,214 ON PERUSAL OF ABOVE, THE ASSESSING OFFICER WAS OF THE VIEW THAT CONTENTION OF THE ASSESSEE IS NOT CORRECT THAT IT HAS EARNED PROFIT FROM ITS EXPORT ACTIVITY. DURING THE COURSE OF HEARING, THE ASSESSEE COMPANY WAS ASKED TO EXPLAIN WHY THE COST OF SALE IS HIGHER THAN THE ACTUAL SALE CONSIDERATION. 6. IN THIS REGARD, THE ASSESSEE, VIDE HIS SUBMISSION DATED 13.12.2016, HAS GIVEN FOLLOWING EXPLANATION: 'THE BUSINESS MODEL OF THE ASSESSEE IS DIFFERENT FROM OTHER IMPORTER-EXPORTER MANUFACTURERS IN THE DIAMOND TRADE. THE ASSESSEE DOES CUTTING-POLISHING AND MANUFACTURING OF DIAMONDS ON JOB-WORK BASIS FOR VARIOUS INDIAN PARTIES. FOR FOREIGN PARTIES, IT IMPORTS ROUGH DIAMONDS ONLY FROM THOSE PARTIES WHO ARE WILLING AND COMMITTED TO BUY-BACK THE POLISHED DIAMONDS AFTER CUTTING-POLISHING. SO IN A WAY THE SAME IS ALSO IN NATURE OF JOB WORK ONLY ALTHOUGH THE ROUGH DIAMONDS COME INTO INDIA AS IMPORTS AND GO OUT AS EXPORTS AS PER THE EXIM POLICY OF THE GOVERNMENT. THUS, FOR EACH IMPORT OF ROUGH, THERE IS A CORRESPONDING EXPORT OF POLISHED DIAMONDS AND EVEN BY-PRODUCTS OR WASTE SMALL PIECES ARE SENT TO THE SPECIFIC PARTY ONLY. THE NET VALUE ADDITION IS THE INCOME OF THE ASSESSEE. IN SOME CASES, THE OVERSEAS PARTIES REQUIRE THE ASSESSEE TO SHOW THE VALUE ADDITION DONE THROUGH TECHNICAL INPUTS OF THE ASSESSEE SEPARATELY BY WAY OF A SEPARATE INVOICE RATHER THAN ADDING THE SAME TO THE EXPORT VALUE. THIS AMOUNT IS SHOWN IN THE AUDIT REPORT SEPARATELY UNDER THE HEADS 'TECHNICAL CONSULTATION CHARGES OR MANUFACTURING CHARGES' BUT IS INTRICATELY LINKED TO THE EXPORT OF POLISHED DIAMONDS AND HAS TO BE CONSIDERED, AS SUCH FOR THE PURPOSE OF CALCULATION OF OPERATING MARGIN. THUS, IF YOU ADD THESE FIGURES OF RS.1,15,84,592/-, THE OPERATING MARGIN IS POSITIVE.' 7.ABOUT BUSINESS MODEL OF IMPORT AND EXPORT WITH THE FOREIGN PARTIES, THE ASSESSING OFFICER STATED THAT ASSESSEE HAS GROSSLY FAILED TO SUBMIT THE COPY OF AGREEMENT WITH THOSE PARTIES TO PROVE THE GENUINESS OF TRANSACTION/ARRANGEMENT, VALUE ADDITION IF ANY MADE BY IT, WORKING OF ACTUAL AMOUNT BILLED TO THOSE PARTIES FOR THE SERVICES RENDERED AGAINST EACH IMPORT/EXPORT AND INCOME EARNED FROM THOSE TRANSACTIONS. IN OTHER WORDS, THE AO NOTICED THAT THE REPLY SUBMITTED BY ASSESSEE IS VERY GENERAL IN NATURE. FURTHER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE HAS ALSO NOT PROVIDED WHETHER SUCH ARRANGEMENT WITH FOREIGN PARTIES IS LEGAL UNDER THE IMPORT AND EXPORT POLICY WHERE ASSESSEE IS FILING WRONG DECLARATION IN RESPECT OF VALUATION OF GOODS EXPORTED UNDER SELF-DECLARATION SCHEME. FURTHERMORE, ASSESSEE HAS ALSO PAGE | 5 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. NOT PROVIDED ANY EVIDENCE IN RESPECT OF ITS RELATION WITH THOSE PARTIES FROM WHOM IT IS IMPORTING AND EXPORTING WITHOUT ANY VALUE ADDITION OR PROPER VALUE ADDITION, IF ANY AND UNDER SUCH CIRCUMSTANCE, WHEN THE IMPORT PARTIES AND EXPORT PARTIES ARE SAME, LOOKING TO THE FACTS AND FIGURES, THE POSSIBILITY OF CONNIVANCE OR COLLUSION CANNOT BE RULED OUT TO DEFLATE THE PROFIT. IN VIEW OF THE ABOVE DISCUSSION, THE BOOK RESULT ARRIVED BY THE ASSESSEE COMPANY WAS REJECTED WITHIN THE MEANING OF SECTION 145(3) OF THE ACT. THE ASSESSING OFFICER, THEREFORE, ESTIMATED THE GP ON THE BASIS OF AVERAGE GP SHOWN BY THE ASSESSEE IN THE LAST THREE FINANCIAL YEAR, INCLUDING THE CURRENT YEAR WHICH COMES AT 17.03% (8.39 + 9.44 + 33.28/3). ACCORDING, TO THE ABOVE FORMULA, THE GP FOR THE YEAR COMES TO RS.5,63,74,496/-. HOWEVER, ASSESSEE COMPANY HAS SHOWN GP AT RS.2,77,73,460/- FOR THE CURRENT YEAR. THE DIFFERENCE AMOUNT OF RS.2,86,01,036/- (5,63,74,496 2,77,73,460) WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. 8. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 9. LEARNED DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER, WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. WHEREAS, LEARNED AUTHORIZED REPRESENTATIVE (IN SHORT THE LD. AR) RELIED ON THE ORDER OF LD. CIT(A). 10. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE SUBMISSIONS PUT FORTH ON BEHALF OF THE ASSESSEE ALONG WITH THE DOCUMENTS FURNISHED AND THE CASE LAWS RELIED UPON, AND PERUSED THE FACTS OF THE CASE INCLUDING THE FINDINGS OF THE LD. CIT(A) AND OTHER MATERIAL BROUGHT ON RECORD. WE NOTE THAT LD. CIT(A), VIDE HIS ORDER DATED 23.06.2017 HAS ALLOWED THE APPEAL OF THE ASSESSEE COMPANY DELETING THE ADDITION OF RS.2,86,01,036/- ON ACCOUNT OF LOW GROSS PROFIT. AS REGARDS DELETION OF LOW GP ADDITION, THE LD. CIT(A) HAS HELD THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF ROUGH DIAMOND DESIGN, MANUFACTURING, AUDIT AND OTHER TECHNOLOGICAL SERVICES. OUT OF 3 SEGMENTS, ONE SEGMENT IS RELATING TO SERVICE SEGMENT, WHICH NORMALLY HAS HIGHER PROFIT MARGINS IN COMPARISON TO PRODUCT PAGE | 6 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. SEGMENTS. THIS IS EVIDENT FROM AUDITED FINAL ACCOUNTS THAT SHARE OF SERVICE SEGMENT IN TOTAL TURNOVER WAS ON DECREASING TREND SINCE A.Y.2012-13. DURING THE YEAR UNDER CONSIDERATION, THE SHARE OF SERVICE SEGMENT WAS ONLY 14% OUT OF TOTAL REVENUES IN A.Y.2014-15. AS AGAINST THIS, THE SHARE OF PRODUCT SEGMENT HAS INCREASED BY MORE THAN 6 TIMES IN COMPARISON TO A.Y.2012-13, WHICH HAS RESULTED INTO DECLINE IN PROFIT MARGINS. THE LD. CIT(A) HAS ALSO HELD THAT THE AO HIMSELF HAS ACCEPTED THAT THERE WAS OVERALL FALL IN TOTAL TURNOVER FROM RS.65.17 CRORES IN A.Y.2013-14 TO RS.33.12 CRORES IN A.Y.2014-15. THE AO HAS FAILED TO POINT OUT ANY SERIOUS DEFECT IN MAINTENANCE OF BOOKS OF ACCOUNTS EXCEPT COMPARING GROSS PROFIT RATIO OF PRECEDING YEARS AND MAKING FALL IN GP RATIO AS MAIN BASIS FOR REJECTION OF BOOKS RESULTS. THE LD. CIT(A) HAS ALSO HELD THAT THERE WAS NO CHANGE IN METHOD OF ACCOUNTING AND IT IS SETTLED LAW THAT AO CANNOT DOUBT THE GENUINENESS OF BOOKS OF ACCOUNTS MERELY BECAUSE THERE HAS BEEN REDUCTION IN GROSS PROFIT RATIO IN COMPARISON TO EARLIER YEARS. THE LD. CIT(A) HAS RELIED UPON THE DECISION OF HON`BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. VIKRAM PLASTICS & OTHERS (239 ITR 161) (GUJ.), WHEREIN IT WAS HELD THAT IF THERE WAS NO DISCREPANCY OR DEFECT POINTED OUT IN THE BOOKS OF ACCOUNTS AND IF THERE IS NO MATERIAL BROUGHT ON RECORD THAT PURCHASES AND EXPENSES WERE INFLATED OR SALES SUPPRESSED THEN BOOKS OF ACCOUNTS CANNOT BE REJECTED. THE LD. CIT(A) HAS ALSO DISCUSSED THAT THE PRODUCT - SERVICE MIX IN A.Y.2012-13 WAS 42:58 WHICH WAS 86:14 IN A.Y.2014-15, OBVIOUSLY THE GP RATIO WOULD BE ON LOWER SIDE AS COMPARED TO A.Y.2012-13. THE LD. CIT(A) HAS ALSO HELD THAT THE AO COULD NOT CITE ANY COMPARABLE CASE FROM THE SAME LINE OF BUSINESS TO PROVE THAT ASSESSEE'S PROFIT MARGINS IS ON LOWER SIDE. BASED ON THE FACTS NARRATED ABOVE, WE NOTE THAT LD CIT(A) HAS REACHED ON RIGHT CONCLUSION THEREFORE WE ARE CONSTRAINED TO AGREE WITH THE FINDINGS OF THE LD CIT(A). THUS, THIS GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 11. NOW, WE SHALL TAKE GROUND NO.2, WHICH RELATES TO DELETING THE DISALLOWANCE OF RS.9,12,600/- UNDER SECTION 40(A)(IA) OF THE ACT. 12. BRIEF FACTS QUA THE ISSUE ARE THAT ON PERUSAL OF THE SUBMISSION OF THE ASSESSEE, IT WAS NOTED BY THE ASSESSING OFFICER THAT DURING THE YEAR, ASSESSEE COMPANY HAD PURCHASED SOFTWARE, CALLED, PACOR CLIENTS SOFTWARE WITH HASP KEY NOTE FROM PAGE | 7 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. COMPUTER SYSTEM AND NETWORKING (FOREIGN SUPPLIER OF THE SOFTWARE) FOR THE CONSIDERATION OF RS.9,12,600/-. IT WAS ALSO NOTICED THAT ASSESSEE COMPANY HAS NOT DEDUCTED TAX ON SUCH EXPENDITURE THOUGH IT WAS SUBJECT TO TDS PROVISIONS. THE ASSESSING OFFICER WAS OF THE VIEW THAT ASSESSEE IS LIABLE TO DEDUCT TDS ON PAYMENT MADE TO NON-RESIDENT FOR PURCHASE OF SOFTWARE BECAUSE SAME WOULD CONSTITUTE 'ROYALTY' UNDER SECTION 9 OF THE ACT, AS HELD BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. P.S.I. DATA SYSTEM LTD [2012] 23 TAXMANN.COM 432 (KAR.). THE ASSESSEE COMPANY WAS ASKED TO SUBMIT THE EXPLANATION. 13. IN RESPONSE, THE ASSESSEE COMPANY, SUBMITTED ITS EXPLANATION WHICH IS REPRODUCED BELOW: '3. WITH REGARDS POINT 4 OF YOUR SCN, THE ASSESSEE HEREBY SUBMIT THAT UNDER SECTION 9(L)(VI) OF THE ITA, IN EXPLANATION 2, ROYALTY IS DEFINED AS THE CONSIDERATION (INCLUDING LUMP SUM PAYMENT) FOR THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENSE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA, PROCESS, TRADEMARK, COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK. IT FURTHER INCLUDES CONSIDERATION FOR THE USE OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA, PROCESS, TRADEMARK OR SIMILAR PROPERTY. IT MAY BE OBSERVED THAT THE MOST IMPORTANT ASPECT OF THIS DEFINITION IS THE USE OF THE WORDS 'CONSIDERATION FOR'. THIS CLEARLY IMPLIES THAT THE PURPOSE FOR WHICH THE CONSIDERATION IS PAID IS OF PARAMOUNT IMPORTANCE FOR THE INTERPRETATION OF THE EXPRESSION 'ROYALTY'. THUS, ONLY IF SOME RIGHT IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA, PROCESS, COPYRIGHT, LITERARY OR SCIENTIFIC WORK OR THE USE OF THE RIGHT IN A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADEMARK OR SIMILAR PROPERTY ARE TRANSFERRED, IT CANNOT BE REGARDED AS ROYALTY. IT IS EVIDENT THAT WHERE THE CONSIDERATION PAID IS FOR THE PURCHASE OF A PRODUCT, AS ENVISAGED IN CATEGORY (2) DESCRIBED ABOVE, AND NOT FOR THE TRANSFER OF THE INTELLECTUAL PROPERTY PER SE, IT MAY NOT BE REGARDED AS ROYALTY. FOR EXAMPLE, THE PURCHASE OF A BOOK BY A CUSTOMER DOES NOT TANTAMOUNT TO THE PURCHASE OF THE COPYRIGHT IN THE BOOK, EVEN THOUGH THE PUBLISHER PUBLISHES THE BOOK BY PURCHASING THE COPYRIGHT. DRAWING A PARALLEL FROM THIS EXAMPLE, PURCHASE OF A SHRINK-WRAP PRODUCT BY AN INDIAN COMPANY FROM A FOREIGN COMPANY SHOULD NOT BE REGARDED AS PURCHASE OF A COPYRIGHT BUT ONLY A PURCHASE OF A COPYRIGHTED ARTICLE AND THUS THE PAYMENT THEREFOR SHOULD NOT BE REGARDED AS ROYALTY. AN IMPORTANT ASPECT THAT HAS BEEN EMPHASIZED BY THE INDIAN COURTS IS THAT WHILE CHARACTERIZING THE INCOME, ONE SHOULD LOOK AT THE PREDOMINANT PURPOSE FOR WHICH THE CONSIDERATION IS PAID IN A TRANSACTION. THUS, WHERE THE CONSIDERATION IS PRIMARILY FOR THE PURCHASE OF THE PRODUCT AND THE USE OF SUCH INTELLECTUAL PROPERTY IS MERELY INCIDENTAL TO THE PURCHASE OF THE PRODUCT, THE PAYMENT WOULD BE CHARACTERIZED AS PURCHASE OF A PRODUCT AND NOT AS ROYALTY. IN VIEW OF THIS, THE PAYMENT SHOULD BE CHARACTERIZED AS BUSINESS INCOME UNDER THE ITA. PAGE | 8 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. EVEN IN A DTAA SCENARIO, THE PAYMENTS MADE FOR PURCHASE OF A PRODUCT, WHICH EMBODIES INTELLECTUAL PROPERTY IN IT, CAN'T BE REGARDED TO HAVE BEEN MADE FOR THE USE OF OR THE RIGHT TO USE ANY INTELLECTUAL PROPERTY AND THE AMOUNT WOULD FALL OUTSIDE THE ABOVE DEFINITION OF ROYALTY UNDER THE INDIA-US DTAA AND SHOULD BE TAXED AS BUSINESS INCOME. 3.1 THE SALE OF A CD ROM/DISKETTE CONTAINING SOFTWARE IS NOT A LICENSE BUT IT IS A SALE OF A PRODUCT WHICH, OF COURSE, IS A COPYRIGHTED PRODUCT AND THE OWNER OF THE COPYRIGHT BY WAY OF AGREEMENT PUTS THE CONDITIONS AND RESTRICTIONS ON THE USE OF THE PRODUCT SO THAT HIS COPYRIGHTS IN SUCH COPYRIGHTED ARTICLE OR THE WORK MAY NOT BE INFRINGED. IN THE CASE OF DIRECTOR OF INCOME TAX V. INFRASOFT LTD. [2013 (11) TMI 1382 - DELHI HIGH COURT], THE HIGH COURT HAS RULED THAT 'FOR A PAYMENT TO QUALIFY AS ROYALTY PAYMENT, IT IS NECESSARY TO ESTABLISH THAT THERE IS TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF ANY LICENSE) IN RESPECT OF COPYRIGHT. DISTINCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE'. COPYRIGHT IS DISTINCT FROM THE MATERIAL OBJECT, COPYRIGHTED. COPYRIGHT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE. THE RIGHT TO USE A COPYRIGHT IN A PROGRAMME IS TOTALLY DIFFERENT FROM THE RIGHT TO USE A PROGRAMME EMBEDDED IN A CASSETTE OR A CD WHICH MAY BE A SOFTWARE AND THE PAYMENT MADE FOR THE SAME CANNOT BE SAID TO BE RECEIVED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE OF ANY COPYRIGHT TO BRING IT WITHIN THE DEFINITION OF ROYALTY AS GIVEN IN THE DTAA. FOLLOWING DELHI HIGH COURT IN DIT V. M/S NOKIA NETWORKS [2012 (9) TMI 409 - DELHI HIGH COURT] - THE RIGHT TO MAKE A BACKUP COPY PURELY AS A TEMPORARY PROTECTION AGAINST LOSS, DESTRUCTION OR DAMAGE DOES NOT AMOUNT TO ACQUIRING A COPYRIGHT IN THE SOFTWARE. WHAT HAS BEEN TRANSFERRED IS NOT COPYRIGHT OR THE RIGHT TO USE COPYRIGHT BUT A LIMITED RIGHT TO USE THE COPYRIGHTED MATERIAL AND DOES NOT GIVE RISE TO ANY ROYALTY INCOME. THE CONSIDERATION RECEIVED ON GRANT OF LICENSES FOR USE OF SOFTWARE IS NOT ROYALTY WITHIN THE MEANING OF ARTICLE 12(3) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND THE UNITED STATES OF AMERICA - DECIDED AGAINST REVENUE,' THIS SETTLED SITUATION HAS BEEN UPHELD IN NUMEROUS DECISIONS OF THE TRIBUNAL AND HIGH COURTS VIZ. [2014] 43 TAXMANN.COM 16 (HYDERABAD - TRIB.) ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) -I, HYDERABAD VS. BARTRONICS INDIA LTD. MUMBAI IT AT - M/S. GALATEA LTD. VS. DCIT INTERNATIONAL TAXATION DIRECTOR OF INCOME-TAX VS. NOKIA NETWORKS OY IN THE PRESENT CASE, THE ASSESSEE COULD NOT BE SAID TO HAVE PAID THE CONSIDERATION FOR USE OF OR THE RIGHT TO USE COPYRIGHT BUT HAD SIMPLY PURCHASED THE COPYRIGHTED WORK EMBEDDED IN THE CD-ROM OR ANY OTHER MEDIA WHICH COULD BE SAID TO BE SALE OF 'GOODS' BY THE OWNER. THE CONSIDERATION CLAUSES TO THE INDIA - UAE DTAA COULD NOT BE SAID TO BE ROYALTY AND THE SAME WOULD BE OUTSIDE THE SCOPE OF THE DEFINITION OF ROYALTY' AS PROVIDED IN INDIA - UAE DTAA.' 14. THE ASSESSING OFFICER, HAVING GONE THROUGH THE ABOVE SUBMISSIONS, OBSERVED THAT ASSESSEE HAS PLACED HEAVY RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIT V. M/S NOKIA NETWORKS OY [2012 (9) TMI 409 - DELHI HIGH COURT]. HOWEVER, IT IS PERTINENT TO MENTION HERE THAT THE VIEW OF THE HON'BLE KARNATAKA HIGH COURT IS DIFFERENT ON THIS ISSUE. FURTHER, THE HON'BLE PAGE | 9 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. JURISDICTIONAL HIGH COURT, ON THIS ISSUE, HAS NOT DECIDED. IN THE LIGHT OF THE ABOVE FACTS, THE IMPUGNED ISSUE IS DEBATABLE ISSUE AS DIFFERENT HIGH COURT HAVE DIFFERENT VIEW ON THIS ISSUE. IN THE ABSENCE OF ANY DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THIS MATTER, THE ARGUMENT OF THE ASSESSEE BASED OF THE DECISION OF THE HON'BLE DELHI HIGH COURT IS NOT BINDING UPON THE ASSESSING OFFICER. IN VIEW OF THE ABOVE, THE SUM OF RS.9,12,600/- WAS DISALLOWED BY INVOKING THE PROVISION OF SECTION 40(A)(IA) OF THE ACT AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 15. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CTI(A) WHO HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 16. LEARNED DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER, WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. WHEREAS, LEARNED AUTHORIZED REPRESENTATIVE (IN SHORT THE LD. AR) RELIED ON THE ORDER OF LD. CIT(A). 17. WE HAVE HEARD BOTH THE PARTIES. WE NOTE THAT DURING THE COURSE OF ASSESSMENT PROCEEDING, THE AO HAS NOTICED THAT THE ASSESSEE COMPANY HAD PURCHASED SOFTWARE CALLED PACOR CLIENTS SOFTWARE WITH HASP KEY NOTE FROM COMPUTER SYSTEM AND NETWORKING (FOREIGN SUPPLIER OF THE SOFTWARE) FOR THE CONSIDERATION OF RS.9,12,600/- AND THE ASSESSEE COMPANY HAD NOT DEDUCTED TAX ON SUCH EXPENDITURE THOUGH IT WAS SUBJECT TO TDS PROVISIONS. ON BEING AGGRIEVED WITH THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO HAS ALLOWED THE APPEAL OF THE ASSESSEE COMPANY DELETING THE ADDITION OF RS.9,12,600/- ON ACCOUNT OF DISALLOWANCE U/S 40(A)(IA) OF THE ACT. WE NOTE THAT LD. CIT(A) HAS HELD THAT THE ASSESSEE COMPANY HAS PURCHASED SOFTWARE FROM A FOREIGN SUPPLIER PRIMARILY AS PRODUCT, SO THE CONSIDERATION PAID WAS FOR PURCHASE OF PRODUCT AND THE USE OF INTELLECTUAL PROPERTY IS MERELY INCIDENTAL TO THE PURCHASE OF THE PRODUCT, SO THE PAYMENT SHOULD BE CATEGORIZED AS PURCHASE OF PRODUCT AND NOT AS ROYALTY. GENERALLY, THE OWNER OF THE COPYRIGHT, BY WAY OF AGREEMENT PUTS THE PAGE | 10 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. CONDITIONS AND RESTRICTIONS ON THE USE OF THE PRODUCT SO THAT HIS COPYRIGHT IN SUCH COPYRIGHTED ARTICLE OR THE WORK CANNOT BE INFRINGED. THERE IS APPARENTLY A DISTINCTION BETWEEN ACQUISITION OF A 'COPYRIGHT RIGHT' AND 'COPYRIGHTED ARTICLE'. THE ID. CIT(A) HAS RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICE VS. STATE OF ANDHRA PRADESH 271 ITR 401 (SC), WHEREIN IT WAS HELD THAT SOFTWARE, WHICH IS INCORPORATED ON A MEDIA, WOULD BE GOODS AND THEREFORE LIABLE TO SALES TAX. THE LD. CIT(A) HAS ALSO PLACED RELIANCE ON THE FOLLOWING JUDGMENTS: 1) CIT VS. CREATIVE INFOCITY LTD (2017) 82 TAXMANN.COM 356 (GUJ.) 2) DCIT VS. ATMEL R 8S D INDIA (P) LTD (2016) 74 TAXMAN.COM 106 (CHENNAI) 3) DCIT VS. WESTERN UNION FINANCIAL SERVICES INC (2016) 156 ITD 882 (DEL) 4) DATAMINE INTEMATION LTD VS. ADDL. CIT (2016) 158 ITD (DEL) 18. WE NOTE THAT HON`BLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT.LIMITED VS.CIT, CIVIL APPEAL NO.8733-8734 OF 2018, DATED 02.03.2021 UPHELD THE SAME VIEW. IN VIEW OF THE ABOVE DECISIONS AND ALSO THE FACT THAT THE LD.CIT(A) HELD THAT IMPUGNED PAYMENT WAS NOT MADE FOR ACQUIRING ANY COPYRIGHT BUT 'COPYRIGHTED MATERIAL' AND PAYMENT WAS FOR PURCHASE OF GOODS AND NOT TOWARDS ROYALTY. HENCE, THE ASSESSEE WAS NOT HAVING ANY LIABILITY TO DEDUCT TAX U/S195 OF THE ACT. ACCORDINGLY, LD CIT(A) DELETED THE ADDITION OF RS.9,12,600/- MADE BY THE ASSESSING OFFICER. WE HAVE GONE THROUGH THE ORDER OF LD CIT(A) AND NOTED THAT THERE IS NO ANY INFIRMITY IN THE ORDER OF LD CIT(A). THAT BEING SO, WE DECLINE TO INTERFERE WITH THE ORDER OF ID. CIT(A) IN DELETING THE AFORESAID ADDITIONS. HIS ORDER ON THIS ADDITION IS, THEREFORE, UPHELD AND THE GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 19. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER IS PRONOUNCED ON 17/05/2021 BY PLACING RESULT ON NOTICE BOARD. SD/- SD/- (PAWAN SINGH) (DR. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER LWJR /SURAT / DATE: 17/05/2021 PAGE | 11 ITA NO.117/SRT/201 7 ASSESSMENT YEARS.2014-15 LEMON TECHNOMIST PVT. LTD. SAMANTA COPY OF THE ORDER FORWARDED TO 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR/AR, ITAT, SURAT 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR/SR. PS/PS ITAT, SURAT