Deputy Commissioner of Income tax,Circle-7(1)(2), Bangalore V. WS Atkins India P Ltd, Bangalore

ITA 1467/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89905 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 19-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR K SHANKAR PRASAD JT
• Assessee Lawyers: K P SRINIVAS
• Keywords: Depreciation; Retrospective amendment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.1467/BANG/2014 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), BANGALORE. VS. M/S. WS ATKINS INDIA PVT. LTD. 10 TH FLOOR, SAFINA TOWERS, NO.3, ALI ASKAR ROAD, BANGALORE 560 052. PAN : AAACW 1400B APPELLANT RESPONDENT APPELLANT BY : DR. K. SHANKAR PRASAD, JT. CIT(DR) RESPONDENT BY : SHRI K.P. SRINIVAS, C.A. DATE OF HEARING : 15.04.2015 DATE OF PRONOUNCEMENT : 08.05.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 19.8.2014 OF THE CIT(APPEALS)-III, BANGALORE RELATING TO ASSESSM ENT YEAR 2009-10. 2. GROUND NO.2 READS AS FOLLOWS:- ITA NO. 1467/BANG/2014 PAGE 2 OF 8 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN LAW IN HOLDING THAT 10% OF THE TOTAL TELECOMMUNICATIONS EXPENSES ARE TO BE ALLOWED AS TELECOMMUNICATION EXPENSES FOR DELIVERY OF SOFTWARE OUTSIDE INDIA INSTEAD OF 50%, WITHOUT APPRECIATING THAT THE AO HAD GIVEN A SUBSTANTIAL FINDING ON THIS ISSUE AND THE FACTS W ERE SAME FOR AY 2008-09. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF RENDERING COMPUTER SOFTWARE DEVELOPMENT SERVICES. THE ASSESS EE IS REGISTERED WITH THE SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI) AND H AS REGISTERED OFFICE IN BANGALORE. THE ASSESSEE WAS ENTITLED TO CLAIM DEDU CTION U/S. 10A OF THE ACT. WHILE COMPUTING DEDUCTION U/S. 10A, THE ASSES SEE EXCLUDED FROM THE EXPORT TURNOVER 10% OF THE TELECOMMUNICATION EXPENS ES OF RS.45,67,877. ACCORDING TO THE ASSESSEE, AS PER THE DEFINITION OF EXPORT TURNOVER AS LAID DOWN IN CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A OF THE ACT, FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE, ATTRIBUTABL E TO DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA HAVE T O BE EXCLUDED. ACCORDING TO THE ASSESSEE, ONLY 10% OF THE TELECOMM UNICATION EXPENSES WERE ATTRIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND ACCORDINGLY ONLY A SUM OF RS.4,56,788 WAS EXCLUDED. ACCORDING TO THE ASSESSING OFFICER, IN A.Y. 2008-09, 50% OF THE TELE COMMUNICATION EXPENSES WERE CONSIDERED AS EXPENSES ATTRIBUTABLE T O DELIVERY OF SOFTWARE OUTSIDE INDIA AND FOLLOWING THE SAME, THE AO EXCLUD ED 50% OF ITA NO. 1467/BANG/2014 PAGE 3 OF 8 TELECOMMUNICATION EXPENSES AND THEREBY THE EXPORT T URNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 10A WAS TAKEN A T A LOWER FIGURE. 4. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) FOUN D ON THE BASIS OF EVIDENCE LED BEFORE HIM THAT ONLY 10% OF THE TELECO MMUNICATION EXPENSES WERE TO BE EXCLUDED FROM THE EXPORT TURNOVER AS ATT RIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA INCURRED BY THE ASS ESSEE. IN THIS REGARD, THE CIT(APPEALS) HAS VERIFIED ALL THE DOCUMENTS FIL ED BY THE ASSESSEE TO DEMONSTRATE THE ABOVE POSITION AND CAME TO THE CONC LUSION THAT THE ESTIMATE MADE BY THE AO WAS WITHOUT ANY BASIS. AGG RIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE IS IN APPEAL BEFORE T HE TRIBUNAL. 5. BEFORE US, THE LD. DR RELIED ON THE ORDER OF THE AO. WE FIND THAT AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND ITS CUST OMERS OVERSEAS, COMMUNICATION EXPENSES WERE TO BE BORNE BY THE CUST OMER. IN SUCH CIRCUMSTANCES, THERE COULD BE NO EXPENSES INCURRED BY THE ASSESSEE FOR DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. NEVER THELESS, THE ASSESSEE HAS ON HIS OWN, ON A CONSERVATIVE APPROACH, DISALLO WED 10% OF THE TELEPHONE EXPENSES AS INCURRED BY THE STPI UNIT AS ATTRIBUTABLE TO DELIVERY OF SOFTWARE OUTSIDE INDIA. IN THE GIVEN CIRCUMSTAN CES, WE DO NOT FIND ANY MERIT IN GROUND NO.2 RAISED BY THE REVENUE. 6. GROUNDS NO.3 & 4 ARE WITH REGARD TO EXCLUSION OF REIMBURSEMENT OF CERTAIN EXPENSES FROM BOTH EXPORT TURNOVER AND TOTA L TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 10A OF THE ACT. ACCORDING TO THE ITA NO. 1467/BANG/2014 PAGE 4 OF 8 ASSESSEE, WHATEVER IS EXCLUDED FROM THE EXPORT TURN OVER HAS ALSO TO BE EXCLUDED FROM THE TOTAL TURNOVER AS LAID DOWN BY TH E HONBLE HIGH COURT OF KARNATAKA IN TATA ELXSI LTD., 349 ITR 98 (KAR) . THE AO DID NOT AGREE WITH THE SUBMISSIONS OF THE ASSESSEE, BUT THE CIT(A PPEALS) ALLOWED THE CLAIM OF THE ASSESSEE. THE GRIEVANCE OF THE REVENU E IS THAT THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA CITED SUPRA HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN SLP WAS PENDING BEFORE THE HONBLE SUPREME COURT. IN OUR VIEW, THIS CANNOT BE THE BASIS NOT T O FOLLOW THE BINDING DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT. WE THEREFORE CONFIRM THE ORDER OF THE CIT(APPEALS) AND DISMISS GROUNDS NO.3 & 4 RAISED BY THE REVENUE. 7. GROUND NO.5 READS AS FOLLOWS:- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN LAW IN DELETING THE DISALLO WANCE U/S 40(A)(IA) WITHOUT APPRECIATING THE FACT THAT THE AS SESSEE HAD PURCHASED SOFTWARE WHICH IS IN NATURE OF A LICENSE PAID FOR USAGE OF THE SOFTWARE AND THE CONSIDERATION FOR SUCH LICE NSES WOULD FALL WITHIN THE DEFINITION OF THE ROYALTY DEFINED IN EXP LANATION 9(1)(IV) AND HENCE DEDUCTION OF TAX AT SOURCE UNDER SECTION 194J SHOULD HAVE BEEN DONE BY THE ASSESSEE. 8. THE ASSESSEE HAD DURING THE PREVIOUS YEAR ACQUIR ED SOFTWARE BY WAY OF PURCHASE. THE DEPRECIATION ON SUCH ADDITION OF SOFTWARE WAS A SUM OF RS.32,36,441. THE ASSESSEE CLAIMED THE AFORESAI D DEPRECIATION AS AN ALLOWABLE DEDUCTION WHILE COMPUTING ITS INCOME FROM BUSINESS. THE AO, ITA NO. 1467/BANG/2014 PAGE 5 OF 8 HOWEVER, NOTICED THAT ON THE PURCHASE OF SOFTWARE, THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE. THE AO WAS THEREFORE OF TH E VIEW THAT PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WERE APPLICABLE AND CLAIM FOR DEPRECIATION HAD TO BE DISALLOWED U/S. 40(A)(IA). 9. UNDER SEC. 40(A)(IA), DEDUCTION ON INTEREST, COM MISSION OR BROKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SER VICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT OR AMOUNTS PAYABLE T O A CONTRACTOR OR A SUB- CONTRACTOR BEING A RESIDENT FOR CARRYING OUT ANY WO RK ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVIIB AND SUCH T AX HAS NOT BEEN DEDUCTED, THE SAME WILL NOT BE ALLOWED AS A DEDUCTI ON. ACCORDING TO THE AO, THE AMOUNT PAID BY THE ASSESSEE FOR ACQUIRING S OFTWARE WAS IN THE NATURE OF ROYALTY WITHIN THE MEANING OF EXPLANATION 2 TO SECTION 9(1)(VI) AND ACCORDINGLY THE AO DISALLOWED THE CLAIM OF THE ASSE SSEE FOR DEPRECIATION. 10. ON APPEAL BEFORE THE CIT(APPEALS), THE ASSESSEE RAISED A CONTENTION THAT SOFTWARE HAS BEEN INCLUDED IN DEFIN ITION OF ROYALTY ONLY BY AMENDMENT OF FINANCE ACT 2012. ALTHOUGH THIS AMENDM ENT IS RETROSPECTIVE, THERE IS NO LIABILITY THAT CAN BE FA STENED ON THE ASSESSEE TO DEDUCT TAX AT SOURCE. VARIOUS DECISIONS WERE RELIED UPON INCLUDING THE DECISION OF INFOTECH ENTERPRISES LTD ITA 115/HYD/2011 OF THE HYDERABAD BENCH OF THE TRIBUNAL WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOULD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT DON E AND SUBSEQUENTLY BECOME TAXABLE ON ACCOUNT OF A RETROSPECTIVE LEGISL ATION. ITA NO. 1467/BANG/2014 PAGE 6 OF 8 11. THE CIT(APPEALS) HELD AS FOLLOWS:- 7.3 IN MY VIEW THERE IS CONSIDERABLE FORCE IN THE SUBMISSIONS OF THE APPELLANT. EVEN ACCEPTING THE VIEW OF THE AO THAT THE PAYMENT MADE FOR OBTAINING LICENSE FOR USE OF SOFTW ARE WOULD AMOUNT TO ROYALTY, IT IS NECESSARY TO NOTE THAT DUR ING THE PERIOD WHEN THE PURCHASE WAS MADE IE. F.Y. 2008- 09, THE A SSESSEE DID NOT HAVE THE BENEFIT OF THE CLARIFICATION BROUGHT A BOUT BY THE RETROSPECTIVE AMENDMENT THAT THE PAYMENT TANTAMOUNT S TO PAYMENT FOR ROYALTY AND CONSEQUENTLY TAX WAS TO BE DEDUCTED U/S.194J. THE LAW AS EXTANT ON THE DATE WHEN THE PA YMENT FOR OBTAINING THE SOFTWARE WAS MADE, HAS NOT CATEGORICA LLY LAID DOWN THAT TAX IS REQUIRED TO BE DEDUCTED. AS IT IS IMPOS SIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVE LY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN THE PAYMENT IS CREDITED OR MADE, THE CONTENTIONS OF THE AR OF THE APPELLANT AR E VALID. THIS VIEW IS SUPPORTED BY THE RATIO OF THE FOLLOWING DEC ISIONS RELIED ON BY AR OF APPELLANT. INFOTECH ENTERPRISE4 ITA 115/2011 DT.29/10/2013 KERALA VISION LTD 40 TAXMANN.COM 50 (COCHIN) CHANNEL CUIDE INDIA LTD 139 LTD 49 (MUM) 7.4 AO IS THEREFORE DIRECTED TO ALLOW THE CLAIM OF THE APPELLANT. THIS GROUND IS ALLOWED. 12. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS RAISED GROUND NO.5 BEFORE THE TRIBUNAL. 13. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WH O REITERATED THE STAND OF THE REVENUE AS CONTAINED IN GROUND NO.5. IN OUR VIEW, THE ISSUE RAISED BY THE REVENUE IN THE GROUND OF APPEAL IS NO LONGER RES INTEGRA AND HAS BEEN CONSIDERED AND DECIDED BY THE ITAT DELHI B ENCH IN THE CASE OF SMS DEMAG PVT. LTD. V. DCIT, 132 TTJ 498 AND SONIC BIOCHEM ITA NO. 1467/BANG/2014 PAGE 7 OF 8 EXTRACTIONS PVT. LTD., (2013) 23 ITR (TRIB) 447 ITA T MUM . IN SONIC BIOCHEM EXTRACTIONS PVT. LTD. (SUPRA) , IDENTICAL ISSUE WAS CONSIDERED AND DECIDED BY THE MUMBAI TRIBUNAL. FOLLOWING WERE THE RELEVANT OBSERVATIONS:- THE ASSESSEE PURCHASED SOFTWARE, CAPITALISED THE P AYMENT TO THE COMPUTERS ACCOUNT AS THE SOFTWARE CAME ALONG WITH T HE HARDWARE OF COMPUTERS AND CLAIMED DEPRECIATION. ON THE GROUN D THAT PURCHASE OF SOFTWARE IS ESSENTIALLY PURCHASE OF COP YRIGHT WHICH ATTRACTS TAX DEDUCTION AT SOURCE UNDER SECTION 194J , THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 40(A)(IA) AND DISALLOWED THE DEPRECIATION CLAIMED. THE COMMISSION ER (APPEALS), CONFIRMED THE ACTION OF THE ASSESSING OF FICER ON THE GROUND THAT THE PURCHASE OF SOFTWARE AMOUNTED TO AC QUISITION OF INTANGIBLE ASSET AND THEREFORE, THE PAYMENT WAS ROY ALTY AND DISALLOWABLE. ON APPEAL: HELD, (I) THAT MERE PURCHASE OF SOFTWARE, A COPYRIG HTED ARTICLE, FOR UTILISATION OF COMPUTERS CANNOT BE CONSIDERED AS PU RCHASE OF COPYRIGHT AND ROYALTY. THE ASSESSEE DID NOT ACQUIRE ANY RIGHTS FOR MAKING COPIES, SELLING OR ACQUIRING WHICH GENERALLY COULD BE CONSIDERED WITHIN THE DEFINITION OF ROYALTY. EXPL ANATION 2 TO SECTION 9(1)(VI) CANNOT BE APPLIED TO PURCHASE OF A COPYRIGHTED SOFTWARE, WHICH DOES NOT INVOLVE ANY COMMERCIAL EXP LOITATION THEREOF. THE ASSESSEE SIMPLY PURCHASED SOFTWARE DEL IVERED ALONG WITH COMPUTER HARDWARE FOR UTILIZATION IN THE DAY-T O-DAY BUSINESS. 14. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL, WE UPHOLD THE ORDER OF THE CIT(APPEALS) AND DISMISS TH E GROUND RAISED BY THE REVENUE. ITA NO. 1467/BANG/2014 PAGE 8 OF 8 15. IN THE RESULT, THE APPEAL BY THE REVENUE IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF MAY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 8 TH MAY, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.