M/s. VST Industries Limited, Hyderabad V. ACIT, Circle-16(2), Hyderabad

ITA 1492/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59174 (ITAT-HYDERABAD)
• Duration Of Justice: 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2002-2003
• Appeal Filed On: 17-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS; T DIWAKAR PRASAD
• Assessee Lawyers: T S AJAI
• Keywords: Bonafide belief; Non-deduction of tax; Reasonable cause
• Section: 201(1)

Judgement Text

ITA NO.1492/H/2011 VST INBDUSTRIES LIMITED, HYDERABAD 1 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE CHANDRA POOJARI, ACCOUNTANT MEMBER & SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1492/HYD/2011 ASSESSMENT YEAR 2002-03 M/S VST INDUSTRIES LIMITED, HYDERABAD (PAN AAACV6799C) VS THE ACIT, CIRCLE 16(2), HYDERABAD APPELLANT RESPONDENT APPELLANT BY : SHRI T.S. AJAI RESPONDENT BY : SHRI V. SRINIVAS & T. DIWAKAR PRASAD DATE OF HEARING : 12.12.2011 DATE OF PRONOUNCEMENT : 31.1.2012 ORDER PER ASHA VIJAYARAGHAVAN, JM . THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF THE CIT(A)- II, HYDERABAD PASSED ON 11-5-2011 UPHOLDING THE ORD ER PASSED BY THE ASSESSING OFFICER (ACIT RANGE-15, HYDERABAD) ON 3-6 -2008 LEVYING PENALTY OF RS.4,20,000/- U/S. 271C OF THE IT ACT 2. THE FACTS OF THE CASE IN BRIEF ARE THAT THERE W AS A SURVEY U/S.133A CONDUCTED IN THE ASSESSEES BUSINESS PREMISES ON 14 -3-2006, DURING THE COURSE OF WHICH IT WAS FOUND BY THE ASSESSING OFFIC ER (AO) THAT THE ASSESSEE PAID AN AMOUNT OF RS.80,00,000/-TO M/S SAP INDIA PVT. LTD. (BANGALORE) FOR PURCHASE OF LICENSE TO USE SAP SOFT WARE. NO TAX WAS WITHHELD (I.E., TDS) FOR THE AFORESAID PAYMENT FOR PURCHASE OF SOFTWARE AND THE AO PASSED AN ORDER U/S 201(1A) DATED 22-01- 2007 RAISING A ITA NO.1492/H/2011 VST INBDUSTRIES LIMITED, HYDERABAD 2 DEMAND OF RS.31,500/-. NO DEMAND U/S 201(1) WAS RAI SED SINCE THE DEDUCTEE HAS ACCOUNTED FOR THE PAYMENT OF RS.80,00, 000/- AND HAS PAID TAX THEREON. SUBSEQUENT TO THE ORDER U/S 201(1A) , A PENALTY ORDER WAS PASSED ON 03-06-2008 BY THE AO LEVYING A PENALTY OF RS.4,20,000/- FOR THE NON-DEDUCTION OF TAX BY ASSESSEE FROM PAYMENT M ADE FOR PURCHASE OF LICENSE FOR SAP SOFTWARE . 3. THE CIT(A) UPHELD THE PENALTY ORDER OF THE AO A ND HELD AS FOLLOWS: THE CONTENTION OF THE APPELLANT THAT THE SAP SOFTWA RE IS A PROPRIETARY SOFTWARE OF SAP INDIA AND ALSO THAT IT IS A GOOD AND NOT SERVICE, THEREFORE, PROVISIONS OF SEC. 194J WOULD N OT BE APPLICABLE, IS NOT ACCEPTABLE. THOUGH THE SAP SOFTWARE IS A PROPRI ETARY SOFTWARE OF SAP INDIA, IT IS NOT OFF THE SHELF SOFTWARE WHICH C AN BE BOUGHT AND INSTALLED. AS POINTED BY THE AO IN THE ASSESSMENT O RDER, THERE IS SUBSTANTIAL WORK IN TERMS OF PREPARATION OF SITE, P URCHASE OF HARDWARE ETC. AND EXPENDITURE INVOLVED BEFORE THE A CTUAL INSTALLATION OF SAP AND SOMETIMES, THE SAP SOFTWARE IS CUSTOMIZED AS PER THE SPECIFICATIONS OF THE PURCHASER COMPANY. HENCE IT CANNOT BE CATEGORIZED AS OFF THE SHELF COMMODITY WHICH CAN BE USED BY ANY PERSON. THE CONTENTION OF THE APPELLANT THAT THE DE DUCTEE HAS PAID TAXES ON THE AMOUNTS RECEIVED FROM IT IS NOT TENABL E. WHEN THERE WAS AN AGREEMENT TO PURCHASE THE SAP SOFTWARE, IT W AS THE DUTY OF THE PURCHASER OF THE LICENSE TO USE SAP, TO MAKE DE DUCTION OF TAX AT SOURCE AT THAT POINT. SUBSEQUENTLY, THE DEDUCTEE HA S PAID TAXES ON THE AMOUNTS WILL NOT ABSOLVE THE DEDUCTOR OF HIS DU TY TO DEDUCT THE TAX. THE EXPLANATION OFFERED BY THE APPELLANT COMPA NY AT ASSESSMENT STAGE, PENALTY STAGE AND EVEN NOW AT AP PELLATE STAGE THAT THE PROVISIONS OF SECTION 194J ARE CONTENTIOUS IS DEVOID OF MERIT ITA NO.1492/H/2011 VST INBDUSTRIES LIMITED, HYDERABAD 3 AND IS UNSATISFACTORY. RELYING ON VARIOUS COURT DEC ISIONS BY THE APPELLANT IS ONLY TO DEFEND ITS CASE, BUT IT COULD NOT SUBSTANTIATE ITS FAILURE FOR NON DEDUCTION OF TAX WITH ANY REASONABL E CAUSE 6. THE APPELLANT HAS NOT GIVEN ANY BONA FIDE EXPLA NATION NOR HAS SHOWN ANY REASONABLE CAUSE FOR ITS FAILURE TO DEDUC T TAX AT SOURCE. THE REASONS SHOWN ARE ONLY FRIVOLOUS AND WITHOUT SU BSTANCE. WHEN NO GOOD AND SUFFICIENT REASONS FOUND TO EXIST, LEVY OF PENALTY BY THE AO FOR APPELLANTS FAILURE TO DEDUCT TAX AT SOURCE IS JUSTIFIED 4. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI. T.S. AJAY, REITERATED THE POINTS IN THE GROUNDS OF APPEAL AND RELIED ON WIPRO GE MEDICAL SYSTEMS VS. ITO-III (2005 3 SOT 627) AND CIT VS. CADBURY INDIA LTD. (2011 11 TAXMANN.COM 66 DELHI HC) . THE LEARNED DEPARTMENTAL REPRESENTATIVE S/SHRI. V. SRINIVAS & T. DIWAKAR PRASAD RELIED ON THE ORDER OF THE LOWER AUT HORITIES. 5. WE HEARD BOTH PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE SHALL FIRST DISCUSS THE CONDITIONS UNDE R WHICH PENALTY U/S 271(1)(C) CAN BE LEVIED. SEC 271(1) PROVIDES FOR L EVY OF PENALTY FOR PROVIDING INACCURATE PARTICULARS OR MAKING FALSE CL AIMS. HOWEVER THERE IS A CAVEAT IN SEC 273B, WHEREBY IF THE ASSESSEE HAD A REASONABLE CAUSE FOR THE FAILURE REFERRED TO IN SEC 271(1)(C). WHAT IS A `REASONABLE CAUSE HAS BEEN EXPLAINED BY THE DELHI HIGH COURT IN THEIR DEC ISION IN THE CASE OF CIT, VII, DELHI VS. CADBURY INDIA LTD. (11 TAXMAN 6 6) (DELHI). IT WAS HELD AS UNDER:- LEVY OF PENALTY UNDER SECTION 271(1)(C) IS NOT AUT OMATIC. BEFORE LEVYING PENALTY, THE CONCERNED OFFICER IS REQUIRED TO FIND OUT THAT ITA NO.1492/H/2011 VST INBDUSTRIES LIMITED, HYDERABAD 4 EVEN IF THERE WAS ANY FAILURE REFERRED TO IN THE CO NCERNED PROVISION THE SAME WAS WITHOUT A REASONABLE CAUSE. THE INITIA L BURDEN IS ON THE ASSESSED TO SHOW THAT THERE EXISTED REASONABLE CAUSE WHICH WAS THE REASON FOR THE FAILURE REFERRED TO IN THE C ONCERNED PROVISION. THEREAFTER THE OFFICER DEALING WITH THE MATTER HAS TO CONSIDER WHETHER THE EXPLANATION OFFERED BY THE ASSESSEE OR THE PERSON, AS THE CASE MAY BE, AS REGARDS THE REASON FOR FAILURE, WAS ON ACCOUNT OF REASONABLE CAUSE. REASONABLE CAUSE AS APPLIED TO HUMAN ACTION IS THAT WHICH WOULD CONSTRAIN A PERSON OF AV ERAGE INTELLIGENCE AND ORDINARY PRUDENCE. IT CAN BE DESCRIBED AS A PRO BABLE CAUSE. IT MEANS AN HONEST BELIEF FOUNDED UPON REASONABLE GROU NDS, OF THE EXISTENCE OF A STATE OF CIRCUMSTANCES, WHICH ASSUMI NG THEM TO BE TRUE, WOULD REASONABLY LEAD ANY ORDINARY PRUDENT AN D CAUTIOUS MAN, PLACED IN THE POSITION OF THE PERSON CONCERNED , TO COME TO THE CONCLUSION THAT SAME WAS THE RIGHT THING TO DO. THE CAUSE SHOWN HAS TO BE CONSIDERED AND ONLY IF IT IS FOUND TO BE FRIVOLOUS, WITHOUT SUBSTANCE OR FOUNDATION, THE PRESCRIBED CONSEQUENCE S WILL FOLLOW. 6. FURTHERMORE, WE NOTE THAT WHAT WOULD CONSTITUTE REASONABLE CAUSE IS A QUESTION OF FACT WHICH HAS TO BE SEEN FROM THE FACTS AND CIRCUMSTANCES OF EACH CASE. 7. NOW, AS REGARDS THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, IT IS AMPLY CLEAR THAT THE ISSUE OF PURCHASE OF SOFTWA RE LICENCE IS A HIGHLY CONTENTIOUS ISSUE AND IS FRAUGHT WITH INTERPRETATIO N. THE HONBLE SUPREME COURT IN TATA CONSULTANCY SERVICES VS. ANDHRA PRADESH (271 ITR 401) , IN THE CONTEXT OF SALES TAX, HELD THAT OFF-THE-SH ELF SOFTWARE PURCHASE IS AKIN TO PURCHASE OF GOODS. SUBSEQUENT T O THAT A NUMBER OF DECISIONS IN THE CONTEXT OF INCOME TAX ACT HAVE BEE N RENDERED IN WHICH ITA NO.1492/H/2011 VST INBDUSTRIES LIMITED, HYDERABAD 5 IT HAS BEEN HELD SOFTWARE LICENCE PURCHASE IS THE S ALE OF A COPYRIGHTED ARTICLE I.E., A SALE AND NOT ROYALTY PAYMENTS UNDER SECTION 9(1)(VI) OF THE I.T ACT [REFER MOTOROLA 95 ITD 269 SPECIAL BENCH, VELANKANI MAURIT IUS VS. DDIT (ITAT BANGALORE, ITA NO/985 & 986/BANG/2009), DASSAULT SYSTEMS (AAR 322 ITR 125) , INFRASOFT VS ADIT (ITAT DELHI 2 010 1 ITR 390), FACTSET RESEARCH SYSTEMS (317 ITR 169), KANSAI NEROLAC (ITA NO.568/MUM/2009, 2010-TII-154-ITAT-MUM-INTL) ETC ] . AT THE SAME TIME, THERE HAVE BEEN A NUMBER OF DECISIONS WHERE IT HAS BEEN HELD THAT SOF TWARE LICENCE PURCHASE WAS ROYALTY UNDER THE I.T.ACT AND NOT SALE OF GOODS [REFER M/S GRACEMAC CORPORATION VS ADIT, MICROSOFT REGIONAL SA LES CORPORATION VS ADIT (2010-TII-141-ITAT-DEL-INTL), CIT VS. SAMSUNG ELECTRONICS (ITA.NO.2808 OF 2005, KARNATAKA HIGH COURT) ETC .] 8. HENCE SUCH A CONTENTIOUS ISSUE CLEARLY PROVIDES SUFFICIENT REASONABLE CAUSE FOR THE ASSESSEE TO HAVE BONAFIDE BELIEF THAT ITS SOFTWARE PURCHASE TRANSACTION DOES NOT ATTRACT ANY TDS U/S 194J. IN SUCH A SCENARIO, THE QUESTION OF LEVYING PENALTY U/ S 271C DOES NOT ARISE. 9. WE ALSO RELY ON THE DECISION OF THE ITAT BANGAL ORE IN WIPRO GE MEDICAL SYSTEMS LTD. VS ITO(TDS)-III (2005 3 SOT 62 7) WHERE A SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AN D THE DECISION OF THE HONBLE DELHI HIGH COURT IN CIT VS. CADBURY INDIA LTD. (2011 11 TAXMANN.COM 66 DELHI) WHEREIN IT WAS HELD THAT NO PENALTY CAN BE LEVIED UNDER 271C OF THE IT ACT FOR FAILURE OF NON-DEDUCTI BILITY OF TAX DUE TO MISCONCEIVED APPLICABILITY OF ONE PROVISION OF LAW THAN THE OTHER. ITA NO.1492/H/2011 VST INBDUSTRIES LIMITED, HYDERABAD 6 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON: 31.1.201 2 SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER DATED THE 31 ST JANUARY, 2012 COPY FORWARDED TO: 1. M/S VST INDUSTRIES LIMITED, 1-7-1063/1065, AZAMABAD , HYDERABAD 2. THE ACIT, CIRCLE 15(2), HYDERABAD 3. THE CIT(A)-II, HYDERABAD 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/