JCIT (OSD), CHENNAI V. Sify Technologies Limited, CHENNAI

ITA 1793/CHNY/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8691 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 14-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HOMI RAJVANGH
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Business expenditure; Earning of tax free income; Unabsorbed depreciation; Revenue expenditure
• Section: 143(3); 14A; 40(a)(ia); 201(1); 195; 32; 11

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , , $ BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 1650/CHNY/2017 / ASSESSMENT YEAR : 2010-11 DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT 1, CHENNAI 600 101. VS. M/S. SIFY TECHNOLOGIES LTD., TIDEL PARK, 2 ND FLOOR, NO.4, CANAL BANK ROAD, TARAMANI, CHENNAI 600 113. [PAN: AAACS 9032R] ( / APPELLANT) ( %&' /RESPONDENT ) /. I.T.A. NOS. 1793, 1794 & 1795/CHNY/2016 / ASSESSMENT YEARS : 2009-10, 2010-11 & 2011-12 JOINT COMMISSIONER OF INCOME TAX (OSD), LARGE TAXPAYER UNIT 1, CHENNAI 600 034 VS. M/S. SIFY TECHNOLOGIES LTD., TIDEL PARK, 2 ND FLOOR, NO.4, CANAL BANK ROAD, TARAMANI, CHENNAI 600 113. [PAN: AAACS 9032R] ( / APPELLANT) ( %&' /RESPONDENT ) REVENUE BY : SHRI. HOMI RAJVANGH, CIT ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE . /DATE OF HEARING : 18.12.2018 . /DATE OF PRONOUNCEMENT : 18.12.2018 :-2-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THESE ARE THE APPEALS FILED BY THE REVENUE AGAINST THE CONSOLIDATED ORDERS PASSED BY THE COMMISSIONER OF I NCOME TAX (APPEALS)-17, CHENNAI IN ITA NOS. 69/11-12, 3/13-14 & 18/15- 16/CIT(A)-17 DATED 28.03.2016 FOR ASSESSMENT YEARS 2009-10, 2010-11 & 2011-12, RESPECTIVELY, AND THE ORDER OF T HE COMMISSIONER OF INCOME TAX (APPEALS)-17 IN ITA NO. 52/15-16/CIT( A)-17 DATED 31.03.2017 FOR ASSESSMENT YEAR 2010-11 ON THE ORDER PASSED U/S. 143(3) R.W.S. 147. 2. M/S. SIFY TECHNOLOGIES LTD., THE ASSESSEE, IS IN THE BUSINESS OF NETWORKING SERVICES AND DEVELOPMENT OF SOFTWARE. W HILE MAKING THE ASSESSMENTS FOR ASSESSMENT YEARS 2009-10, 2010- 11 & 2011-12 U/S. 143(3), THE ASSESSING OFFICER DISALLOWED EXPEN DITURE ON ESOP, ADDITION OF UNEARNED INCOME AND MADE DISALLOWANCES U/S. 40(A)(IA), ON NETWORKING COST, CONTENT DEVELOPMENT COST, DIREC T COST AND LEGAL AND PROFESSIONAL CHARGES. AGGRIEVED, THE ASSESSEE FILED APPEALS AND THE CIT(A) ALLOWED THE ASSESSEES APPEALS. :-3-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 3. AGGRIEVED AGAINST THOSE ORDERS, THE REVENUE FILE D THESE APPEALS WITH THE COMMON GROUNDS OF APPEAL. ONE OF THE COMMON GROUNDS IS EXTRACTED AS UNDER: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE DIFFERENCE IN ISSUE PRICE OF ESOPS PARTAKES THE CHARACTER OF SHAR E PREMIUM AND THE SHORTFALL IS AKIN TO SHORT RECEIPT OF PREMIUM AND H ENCE NOT AN ALLOWABLE ITEM OF EXPENDITURE. 3. THE CIT(A) ERRED IN DELETING THE ADDITION OF UNE ARNED INCOME TO THE TUNE OF RS.35.48 CRORES MADE BY THE ASSESSING OFFIC ER. 3.1 THE CIT(A) ERRED IN NOT APPRECIATING THE FACT T HAT THE ASSESSEE USED TO RAISE INVOICES AGAINST SERVICES TO BE RENDE RED AND ONCE THE INVOICES ARE RAISED , THAT CONSTITUTES A SALE TO BE RECOGNISED. THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG AND HENCE INCOME HAS TO BE CHARGED ON ACCRUAL BASIS. THEREFOR E THE YEAR OF CHARGEABILITY IS THE YEAR IN WHICH THE RELEVANT INV OICE IS RAISED. 3.2 THE CIT(A) FAILED TO APPRECIATE THE FACT THAT S INCE EXPENSES ARE BOOKED IMMEDIATELY AT THE TIME OF INCURRING, THE AS SESSEE NECESSARILY HAS TO OFFER THE / INCOME FROM PROVIDING WEB SERVER CERTIFICATES FULLY AT THE TIME OF RECEIPT. 3.3 THE CIT(A) OUGHT TO HAVE FOLLOWED THE DECISION OF THE KERALA HIGH COURT IN THE CASE OF SOUTHERN CABLES & ENGINEERING WORKS (289 ITR 167) AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHOWRINGEE SALES BUREAU P LTD. (87 ITR 542) WHEREIN IT WAS HELD THAT IF A RECEIPT IS A TRADING RECEIPT, THE FACT THAT IT WAS NOT SHOWN AS SUCH IN THE BOOKS DOES NOT PREVENT THE TAXABILITY OF SUC H INCOME. 4.1 THE CIT(A) ERRED IN DELETING THE DISALLOWANCE U /S 40(A)(IA) OF NETWORKING COSTS MADE BY THE ASSESSING OFFICER. 4.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT T HAT THE ASSESSEE IS IN THE BUSINESS OF PROVIDING DIGITAL CERTIFICATES-B ASED AUTHENTICATION SERVICE FOR WEBSITE AND CORPORATES/INDIVIDUALS AND ALSO PROVIDING IP / :-4-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 VPN SERVICES, FOR WHICH IT HAS PAID THE NETWORKING COSTS TO THE SERVICE PROVIDERS LIKE BHARTI AIRTEL LTD., BSNL ETC. FOR TH E USAGE OF INTERNET BANDWIDTH SERVICES, WHICH COMES UNDER THE PURVIEW O F EXPLANATION (B) TO SUB SECTION (1) OF SECTION 194J AND THEREFORE, T HE DISALLOWANCE U/S 40(A)(IA) WAS JUSTIFIED. 4.3 IT IS SUBMITTED THAT THE DECISION OF THE CIT(A) FOR THE AY 2005-06 IN ASSESSEES OWN CASE ON A SIMILAR ISSUE WAS TAKEN UP IN APPEAL BEFORE THE ITAT AND AGAINST THE ADVERSE DECISION OF THE ITAT, THE MATTER HAS BEEN TAKEN IN APPEAL TO THE HONBLE HIGH COURT. 5 THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE R ATIO OF THE RULING OF THE AAR IN THE CASE OF STEFFEN ROBERTSON AND KIRSTE N CONSULTING ENGINEERS & SCIENTISTS [1998] 230 ITR 206 WHEREIN I T HAS BEEN HELD THAT EVEN IF THE PAYMENT TO NON RESIDENTS HAVE BEEN MADE FOR SERVICES RENDERED ABROAD, IF THE BENEFITS THEREOF ARE DERIVE D IN INDIA, THEN 40(A)(I) WOULD BE APPLICABLE. 5.1 THE LEARNED CIT(A) HAS THEREFORE ERRED IN HOLDI NG THAT SECTION 40(A)(I) IS NOT ATTRACTED IN THE CASE OF EXPENSES O F THE NATURE OF CONTENT DEVELOPMENT CHARGES, DIRECT COST AND LEGAL AND PROFESSIONAL CHARGES. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 4. THE LD. DR PRESENTED THE CASE ON THE LINES OF TH E GROUNDS OF APPEAL. PER CONTRA, THE LD. AR SUBMITTED THAT THIS HONBLE TRIBUNAL DECIDED ALL THE ABOVE ISSUES IN ITS FAVOUR IN THE O RDERS IN DCIT VS SIFY TECHNOLOGIES LTD IN ITA NO. 1076/MDS/2011 DATE D 04.10.2013 FOR ASSESSMENT YEAR 2008-09 AND IN ITA NOS. 435,439 & 859/MDS/2010 DATED 08.06.2016 FOR ASSESSMENT YEARS 2001-02, :-5-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 2006-07 & 2007-08, RESPECTIVELY. SO, HE PLEADED TH AT ON THE SAME REASONS THESE APPEALS MAY BE ALLOWED. 5. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL. THE RELEVANT PORTIONS OF THE ORDERS, SUP RA, ISSUE WISE ARE EXTRACTED AS UNDER: 5.1 ON EMPLOYEES STOCK OPTION PLAN: 24. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MA TERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE ONLY CONTENTION O F THE DEPARTMENT THAT THE EXPENDITURE IS IN THE NATURE OF CAPITAL IN NATURE AND THE DECISION RELIED BY THE COMMISSIONER OF INCOME TAX ( APPEALS) HAS NOT ATTAINED FINALITY. THE LD. AUTHORISED REPRESENTATIV E ARGUED ON THE PURPOSE OF ISSUE OF ESOP AND ALSO THE TYPES OF EXPE NDITURE INCURRED AND SUPPORTED HIS ARGUMENTS RELYING ON THE TRIBUNAL DECISION IN THE CASE OF SSI LTD (SUPRA). WE PERUSED THE ORDER OF C OMMISSIONER OF INCOME TAX (APPEALS) AND THE SUBMISSIONS OF BOTH CO UNSELS AND FOUND THAT ESOP ARE IN THE NATURE OF BUSINESS EXPENDITURE AND IT TAKES THE CHARACTERISTIC OF STAFF WELFARE AND THE SHARES ARE ISSUED TO THE EMPLOYEES TO WORK IN THE BEST INTEREST OF THE ASSES SEE. THESE SHARES ARE ALLOTTED THROUGH SEBI GUIDELINES AND EXPENDITUR E IS IN THE NATURE OF REVENUE EXPENDITURE AND CLAIMED DEDUCTION AND LD . AUTHORISED REPRESENTATIVE SUPPORTED HIS ARGUMENTS WITH DECISIO N OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. PVP VENTURES LTD 90 DTR 340 (MAD) WHEREIN IT HELD THAT STAFF WELFARE EXPENDITURE INCU RRED BY THE ASSESSEE IN RESPECT OF EMPLOYEES STAFF OPTION PLAN AS PER SE BI GUIDELINES IS AN ASCERTAINED LIABILITY AND IS ALLOWABLE AS EXPENDIT URE IN COMPUTATION OF INCOME. CONSIDERING THE JURISDICTIONAL HIGH COURT D ECISION, WE UPHOLD THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) A ND ALLOW THE EXPENDITURE. THE GROUND OF THE REVENUE IS DISMISSED . :-6-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 5.2 ON UNEARNED INCOME: 8. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. AUTHO RISED REPRESENTATIVE CONTENTION THAT UNEARNED INCOME AS PER SEC. 145(2) IN RESPECT OF ANY CLASS OF INCOME TO BE DISCLOSED AND NOTIFIED IN THE CENTRAL GOVERNMENT BY OFFICIAL GAZETTE. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. AUTHORISED REPRESENTATIVE AN D ALSO FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) WHO RELIED ON THE EARLIER YEAR ORDERS. WE FOUND THAT SIMILAR ISSUE WAS DECID ED BY THE CO- ORDINATE BENCH IN FAVOUR OF THE ASSESSEE IN ASSESSE ES OWN IN ITA NO.1084/MDS/2012, FOR THE ASSESSMENT YEAR 2002-2003 , DATED 20.11.2012, WHERE THE TRIBUNAL OBSERVED IN PARA NO S. 5 TO 7 AS UNDER:- 5. THE DR VEHEMENTLY SUBMITTED THAT THE CIT(A) HA S WRONGLY DELETED THE ADDITION WHICH WAS DESERVINGLY MADE BY THE ASSESSING OFFICER. ACCORDINGLY, HE PRAYED FOR RESTORING THE S AME. 6. OPPOSING THE SUBMISSIONS OF THE DR, THE AR REPRE SENTING THE ASSESSEE HAS SUBMITTED THAT THE ISSUE IN HAND HAS A LREADY BEEN ADJUDICATED BY THE COORDINATE BENCH OF CHENNAI ITAT IN ASSESSEES OWN CASE I.E. I.T.A. NO. 1954/MDS/2007 DECIDED ON 2 6.05.2009 FOR THE ASSESSMENT YEAR 2003- 04 AND ALSO PRODUCED COPY OF THE ORDER. IN REBUTTAL, THE DR COULD NOT POINT OUT ANY DISTINGUISHING FEATURE AND ONLY PLEADED THAT THE SAID ORDER IS YET TO BECOME FINAL. 7. WE HAVE HEARD BOTH PARTIES AND ALSO PERUSED THE RELEVANT FINDINGS AS WELL AS CASE LAW CITED. THE ONLY BONE O F CONTENTION BETWEEN THE PARTIES IS THAT THE ASSESSEE HAS TREATE D THE AMOUNT IN QUESTION AS UNEARNED INCOME, WHEREAS; PER REVENUE, SECTION 145(2) OF THE ACT IS APPLICABLE AND HE AMOUNT IN QUESTION HAS TO BE TREATED AS INCOME OF THE CURRENT YEAR. WE FIND T HAT THE SAME VERY ISSUE HAD ARISEN IN ASSESSMENT YEAR 2003-04 IN I.T.A. NO. 1954/MDS/2007 (SUPRA), WHEREIN THE COORDINATE BENCH HAD DECIDED IT IN FAVOUR OF THE ASSESSEE AS UNDER: GROUND NO. 4 :-7-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 4.1 THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSES SING OFFICER TO DELETE THE ADDITION OF RS.39,68,208 RECORDED IN THE ASSESSEE'S BOOKS FOR THE RELEVANT PREVIOUS YEAR AS 'UNEARNED I NCOME'. 4.2 THE LEARNED CIT(A) OUGHT TO HAVE NOTED THAT THE IMPUGNED INCOME HAD ACCRUED TO THE ASSESSEE, AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 4.3 THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT THE ASSESSEE ADOPTED A DEVICE TO POSTPONE THE INCOME FOR THE PUR POSE OF INCOME TAX ONLY. 4.4 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT T HE HON'BLE SUPREME COURT IN THE CASE OF CIT V. THANTHI TRUST ( 239 ITR 502) HAS APPROVED IN PRINCIPLE THE PROPOSITION THAT BOOK ENTRIES TO HAVE A LEGAL EFFECT AND CANNOT BE IGNORED MERELY BE CAUSE THEY ARE BOOK ENTRIES. 31. IT WAS NOTICED BY THE AO DURING ASSESSMENT PROC EEDING THAT IN THE BALANCE SHEET AS ON 31.03.2003 RS. 45,6 7,354 WAS SHOWN AS 'UNEARNED INCOME' UNDER THE HEAD 'CURRENT LIABILITIES' AS AGAINST RS. 15,13,162 SHOWN AS ON 31.03.2002. TH E DETAILS FURNISHED BY THE ASSESSEE SHOWED THAT RS. 39,68,208 RECEIVED DURING THE YEAR ENDING 31.03.2003 WAS NOT OFFERED F OR TAX AND WAS CARRIED FORWARD TO NEXT YEAR. THE ASSESSEE EXPL AINED AS UNDER. 'FOR REVENUE RELATING TO DEVELOPMENT OF E-LEARNING SOFTWARE. THE INVOICES ARE RAISED ON THE BASIS OF PAYMENT MILESTONES WHERE AS REVENUE ARE RECOGNIZED ON THE BASIS OF THE MODULES DEVELOPED AND DELIVERED . THOUGH THE PAYMENTS HAS BEEN RECEIVED ON THE BASIS OF INVOICES, IF THE PRODUCTS ARE NOT DELIVERED SIFY E- LEARNING NEEDS TO REFUND THE AMOUNT IN FULL TO THE CUSTOMER.' 32. THE AO REJECTED THE EXPLANATION AND ADDED RS. 3 9,68,208 FOR THE REASONS GIVEN IN HIS ORDER AS UNDER: '4. TH E SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE WAS MERCANTILE. IN SUCH METHOD OF ACCOUNTING THE RECEIPT ON SALE NEEDS TO B E RE :-8-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 RECOGNIZED ONCE AN SALES INVOICE WAS RAISED. ONCE A CUSTOMER IS BILLED, THERE CAN BE NO OTHER TREATMENT EXCEPT T O RECOGNIZE THE SALE IN THE ASSESSEE'S BOOKS. IT IS ALSO A FACT ADMITTED BY THE ASSESSEE THAT PAYMENTS WERE RECEIVED ON THE BASIS O F INVOICES (SEE PARA E-3). THE NON RECOGNITION OF A SALE IN THESE CIRCUMSTANCE S DOES NOT DEPEND UPON FINAL APPROVAL OF THE CUSTOMER, WHO HAS BEEN MAKING PAYMENTS ON THE BASIS OF INVOICES, RAISE AS SESSEE. THE ARGUMENT OF THE ASSESSEE THAT IT NEEDS TO REFUN D THE AMOUNTS TO CUSTOMER UNDER CERTAIN CIRCUMSTANCES DOE S NOT HOLD GROUND. IN CASE A CUSTOMER RETURNS THE PRODUCT S SOLD BY THE ASSESSEE AND THE ASSESSEE IS REQUIRED TO REFUND THE PAYMENTS RECEIVED FROM THE CUSTOMER, THE ASSESSEE C AN BOOK THE SAME AS SALES RETURNS. HENCE, THE SYSTEM ADOPTE D BY THE ASSESSEE CANNOT BE ACCEPTED AND SO THE UNRECOGNIZED INCOME OF RS.39,68,208 IS NOW TREATED AS INCOME.' 33. THE CIT(A) DELETED THE ADDITION AND HIS ORDER HAS BEEN CHALLENGED BY THE DEPARTMENT IN THE PRESENT APPEAL. 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL ON RECORD. IT WAS EXPLAINED BY THE LEARNED AR THAT THE SOFTWARE DEVELOPMENT WAS THE MAJOR SOURCE OF INCOME . IN THE WRITTEN SUBMISSION FILED BY THE AR BEFORE THE CIT(A ) THE BREAK- UP OF RECEIPTS WAS SHOWN AS UNDER. SL.NO PARTICULARS AMOUNT ( IN LACS) C THE MAJOR SERVICE INCOME ARE AS UNDER:- INCOME FROM SOFTWARE DEVELOPMENT (IDC) LMNK 1175 INCOME FROM SOFTWARE DEVELOPMENT NON LMNK 162 INCOME FROM IT TRAINING 48 INCOME FROM SOFTWARE SERVICES - LMS 3 INCOME FROM - LL 2 MISCELLANEOUS OTHERS 4 TOTAL 1394 :-9-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 35. THE CIT(A) HAS DELETED THE ADDITION FOR THE REA SONS GIVEN IN PARAGRAPH 4.3 OF HIS ORDER. HE HAS, INTERALIA, OBSE RVED THAT THE REVENUE EARNED BY THE ASSESSEE FROM SOFTWARE AND CO NSULTANCY SERVICES WAS RECOGNIZED ON DELIVERY OF GOODS / SERV ICES, THAT AS PER THE EXISTING SCHEME, M/S. SATYAM EDUCATION SERV ICES LIMITED WAS ASSIGNED THE RESPONSIBILITY TO 'SIGN OF F ON COMPLETION OF THE PROJECT IN THE CASE OF ALL CUSTOM ERS, THAT THE ASSESSEE-COMPANY WAS FOLLOWING THE AS 9 PRESCRIBED BY THE INSTITUTE WHICH WAS IN CONFORMITY WITH THE PROVISIO NS OF SECTION 145(2) OF THE ACT. THE ASSESSEE WAS REGULARLY FOLLO WING THE 'PROJECT COMPLETION METHOD, WHICH IS A RECOGNIZED M ETHOD. THE COMPLETION OF EACH PROJECT IS DETERMINED BY 'SIGN O FF. THERE IS NOTHING ON RECORD TO SHOW THAT THERE WAS ANY INCONS ISTENCY IN THIS REGARD. THE CIT(A) FOUND THAT THE DEFERRED INC OME AMOUNTING TO RS.39,68,208 WAS CARRIED FORWARD AND W AS DULY TAKEN INTO ACCOUNT IN THE NEXT ASSESSMENT YEAR. IN THE CIRCUMSTANCES, THEREFORE, WE SEE NO REASON TO INTER FERE WITH THE CONCLUSIONS REACHED BY THE CIT(A). THE GROUND N O. 4 IS, ACCORDINGLY REJECTED. 36. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. TAKING CUE FROM THE SAME AND MORE PARTICULARLY, IN VIEW OF THE FACT THAT THERE IS NO DIFFERENCE POINTED OUT BY THE REVENUE, WE ARE OF THE OPINION THAT THE CIT(A) HAS RIGHTLY DELE TED THE ADDITION UNDER THE HEAD 'UNEARNED INCOME. THE MERE SUBMISSION ON THE PART OF REVENUE THAT THE SAME HAS NOT ATTAINED FINALITY IS NO GROUND IN ITSELF FOR NOT PL ACING RELIANCE UPON THE SAME. ACCORDINGLY, THE FINDINGS OF THE CIT (A) ARE UPHELD AND THE GROUND IS DECIDED AGAINST THE REVENU E. WE RESPECTFULLY FOLLOWING THE ABOVE DECISION, UPHE LD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND DISMISS TH E REVENUE GROUND. 5.3 ON NETWORKING COST: :-10-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 13. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD AND JUDICIAL DECISIONS CITED. SIMILAR ISSU E WAS DEALT IN ITA NO. 1084/MDS/2012, FOR THE ASSESSMENT YEAR 2002-2003, D ATED 20.11.2012, WHERE THE TRIBUNAL OBSERVED IN PARA NO .13 AS UNDER:- 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THROUGH THE RELEVANT FINDINGS AS WELL AS CASE LAW ABOVE SAID. T HE ONLY ISSUE BETWEEN THE PARTIES IS THAT PER REVENUE, THE PAYMEN T IN QUESTION MADE BY THE ASSESSEE IS LIABLE TO TDS PROV ISIONS AS COMPRISED IN CHAPTER XVII B OF THE ACT WHICH THE ASSESSEE IS DISPUTING. WE NOTICE THAT THE COORDINATE BENCH IN I .T.A. NO. 1277 AND 1283/MDS/2008 (SUPRA) DECIDED ON 02.02.201 2 [IN WHICH ONE OF US N.S. SAINI, A.M. MEMBER OF THE BENC H) HAS HELD AS UNDER:4. WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AS WELL AS THE CITED DECISIONS. WE FIND THAT THE LD. CIT(A) HAS DECIDED THIS ISSUE BY OBSERVING AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE RIVAL SUBMISSIONS AND ALSO EXAMINED THE ISSUES CAREFULLY WITH REFERENCE TO APPLICABILITY OF SEC. 1 95, WHICH HAS BEEN DENIED BY THE APPELLANT. THE APPELLA NT COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING NETWORKING AND E-COMMERCE SERVICES BY WAY OF INTERNET. IN ORDER TO CARRY OUT ITS BUSINESS OF PRO VIDING BROADBAND INTERNET CONNECTIVITY THE APPELLANT COMPA NY HAS ENTERED INTO AGREEMENTS WITH CERTAIN NON-RESIDE NT COMPANIES. THE ASSESSEE THEREFORE MADE CERTAIN REMITTANCES IN FOREIGN CURRENCY TOWARDS CONNECTIVIT Y CHARGES AND BANDWIDTH CHARGES WHICH ARE CALLED TELECOMMUNICATION CHARGES WITHOUT DEDUCTION OF TAX AT SOURCE. THE ASSESSING OFFICER EXAMINED THE MATTER A ND FOUND THAT THE EQUIPMENTS USED BY THE APPELLANT COMPANY THROUGH WHICH CONNECTIVITY WAS PROVIDED ARE USED BY THE ASSESSEE. THEREFORE, IT TREATED THE PAY MENT AS ROYALTY FOR THE USE OF THE EQUIPMENTS. CONSEQUEN TLY, :-11-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 THE ASSESSING OFFICER HELD THAT THE APPELLANT COMMI TTED DEFAULT U/S 195 IN SO FAR AS IT HAD NOT DEDUCTED TA X AT SOURCE. HE THEREFORE, WORKED OUT SHORT DEDUCTION OF TAX U/S. 201(1) AT RS.3,45,99,751/- AND RS.3,33,39,659/ - FOR A.YS. 2002-03AND 2003-04 RESPECTIVELY. THE ASSESSING OFFICER ALSO CHARGED INTEREST U/S. 201(1A ) AMOUNTING TO RS.1,99,6S,927/- AND RS.1,52,71,474/- FOR A.YS. 2002-03 AND 2003-04 RESPECTIVELY. THE ASSESSI NG OFFICER HAS, THEREFORE, TAKEN THE FOLLOWING ARGUMEN TS FOR RAISING THE IMPUGNED DEMANDS. (1) THE SERVICE PROVIDED BY THE TELECOMMUNICATION SERVICE PROVIDER IN THE CASE IS DIFFERENT FROM THAT PROVIDED BY THE NONRESIDENT COMPANIES IN THE PRESENT CASE. (2) TELEPHONE IS FUNDAMENTALLY DIFFERENT FROM A BANDWIDTH SERVICE. (3) THE BANDWIDTH SERVICE IS NOT A SPECIFIED SERVICE. 4) EQUIPMENT OF THE NONRESIDENT COMPANY THROUGH WHICH CONNECTIVITY IS PROVIDED IS USED BY THE ASSESSEE THE REQUISITE BANDWIDTH ALONG WITH EQUIPMENTS IS FOR EXCLUSIVE FOR THE ASSESSEE WHICH CANNOT BE USED BY OTHERS NOR BY THE NON- RESIDENT COMPANY; ON TERMINATION OF THE AGREEMENT THE ASSESSEE MUST CEASE TO USE THE SERVICE AND ALL EQUIPMENT OF THE NON-RESIDENT COMPANY. THUS THE PAYMENT BY THE ASSESSEE CAN BE TREATED AS ROYALTY FOR USE OF EQUIPMENT. THE ITO FURTHER ARGUED THAT CASE HAS TO BE DISTINGUISHED FROM THE CASE OF BSNL AND OTHERS VS. UNION OF INDIA (SUPREME COURT). IN THAT CASE THE SUPREME COURT DEALT WITH THE ISSUE OF USING STANDARD FACILITY PROVIDED TO AN AVERAGE :-12-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 HOUSEHOLDER OR CONSUMER WHEREAS IN THE PRESENT CASE IT DEALT WITH PAYMENT FOR USE OF EQUIPMENT. 6:1. IN THE REPORT DATED 07-09-2007 THE ASSESSING OFFICER HAS REITERATED THE ARGUMENTS MADE IN THE IMPUGNED ORDER 6.2 ON THE OTHER HAND THE LEARNED AR HAS VEHEMENTLY ARGUED THAT THE LEARNED ASSESSING OFFICER HAS NOT PROPERLY APPRECIATED THE FACTS OF THE CASE AND SUBM ITTED THAT THE BANDWIDTH CHARGES ARE PROVIDED EITHER BY W AY OF UNDERSEA CABLES OR BY SATELLITE EARTH STATIONS A ND THE APPELLANT DOES NOT HAVE ANY CONTROL OVER THE EQUIPMENTS AS IT HAS ONLY LEASED A PART OF THE TRANSPONDER CAPACITY AND NOT LEASED THE TRANSPONDER . THEREFORE, THE RIGHT OF' USE OF THE EQUIPMENT IS NO T EXCLUSIVELY WITH THE APPELLANT. FURTHER, THE RIGHT TO USE EQUIPMENT MAINLY ARISES IF THERE IS PHYSICAL EQUIPM ENT AND SINCE THE EQUIPMENTS USED BY THE APPELLANT ARE NOT UNDER ITS CONTROL. THEREFORE, THE PAYMENTS MADE DO NOT HAVE THE CHARACTER OF ROYALTY. 6.3 ON THE ABOVE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ONLY ONE QUESTION ARISES FOR DECISION WHETHER THE REMITTANCES MADE BY THE APPELLANT COMPANY TO THE FOREIGN PARTIES WOULD FALL WITHIN THE PURVIEW OF SE C. 195(1) WHICH REQUIRES DEDUCTION OF TAX AT SOURCE. BANDWIDTH IS BOUGHT AND SOLD TO CONSUMERS AND IT AC TS AS A CONDUIT ONLY. IN THE APPELLANT'S CASE THERE AR E NO EQUIPMENTS INSTALLED IN ITS PREMISES AND THE CONTRA CT ENTERED WITH THE FOREIGN PARTIES IS ONLY FOR THE SE RVICES. MERE USE OF EQUIPMENT IN PROVIDING BANDWIDTH SERVIC ES WOULD NOT AMOUNT TO TRANSFER OF RIGHT TO USE. AS A MATTER OF FACT THERE ARE NO GOODS INVOLVED IN THE TRANSACTION AND THE PAYMENTS ARE MADE ONLY FOR THE USE OF SERVICES. THE WORD 'ROYALTY' AND ITS MEANING WAS INTRODUCED VIDE FINANCE ACT, 1976 AND WAS DEFINED :-13-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 UNDER EXPLANATION 2 TO SEC. 9(1)(I) WHICH WAS FURTH ER EXPANDED TO INCLUDE 'THE RIGHT TO USE ANY INDUSTRIA L COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDIN G THE AMOUNTS REFERRED TO IN SEC,. 44B. THE AMENDMENT WAS MADE BY FINANCE ACT, 2001 BY INCORPORATING C1AUSE ( IV A) W.E.F. 01-04-2002 I.E., APPLICABLE FOR A.Y. 2002 -03. IN SIMPLE WORDS, THEREFORE, ROYALTY MEANS THE PAYMENT OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF ' OR THE RIGHT TO USE, ANY COPY RIGHT OF LITERARY ARTIST IC OR SCIENTIFIC WORK BUT, DOES NOT INCLUDE THE WORDS 'US E' OR RIGHT TO USE, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT. IN THE APPELLANT'S CASE THERE IS NO 'RIG HT TO USE EQUIPMENT. THEREFORE, THE PAYMENTS MADE DO NOT FALL UNDER 'ROYALTY'. ON SIMILAR FACTS THE ITAT, BA NGALORE BENCH IN THE CASE OF ACIT VS. INFOSYS TECHNOLOGIES LTD. IN ITA NOS. 653 AND 969/BANG/2006 DATED 17-10-2007 HELD THAT ANY PAYMENT MADE TO DATABASE OWNERS OUTSIDE INDIA FOR ACCESSING SUCH DATABASES AND THE SERVICES PROVIDED BY SUCH TELECOM OPERATOR TO THE CUSTOMERS DO NOT AMOUNT TO TECHNICAL SERVICES OR RO YALTY U/S 9(1)(VII) OF THE IT ACT. ACCORDINGLY, IT WAS HE LD THAT NO TDS IS TO BE MADE. THE HON'BLE TRIBUNAL ALSO HEL D THAT PAYMENTS FOR ACCESSING DATA IS LIKE READING A BOOK IN A LIBRARY WHICH COULD NOT BE PASSED ON TO ANYONE ELSE. SINCE THE COPYRIGHT WAS NOT FOR LITERARY, ART ISTIC OR SCIENTIFIC WORK, THE PAYMENT IS NOT TO BE TREATED A S ROYALTY AND IT WAS HELD THAT NO TDS WAS REQUIRED TO BE MADE. THE HON'BLE ITAT, BANGALORE BENCH IN THE CASE OF ITO VS. MADHURA COATS PVT. LTD., IN ITA NO. 1711 AND 1712/BANG/2005 FOR AYS. 2005-06 AND 2006-07 VIDE ORDER DATED 28-09-2006, RELYING ON THE DECISION OF THE APEX COURT IN THE CASE OF BHARAT SANCHAR NIGAM LTD. , (SUPRA)' WHEREIN, IT WAS HELD THAT PROVIDING TELECO M SERVICES DO NOT FALL UNDER THE CATEGORY OF 'GOODS', THE :-14-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 HON'BLE ITAT HELD THAT PAYMENTS MADE FOR CONNECTIVI TY FOR TRANSMISSION OF DATA WOULD NOT FALL INTO THE CA TEGORY 'ROYALTY' OR 'FEES FOR TECHNICAL. 6:4. IN VIEW OF THESE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE AND THE POSITION OF LAW SET OUT ABOVE, IT IS HELD THAT THE TRANSACTIONS IN RESPECT OF WHICH THE IMPUG NED PAYMENTS WERE MADE WAS PURELY ON ACCOUNT OF SERVICE S AND THERE IS NO TRANSFER OF RIGHT TO USE THE GOODS. IN THE RESULT, IT IS HELD THAT THE ASSESSING OFFICER WAS N OT JUSTIFIED IN TREATING THE PAYMENT AS ROYALTY AND IN VOKING THE PROVISIONS OF SEC. 195 FOR BOTH THE ASSESSMENT YEARS. CONSEQUENTLY, THE IMPUGNED ORDER U/S, 195 R.W.S. 201(1) AND 201(1A) DATED 21-03-2006 FOR A.YS . 2002-03 AND - 2003-04 IS CANCELLED. 6. ON A QUERY FROM THE BENCH FROM THE LD. D.R. AS T O WHETHER THERE IS ANY CONTRARY DECISION OF ANY OTHER HIGH CO URT, THE LD. D.R. REPLIED THAT THE HONBLE DELHI HIGH COURT DECI SION IS A LONE DECISION ON THE ISSUE. 7. ON THE ABOVE FACTS, WHEN THERE IS ONLY ONE DECIS ION OF THE HIGH COURT, THEN THE SAME REQUIRES TO BE FOLLOWED B Y US. OUR VIEW FINDS SUPPORT FROM THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN CIT VS. GODAVARI DEVI SARAF [SMT] [19 78] 113 ITR 589 [BOM] WE, THEREFORE, CONFIRM THE ORDER OF T HE LD. CIT(A) AND DISMISS THE GROUNDS OF APPEALS OF THE RE VENUE. 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. AFTER GOING THROUGH THE OPERATIVE PORTION ABOVE SAI D, THERE IS NO IOTA OF DOUBT THAT THE PAYMENTS IN QUESTION MADE BY THE ASSESSEE CANNOT BE SUBJECTED TO THE APPLICABILITY O F TDS PROVISIONS CONTAINED IN THE ACT. THEREFORE, IN VI EW OF THE SAME AND IN ORDER TO MAINTAIN CONSISTENCY, WE RELY ON TH E ABOVE SAID ORDER OF THE ITAT AND DECIDE THE GROUNDS AGAINST TH E REVENUE. :-15-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 WE RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE U PHELD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND DISMIS S THE REVENUE APPEAL. 5.4 ON CONTENT DEVELOPMENT COSTS: 53. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS M ADE BY THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS T HE GROUND OF THE REVENUE. 5.5 ON DIRECT COSTS: 32. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS M ADE BY THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS T HE GROUND OF THE REVENUE. 5.6 LEGAL AND PROFESSIONAL CHARGES 53. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MA DE BY THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS T HE GROUND OF THE REVENUE. FOLLOWING, THE CO-ORDINATE BENCH DECISIONS, SUPRA, ON THE ABOVE ISSUES THE REVENUES APPEALS ON THE ABOVE ISSUES A RE DISMISSED. :-16-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 6. WITH REGARD TO THE APPEAL FOR ASSESSMENT YEAR 20 10 IN ITA NO. 1650/CHNY/2017, WHILE MAKING THE RE-ASSESSMENT U/S. 143(3) R.W. 147, THE ASSESSING OFFICER MADE DISALLOWANCE U /S. 14A R.W.R. 8D AND REFUSE TO ALLOW BROUGHT FORWARD UNABSORBED DEPR ECIATION PERTAINING TO ASSESSMENT YEAR 2001-01. AGGRIEVED, THE ASSESSEE FILED AN APPEAL AND THE CIT(A) ALLOWED THE APPEAL. 7. AGGRIEVED, THE REVENUE FILED THIS APPEAL WITH TH E FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2.1 THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT IN VESTMENTS MADE IN SUBSIDIARY COMPANIES ARE NOT LIABLE FOR DISALLOWANC E U/S. 1 4A WHEN THE PROVISIONS OF THE SAID SECTION AS WELL AS RULE 8D DOES NOT PROVIDE FOR ANY SUCH EXCEPTION. 2.2 THE LEARNED CIT(A) OUGHT TO HAVE FOLLOWED THE D ECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF UNITED BREWERIES LTD V DCIT (241 TAXMANN 299). 2.3 THE LEARNED CIT(A) ERRED IN RELYING ON THE DECI SION OF ITAT CHENNAI IN THE CASE OF EIH ASSOCIATED HOLES V DCIT WHICH HAS NOT BECOME FINAL. 3. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT IN THE ASSESSEES CASE THE SET OFF PERIOD OF EIGHT YEARS H AD EXPIRED AND THUS THE ASSESSEE IS NOT ELIGIBLE FOR SET OFF OF SUCH UN ABSORBED DEPRECIATION PERTAINING TO AY 2001-02 AS PER THE AM ENDED PROVISIONS OF SECTION 32(2) OF THE ACT. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . :-17-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 8. THE LD. DR PRESENTED THE CASE ON THE LINES OF GR OUNDS OF APPEALS. PER CONTRA, THE LD. AR SUBMITTED THAT SIN CE THE ASSESSEE WAS NOT HAVING ANY EXEMPT INCOME, AS PER JURISDICTI ONAL HIGH COURT DECISIONS IN THE CASES OF REDINGTON (INDIA) LTD VS ACIT (392 ITR 633) (MAD) AND CIT VS CHETTINAD LOGISTICS PVT. LTD. , (248 TAXMAN 55) (MAD), NO DISALLOWANCE COULD BE MADE 14A R.W.R . 8D. 8.1 WITH REGARD TO SET OFF OF BROUGHT FORWARD UNABS ORBED DEPRECIATION, THE AR RELIED ON THE DELHI HIGH COURT DECISION IN THE CASE OF PCIT VS BRITISH MOTOR CAR CO. (1934) LTD., REPORTED IN 400 ITR 569 (DELHI) AND INVITED OUR ATTENTION THE HEAD NOT WHICH IS EXTRACTED AS UNDER: SECTION 32 OF THE INCOME-TAX ACT, 1961 - DEPRECIAT ION - UNABSORBED DEPRECIATION (SCOPE OF) - WHETHER AMENDMENT IN SECT ION 32(2) DISPENSED WITH RESTRICTION AGAINST SET OFF AND CARR Y FORWARD THAT WAS LIMITED TO 8 YEARS BEYOND WHICH BENEFIT COULD NOT B E CLAIMED - HELD, YES - WHETHER UNABSORBED DEPRECIATION THAT WAS CARR IED FORWARD UP TO ASSESSMENT YEAR 2001-02 WOULD BE CARRIED FORWARD TO ASSESSMENT YEAR 2002-03 AND BECOME PART THEREOF AND IT WOULD B E GOVERNED BY PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE A CT, 2001 AND WOULD BE AVAILABLE FOR CARRY FORWARD AND SET OFF AG AINST PROFITS AND GAINS OF SUBSEQUENT YEARS WITHOUT ANY LIMIT WHATSOE VER. 9. WE HEARD THE RIVAL SUBMISSIONS. SINCE, THE ASSE SSEE HAS NOT EARNED ANY EXEMPT INCOME, IN ACCORDANCE WITH THE JU RISDICTIONAL HIGH COURT DECISIONS, SUPRA, NO DISALLOWANCE CAN BE MADE U/S. 14A :-18-: ITA NOS. 1650/CHNY/2016 & 1793, 1794 & 1795/CHNY/2016 AND HENCE, WE DO NOT FIND ANY MERIT IN THE GROUNDS OF REVENUES APPEAL. WITH REGARD TO THE SET OFF OF BROUGHT FORW ARD UNABSORBED DEPRECIATION FOR ASSESSMENT YEAR 2001-02 AGAINST T HE INCOME FOR ASSESSMENT YEAR 2010-11, SINCE THE ISSUE IS DECIDED BY THE HONBLE DELHI HIGH COURT, SUPRA, IN FAVOUR OF ASSESSEE, WE DO NOT FIND ANY MERIT IN THE GROUND OF THE REVENUES APPEAL. THE R EVENUES APPEAL FOR ASSESSMENT YEAR 2010-11 IN ITA NO. 1650/CHNY/20 17 IS DISMISSED. 10. IN THE RESULT, THE REVENUES APPEALS IN ITA NOS . 1793, 1794 & 1795/CHNY/2016 FOR ASSESSMENT YEARS 2009-10, 2010-1 1 & 2011-12 AND ITA NO. 1650/CHNY/2017 FOR ASSESSMENT YEAR 2010 -11 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER, 2018 AT CHENNAI. SD/- ( ) (GEORGE MATHAN) ! /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ! /ACCOUNTANT MEMBER /CHENNAI, 3 /DATED: 18 TH DECEMBER, 2018 JPV .%5676 /COPY TO: 1. '/ APPELLANT 2. %&' /RESPONDENT 3. 9 ) (/CIT(A) 4. 9 /CIT 5. 6% /DR 6. /GF