Hewlwtt Packward India Software Operation Pvt Ltd , Bangalore V. Assistant Commissioner of Income TAx Circle-3(1)(2), Bangalore

ITA 2175/BANG/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6479 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 09-10-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 13-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R PREMI JT BENGALU RU
• Keywords: Additional evidence; Set aside
• Section: 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND S HRI B.R. B ASKARAN , ACCOUNTANT MEMBE R IT ( TP ) A NO. 2175/ BANG / 2017 ASSESSMENT YEAR : 2012 - 13 HEWLETT PACKARD (INDIA) SOFTWARE OPERATION PVT. LTD., SURVEY NO.192, WHITEFIELD ROAD, MAHADEVAPURA POST, BENGALURU 560 048. P AN: AAACH 7164 B VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, [FORMERLY DCIT], CIRCLE 3(1)(2) BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SHRI SHARATH R A O, CA RESPONDENT BY : S MT. R. PREMI, JT.CIT(DR)(ITAT) , BENGALU RU. DATE O F HEARING : 09 . 1 0 .2019 DATE OF PRONOUNCEMENT : 16 . 1 0 .2019 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORD ER DATED 12.09.2017 OF THE CIT(APPEALS)-3, BENGALURU, RELATING TO ASSES SMENT YEAR 2012-13. 2. GROUNDS NO.1 & 2 ARE GENERAL IN NATURE. 3. GROUNDS NOS.3 TO 13 RAISED BY THE ASSESSEE IN TH E GROUNDS OF APPEAL ARE WITH REGARD TO THE ACTION OF THE REVENUE AUTHORITIES IN IT(TP)A NO. 2175/BANG/2017 PAGE 2 OF 7 DISALLOWING THE CLAIM FOR DEDUCTION OF A SUM OF RS. 40,96,000 PAID FOR ACQUISITION OF THE FOLLOWING SOFTWARE:- VENDORS AMOUNT (RS. ROGUE WAVE SO FTWARE INC. 1,11 0,000 INTERNET SYSTEMS CONSORTIUM 2,252,500 E DISON DESIGN GROUP 733,500 4. THE AFORESAID ITEM OF EXPENDITURE WAS DISALLOWED ON THE GROUND THAT TAX HAS NOT BEEN DEDUCTED AT SOURCE AT THE TIME OF MAKING PAYMENTS TO THE NON-RESIDENT PAYEES AS REQUIRED BY THE PROVISIONS O F SEC.40(A)(IA) OF THE INCOME TAX ACT, 1961 (ACT). 5. THE CIT(APPEALS) UPHELD THE ORDER OF THE AO BY F OLLOWING THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SAMSUNG ELECTRONICS CO. LTD. [2011] 201 TAXMAN 477 (KAR) WHEREIN IT TOOK THE VIEW THAT RIGHT TO USE SOFTWARE WAS AKIN T O RIGHT TO USE COPYRIGHT IN THE SOFTWARE AND WAS THEREFORE IN THE NATURE OF ROY ALTY. SUCH PAYMENT FOR RIGHT TO USE SOFTWARE IS CHARGEABLE TO TAX IN INDIA IN THE HANDS OF A NON- RESIDENT PAYEE. THE FOLLOWING WERE THE RELEVANT OB SERVATIONS ON FACTS OF THE DISPUTED ADDITION BEFORE THE CIT(APPEALS):- 3.9 AS REGARDS SOFTWARE WORTH RS.11,10,000 ($ 25,0 00) PURCHASED FROM ROGUE WAVE SOFTWARE INC, ALTHOUGH TH E SAME IS OF REVENUE NATURE, THE SAME CANNOT BE ALLOWED AS AN EXPENSE DURING THE YEAR UNDER CONSIDERATION AS THE SAME REL ATES TO FINANCIAL YEAR 2010-11 AND HENCE PRIOR PERIOD EXPEN DITURE. FURTHER, THE APPELLANT HAS NOT DEDUCTED ANY TAX AT SOURCE ON THE SAME. SINCE PURCHASE OF SOFTWARE IS ROYALTY, AS PER DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF SAMSUNG EL ECTRONICS (SUPRA), THE AMOUNT WOULD NOT BE ALLOWABLE AS A DED UCTION AS PER PROVISIONS OF SECTIONS 40(A) OF THE ACT. IT(TP)A NO. 2175/BANG/2017 PAGE 3 OF 7 3.10 AS REGARDS SOFTWARE WORTH RS.7,33,500/- ($ 15, 000) PURCHASED FROM EDISON DESIGN GROUP, ALTHOUGH THE SA ME IS OF REVENUE NATURE, THE SAME CANNOT BE ALLOWED AS AN EX PENSE AS THE APPELLANT HAS NOT DEDUCTED ANY TAX AT SOURCE ON THE SAME. SINCE PURCHASE OF SOFTWARE IS ROYALTY, AS PER DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS (SUPR A), THE AMOUNT WOULD NOT BE ALLOWABLE AS A DEDUCTION AS PER PROVISIONS OF SECTIONS 40(A) OF THE ACT. 3.11 AS REGARDS PAYMENT AMOUNTING TO RS.22,52,500/- ($ 42,500), MADE TO M/S INTERNET SYSTEMS CONSORTIUM, THE APPELL ANT HAS SUBMITTED THAT THE SAME IS A MEMBERSHIP RENEWAL FEE S AND NOT PURCHASE OF ANY SOFTWARE. THIS ARGUMENT OF THE APPE LLANT IS WITHOUT ANY MERIT AS THE PAYMENT HAS BEEN MADE TO M /S INTERNET SYSTEMS FOR 'ANNUAL BIND FORUM MEMBERSHIP'. BIND (B ERKELY INTERNET NAME DOMAIN) IS A POPULAR SOFTWARE FOR TRA NSLATING DOMAIN NAMES INTO IP ADDRESSES AND USUALLY FOUND ON LINUX SERVERS. BIND FORUM IS A PROFESSIONAL FORUM WHICH P ROVIDES TECHNICAL SUPPORT FOR COMPUTER/1T PROFESSIONALS FOR DNS/BIND/DHCP/WINS ISSUES INCLUDING PROBLEM SOLVING COLLABORATION TOOLS. THUS THE PAYMENT MADE IS IN NA TURE OF ROYALTY AND THE SAME HAS ALSO BEEN CHARACTERIZED BY THE APP ELLANT AS SOFTWARE IN ITS BOOKS OF ACCOUNTS. THE ABOVE CLAIM OF THE APPELLANT THAT IT IS ONLY A MEMBERSHIP FEE AND NOT RELATED TO ANY SOFTWARE RELATED ACTIVITIES IS JUST MEANT TO ESCAPE THE RIGOR OF SECTION 40(A) OF THE ACT. CONSIDERING ABOVE, SINCE THE APPELLANT HAS NOT DEDU CTED ANY TAX AT SOURCE ON THE SAME, AS PER DECISION OF JURISDICT IONAL HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS (SUPRA), T HE AMOUNT WOULD NOT BE ALLOWABLE AS A DEDUCTION AS PER PROVIS IONS OF SECTIONS 40(A) OF THE ACT. 6. BEFORE THE TRIBUNAL, THE LEARNED COUNSEL FOR ASS ESSEE MADE SUBMISSIONS ON DISALLOWANCE OF A SUM OF RS.22,52,50 0/- PAID TO M/S. INTERNET SYSTEMS CONSORTIUM (ISC) ONLY. THE SUBMIS SION MADE BY THE LD. COUNSEL FOR THE ASSESSEE WAS THAT AS REGARDS PAYME NT MADE TO INTERNET SYSTEMS CONSORTIUM OF RS.22,52,500 IS CONCERNED, TH E SAME IS NOT FOR IT(TP)A NO. 2175/BANG/2017 PAGE 4 OF 7 RIGHT TO USE SOFTWARE AND IN THIS REGARD, FILED A C OPY OF THE QUOTATION DATED 13.10.2011 ISSUED BY INTERNET SYSTEMS CONSORTIUM, U SA, WHEREIN THE DESCRIPTION OF SERVICES FOR WHICH THE PAYMENT IS MA DE HAS BEEN ENUMERATED. IT HAS BEEN CLAIMED BY THE ASSESSEE TH AT THE AFORESAID DOCUMENT COULD NOT BE PROVIDED BEFORE THE LOWER AUT HORITIES FOR WANT OF PROPER OPPORTUNITY AND THE CIT(APPEALS) DID NOT GIV E EFFECTIVE HEARING BEFORE PASSING THE IMPUGNED ORDER. 7. WE HAVE CONSIDERED THE REQUEST OF THE ASSESSEE F OR ADMISSION OF ADDITIONAL EVIDENCE AND WE FIND FROM PARA 3 OF THE CIT(APPEALS) ORDER THAT THERE WERE TWO HEARINGS ON 4.8.17 AND 22.8.17 BEFOR E THE CIT(A) AND ON THOSE DATES NONE APPEARED ON BEHALF OF ASSESSEE. T HE APPEAL WAS FIXED FOR HEARING ON 11.9.17 AND ON THAT DATE THE ASSESSE E SOUGHT TIME TO FURNISH SOME DETAILS. THE CIT(APPEALS) REJECTED THE REQUES T OF ASSESSEE FOR GRANT OF FURTHER TIME AND PROCEEDED TO DECIDE THE APPEAL ON THE BASIS OF MATERIAL ALREADY AVAILABLE ON RECORD. TAKING INTO CONSIDERA TION THE ABOVE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ADDITION AL EVIDENCE NOW SOUGHT TO BE FILED BEFORE THE TRIBUNAL REQUIRES TO BE ADMI TTED FOR ADJUDICATION AS THE SAME IS CONSIDERED AS MATERIAL NECESSARY FOR CO NSIDERATION FOR EFFECTIVE ADJUDICATION OF THE APPEAL OF ASSESSEE AND ACCORDIN GLY THE SAME IS ADMITTED. 8. WE HAVE PERUSED THE QUOTATION FILED BY THE ASSES SEE AND WE FIND THAT THE DESCRIPTION GIVEN IN THAT QUOTATION IS MOR E IN THE NATURE OF PROVIDING NEWSLETTER AND MATERIAL ON BIND SOFTWARE. IN THIS QUOTATION, THERE IS ALSO A REFERENCE TO AGREEMENT BETWEEN THE ASSESSEE AND INT ERNET SYSTEMS CONSORTIUM. FROM THE ABOVE, IT IS NOT POSSIBLE TO CONCLUDE WHETHER THE PAYMENT IN QUESTION WAS FOR RIGHT TO USE SOFTWARE A ND IT REQUIRES FURTHER EXAMINATION WHICH COULD BE DONE ONLY BY THE AO AFTE R DUE OPPORTUNITY TO THE ASSESSEE. WE THEREFORE SET ASIDE THE ORDER OF CIT(APPEALS) TO THE LIMIT EXTENT OF EXAMINING AS TO WHETHER THE PAYMENT MADE TO INTERNET SYSTEMS IT(TP)A NO. 2175/BANG/2017 PAGE 5 OF 7 CONSORTIUM CAN BE REGARDED AS A PAYMENT FOR RIGHT T O USE THE SOFTWARE. TO THIS LIMITED EXTENT, GROUND NOS.3 TO 13 ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. THE OTHER ISSUE THAT NEEDS TO BE CONSIDERED IS A S TO WHETHER PROVISION FOR LEAVE ENCASHMENT SHOULD BE DISALLOWED EVEN THOUGH THE SAME IS BASED ON ACTUARIAL VALUATION AND IS AN ASCE RTAINED LIABILITY. THE BACKGROUND OF THE DISALLOWANCE MADE BY THE AO IS TH AT PROVISION FOR LEAVE ENCASHMENT WAS REGARDED AS A CONTINGENT LIABILITY A ND THEREFORE CANNOT BE ALLOWED AS A DEDUCTION UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, AS THE LIABILITY CANNOT BE SAID TO HAVE BEEN ACCRUED. THE HONBLE SUPREME COURT IN THE CASE OF BHARATH EARTH MOVERS V. CIT, 245 ITR 428 (SC) TOOK THE VIEW THAT EVEN THOUGH LIABILITY ON ACCOUNT OF LEAVE ENCASHMENT IS CLAIMED BY WAY OF A PROVISION, THE SAME SHOULD BE ALLOWED A S A DEDUCTION, IF THE LIABILITY OF THE ASSESSEE FOR PAYMENT OF LEAVE ENCA SHMENT IS CERTAIN AND QUANTIFICATION OF THE SUCH LIABILITY IS REASONABLE. SECTION 43B(F) WAS INTRODUCED BY THE FINANCE ACT, 2001 W.E.F. 1.4.2002 AND IT WAS PROVIDED THEREIN THAT A LIABILITY ON ACCOUNT OF LEAVE ENCASH MENT OF EMPLOYEES WILL BE ALLOWED ONLY ON ACTUAL PAYMENT. 10. WE FIND THAT THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD VS UNION OF INDIA REPORTED IN 292 IT R 470 (CAL) HAD STRUCK DOWN THE PROVISIONS OF SECTION 43B(F) OF THE ACT AS UNCONSTITUTIONAL. THE REVENUE HAD CARRIED THE MATTER FURTHER TO THE H ONBLE SUPREME COURT WHICH INITIALLY IN SPECIAL LEAVE TO APPEAL (CIVIL) CC 12060 / 2008 BY ORDER DATED 8.9.2008 HAD HELD AS UNDER:- THE PETITION WAS CALLED ON FOR HEARING TODAY. UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING O RDER. ISSUE NOTICE. IT(TP)A NO. 2175/BANG/2017 PAGE 6 OF 7 IN THE MEANTIME, THERE SHALL BE STAY OF THE IMPUGNE D JUDGEMENT, UNTIL FURTHER ORDERS. 11. LATER THE HONBLE SUPREME COURT IN SPECIAL LEAV E TO APPEAL (CIVIL) NO(S). CC 22889 / 2008 ORDER DATED 8.5.2009 HAD HE LD AS UNDER:- THE PETITION WAS CALLED ON FOR HEARING TODAY. UPON HEARING COUNSEL THE COURT MADE THE FOLLOWING O RDER DELAY CONDONED. LEAVE GRANTED. PENDING HEARING AND FINAL DISPOSAL OF THE CIVIL APP EAL, DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AN D INTEREST WHICH HAS ACCRUED TILL DATE. IT IS MADE CLEAR THAT AS FAR AS THE OUTSTANDING INTEREST DEMAND AS OF DATE IS CONCERNED , IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THAT AMOUNT IN CA SE CIVIL APPEAL OF THE DEPARTMENT IS ALLOWED. WE FURTHER MAKE IT CLEAR THAT THE ASSESSEE WOULD, D URING THE PENDENCY OF THIS CIVIL APPEAL , PAY TAX AS IF SECTI ON 43B(F) IS ON THE STATUTE BOOK BUT AT THE SAME TIME IT WOULD BE E NTITLED TO MAKE A CLAIM IN ITS RETURNS. 12. HENCE FROM THE AFORESAID SUPREME COURT JUDGEMEN T, IT COULD BE INFERRED THAT THE HONBLE SUPREME COURT HAD NOT STA YED THE JUDGEMENT OF THE CALCUTTA HIGH COURT DURING LEAVE PROCEEDINGS. BUT THE HONBLE SUPREME COURT HAD ONLY PASSED AN INTERIM ORDER ON T HE IMPUGNED ISSUE. 13. IN THE LIGHT OF THE AFORESAID BACKGROUND, WE FI ND THAT THE COORDINATE BENCH OF THE ITAT BANGALORE IN ASSESSEES OWN CASE FOR THE AY 2011-12 IN IT(TP)A NO.668(B)/2016, ORDER DATED 02.08.2019 REMA NDED THE MATTER TO THE AO TO REVISIT THE ISSUE AFTER THE DECISION OF T HE HONBLE SUPREME COURT. IT(TP)A NO. 2175/BANG/2017 PAGE 7 OF 7 FOLLOWING THE SAME, WE SET ASIDE THE ORDER OF THE C IT(APPEALS) AND REMAND THE ISSUE TO AO FOR FRESH CONSIDERATION IN T HE LIGHT OF DECISION THAT MAY BE TAKEN BY THE HONBLE SUPREME COURT IN T HE APPEAL PENDING BEFORE IT. 14. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF OCTOBER, 2019. SD/- SD/- ( B R BASKARAN ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 16 TH OCTOBER, 2019. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPON DEN T 3. CIT 4. CIT(A) 5. DR, I TAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.