M/s Honeywell Technology Solutions Lab private Limited , Bangalore V. Joint Commissioner of Income Tax Special Range-3 , Bangalore

ITA 2890/BANG/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 0757 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 21-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA
• Keywords: Capital asset; Business income; Depreciation; Double taxation relief; Permanent establishment; Question of law; Non-deduction of tax; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 2; 40(a)(ia); 201(1); 195; 194J

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “A” BENCH, BENGALURU Before Shri N.V. Vasudevan, Vice President and Shri B.R. Baskaran, Accountant Member ITA No. 2890/Bang/2018 (Assessment Year: 2011-12) M/s Honeywell Technolgoy Solutions Pvt. Ltd. Survey No. 96 & 97, Boganahalli Village and Survey No. 72/2 & 72/5 Doddakananahalli Village Varthur Hobli, Bengaluru East Taluk, Bengaluru 560103 Vs. Jt. CIT, Special Range 3 2nd Floor, BMTC Building 6th Block, Koramangala Bengaluru 560095 PAN – AAACH4151J Appellant Respondent Appellant by: Smt. Shreya Loyalaka, Advocate Respondent by: Shri Sumer Singh Meena, CIT-DR Date of Hearing: 30.03.2022 Date of Pronouncement: 30.05.2022 O R D E R Per: B.R. Baskaran, A.M. The assessee has filed this appeal challenging the order dated 18-07- 2018 passed by Ld CIT(A)-3, Bengaluru and it relates to the assessment year 2011-12. The grounds urged by the assessee relate to the following issues:- (a) Disallowance of deduction claimed u/s 80JJAA of the Act (b) Disallowance of expenses on Annual maintenance contract and software expenses. (c) Disallowance of communication expenses (d) of Legal and Professional fees. (e) Deduction of education cess paid. 2. The assessee is engaged in the business of development of computer software and providing I T enabled services. The return of income was filed by the assessee for the year under consideration declaring total income of Rs.102.35 crores. The AO completed the assessment determining total ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 2 income at Rs.170.89 crores by making various additions and disallowances. The appeal filed by the assessee before Ld CIT(A) challenging the assessment order was partly allowed. Still aggrieved, the assessee has filed this appeal before the Tribunal. 4. The first issue relates to the disallowance of deduction claimed u/s 80JJAA of the Act. The facts are that the assessee claimed a deduction of Rs.26.87 crores u/s 80JJAA of the Act, under which additional deduction of 30% of the additional wages paid to ‘new regular workmen’ employed by the assessee in a previous year is allowed for three assessment years. The AO disallowed the claim holding that:- (a) the business of software development will not fall under the category of industrial undertaking. (b) assessee is not engaged in the business of manufacturing or production of articles or things. (c) the employees, being software engineers, would not fall under the definition of “workmen” as defined u/s 80JJAA of the Act. 4.1 In the appeal filed before Ld CIT(A), the first appellate authority did not agree with the above said views taken by the AO and accordingly set aside them. However, the Ld CIT(A) confirmed the disallowance on various other grounds. 4.2 We notice that the various contentious issues with regard to the deduction allowable u/s 80JJAA of the Act has been resolved by Hon’ble jurisdictional Karnataka High Court in the case of CIT vs. Texas Instruments India P Ltd (ITA No.141/2020 dated 21.4.2021). Both the parties agreed that this issue may be restored to the file of the assessing officer for examining it afresh in the light of decision rendered by Hon’ble jurisdictional High Court, referred above. For the sake of convenience, we extract below the decision rendered by the Hon’ble High Court in the above said case:- “16. Answer to Substantial Question No.1: Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of Rs.7,57,22,069 made under section 80JJAA of the Act by holding that the employees in software industry are covered by definition of 'Workman' in Explanation ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 3 (iii) to section 80JJAA of the Act read with section 2(s) of the Industrial Dispute Act and employees who have worked for 300 days in a previous are eligible for the purpose of deduction under section 80JJAA in the succeeding year if he completes 300 days in such succeeding year without appreciating that person working in software industry cannot be said to be 'Workman' for the purpose of section 80JJAA of the Act and conditions prescribed for claiming said deduction are not satisfied by Assessee? 16.1. The Assessee had claimed deduction under Section 80JJ-AA of the Act on account of the payments made to the employees hired by the Assessee in the previous year even though they had not completed 300 days of service in that year since they continued on the rolls of the Assessee in the next year totalling up to more than 300 days as required under section 80JJ-AA of the Act. The issue raised by the Revenue is that the employees of the Assessee would not come within the purview of the definition of workman under Section 2(2) of the Industrial Disputes Act, 1947 (for short 'ID Act') and that since the employee has not completed 300 days of employment in the previous year, no deduction could be claimed by the Assessee. 16.2. As regards the first contention of the Revenue, the same does not require much examination by this Court inasmuch as at the first instance; the Assessing Officer had held that the Assessee's employees would not come within the purview of workman under Section 2(s) of the I.D. Act and disallowed the claim, on an appeal filed by the Assessee, the Commissioner, Income-tax (Appeals) CIT(A) accepted the Assessee's contention and held that the Assessee's employee would come within the purview of Section 2(s) of the ID Act. This aspect was not challenged by the Revenue, although the Revenue had filed an appeal against the order of the CIT(A). Having accepted the said finding of the CIT(A) and not having filed any appeal, the Revenue cannot now seek to challenge the said finding in the present appeal. 16.3. Section 2(s) of the ID Act is reproduced hereunder for easy reference: "workman" means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person- ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 4 (i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1950 (46 of 1950), or the Navy Act, 1957 (62 of 1957); or (ii) who is employed in the police service or as an officer or other employee of a prison, or (iii) who is employed mainly in a managerial or administrative capacity; or (iv) who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature. 16.4. In terms of section 2(s) of the ID Act, the definition of a workman is very wide inasmuch as the said definition would cover any person who has the technical knowledge, self skilled in an industry. It cannot be disputed that the Assessee's business is an industry. It also cannot be disputed that the employees of the Assessee are technical persons skilled in software development and, as such, engaged by the Assessee to render services in the industry being run by the Assessee. Thus the software engineer would also come within the purview and ambit of workman under Section 2(s) of the ID Act so long as such a person does not take a supervisory role. The software engineer per se would be a workman; a software engineer rendering supervisory work would not be a workman. In the present case, it is not the case of the Revenue that the persons employed by the Assessee are rendering any supervisory work or assistance. Admittedly, the said persons have been engaged for the purpose of software development, and as such, they are to be regarded as a workman in terms of Section2 (s) of the ID Act. 16.5. The Apex Court has in the case of Devinder Singh's (supra) categorically held that when a person is employed in an industry for hire or reward for doing manual, unskilled, skilled, operational, technical or clerical work, such a person would satisfy the requirement and would fall within the definition of the 'workman'. In the present case, a software engineer is a skilled person, a technical person who is engaged by the employer for hire or reward. Therefore, all the said persons would satisfy the requirement of being a workman in terms of Section 2(s) of the I.D. Act. In our considered view, the concept of the workman has undergone a drastic change and is no longer restricted to a blue collared person but even extends to white- collared person. A couple of decades ago, an industry would have meant only a factory, but today industry includes software and hardware industry, popularly known as the Information technology ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 5 industry. Thus the undertaking of the Assessee being an industrial undertaking, the persons employed by the Assessee on this count also would satisfy the requirement of a workman under Section 2(s) of the ID Act. 16.7. Sri. Aravind, learned Senior Panel counsel of the Revenue, has strenuously argued that the period of 300 days in a year I.T.A. NO.141 OF 2020 c/w I.T.A. NO.151 OF 2020 would mean 300 days in the financial year alone, not in the calendar year or otherwise. He has submitted that if the period of 300 days is not satisfied, no such deduction could be allowed. 16.8. Admittedly, the provisions concerned, i.e. Section 80JJ-AA, comes under Chapter-VI-A of the IT Act, which deals with deductions in certain income; this deduction is issued and or permitted as an incentive to the Assessee on fulfilling certain criteria as required under the various provisions under Chapter-VI-A. The incentive of the deduction provided under Section 80JJ-AA is with an intention to encourage the Assessee to employ more and more people, provide employment and, in lieu thereof, permit the employer/assessee to deduct certain amounts from the income when the returns are filed. It is with this object, purport and intent of section 80JJ-AA of the Act that the present facts and circumstances would have to be considered. It is also required for the Assessing Officer, CITA, Income-tax Appellate Tribunal, as also any other officer to always interpret and or apply the provisions of the Act, taking into consideration the intent and purport of the said provision. 16.9. The meaning or interpretation now sought to be given by Sri. Aravind, learned Senior Panel counsel is that only if the employee were employed for a period of 300 days in a particular financial year, only then deductions could be claimed, if not the deductions could not be claimed even though such employee has been employed for 300 continuous days or more. 16.10. We would disagree with the said contention. What is required is for a person to be employed for a period of 300 days continuously. There is no such criteria made out for a person to be employed in any particular year or otherwise. If such a restrictive interpretation is given, then any person employed post 5th June of a particular year would not entitle the Assessee to claim any deduction. Thus in order to claim the benefit under Section 80JJ-AA, an employer would have to hire the workmen before 5th June of that year. As a corollary, since the Assessee would not get any benefit if the workmen were engaged post 5th June, the employer/Assessee may not even employ anyone post 5th June, which would militate against the purpose and intent of Section ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 6 80JJ-AA, which is the encourage creation of new employment opportunities. 16.11. The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Limited (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entitled to the benefit of Section 80JJ-AA in the next assessment year and so on so forthwith for a period of three years. The Income-tax Appellate Tribunal, having held to that effect, in our considered opinion, it would not be open for the Revenue to now contend otherwise, more so since the said order has attained finality on account of the Revenue not having filed an appeal. 16.12. It is sought to be contended by Sri. K V Aravind, learned Senior Panel counsel that the fact that such an interpretation could not be given is established by the curative amendment carried out in the year 2018 wherein it is clarified that an assesses whose employee completes 300 days in a second year would also be entitled to a deduction for three years therefrom. Thus he submits that the amendment having been brought into force in the year 2018 the present matter relating to the year 2007-2008, the said curative or clarificatory amendment would not come to the rescue of the Assessee and as such, the finding of the Tribunal in this regard is required to be set aside. 16.13. We are unable to agree with such a submission- the amendment of the year 2018 though claimed curative by Sri. Aravind, we are of the considered opinion that the same is more an explanatory amendment or a clarificatory amendment which clarifies the methodology of applying Section 80JJ-AA of the Act. If the submission of Sri. K.V.Aravind is accepted, then no employer/assessee would be able to fulfil the requirement of employing its labour/assessee prior to 5th June of that assessment year so as to claim the benefit of Section 80JJ-AA. Such a narrow and pedantic approach is impermissible. It also being on account of the fact that Section 80JJ-AA relating to deductions under Chapter is an incentive and, therefore, has to be read liberally. In this aspect, we are also supported by the decision of the Apex Court in Mavilayi Service co-operative Bank Ltd's case (supra), wherein the Apex Court has held that a benevolent provision has to be read liberally and reasonably and if there is an ambiguity in favour of the Assessee. 16.14. The Apex Court in the case Vatika Township (P.) Ltd. (supra) has also held similarly, in that if there is a benefit conferred by legislation, the said benefit being legislative's object, there would be a presumption that such a legislation would operate with retrospective effect by giving a purposive construction. Thus the clarificatory ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 7 amendment of the year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years. 16.15. In view thereof, the substantial question No.1 is answered by holding that the software professional/engineer is a workman within the meaning of Section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of Section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete 300 days in a particular assessment year but in the subsequent year so long as there is continuity of employment, the Assessee could continue to claim further benefit in the next two years as provided in under Section 80JJ-AA of the Act. 16.16. Accordingly, we answer Question No.1 by holding that a software engineer in a software industry is a workman within the meaning of Section 2(s) of the Industrial Disputes Act so long as the Software engineer does not discharge any supervisory role. 16.17. The period of 300 days as mentioned under Section 80JJAA of the Act could be taken into consideration both in the previous year and the succeeding year for the purpose of availing benefit under Section 80JJAA. It is not required that the workman works for entire 300 days in the previous year. 16.18. Hence, in the facts and circumstances of the case, the software engineer being workman having satisfied the period of 300 days, the assessee is entitled to claim deduction under Section 80JJAA.” Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining this issue afresh. The assessee is free to raise all contentions and accordingly all contentions on this issue is left open. 5. The second issue relates to the disallowance of annual maintenance contract and software expenses. The assessee had incurred software expenditure of Rs.32.87 crores and claimed the same as revenue expenditure. The AO noticed that the above said claim consisted of Annual maintenance charges for Computer licenses – Rs.17.50 crores and purchase of computer software – Rs.15.37 crores. The assessee submitted that it has not deducted tax at source on the amount of Rs.11.42 crores, ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 8 as the said payment was made to non-residents. It was contended that the above said payment is not liable for deduction of tax at source. It was also submitted that the above said expenses included Hardware purchases of Rs.0.37 crore. It was also submitted that the software purchases consisted of application software having a limited/short life and the same does not result in enduring benefit. 5.1 Since the assessee had not deducted tax at source on an amount of Rs.11.42 crores, the AO disallowed the same u/s 40(a)(i)/40(a)(ia) of the Act. In respect of balance amount of expenditure amounting to Rs.21.45 crores (32.87 less 11.42 = 21.45 crores), the AO took the view that the same is required to be capitalised. Since the details of purchases are not available, the AO computed the depreciation @ 30% at Rs.6.43 crores and disallowed the balance amount of Rs.15.02 crores, treating the same as capital expenditure. 5.2 The Ld CIT(A) decided the issue relating to the disallowance of Rs.11.42 crores as under:- (a) ‘in respect of payments for purchase of software’, following the decision rendered by Hon’ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co Ltd (2011)(203 Taxman 477)(Kar), the Ld CIT(A) held that the payments made for purchase of software is to be treated as ‘royalty’ and is liable for deduction of tax at source. (b) ‘in respect of AMC’, Ld CIT(A) held that the claim the benefit of second proviso to sec. 40(a)(ia) read with the first proviso to sec. 201(1) of the Act is not automatic, i.e., it is the responsibility of the assessee to show that the payee has complied with the conditions laid down in the said proviso. Since the assessee did not bring anything on record to show such a certificate was furnished to the AO, the Ld CIT(A) rejected the benefit of second proviso to sec.40(a)(ia) of the Act. 5.3 In respect of Software expenses of Rs.21.45 crores capitalised by the AO, the assessee submitted before the AO that it has deducted tax at source on an amount of Rs.19.85 crores and further their software licenses was valid for a period of less than two years. In respect of balance amount ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 9 of Rs.1.60 crores, the assesseee admitted that their life is more than two years. Accordingly, with respect to the amount of Rs.1.60 crores, the Ld CIT(A) upheld its capitalisation and directed the AO allow depreciation @ 60% /30% depending upon the period of usage in this year. In respect of the amount of Rs.19.85 crores, the Ld CIT(A) directed the AO to examine the claim afresh and in this regard, he gave various directions to the AO. 5.4 We heard the parties and perused the record. The ld A.R submitted that the decision has been rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd on 15.10.2011 only. The year under consideration falls prior to that date and there were certain decisions of Tribunal, which had held that the tax was not required to be deducted at source. Accordingly, various Tribunals have held that the assessee could not have visualised the future decision of High Court and hence non-deduction of tax at source relying on the then ruling decisions of Tribunal would not attract provisions of sec.40(a)(i) of the Act under the doctrine of “impossibility of performance”. In support of this proposition, the Ld A.R relied upon the decision rendered by the Bangalore bench of Tribunal in the case of Teekays Interior Solutions P Ltd (ITA 400/Bang/2017) and the decision rendered in the case of Acer India P Ltd vs. DCIT (IT(IT)A Nos. 107 to 114/Bang/2018). The Ld A.R also submitted that the assessee has filed a declaration under the Vivad Se Vishwas Act in relation to 201(1) proceedings for a sum of Rs.0.32 crores. The Ld A.R also submitted that the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics P Ltd (supra), has since been reversed by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd vs. CIT (2021)(125 taxmann.com 42). 5.5 For the sake of convenience, we extract below the the observation made by the coordinate bench in the case of Infineon Technologies India Pvt. Ltd. (IT(TP)A No.405/Bang/2015), with regard to the disallowance u/s 40(a)(i), in cases of purchases of software made prior to the date of decision rendered in the case of Samsung Electronics (supra:- ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 10 “25. We have carefully considered the rival submissions. The payment in question was made to the non-resident in the previous year relevant to AY. 10-11. Therefore the law as on 31.3.2010 the last date of the previous year was that payment for purchase of off shelf software was not in the nature of royalty. In Sonata Information Technology Ltd. v. ACIT (103 ITD 324) decision rendered on 31.1.2006, it was held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC IT(TP)A Nos.405 & 474/Bang/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in: ♦ ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) ♦ Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) ♦ Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) ♦ Channel Guide India Ltd. v. ACIT (25 taxmann.com 25) ♦ DCI v. Virola International (20 14(2) TMI 653) ♦ CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 26. The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra) which was passed on 15.10.2011 transactions carried out on purchase of off the shelf software are not liable to TDS and hence there can be no disallowance u/s.40(a)(ia) of the Act based on subsequent development of law after the date on which payments are made. 27. we are of the view that in the light of law as laid down by this Tribunal in the case of Ingersoll Rand (I) Ltd. (supra), there cannot be a retrospective obligation to deduct tax at source and therefore as on the date when the assessee made payments to the non-resident for acquiring off-the-shelf software cannot be regarded as in the nature of royalty and therefore there was no obligation on the part of assessee to deduct tax at source. The payment would be in the nature of business profits in the hands of non-resident and since admittedly the non-resident does not have a Permanent Establishment in India, the sum in question is not chargeable to tax in the hands of non-resident. Consequently, the disallowance made u/s. 40(a)(ia) of the Act has to be deleted. We direct accordingly. Ground No.14 by the assessee is accordingly allowed.” ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 11 18. In view of the above said submissions, we hold that there is no requirement of disallowance made u/s 40(a)(i)/40(a)(ia) as the payments have been made prior to the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co (supra). Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(i)/40(a)(ia) of the Act. 5.6 With regard to the capitalisation of software expenses, we notice that the Hon’ble Karnataka High Court has rendered following two decisions:- (a) CIT vs. Toyota Kirloskar Motors (P) Ltd (ITA No.176 of 2009), wherein the Hon’ble High Court had held that the software licence fee paid for use of software for a limited duration upto two years is allowable as revenue expenditure. (b) CIT vs. IBM India Ltd (357 ITR 88), wherein the Hon’ble Karnataka High Court has held that the purchase of application software is revenue expenditure. The relevant observations are extracted below:- “9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum of Rs.33,14,298/-. The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. Infact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 12 less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and therefore, it has to be treated as revenue expenditure. In that view of the matter, the finding recorded by the Tribunal is in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue.” Accordingly, we are of the view that this issue also requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO with the direction to examine this issue, follow the above cited binding decisions of the jurisdictional High Court and take appropriate decision. The assessee is also directed to furnish all the relevant information to the assessing officer. 6. The next issue relates to the disallowance of claim of communication expenses. The assessee had paid a sum of Rs.2,45,89,919/- to its AE M/s Honeywell International Inc (HII) and claimed the same as communication expenses. Before the AO, the assessee submitted that the above said payment is in the nature of data link charges, i.e., the HII, as part of its headquarter services, charges its affiliates for management and routine maintenance of data link facility. It was also submitted that the said payment does not quality to be royalty as per Article 12 of India-US treaty and hence it is not liable for tax deduction at source. The AO, however, held that the assessee would be liable to deduct tax at source on the above said payment in terms of sec. 9(1)(vi) of the Act and accordingly disallowed the above said expenditure. 6.1 Before Ld CIT(A), the assessee submitted that the AE, M/s HII has contracted with third party vendors for providing data link services to all its affiliates. The payment for the same was made by HII and it has been ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 13 cross charged to the assessee. Accordingly, it was contended that this payment would not qualify as ‘royalty’ and hence no tax is required to be deducted. However, the Ld CIT(A), placing reliance on the amendment made by Finance Act, 2012 to sec. 9(1)(vi) of the Act and also on the decision rendered by Hon’ble Madras High Court in the case of Verizon Communications Singapore Pte Ltd vs. ITO (2014)(361 ITR 575)(Mad) held that the impugned payment is in the nature of ‘royalty’ and hence the assessee is liable to deduct tax at source. Since the assessee had not deducted tax at source, the Ld CIT(A) confirmed the disallowance. 6.2 The Ld A.R submitted that the ‘data link charges’ is in the nature of communication expenses only and the nature of payment has been explained before Ld CIT(A). Relying on various decisions, the Ld A.R contended that the communication expenses have been held to be not ‘royalty’ attracting TDS provisions. The Ld A.R also placed reliance on the decision rendered by Bangalore bench of Tribunal in the case of J & P Coats Ltd (TS – 1075 – ITAT – 2021), wherein the decision rendered by Hon’ble Delhi High Court in the case of New Skies Satellite BV (2016)(68 taxmann.com 8) and the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (2009)(310 ITR 320) were preferred over the decision rendered by Hon’ble Madras High Court in the case of Verizon Communications Singapore Pte Ltd (supra), in the absence of any decision rendered on this issue by Hon’ble jurisdictional Karnataka High Court. The Ld A.R also relied on the decision rendered by Mumbai bench of Tribunal in the case of Netcracker Technology Solutions LLC (2020)( 116 taxmnn.com 243), wherein the payment received on account of data access/link charges was not royalty within the meaning of Article 12 of India – USA DTAA. Accordingly, she submitted that the data link charges cannot be treated as Royalty. The Ld A.R also submitted that the amendments in sec. 9(1)(vi) of the Act have been brought into the Act by Finance Act, 2012 only and hence, under the doctrine of impossibility of performance, the assessee cannot be fasted with liability to deduct tax at source u/s 9(1)(vi) of the Act. ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 14 6.3 We heard Ld D.R and perused the record. The assessee has explained the nature of payment before Ld CIT(A). Before us, the Ld A.R submitted that the payment has been made for providing point to point connection between two computers or local area networks. It is called data link facility and it can be used for telephone, data or internet services. Explaining further, the Ld A.R submitted that the parent company M/s HII enters into an agreement with the 3 rd party vendor for providing data link services. The payment shall be made by the parent company and the proportionate cost, based on actual usage, is recovered from the affiliates. The Ld A.R submitted that the assessee does not possess any right or control over the equipment provided by the 3 rd party vendor. The purpose of payment is towards utilisation of data link facility and not in connection with the grant of any license/use of equipment belonging to 3 rd party vendor. Hence there is no use or right to use equipment. 6.4 The question about the nature of payment received for providing communication facilities by way of band width facility have been examined by the co-ordinate bench in the case of J P Coats P Ltd (supra) by Bangalore bench of Tribunal. Following the decision rendered by Hon’ble Delhi High Court in the case of Asia Satellite Telecommunication Co Ltd (197 taxmann 263) and the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (2009)(310 ITR 320), the Tribunal has held that the payment received for providing bandwidth facility is not taxable as equipment royalty or process royalty. The Mumbai bench of Tribunal has held in the case of Netcracker Technology Solutions LLC (2020)(116 Taxmann.com 243)(Mumbai – Trib.) that the payment received on account of data access/ link charges also known as International Private Leased Circuits (IPLC) charges from its Indian subsidiary was neither payment for scientific work nor any patent, trademark, design, plan or secret formula or process and hence it was not royalty under Article 12. In the instant case, the assessee has reimbursed the data link charges to its AE, which in turn has entered into agreement with third party vendors for providing data link facility. It can be noticed that the assessee has made the payment for using the facility provided by ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 15 a third party vendor. Accordingly, following the decisions rendered in the above cited cases, we hold that this payment shall not fall under the category of royalty within the meaning of Article 12 of DTAA. Since it is not shown that the provider of the link facility had permanent establishment in India, the payment cannot be taxed in India and hence the provisions of sec.195 are not applicable. We noticed that the AO/CIT(A) relied upon the Explanations 5 & 6 inserted in sec. 9(1)(vi) of the Act by Finance Act, 2012. Since it is a prospective amendment, the disallowance u/s 40(a)(i) cannot be invoked for the year under consideration relying upon the above said amendment. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. 7. The next issue relates to the disallowance of Legal and Professional fees u/s 40(a)(i) of the Act. The AO noticed that the assessee has paid legal and professional fees to the tune of Rs.4,73,18,208/- to certain foreign legal firms as detailed below:- 1. Deloitee Tax LLP - 3,35,77,224 2. Fragomen, Del Rey, Bernsen & Loewy 36,910 3. Schiff Hardin LLP 61,67,154 4. Schwegaman Lundberg Woessner Kluth 75,36,920 ---------------- 4,73,18,208 ========== The AO noticed that the assessee has not deducted tax at source from the above said payments. The assessee submitted that the above said payments were made to foreign legal firms, which are firm of individuals in connection with services rendered by them in USA in connection with preparation of tax return, tax reconciliation calculation, application for tax identification numbers, submission of documents etc. It was submitted that the services were provided outside India and they have been consumed outside India. Hence the services rendered by them do not have any nexus in India. Accordingly, it was submitted that the payments are not taxable in the hands of recipients in terms of Article 15 of the India- USA DTAA. Accordingly it was submitted that the assessee is not liable to deduct tax at source from these payments. The AO did not accept the ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 16 explanations given by the assessee. He also observed that the assessee company could not furnish any agreement or any type of proof in support of its claim. He also took the view that the assessee is taking contradictory stands, i.e., initially, the assessee claimed that the payments were given for providing independent personal services and later it changed its stand and submitted that the services were rendered outside India. 7.1 Before Ld CIT(A), the assessee reiterated that the services were provided outside India and the said services were consumed outside India. It was also contended that the said services cannot be considered as “Fee for Technical Services” or “Fee for included Services”. It also relied upon Article 15 of India – USA DTAA and contended that the services provided by individual or firm of individuals would not attract TDS. 7.2 However, the Ld CIT(A) took the view that the assessee had not disputed that the nature of payments was FTS/FIS and it is making contrary contention only before him on the ground ‘make available’ test fails in availing these services. With regard to the submission of the assessee that the services were availed to help its employees working in abroad on projects/assignments in connection with tax compliances in USA, the Ld CIT(A) took the view that it is an afterthought. He also expressed the view that the assessee has not provided exact nature of services provided by each of the service providers. The assessee had submitted a proof in respect of only one concern M/s Deloitte Tax LLP to show that it is a firm of individuals and did not furnish any document in respect of other three concerns. The certificate furnished was rejected by Ld CIT(A) holding that the self-certificate cannot be accepted. Accordingly, the Ld CIT(A) rejected these contentions. 7.3 The assessee also contended the income has not accrued in India in the hands of these recipients. Further, these non-resident concerns do not have permanent establishment (PE) in India as such provisions of Section 9 of the Act were not attracted. However, the Ld CIT(A) held that the fees for technical services payable to a resident in India would be income ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 17 deemed to arise in India except where FTS is payable in respect of any right, property or information used or services is utilised for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India. He also referred to the Explanation given under sec. 9(2) and observed that the said Explanation was inserted to undo the ratios laid down by the Hon’ble Supreme court in the case of Ishikawajima Harima Heavy Industries Ltd (288 ITR 408) and Jindal Thermal Power Company Ltd (321 ITR 31)(Kar). Accordingly, the Ld CIT(A) held that (a) the non-residents have provided technical services to the assessee company and therefore, the payments are “fee for technical services” liable for deduction of tax at source. (b) With regard to Article 15 of India-USA DTAA, the Ld CIT(A) held that the assessee has not brought anything on record to show that the payments were made to individual or firm of individuals except for one document related to M/s Deloitte. However, it was self-certified document and hence cannot be considered as sufficient. (c) the Article 15 covers payments for performance of services in “Other contracting state” (here India). However, in the instant case, the assessee himself has admitted that the services were performed in USA. Hence Article 15 is not applicable here. Accordingly, the Ld CIT(A) confirmed the disallowance made by the AO. 7.4 We heard rival contentions on this issue and perused the record. The facts relating to this issue, as submitted by the assessee, are that the employees of the assessee have been sent to USA for undertaking projects online. The assessee is required to comply with the requirements of tax laws of USA in respect of these employees. Hence it has availed the services of the above said professional firms for complying with those requirements and the payments were made to the above said professional firms towards legal and professional fees. As submitted by the assessee before the tax authorities, the assessee has availed these services outside India and further these services have been used outside India. The assessee did not deduct tax at source from these payments. The assessee has raised many contentions with regard to its liability to deduct tax at source from these payments. ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 18 7.5 The assessee has contended that, as per Article 15 of India -USA DTAA, these are independent personal services and hence not taxable in India. Since it is not taxable in India in the hands of recipients, there is no liability to deduct tax at source u/s 195 of the Act. Article 15 of DTAA read as under:- INDEPENDENT PERSONAL SERVICES “1. Income derived by a person who is individual or firm of individuals (other than a company) who is resident of a Contracting State from the performance in other Contracting Stateof professional services or other independent activities of a similar character shall be taxable only in the first mentioned State except in the following circumstances.........” We noticed that the Ld CIT(A) has expressed the view that the Article 15 shall be applicable only if the services are rendered in other contracting State by the professional, i.e., a professional resident of USA should have performed in other Contracting State, i.e., the professionals of USA should have performed services in India. However, in the instant case, the professionals of USA have performed services in USA only. Accordingly, the Ld CIT(A) has held that Article 15 is not applicable to the facts of the present case. 7.6 The Ld CIT(A) has, however, taken the view that the services rendered by these professionals fall under the category of “Fee for Technical services” u/s 9(1)(vii) of the Act. In view of Explanation given u/s 9(2), the Ld CIT(A) took the view that the payment is taxable in the hands of the recipients, even if they do not have residence of place of business in India. 7.7 We heard the parties on this issue and perused the record. Since the Ld CIT(A) has held that the impugned payment would be hit by sec. 9(1)(vii) of the Act, it is required to be examined as to whether the impugned payments would fall under the category of “Fee for technical services” in terms of sec. 9(1)(vii) of the Act or not. Section 9 of the Act lists out income which are “deemed to accrue or rise in India”. Section 9(1)(vii) of the Act reads as under:- ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 19 “9(1)(vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non- resident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.” ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 20 The Ld CIT(A) has expressed the following view:- “10.5 A perusal of the above provisions shows that where fees for technical services (FTS) is payable by a person who is resident of India, it would be a deemed income arising in India, within the meaning of section 9(1), irrespective of whether the recipient of such income is a resident or non-resident of India except where FTS is payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India....” 10.6 In the case under consideration the non-residents have provided technical services to the appellant company. Therefore, the payment made towards these technical services is undisputedly fee for technical services as stipulated in Section 9(1)(vii) of the Income tax Act, liable for deduction of tax at source.” 7.8 The contention of the Ld A.R is that the assessee has availed only “legal and professional services” from some professional firms and it will not fall under the category of “Fee for technical services” defined in sec. 9(1)(vii) of the Act, since the professional service will not fall under the category of “managerial or technical or consultancy service” mentioned in the definition of the expression “Fee for Technical services” given in Explanation 2 to sec. 9(1)(vii). In this regard, the Ld A.R placed her reliance on the decision rendered by Delhi bench of Tribunal in the case of Sh. Chander Mohal Lall vs. ACIT (ITA No.1869/Del/2019 dated 09-12- 2021). 7.9 We heard Ld D.R on this issue and perused the record. The Delhi bench of Tribunal in the case of Sh. Chander Mohan Lall (supra) has that the professional fee paid to non-resident attorneys for rendering various professional services in their respective foreign jurisdiction will not fall under the category of “Fee for technical services”. The relevant discussions made by the Delhi bench are extracted below:- “11. The learned counsel for the assessee submitted, out of the total disallowance of Rs.65,94,145/-, the payment made towards reimbursement of amount recovered on behalf of the client in litigation, payment of official fee, payment for publication and trade fair services has to be deleted at the threshold itself as such payments do not attract the provisions of section 195 of the Act. Proceeding further, he submitted, the payments are not in the ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 21 nature of Fees for Technical Services (FTS), hence, cannot be considered to be income chargeable to tax in India. Drawing our attention to section 9(1)(vii) of the Act, he submitted, the provision is applicable only to the payment made towards FTS. He submitted, payment made by the assessee to foreign attorneys/lawyers are not in the nature of FTS but are fees for professional services. He submitted, technical service is distinct from professional service. To emphasize further, he submitted, as per Explanation 2 to section 9(1)(vii) of the Act, FTS has been defined to mean consideration paid for rendering of any managerial, technical or consultancy services. He submitted, section 44AA of the Act, clearly distinguishes profession from business and as per the said provision, legal and technical consultancy are distinct from each other. Further, drawing our attention to section 194J of the Act, he submitted, professional and technical services have been treated as two separate categories. In this context, he drew our attention to clauses (a) and (b) of Explanation to section 194J of the Act. He submitted, even section 194J has prescribed two different rates for TDS for professional services and technical services. Thus, he submitted, the payment made by the assessee not being in the nature of FTS, there is no liability to deduct tax at source. 12. Without prejudice, he submitted, even assuming that the payment made to foreign attorneys are in the nature of FTS, then also such payment are not chargeable to tax under clause (b) of section 9(1)(vii) of the Act, as, the payments were made to foreign attorneys for utilizing their services outside India and for the purpose of earning income from a source outside India. Therefore, such income cannot be deemed to accrue or arise in India. 13. Without prejudice, he submitted, in terms of DTAAs entered with certain countries, payments received by the nonresidents are in the nature of business income, hence, not liable to tax in India under the respective DTAAs in absence of a fixed place of business or PE in India. Thus, he submitted, there being no obligation on the assessee to deduct tax at source under section 195 of the Act, no disallowance under section 40(a)(i) can be made. Further, he submitted, only because the assessee was unable to furnish the TRC in respect of some of the payees, the Assessing Officer has disallowed part of expenditure. He submitted, non-furnishing of TRCs cannot be the sole reason for disallowing assessee’s claim when the genuineness of the expenditure is not doubted. He submitted, since, the assessee has no control over issuance of TRC by foreign jurisdiction, the disallowance should not have been made, when all other evidences including Outward Telegraphic Transfer Application Form, invoices, etc. were furnished. He submitted, at no stage, the departmental authorities have examined the applicability of respective DTAAs qua the payments made. He submitted, since the beneficial provisions of DTAA would override the domestic laws in terms of section 90(2) of the Act, there is no obligation on the assessee to deduct tax at source on the payments made. In support, learned counsel relied upon the following decisions:- i. CIT vs. Dunlop Rubber Co. Ltd.: (1983) 142 ITR 493 (Cal) ii. ...................... ................... 14. Strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals), the learned Departmental Representative submitted, undisputedly, the payer is located in India and carries on his ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 22 profession in India. He submitted, while carrying out his profession, the assessee has utilized the services of foreign attorneys to whom, payments have been made. Therefore, the payment made to the non-residents is income deemed to accrue and arise in India. He submitted, in many cases, the non-residents, to whom payments have been made, are residents of countries which do not have DTAA with India. Therefore, in absence of any DTAA, the income is chargeable to tax in India, as per the Act. He submitted, even in respect of payees situated in countries with whom India has entered into DTAA, the assessee failed to furnish TRCs. Therefore, the disallowance made is justified. 15. We have considered rival submissions in the light of the decisions relied upon and perused the material available on record. Facts on record reveal that out of the total payments of Rs.1,89,44,688/- to certain non-resident persons/entities towards legal/professional fees, the Assessing Officer has allowed an amount of Rs.1,23,50,544/-. In other words, he has disallowed Rs.65,94,144/- under section 40(a)(i) of the Act for failure to deduct tax at source under section 195 of the Act. Further, it is evident, the aforesaid disallowance was made solely for the reason that assessee failed to furnish TRCs of the nonresidents to whom such payments were made. In the synopsis filed before us, learned counsel for the assessee has furnished the details of payments made, as under:- ..................... 17. In so far as the balance amount of Rs.48,52,693/- is concerned, undisputedly, they represent professional fee paid to non-resident attorneys for various professional services rendered by them in the respective foreign jurisdictions. Therefore, the foremost crucial issue requiring examination is, whether the payment made to the non-residents is “chargeable under the provisions of the Act” so as to attract the provisions of section 195 of the Act. On a reading of section 5 of the Act, which defines the scope of total income, it would be very much clear that the following categories of income shall be included in the total income:- (i) income received in India; (ii) income deemed to be received in India; (iii) income which accrues or arises in India; or (iv) income which is deemed to accrue or arise in India. 18. In the facts of the present appeal, undisputedly, the non-resident attorneys have rendered their professional services outside India in relation to following: (i) Filing of application for grant/registration of IPR; (ii) Filing of Form/responses/petitions in relation to activity leading to or in the process of grant/registration; (iii) Maintenance of such grant/registration or services in relation thereto, as required under law, such as, towards annuity payment, renewal fee, restoration of patent, etc. (iv) Undertaking compliances for effecting charge in the ownership/address etc. of such intellectual property. ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 23 Thus, the nature of services rendered by the non-resident attorneys in their countries of residence make it clear that the payments received by them cannot be treated as income received in India, or deemed to be received in India, or income which accrues or arises in India. Therefore, the only category, if at all, under which the payments can be chargeable to tax is, income deemed to accrue or arise in India. For this purpose, we have to look at the provisions contained under section 9 of the Act. A reading of section 9, as a whole, including, the Explanation under sub-section (2) to section 9 would make it clear that income by way of interest, royalty and FTS shall be deemed to accrue or arise in India, irrespective of the fact, whether the non-resident has a residence or place of business or business connection in India or it has rendered services in India. 19. Factually, the payments made to non-resident attorneys are neither in the nature of interest, nor in the nature of royalty. This is not even the case of the Revenue as well. Therefore, it has to be seen, whether the payment made comes within the ambit of FTS. Explanation 2 to Section 9(1)(vii) defines FTS to mean any consideration received for any managerial, technical or consultancy services, including provision of services by technical or other personnel. In the facts of the present case, undisputedly, the payments to non-resident attorneys are purely for providing legal/professional services. On careful examination of various provisions of the Act brought to our notice by learned counsel for the assessee, we are convinced that the domestic law provisions recognize legal/professional services and FTS as two distinct and separate categories. 20. Therefore, payments made to non-resident attorneys cannot be regarded as FTS under section 9(1)(vii) of the Act. Further, a conjoint reading of section 40(a)(i) and 40(a)(ia) brings out a clear distinction between FTS and fees for professional services. Though, section 40(a)(ia) encompasses, both, FTS and fees for professional services, however, section 40(a)(i) is applicable only in case of failure to deduct tax on payments made for FTS. As rightly submitted by learned counsel for the assessee, this could be for the reason that payment of legal/professional fee to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India as per section 5 and section 9 of the Act. It is relevant to observe, in the case of NQA Quality Systems Registrar Ltd. Vs. DCIT (supra), the coordinate Bench has held that professional services are a category distinct from technical services. Similar view has been expressed in the following decisions as well: (i) ONGC Vs. DCIT (supra) (ii) Deloitte Haskins & Sells Vs. ACIT (supra) No contrary decision has been brought to our notice by learned Departmental Representative. In view of the aforesaid, we hold that the payments made to non-resident attorneys being not in the nature of FTS, there was no obligation on the assessee to deduct tax at source. 21. At this stage, we must observe, learned Departmental Representative has submitted before us that the payments made by the assessee being in the nature of FTS are taxable by applying the source rule. In our view, even assuming that payments made by the assessee come within the ambit of ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 24 section 9(1)(vii) of the Act, nonetheless, the exception provided under clause (b) to Section 9(1)(vii) would apply. We have already examined the nature of services provided by the foreign attorneys. It is a fact that Indian/overseas clients engage the assessee for availing certain services. In turn, assessee engages the foreign attorneys to perform certain services which are required to be performed in foreign jurisdictions. There is no privity of contract between the assessee’s clients and foreign attorneys. In fact, the clients are no way concerned, whether the assessee does the work himself or engages others. Thus, the source of income of the assessee through services rendered by non-resident attorneys in foreign jurisdictions is located outside India. That being the case, exception provided in clause (b) of section 9(1)(vii) would apply. Hence, the payments are not taxable as FTS. 22. In any case of the matter, the departmental authorities have disallowed a part of the expenditure for the only reason that assessee failed to furnish the TRC of the payees. The departmental authorities have not at all examined the taxability of payments under the applicable DTAAs. 23. Be that as it may, on overall analysis of facts and applicable statutory provisions as well as keeping in view the ratio laid down in the decisions cited before us, we hold that the payments made to foreign attorneys are not chargeable to tax under the provisions of the Act, in terms of section 195 of the Act. Therefore, the assessee was not required to withhold tax on the payments made. Accordingly, we delete the disallowance made under section 40(a)(i) of the Act. 24. In the result, the appeal of the assessee is allowed, as indicated above. 7.10 In the instant case, the assessee has availed legal and professional services in USA. In the above said case, it has been held that the “professional services would not fall under the category of “Fee for technical services” within the meaning of sec. 9(1)(vii) of the Act. Following the same, we hold that the view taken by Ld CIT(A) cannot be sustained. 7.11 We noticed earlier that the services were rendered in USA by these non-residents and the payments have been received by them outside India. Further, their services have been used outside India. Hence these payments does not constitute income under the Indian Income tax Act, 1961 u/s 5 of the Act and we have held that it is not deemed to accrue in India u/s 9(1)(vii) of the Act. Hence this income is not taxable in India in the hands of non-residents and hence the question of deducting tax at source u/s 195 of the Act does not arise here. Accordingly, the disallowance made u/s 40(a)(i) is liable to be deleted. ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 25 7.12 Under Sec. 90(2) of the Act, the provisions of the Income tax Act are required to be applied only if they are more beneficial to the assessee. We noticed that under the Income tax Act, this receipt is not taxable in India in the hands of non-residents. Hence, the provisions of Income tax Act are more beneficial to the non-residents. In this view of the matter, there is no necessity to refer to the provisions of India-USA DTAA. In any case, we notice that, in order to bring the impugned payments within the Article 12 of India- USA DTAA, the services should have been “made available” technical knowledge etc to the assessee herein. In the instant case, the assessee has only availed professional services of non-residents in connection with tax compliances and the technical knowledge has not been “made available”. Since the make available clause fails, the impugned payments cannot be taxed as Fee for Included services under Article 12 of the India-USA DTAA. In this view of the matter, there is no necessity to refer to Article 15 also. 7.13 Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of legal and professional fees made u/s 40(a)(i) of the Act. 8. The assessee has raised an additional ground, wherein it has claimed deduction of education cess. In view of the amendment brought in by Finance Act, 2022 making it mandatory to disallow the claim of education cess as deduction, the additional ground is liable to be dismissed. Accordingly, we dismiss this ground. 9. In the result, the appeal of the assessee is treated as partly allowed. Dictated and pronounced in the open Court on 30 th May, 2022. Sd/- Sd/- (N.V. Vasudevan) (B.R. Baskaran) Vice President Accountant Member Bengaluru, Dated: 30 th May, 2022 ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 26 Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) -3, Bengaluru 4. The Pr.CIT - 3, Bengaluru 5. The DR, ITAT, Bengaluru 6. Guard File By Order //True Copy// Assistant Registrar ITAT, Bengaluru n.p.