ACIT, CHENNAI V. Mgage India Pvt Ltd., CHENNAI

ITA 332/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8555 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 15-02-2016
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: JHARNA
• Keywords: Permanent establishment

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , . ! , ' !# $ [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ] ./ I.T.A.NO.332/MDS/2016 & C.O.NO.49/MDS/2016 / ASSESSMENT YEAR : 2012-13 THE ASSTT. COMMISSIONER OF INCOME-TAX CORPORATE CIRCLE 4(1) CHENNAI VS. M/S MGAGE INDI A PVT. LTD [FORMERLY M/S VELTI INDIA P. LTD] UNIT I AND 2, TARAMANI CHENNAI 600 013 [PAN AACCA 8496 P ] (APPELLANT) (RESPONDENT /CROSS OBJECTOR ) DEPARTMENT BY : SHRI SHIVA SRINIVAS, JCIT ASSESSEE BY : MS. JHARNA, CA / DATE OF HEARING : 23 - 08 - 201 6 / DATE OF PRONOUNCEMENT : 09 - 0 9 - 2016 % / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE REVENUE AND THE CROSS OBJECT ION OF THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE CO MMISSIONER OF INCOME-TAX (APPEALS)-11, CHENNAI, DATED 6.11.2015 F OR ASSESSMENT YEAR 2012-13. 2. IN ITS APPEAL THE REVENUE HAS TAKEN THE FOLLOWING G ROUNDS: ITA NO.332/16 C.O NO.49/16 :- 2 -: 1 . THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LA W AND FACTS OF THE CASE. 2.1. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.2,08,52,080/- MADE UNDER SEC40(A)(I) READ WITH SEC.195 OF THE IT ACT, 1961. 2.2. THE CIT(A) FAILED TO APPRECIATE THAT EXPLANATI ON 6 TO SEC.9(1)(VI) READS THUS : 'FOR THE REMOVAL OF DOUBTS, IT IS HERE BY CLARIFIED THAT THE EXPRESSION 'PROCESS' INCLUDES AND SHALL BE DEEMED T O HAVE ALWAYS INCLUDED TRANSMISSION BY SATELLITE (INCLUDING UP-LI NKING, AMPLIFICATION, CONVERSION FOR DOWN-LINKING OF ANY SIGNAL), CABLE, OPTIC FIBRE OR BY ANY OTHER SIMILAR TECHNOLOGY, WHETHER OR NOT SUCH PROCE SS IS SECRET; ] 2.3. THE CIT(A) FAILED TO APPRECIATE THE FINDING OF THE A.O. THAT DATA TRANSMISSION SERVICES RENDERED BY THE NON-RESIDENT CARRIER WERE IN NATURE OF 'ROYALTY TAXABLE UNDER SECTION 9(1)(VI) IN VIEW OF EXPLANATION 6 TO SECTION 9(1)(VI) WHICH WERE INSERTED RETROSPECTI VELY BY FINANCE ACT 2012, RECEIPTS EARNED FROM PROVIDING DATA TRANSMISS ION SERVICES THROUGH SATELLITES IS TO BE CONSIDERED AS ROYALTY A ND HENCE THE ASSESSEE IS LIABLE TO DEDUCT TAX AT SOURCE FROM THE CARRIER PAYMENTS. 2.4. IT IS SUBMITTED THAT THE CIT(A)'S RELIED UPON ORDER OF THE HON'BLE ITAT IN ASSESSEE'S OWN CASE FOR AY.2009-10 HAS NOT BECOM E FINAL AND AGAINST WHICH DEPARTMENT'S APPEAL IS PENDING BEFORE THE HON'BLE HIGH COURT OF MADRAS VIDE TCA NO.909 OF 2014. 3. THE CIT(A) ERRED IN DELETING THE ADDITION OF RS . 1,46,93,906/- MADE ON ADVANCE RECEIVED FROM CUSTOMERS. 3.1. THE CIT(A) FAILED TO APPRECIATE THE FACT THAT INCOME RECEIVED OR DEEMED TO BE RECEIVED IN THE PREVIOUS YEAR IS TO BE OFFERED FOR TAXATION AND HENCE THE ADDITION MADE BY THE AO ON ADVANCE RE CEIVED FROM CUSTOMERS OUGHT TO HAVE BEEN UPHELD BY THE CIT(A). 4. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE U /S40(A)(IA) ON PAYMENT OF PREMIUM CONTENT OF RS.15,00,000/-. 4.1. THE CIT(A) FAILED TO APPRECIATE THE FINDINGS O F THE AO THAT PREMIUM CONTENT IS A FEE FOR TECHNICAL SERVICES PAID TO BSN L AND HENCE THE ASSESSEE IS LIABLE TO DEDUCT TDS U/S.194J FROM THE PREMIUM CONTENT PAYMENT. 5. 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) M AY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. ITA NO.332/16 C.O NO.49/16 :- 3 -: 3. REGARDING GROUND NO.1, THE FACTS ARE THAT THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF TURN-KEY MOBILE MESSAGIN G SOLUTIONS. DURING THE PREVIOUS YEAR, THE ASSESSEE MADE CARRIE R PAYMENTS TO NON- RESIDENT TELEPHONE OPERATORS. ON THE CARRIER PAYME NTS OF `2,08,52,080/- TAX WAS NOT DEDUCTED AT SOURCE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE WAS LIABLE TO D EDUCT TDS U/S 195 AS THESE PAYMENTS MADE WERE IN THE NATURE OF ROYALT Y/TECHNICAL SERVICE FOR WHICH INCOME ACCRUES OR ARISES IN INDIA EVEN THOUGH THE DEDUCTEE DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA. THEREFORE, THE ASSESSING OFFICER HAS DISALLOWED U/ S 40(A)(IA) OF THE ACT A SUM OF `2,08,52,080/- PAID TO THE NON-RESIDENT FOR NON- DEDUCTION OF TAX U/S 195 BY REPLYING UPON EXPLANAT ION 6 TO SEC. 9(1)(VI) OF THE ACT. ON APPEAL, THE CIT(A) HAS GI VEN A FINDING THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL DATED 27.2.2014 IN ASSESSEES OWN CASE I N I.T.A.NO.1030/ MDS/2013 FOR ASSESSMENT YEAR 2009-10. ACCORDINGLY, HE DELETED THE ADDITION AGAINST WHICH THE REVENUE IS IN APPEAL BE FORE US. 4. AFTER HEARING BOTH PARTIES, WE ARE OF THE OPINION T HAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THE TRIBU NAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10. THE TRIBUNAL IN PARA 8 OF ITS ORDER HAS OBSERVED AS UNDER: ITA NO.332/16 C.O NO.49/16 :- 4 -: 8. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE NATURE OF SERVICES RENDERED BY NON-RESIDENT I.E. M/S. CLICKATEL IS ONLY TO TRANSMI T BULK SMS. THE NATURE OF SERVICE PROVIDED BY CLICKATEL REQUIRES NO TECHNICAL KNOWLEDGE AND WHAT WAS RENDERED WAS JUST TRANSMISSI ON OF DATA WHICH REQUIRES NO TECHNICAL SKILL. THE FINDING OF T HE COMMISSIONER OF INCOME TAX (APPEALS) THAT CARRIER WHICH IS A MED IUM FOR SENDING BULK SMS AND AS SUCH CANNOT BE CONSIDERED T O BE RENDERING ANY TECHNICAL SERVICES. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT CLICKATEL WHICH IS A NON-RE SIDENT CARRIER RENDERED SERVICES OUTSIDE INDIA AND NO PART OF THE PAYMENT MADE TO CLICKATEL IS CHARGEABLE TO TAX IN INDIA. THE COM MISSIONER OF INCOME TAX (APPEALS) ALSO FOLLOWED THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS.BHARTI CELLULAR LTD. (330 ITR 239 ) ON THE ISSUE. THE HONBLE DELHI HIGH COURT TH E CASE OF CIT VS. BHARTI CELLULAR LTD. (319 ITR 139) HELD THAT TH ESE SERVICES DO NOT INVOLVE HUMAN INTERVENTION AND THESE SERVICES C ANNOT BE REGARDED AS FEE FOR TECHNICAL SERVICES. THE HONBLE MADRAS HIGH COURT IN THE CASE OF VERIZON COMMUNICATIONS LTD. VS . ITO IN T.C.(APPEAL) NOS. 147 TO 149 OF 2011 AND 230 OF 201 2 DATED 7.11.2013 HELD THAT COLLECTION OF FEES FOR USAGE OF STANDARD FACILITY WOULD NOT AMOUNT TO PAYMENT MADE FOR PROVIDING TECH NICAL SERVICES. IN THE CIRCUMSTANCES, WE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE DECISION OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN HOLDING THAT PAYMENT MADE BY THE ASSES SEE TO CLICKATEL IS NOT FEES FOR TECHNICAL SERVICES AND NO TDS IS REQUIRED TO BE MADE. 5. BEING SO, THE CIT(A) HAS TAKEN A CORRECT VIEW IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THEREFORE, NO INTER FERENCE IN THE ORDER OF THE CIT(A) IS CALLED FOR. 6. THE NEXT GROUND IS WITH REGARD TO DELETION OF ADDIT ION OF ` 1,46,93,906/- MADE ON ADVANCE RECEIVED FROM CUSTOME RS. 7. THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY ENTERED INTO CONTRACT WITH ITS CLIENTS FOR RENDERING SERVIC ES OF TRANSMISSION OF DATA. THE CONTRACT ENTERED INTO SHALL BE BASED EIT HER ON THE NUMBER ITA NO.332/16 C.O NO.49/16 :- 5 -: OF SMS TO BE SENT OVER A PERIOD OR IT SHALL BE FOR TRANSMITTING OF SMS FOR A PERIOD IRRESPECTIVE OF THE NUMBER TO BE TRANS FERRED. THE ASSESSEE-COMPANY RECEIVED THE PAYMENT FOR THE SAID CONTRACT IN ADVANCE FROM THE CLIENT FOR RENDERING OF THE SERVIC E. THE ASSESSEE RECORDED THE INCOME BASED ON THE SERVICE RENDERED O N PROPORTIONATE BASIS DEPENDING UPON EITHER THE NUMBER OF SMS OR TH E PERIOD OF CONTRACT. DURING THE YEAR, THE ASSESSEE HAD ACCOU NTED `1,46,93,906/- AS ADVANCE RECEIVED FROM THE CUSTOMER IN SCHEDULE - 8 - OTHER CURRENT LIABILITIES (B) TO THE BALANCE SHEET. THE ASSESSING OFFICER HAS TREATED THE ADVANCE RECEIVED FROM THE CUSTOMER AS INCOME IN THE YEAR IN WHICH ADVANCE WAS RECEIVED . THE ASSESSING OFFICER HAS OBSERVED THAT THE INCOME THAT IS RECEIV ED OR DEEMED TO BE RECEIVED IN THE PREVIOUS YEAR, IS LIABLE FOR TAXATI ON. THE ASSESSING OFFICER BY RELYING ON THE FOLLOWING DECISIONS, ADD ED THE ADVANCE RECEIVED FROM THE CUSTOMERS OF `1,46,93,906/- AS INCOME OF THE ASSESSEE: (I) EID PARRY(I) LTD VS CIT 258 ITR 404 (II) LD SASSOON & COMPANY LTD VS CIT, 26 ITR 27(S.C) 8. ON APPEAL, BEFORE THE CIT(A), THE ASSESSEE REITER ATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER. FURT HER THE ASSESSEE RELIED ON THE ORDER OF THE TRIBUNAL IN ITS OWN CASE FOR ASSESSMENT YEAR 2009-10 DATED 27.2.2014 (SUPRA) AND ALSO THE JUDGME NT OF THE MADRAS HIGH COURT IN CIT VS CORAL ELECTRONICS P LTD, 274 I TR 336 WHEREIN HELD ITA NO.332/16 C.O NO.49/16 :- 6 -: THAT SERVICE CHARGES RECEIVED IN ADVANCE FOR THE SE RVICES TO BE RENDERED IN FUTURE YEARS IS NOT LIABLE TO TAX IN TH E YEAR OF RECEIPT. BY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10, THE CIT(A) DELETED THE ADD ITION. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 9. WE FIND THAT SIMILAR ISSUE CAME UP BEFORE THIS TRIB UNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 (SU PRA) AND THE TRIBUNAL IN PARA 13 & 14 OF ITS ORDER HAS OBSERVED AS UNDER: 13. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES AND DECISIONS RELIED ON. ON READING OF THE ASSESSM ENT ORDER AS WELL AS ORDER OF COMMISSIONER OF INCOME TAX (AP PEALS), FIND THAT ASSESSEE RECEIVED ADVANCE INCOME FROM IT S CUSTOMERS AND WHENEVER SERVICES WERE PROVIDED BY T HE ASSESSEE, ASSESSEE ADJUSTS THE ADVANCES RECEIVED F ROM CUSTOMERS AND RECOGNIZES THE INCOME IN THE YEAR IN WHICH SERVICES WERE RENDERED. HOWEVER, THE ASSESSING OFF ICER TAXED THE ADVANCES RECEIVED BY THE ASSESSEE AND TH E COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE S AID ADDITION OBSERVING AS UNDER: 7.2 I HAVE CONSIDERED THE AO'S OBSERVATIONS AND TH E APPELLANTS SUBMISSIONS IN THIS REGARD. SINCE THE APPELLANT MAINTAINS BOOKS ON ACCRUAL SYSTEM, INCOME SHALL BE RECOGNIZED ONLY WHEN IT ACCRUES. IN THE GI VEN CASE, THE INCOME ACCRUES ONLY WHEN THE APPELLANT SE NDS THE REQUIRED NO. OF SMS. THEREFORE, THE SERVICE CHA RGES RECEIVED IN ADVANCE FOR THE SERVICE TO BE RENDERED IN FUTURE YEARS ARE NOT LIABLE TO TAX IN THE YEAR OF R ECEIPT. ONLY ON COMPLETION OF THE SERVICE, THE APPELLANT HA S RIGHT OVER THE AMOUNT THAT WAS RECEIVED IN ADVANCE. .IN VIEW OF THE ABOVE, THE ACTION OF THE AO IS NOT JUST IFIED IN MAKING THE ABOVE DISALLOWANCE OF `1,33,01,684/-AND HENCE DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. ITA NO.332/16 C.O NO.49/16 :- 7 -: 14. ON READING OF THE ABOVE ORDER, WE DO NOT FIND A NY GOOD REASON TO INTERFERE WITH THE FINDINGS OF THE COMMIS SIONER OF INCOME TAX (APPEALS). THUS, THE GROUND OF APPEAL RA ISED BY THE REVENUE ON THIS ISSUE IS REJECTED. 10. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL AND THE FACTS ARE SIMILAR FOR THIS ASSESSMENT YEAR ALSO, WE FIND THAT THE CIT(A) IS JUSTIFIED IN HOLDING THAT THE SERVICE CHARGES RECEI VED IN ADVANCE CANNOT BE TREATED AS INCOME OF THE ASSESSEE FOR THE IMPUG NED ASSESSMENT YEAR. ACCORDINGLY, THE GROUND RAISED BY THE REVENU E IS DISMISSED. 11. THE NEXT GROUND IS WITH REGARD TO DELETING THE DISA LLOWANCE U/S 40(A)(IA) OF THE ACT ON PAYMENT OF PREMIUM CONT ENT OF `15,00,000/-. 12. FACTS OF THE CASE ARE THAT THE ASSESSEE HAS PAID `15,00,000/- AS PREMIUM CONTENT WHICH IS A PULL SERVICE WHERE TH E MOBILE USERS SEND THE REQUEST BY USING A KEYWORD. THE CARRIER CHARGES THE MOBILE USER FOR THE SAME. WITH REGARD TO TREATMENT OF AMOUNT PAID TO BSNL AS PREMIUM CONTENT, THE ASSESSI NG OFFICER HAD DISALLOWED THE SAME ON THE GROUND THAT THE PAYMENT WAS MADE TOWARDS UTILIZING THE SERVICES OF BSNL WITHOUT TDS. ACCORDING TO THE ASSESSING OFFICER, IT IS A FEE FOR TECHNICAL SERVIC ES AND THE ASSESSEE WAS LIABLE TO DEDUCT TDS U/S 194J ON THE ABOVE SAI D EXPENDITURE OF `15,00,000/-. HE, THEREFORE, MADE ADDITION `15,00,000/- TO THE INCOME OF THE ASSESSEE. ON APPEAL, BEFORE THE CIT(A), THE ITA NO.332/16 C.O NO.49/16 :- 8 -: ASSESSEE SUBMITTED THAT THE AGREEMENT BETWEEN THE ASSESSEE AND BSNL SPECIFIES AS FOLLOWS: - VELTI INDIA P. LTD HAS COMMITTED TOP LINE REVENUE OF RUPEES ONE CRORE IN ONE YEAR TO BSNL FROM THE DATE OF SIGN ING OF AGREEMENT AND FROM THE SERVICES SPECIFIED IN THE AG REEMENT AGREED TOGETHER. - VELTI INDIA P. LTD SHALL SUBMIT A BANK GUARANTEE OF ` 15,00,000/- WITH A VALIDITY OF 18 MONTHS TO BSNL AS A BACK UP T O THE COMMITTED TOP LINE REVENUE OF RS. 1 CRORE IN THE YE AR. - THE BANK GUARANTEE OF ` 15,00,000/- SHALL BE ENCASHED BY BSNL IF VELTI INDIA P. LTD IS NOT ABLE TO MEET ITS COMMI TMENT TO GENERATE TOP LINE REVENUE OF RS. 1 CRORE WITHIN ONE YEAR FRO M THE DATE OF SIGNING OF THE AGREEMENT WITH BSNL. - THE BANK GUARANTEE SHALL BE VALID FOR 18 MONTHS F ROM THE DATE OF SIGNING THE AGREEMENT. - BSNL WILL INVOKE THE GUARANTEE IF THE MINIMUM COM MITTED TOP LINE REVENUE IS NOT GENERATED IN ONE YEAR PERIOD. 13. THE ASSESSEE FURTHER SUBMITTED THAT IT WAS NOT ABL E TO GENERATE THE MINIMUM COMMITTED TOP LINE REVENUE, TH E BANK GUARANTEE GIVEN WAS INVOKED BY BSNL. DURING THE YEA R THE ASSESSEE RECORDED THIS PAYMENT OF BANK GUARANTEE AS PREMIUM CONTENT UNDER THE HEAD OTHER EXPENSES WHICH WAS TREATED BY THE AS SESSING OFFICER AS RENDERING OF FEE FOR TECHNICAL SERVICE BY BSNL. AF TER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND AFTER EXAMINING TH E CONTRACTUAL AGREEMENT FILED BY THE ASSESSEE, THE CIT(A) FOUND THAT IT WAS A BANK GUARANTEE AND NOT FTS WARRANTING TDS U/S 194J OF T HE ACT . HE, THEREFORE, DELETED THE ADDITION MADE BY THE ASSESSI NG OFFICER. ITA NO.332/16 C.O NO.49/16 :- 9 -: 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT ON ACCOUNT OF TH E ASSESSEES FAILURE TO MEET THE COMMITMENT OF GENERATING TOP LINE REVEN UE, THE BANK GUARANTEE GIVEN BY THE ASSESSEE WAS INVOKED BY B SNL. THEREFORE, IT CANNOT BE TREATED AS FEE FOR TECHNICAL SERVICES PRO VIDED TO THE ASSESSEE FOR WHICH NO TDS DEDUCTION COULD BE MADE A S THERE WAS NO SERVICE INVOLVED IN IT. AS SUCH, IN OUR OPINION, T HE ASSESSEE IS NOT LIABLE FOR DEDUCTION OF TDS. FURTHER, THE BOMBAY H IGH COURT IN CIT VS REGASLIA APPARELS P. LTD, 352 ITR 71, HAS HELD THAT FORFEITURE OF BANK GUARANTEE WAS COMPENSATORY IN NATURE UNDER SEC. 37( 1) OF THE ACT AND NO TDS TO BE MADE ON THIS PAYMENT. WE, THEREFORE, F IND NO REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS ISSU E. 15. IN THE CROSS OBJECTION, THE ASSESSEE HAS ONLY SUPP ORTED THE ORDER OF THE CIT(A). SINCE WE HAVE DISMISSED THE R EVENUES APPEAL, THE CROSS OBJECTION IS ALSO DISMISSED AS INFRUCTUOU S. ITA NO.332/16 C.O NO.49/16 :- 10 -: 16. IN THE RESULT, THE APPEAL OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH SEPTEMBER, 2016, AT CHENNAI. SD/- SD/- ( . ! ) (G. PAVAN KUMAR) ' / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER / CHENNAI / DATED: 9 TH SEPTEMBER, 2016 RD ' #$ %$ / COPY TO: 1 . &' / APPELLANT 4. ( / CIT 2. ')&' / RESPONDENT 5. $*+ ' , / DR 3. ( () / CIT(A) 6. +/ 0 / GF