DCIT, CHENNAI V. M/s. Sify Technologies Ltd., CHENNAI

ITA 439/CHNY/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9201 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 05-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 07-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR M M BHUSARI IRS
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Depreciation; Business expenditure; Double taxation relief; Opportunity of being heard; Permanent establishment; Cost of acquisition; Valuation report; Reason to believe; Revenue expenditure
• Section: 201(1); 263; 90

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ! ' , #'$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 435, 439 & 859/MDS/2010 # % &% / ASSESSMENT YEAR : 2001-02, 2006-07 & 2007-08 THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI 600 101 VS. M/S. SIFY TECHNOLOGIES LTD, TIDEL PARK, TARAMANI, CHENNAI 600 113. [PAN AAACS 9032R] ( / APPELLANT) ( /RESPONDENT) '( ) * / APPELLANT BY : DR. M.M.BHUSARI, IRS, CIT +,'( ) * /RESPONDENT BY : SHRI. R. VIJAYARAGHAVAN, ADVOCATE ! ) - / DATE OF HEARING : 05-05-2016 ./& ) - / DATE OF PRONOUNCEMENT : 08-06-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE THREE APPEALS FILED BY THE REVENUE ARE DIR ECTED AGAINST DIFFERENT ORDERS OF THE COMMISSIONER OF IN COME-TAX (APPEALS)- LARGE TAX PAYER UNIT, CHENNAI FOR THE ABOVE ASSESS MENT YEARS PASSED U/S.143(3) AND 250 OF THE INCOME TAX ACT, 1961 (H EREIN AFTER ITA NO. 435, 439 & 859/MDS/2010. :- 2 -: REFERRED TO AS THE ACT). SINCE THE ISSUE IN THESE APPEALS ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED, HEARD TOGETHE R, AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST, WE TAKE UP ITA NO.435/MDS/2010 OF ASSESSMEN T YEAR 2001-2002 FOR ADJUDICATION. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL:- 2.1. THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF 18,34,52,000/- MADE BY THE ASSESSING OFFICER TOWARDS 'UNEARNED INCOME', RELYING UPON HIS OWN ORDER IN THE ASSESSEE'S CASE IN ITA TR.NO.431/09-10/LTU(A)/TR.18 DATED 11.12.2009 FOR THE A-Y 2005-06 2.2. IT IS SUBMITTED THAT THE RELIED UPON ORDER HAS NOT BECOME FINAL AND APPEAL HAS BEEN PREFERRED BEFORE THE HON'BLE JURISDICTIONAL TRIBUNAL. 2.3. HAVING REGARD TO THE HON'BLE KERALA HIGH COURT DECISION IN THE CASE OF CIT V. SOUTHERN CABLES & ENGINEERING WORKS (289 ITR 167), THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF THE ASSESSING OFFICER. 3.1. THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE U/S.40(A)(I) OF RS.16,22,09,000/-, TOWARDS 'NETWORKING AND COMMUNICATION COSTS', RELYING UPON HIS OWN ORDER IN THE ASSESSEE'S CASE FOR THE A-Y 2003-04 I N ITA TR.NO.4/09-10/LTU(A) DATED 11.12.2009. 3.2. IT IS SUBMITTED APPEAL BEFORE THE HON'BLE CHENNAI TRIBUNAL HAS BEEN PREFERRED AGAINST THE RELIED UPON ORDER. 4.1. THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF 'RECRUITMENT EXPENSES' (RS.29,38,000) AND 'OTHER EXPENSES' TO THE TUNE OF 1,64,53,286/- BY HOLDING THAT THE IMPUGNED EXPENSES WERE INCURRED BY THE ASSESSEE FOR ITA NO. 435, 439 & 859/MDS/2010. :- 3 -: CARRYING ON BUSINESS IN AUSTRALIA AND CONSEQUENTLY DO NOT INVOLVE ANY EXPOSURE TO TAX IN INDIA. 4.2. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT ARTICLE 7 (BUSINESS PROFITS) OF THE DTAA BETWEEN INDIA AND AUSTRALIA READS THUS: '(1) THE PROFITS OF AN ENTERPRISE OF ONE OF THE CONTRACTING STATES SHAL L BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN ... ' 4.3. IN THE ABSENCE OF ANY FINDING THAT THE ASSESSE E HAS A PERMANENT ESTABLISHMENT IN AUSTRALIA, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF THE ASSESSING OFFICER. 4.4. THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT AS A CONSEQUENCE OF THE ASSESSEE NOT HAVING PERMANENT ESTABLISHMENT IN AUSTRALIA, THE INCOME CORRESPONDING TO THE AFORESAID EXPENSES ARE TAXABLE IN INDIA, THUS, WARRANTING THE ASSESSEE TO MAKE TDS ON THOSE EXPENSES. 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) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 4. THE BRIEF FACTS OF THE CASE IS THAT THE ASSESSEE IS IN THE BUSINESS OF NETWORKING SERVICES & DEVELOPMENT OF SO FTWARE AND FILED RETURN OF INCOME ON 05.09.2002 ADMITTING LOSS OF ?1 12,57,29,850/- AND RETURN WAS PROCESSED U/S.143(1) OF THE ACT AND ASSESSMENT WAS COMPLETED U/S.143(3) OF THE ACT DETERMINING LOSS I NCOME AT ?86,32,85,973/- AND LD. ASSESSING OFFICER ON REASON TO BELIEVE THAT INCOME HAS ESCAPED THE ASSESSMENT ISSUED NOTICE U/ S.148 OF THE ACT. IN COMPLIANCE TO NOTICE, THE ASSESSEE FILED A LETTE R REQUESTING THE ITA NO. 435, 439 & 859/MDS/2010. :- 4 -: ORIGINAL RETURN FILED EARLIER BE TREATED AS RETURN FOR THIS PURPOSE AND NOTICE U/.S143(2) OF THE ACT WAS ISSUED. THE ASSE SSEE FILED LETTER ON 18.09.2008 REQUESTING REASONS FOR REOPENING. IN TH E ASSESSMENT PROCEEDINGS THE LD. AUTHORISED REPRESENTATIVE OF AS SESSEE APPEARED AND PRODUCED DETAILS FOR EXAMINATION. THE LD. ASS ESSING OFFICER FOUND UNEARNED INCOME OF ?18,34,52,000/- AS PER THE SCHED ULE 10 OF BALANCE SHEET AND NOT OFFERED FOR TAXATION. THE ASSESSEE HA S EXPLAINED THAT IT IS DEFERRING THE INCOME AS PER PROVISIONS OF SEC. 145(2) OF THE ACT AND RELIED ON THE DECISION OF SUPREME COURT AND OTHER H IGH COURTS. THE LD. ASSESSING OFFICER RELIED ON THE ASSESSMENT ORDE R OF ASSESSEE APPLICABLE TO ASSESSMENT YEAR 2005-06 WERE THIS ISS UE WAS ELABORATELY DISCUSSED AS ASSESSEE HAS CLAIMED CORRESPONDING EXP ENDITURE FOR EARNING THE ABOVE UNEARNED INCOME IN THE PROFIT AND LOSS ACCOUNT AND THE CORRESPONDING INCOME HAS BEEN DEFERRED TO SUBSE QUENT YEARS, WHICH ARE NOT IN ACCORDANCE WITH ACCOUNTING PRINCIP LES AND MADE ADDITIONS. AGGRIEVED BY THE ORDER, THE ASSESSEE FIL ED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 5. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE SUBMISSIONS, RE ASONS, GROUNDS ARGUED BY THE ASSESSEE AND RELIED ON THE ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2005-06 AND DELETED THE ADDITION MA DE BY THE LD. ITA NO. 435, 439 & 859/MDS/2010. :- 5 -: ASSESSING OFFICER. AGGRIEVED BY THE ORDER OF COMMIS SIONER OF INCOME TAX (APPEALS), THE REVENUE HAS ASSAILED AN APPEAL B EFORE TRIBUNAL. 6. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ARG UED THAT HE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DE LETING THE ADDITION RELYING ON SUBSEQUENT YEAR ORDER AND HAS NOT BECOME FINAL AND APPEAL HAS BEEN PREFERRED IN JURISDICTIONAL TRI BUNAL, PENDING DISPOSAL AND PRAYED FOR ALLOWING THE APPEAL. 7. CONTRA, LD. AUTHORISED REPRESENTATIVE RELIED ON THE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) AND ALSO SUPPO RTED THE CASE WITH DECISION OF CO-ORDINATE BENCH IN ASSESSEES O WN CASE FOR THE ASSESSMENT YEAR 2002-03 AND OPPOSED THE GROUNDS. 8. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. AUT HORISED REPRESENTATIVE CONTENTION THAT UNEARNED INCOME AS PER SEC. 145(2) IN RESPECT OF ANY CLASS OF INCOME TO BE DISCLOSED AND NOTIFIED IN THE CENTRAL GOVERNMENT BY OFFICIAL GAZETTE. WE HAVE CONSIDERED THE SUBMIS SIONS OF THE LD. AUTHORISED REPRESENTATIVE AND ALSO FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) WHO RELIED ON THE EARLIER YEAR ORDERS. WE FOUND THAT SIMILAR ISSUE WAS DECIDED BY THE CO-ORDINATE B ENCH IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN IN ITA NO.1084/MDS/2 012, FOR THE ITA NO. 435, 439 & 859/MDS/2010. :- 6 -: ASSESSMENT YEAR 2002-2003, DATED 20.11.2012, WHERE THE TRIBUNAL OBSERVED IN PARA NOS. 5 TO 7 AS UNDER:- 5. THE DR VEHEMENTLY SUBMITTED THAT THE CIT(A) HA S WRONGLY DELETED THE ADDITION WHICH WAS DESERVINGLY MADE BY THE ASSESSING OFFICER. ACCORDINGLY, HE PRAYED FOR RESTO RING THE SAME. 6. OPPOSING THE SUBMISSIONS OF THE DR, THE AR REPRE SENTING THE ASSESSEE HAS SUBMITTED THAT THE ISSUE IN HAND HAS A LREADY BEEN ADJUDICATED BY THE COORDINATE BENCH OF CHENNAI ITAT IN ASSESSEES OWN CASE I.E. I.T.A. NO. 1954/MDS/2007 D ECIDED ON 26.05.2009 FOR THE ASSESSMENT YEAR 2003- 04 AND ALS O PRODUCED COPY OF THE ORDER. IN REBUTTAL, THE DR COULD NOT PO INT OUT ANY DISTINGUISHING FEATURE AND ONLY PLEADED THAT THE SA ID ORDER IS YET TO BECOME FINAL. 7. WE HAVE HEARD BOTH PARTIES AND ALSO PERUSED THE RELEVANT FINDINGS AS WELL AS CASE LAW CITED. THE ONLY BONE O F CONTENTION BETWEEN THE PARTIES IS THAT THE ASSESSEE HAS TREATE D THE AMOUNT IN QUESTION AS UNEARNED INCOME, WHEREAS; PER REVENUE, SECTION 145(2) OF THE ACT IS APPLICABLE AND HE AMOUNT IN QUESTION HAS TO BE TREATED AS INCOME OF THE CURRENT YEAR. WE FIN D THAT THE SAME VERY ISSUE HAD ARISEN IN ASSESSMENT YEAR 2003- 04 IN I.T.A. NO. 1954/MDS/2007 (SUPRA), WHEREIN THE COORDINATE B ENCH HAD DECIDED IT IN FAVOUR OF THE ASSESSEE AS UNDER: GROUND NO. 4 4.1 THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSES SING OFFICER TO DELETE THE ADDITION OF RS.39,68,208 RECORDED IN THE ASSESSEE'S BOOKS FOR THE RELEVANT PREVIOUS YEAR AS 'UNEARNED INCOME' . ITA NO. 435, 439 & 859/MDS/2010. :- 7 -: 4.2 THE LEARNED CIT(A) OUGHT TO HAVE NOTED THAT THE IMPUGNED INCOME HAD ACCRUED TO THE ASSESSEE, AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 4.3 THE LEARNED CIT(A) OUGHT TO HAVE SEEN THAT THE ASSESSEE ADOPTED A DEVICE TO POSTPONE THE INCOME FOR THE PUR POSE OF INCOME TAX ONLY. 4.4 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT T HE HON'BLE SUPREME COURT IN THE CASE OF CIT V. THANTHI TRUST ( 239 ITR 502) HAS APPROVED IN PRINCIPLE THE PROPOSITION THAT BOOK ENTRIES TO HAVE A LEGAL EFFECT AND CANNOT BE IGNORED MERELY BECAUSE THEY ARE BOOK ENTRIES. 31. IT WAS NOTICED BY THE AO DURING ASSESSMENT PROC EEDING THAT IN THE BALANCE SHEET AS ON 31.03.2003 RS. 45,67,354 WA S SHOWN AS 'UNEARNED INCOME' UNDER THE HEAD 'CURRENT LIABILITI ES' AS AGAINST RS. 15,13,162 SHOWN AS ON 31.03.2002. THE DETAILS FURNI SHED BY THE ASSESSEE SHOWED THAT RS. 39,68,208 RECEIVED DURING THE YEAR ENDING 31.03.2003 WAS NOT OFFERED FOR TAX AND WAS CARRIED FORWARD TO NEXT YEAR. THE ASSESSEE EXPLAINED AS UNDER. 'FOR REVENUE RELATING TO DEVELOPMENT OF E- LEARNING SOFTWARE. THE INVOICES ARE RAISED ON THE BASIS OF PAYMENT MILESTONES WHERE AS REVENUE ARE RECOGNIZED ON THE BASIS OF THE MODULES DEVELOPED AND DELIVERED. THOUGH THE PAYMENTS HAS BEEN RECEIVED ON THE BASIS OF INVOICES, IF THE PRODUCTS ARE NOT DELIVERED SIFY E-LEARNING NEEDS TO REFUND THE AMOUNT IN FULL TO THE CUSTOMER.' 32. THE AO REJECTED THE EXPLANATION AND ADDED RS. 3 9,68,208 FOR THE REASONS GIVEN IN HIS ORDER AS UNDER: '4. THE SY STEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE WAS MERCANTILE. IN SUCH METHOD OF ACCOUNTING THE RECEIPT ON SALE NEEDS TO B E RE RECOGNIZED ONCE AN SALES INVOICE WAS RAISED. ONCE A CUSTOMER I S BILLED, THERE CAN BE NO OTHER TREATMENT EXCEPT TO RECOGNIZE THE S ALE IN THE ASSESSEE'S BOOKS. IT IS ALSO A FACT ADMITTED BY THE ASSESSEE THAT PAYMENTS WERE RECEIVED ON THE BASIS OF INVOICES (SE E PARA E-3). THE NON RECOGNITION OF A SALE IN THESE CIRCUMSTANCE S DOES NOT DEPEND UPON FINAL APPROVAL OF THE CUSTOMER, WHO HAS BEEN MAKING PAYMENTS ON THE BASIS OF INVOICES, RAISE ASSESSEE. ITA NO. 435, 439 & 859/MDS/2010. :- 8 -: THE ARGUMENT OF THE ASSESSEE THAT IT NEEDS TO REFUN D THE AMOUNTS TO CUSTOMER UNDER CERTAIN CIRCUMSTANCES DOES NOT HOLD GROUND. IN CASE A CUSTOMER RETURNS THE PRODUCTS SOLD BY THE ASSESSE E AND THE ASSESSEE IS REQUIRED TO REFUND THE PAYMENTS RECEIVE D FROM THE CUSTOMER, THE ASSESSEE CAN BOOK THE SAME AS SALES R ETURNS. HENCE, THE SYSTEM ADOPTED BY THE ASSESSEE CANNOT BE ACCEPT ED AND SO THE UNRECOGNIZED INCOME OF RS.39,68,208 IS NOW TREATED AS INCOME.' 33. THE CIT(A) DELETED THE ADDITION AND HIS ORDER HAS BEEN CHALLENGED BY THE DEPARTMENT IN THE PRESENT APPEAL. 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL ON RECORD. IT WAS EXPLAINED BY THE LEARNED AR THAT THE SOFTWARE DEVELOPMENT WAS THE MAJOR SOURCE OF INCOME . IN THE WRITTEN SUBMISSION FILED BY THE AR BEFORE THE CIT(A ) THE BREAK-UP OF RECEIPTS WAS SHOWN AS UNDER. SL.NO PARTICULARS AMOUNT ( IN LACS) C THE MAJOR SERVICE INCOME ARE AS UNDER:- INCOME FROM SOFTWARE DEVELOPMENT (IDC) LMNK 1175 INCOME FROM SOFTWARE DEVELOPMENT NON LMNK 162 INCOME FROM IT TRAINING 48 INCOME FROM SOFTWARE SERVICES -LMS 3 INCOME FROM - LL 2 MISCELLANEOUS OTHERS 4 TOTAL 1394 35. THE CIT(A) HAS DELETED THE ADDITION FOR THE REA SONS GIVEN IN PARAGRAPH 4.3 OF HIS ORDER. HE HAS, INTERALIA, OBSE RVED THAT THE REVENUE EARNED BY THE ASSESSEE FROM SOFTWARE AND CO NSULTANCY SERVICES WAS RECOGNIZED ON DELIVERY OF GOODS / SERV ICES, THAT AS PER THE EXISTING SCHEME, M/S. SATYAM EDUCATION SERVICES LIMITED WAS ASSIGNED THE RESPONSIBILITY TO 'SIGN OFF ON COMPLE TION OF THE PROJECT IN THE CASE OF ALL CUSTOMERS, THAT THE ASSESSEE-COM PANY WAS FOLLOWING THE AS 9 PRESCRIBED BY THE INSTITUTE WHIC H WAS IN CONFORMITY WITH THE PROVISIONS OF SECTION 145(2) OF THE ACT. THE ASSESSEE WAS REGULARLY FOLLOWING THE 'PROJECT COMPL ETION METHOD, WHICH IS A RECOGNIZED METHOD. THE COMPLETION OF EAC H PROJECT IS DETERMINED BY 'SIGN OFF. THERE IS NOTHING ON RECOR D TO SHOW THAT THERE WAS ANY INCONSISTENCY IN THIS REGARD. THE CIT (A) FOUND THAT ITA NO. 435, 439 & 859/MDS/2010. :- 9 -: THE DEFERRED INCOME AMOUNTING TO RS.39,68,208 WAS C ARRIED FORWARD AND WAS DULY TAKEN INTO ACCOUNT IN THE NEXT ASSESSMENT YEAR. IN THE CIRCUMSTANCES, THEREFORE, WE SEE NO RE ASON TO INTERFERE WITH THE CONCLUSIONS REACHED BY THE CIT(A). THE GRO UND NO. 4 IS, ACCORDINGLY REJECTED. 36. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. TAKING CUE FROM THE SAME AND MORE PARTICULARLY, IN VIEW OF THE FACT THAT THERE IS NO DIFFERENCE POINTED OUT BY THE REVE NUE, WE ARE OF THE OPINION THAT THE CIT(A) HAS RIGHTLY DELETED THE ADD ITION UNDER THE HEAD 'UNEARNED INCOME. THE MERE SUBMISSION ON THE PART OF REVENUE THAT THE SAME HAS NOT ATTAINED FINALITY IS NO GROUND IN ITSELF FOR NOT PLACING RELIANCE UPON THE SAME. ACCO RDINGLY, THE FINDINGS OF THE CIT(A) ARE UPHELD AND THE GROUND IS DECIDED AGAINST THE REVENUE. WE RESPECTFULLY FOLLOWING THE ABOVE DECISION, UPHE LD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND DISMISS TH E REVENUE GROUND. 9. ON THE SECOND ISSUE, THE LD. ASSESSING OFFICER ON PERUSAL OF THE EXPENDITURE INCURRED ON NETWORKING CALLED FOR C LARIFICATION AS THE EXPENSES ARE SUBJECTED TO TDS U/S.40(A)(I) OF THE ACT AND APPLICABILITY OF PROVISIONS OF SEC. 195 OF THE ACT. THE ASSESSE E GAVE DETAILED CLARIFICATION ON REMITTANCE TOWARDS OVERSEAS SERVIC ES AND EXPLAINED THE NETWORKING AND COMMUNICATION COST AND THE CATE GORY OF EXPENDITURE INCURRED OUTSIDE INDIA AND THE SAID PR OVISIONS SHALL NOT APPLY. THE LD. ASSESSING OFFICER RELIED ON THE LEG AL PROVISIONS OF SEC. ITA NO. 435, 439 & 859/MDS/2010. :- 10 -: 40(A) (I) OF THE ACT AND DOUBLE TAXATION U/S.90(2) OF THE ACT CONSIDERED THE PROVISIONS OF TDS ARE MANDATORY IN RESPECT OF NETWORKING, COMMUNICATION WERE SERVICES ARE OUTSI DE INDIA AND TDS HAS TO BE DEDUCTED AND DISALLOWED ?16,22,09,000/-. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE COMMISSI ONER OF INCOME TAX (APPEALS). 10. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE EXPLAINED THAT ASSESSEE HAS INCURRED SUCH EXPENDITURE IN FOREIGN CURRENCY AND PAYMENTS TO NON-RESIDENTS. THOUGH THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS DEALT ON ITAT DECISION, THE ASSESSEE GAVE A EXHAUSTIVE REPLY REFERRED AT PA GE 4 TO 8 OF COMMISSIONER OF INCOME TAX (APPEALS) ORDER ON THE D EFINITION, APPLICABILITY, SYSTEM OF WORKING AND CRITERIA. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE SUBMISSIONS AND THE FINDINGS OF THE LD. ASSESSING OFFICER AND DELETED THE ADDITION OBSERVED AT PARA 5.3 OF HIS ORDER AS UNDER:- 5.3 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS AS ALSO THE CASES CITED BY THE ASSESSING OFFICER AND THE AP PELLANT. THE LEARNED AO HAS NOTED IN HIS ORDER THAT THE ORDER U/ S 263 IN THE CASE OF COGNIZANT TECHNOLOGY SOLUTIONS P. LTD WAS C ONFIRMED BY THE HON'BLE TRIBUNAL VIDE ITA NO.1L59/MDS/2007 DATED 31.12.2007. HOWEVER, SUBSEQUENTLY THE HON'BLE TRIBU NAL IN THE M.P.NO. 144/MDS12008 (IN ITA NO.1159 /MDS/207) DATE D 12.11.2008 FOR THE SAME ASSESSMENT YEAR HAS HELD TH AT THERE IS ITA NO. 435, 439 & 859/MDS/2010. :- 11 -: A MISTAKE IN THE EARLIER ORDER OF TRIBUNAL AND IT S ET ASIDE THE ISSUE TO FILE OF AO BY OBSERVING 'THEREFORE, WE FIN D THAT THERE IS A MISTAKE APPARENT FROM THE ORDER OF THE TRIBUNAL O N THIS ISSUE AND WE SET ASIDE THE ISSUE OF APPLICATION OF SECTIO N 40(A)(I) OF THE ACT TO THE FILE OF THE ASSESSING OFFICER WITH D IRECTION TO DECIDE THE ISSUE AFRESH AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE.' THEREFORE, THE ISS UE IN COGNIZANT SOLUTIONS CASE HAS NOT BEEN DECIDED BY TH E HON'BLE ITAT. SO FAR AS THE PAYMENTS TO NON RESIDENT PARTIE S ARE CONCERNED, THESE ARE TOWARDS OVERSEAS TERMINATION A ND PEERING CHARGES AND THE QUESTION OF ANY USE OF EQUIPMENT OF THE SERVICE PROVIDERS IN INDIA DOES NOT ARISE. I HAVE H ELD IN MY ORDER FOR THE A.Y. 200304 IN ITA TR. NO. 4/0910/L TU(A) THAT SUCH CONNECTIVITY SERVICES AVAILED WOULD NOT RESULT IN ACCRUAL OF ANY ROYALTY OR TECHNICAL SERVICES IN INDIA UNDER SEC 9 (1) (VI) AND 9(I)(VII) OF THE INCOME TAX ACT 1961. FOLLOWING THE SAME REASONS, I HOLD THAT THE SERVICES ARE NOT LIABLE TO TAX IN INDIA AND HENCE THE QUESTION OF DEDUCTION OF TAX AT SOURCE ON THE SAME DOES NOT ARISE. THE DISALLOWANCE U/S 40(A)(I) IS TH EREFORE DELETED. THE APPELLANT SUCCEEDS ON THIS GROUND. AGGRIEVED BY THE COMMISSIONER OF INCOME TAX (APPEAL S) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 11. BEFORE US, LD. DEPARTMENTAL REPRESENTATIVE ARGUED THAT EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS ASSES SEES OVERSEAS PAYMENT IS SUBJECTED TO TDS AND LD. COMMISSIONER OF INCOME TAX (APPEALS) RELIED ON THE DECISION WHICH ARE YET TO B ECOME AND PRAYED FOR ALLOWING THE APPEAL. ITA NO. 435, 439 & 859/MDS/2010. :- 12 -: 12. CONTRA, LD. AUTHORISED REPRESENTATIVE RELIED ON TH E ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) AND ALSO SUPPO RTED THE CASE WITH DECISION OF CO-ORDINATE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002-03 AND OPPOSED THE GROUNDS. 13. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS CITED. SIMILAR ISSU E WAS DEALT IN ITA NO. 1084/MDS/2012, FOR THE ASSESSMENT YEAR 2002-2003, D ATED 20.11.2012, WHERE THE TRIBUNAL OBSERVED IN PARA NO .13 AS UNDER:- 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THROUGH THE RELEVANT FINDINGS AS WELL AS CASE LAW ABOVE SAID. T HE ONLY ISSUE BETWEEN THE PARTIES IS THAT PER REVENUE, THE PAYMEN T IN QUESTION MADE BY THE ASSESSEE IS LIABLE TO TDS PROVISIONS AS COMP RISED IN CHAPTER XVII B OF THE ACT WHICH THE ASSESSEE IS DISPUTING . WE NOTICE THAT THE COORDINATE BENCH IN I.T.A. NO. 1277 AND 1283/MDS/20 08 (SUPRA) DECIDED ON 02.02.2012 [IN WHICH ONE OF US N.S. SAIN I, A.M. MEMBER OF THE BENCH) HAS HELD AS UNDER: 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AS WELL AS THE CITE D DECISIONS. WE FIND THAT THE LD. CIT(A) HAS DECIDED THIS ISSUE BY OBSERVING AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE RIVAL SUBMISSIONS AND ALSO EXAMINED THE ISSUES CAREFULLY WITH REFERENCE TO APPLICABILITY OF SEC. 195, WHICH HAS BEEN DENIED BY THE APPELLANT. THE APPELLANT COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING NETWORKING AND E-COMMERCE SERVICES BY WAY OF INTERNET. IN ORDER TO CARRY OUT ITS BUSINESS OF PROVIDING BROADBAND INTERNET CONNECTIVITY THE APPELLANT COMPANY HAS ENTERED INTO AGREEMENTS WITH ITA NO. 435, 439 & 859/MDS/2010. :- 13 -: CERTAIN NON-RESIDENT COMPANIES. THE ASSESSEE THEREFORE MADE CERTAIN REMITTANCES IN FOREIGN CURRENCY TOWARDS CONNECTIVITY CHARGES AND BANDWIDTH CHARGES WHICH ARE CALLED TELECOMMUNICATION CHARGES WITHOUT DEDUCTION OF TAX AT SOURCE. THE ASSESSING OFFICER EXAMINED THE MATTER AND FOUND THAT THE EQUIPMENTS USED BY THE APPELLANT COMPANY THROUGH WHICH CONNECTIVITY WAS PROVIDED ARE USED BY THE ASSESSEE. THEREFORE, IT TREATED THE PAYMENT AS ROYA LTY FOR THE USE OF THE EQUIPMENTS. CONSEQUENTLY, THE ASSESSING OFFICER HELD THAT THE APPELLANT COMMITTED DEFAULT U/S 195 IN SO FAR AS IT HAD NOT DEDUCTED TA X AT SOURCE. HE THEREFORE, WORKED OUT SHORT DEDUCTION OF TAX U/S. 201(1) AT RS.3,45,99,751/- AND RS.3,33,39,659/- FOR A.YS. 2002-03AND 2003-04 RESPECTIVELY. THE ASSESSING OFFICER ALSO CHARGED INTEREST U/S. 201(1A) AMOUNTING TO RS.1,99,6S,927/- AND RS.1,52,71,474/- FOR A.YS. 2002-03 AND 2003-04 RESPECTIVELY. THE ASSESSING OFFICER HAS, THEREFORE, TAKEN THE FOLLOWING ARGUMENTS FOR RAISING THE IMPUGNED DEMANDS. (1) THE SERVICE PROVIDED BY THE TELECOMMUNICATION SERVICE PROVIDER IN THE CASE IS DIFFERENT FROM THAT PROVIDED BY THE NONRESIDENT COMPANIES IN THE PRESENT CASE. (2) TELEPHONE IS FUNDAMENTALLY DIFFERENT FROM A BANDWIDTH SERVICE. (3) THE BANDWIDTH SERVICE IS NOT A SPECIFIED SERVICE. (4) EQUIPMENT OF THE NONRESIDENT COMPANY THROUGH WHICH CONNECTIVITY IS PROVIDED IS USED BY THE ASSESSEE THE REQUISITE BANDWIDTH ALONG WITH EQUIPMENTS IS FOR EXCLUSIVE FOR THE ASSESSEE WHICH CANNOT BE USED BY OTHERS NOR BY THE NON-RESIDENT COMPANY; ON TERMINATION OF THE AGREEMENT THE ASSESSEE MUST CEASE TO USE THE SERVICE AND ALL EQUIPMENT OF THE NON- RESIDENT COMPANY. THUS THE PAYMENT BY THE ASSESSEE CAN BE TREATED AS ROYALTY FOR USE OF EQUIPMENT. THE ITO FURTHER ARGUED THAT CASE HAS TO BE DISTINGUISHED FROM THE CASE OF BSNL AND OTHERS VS. UNION OF INDIA (SUPREME COURT). IN THAT CASE THE SUPREME COURT DEALT WITH THE ISSUE OF USING STANDARD FACILITY PROVIDED TO AN AVERAGE HOUSEHOLDER OR ITA NO. 435, 439 & 859/MDS/2010. :- 14 -: CONSUMER WHEREAS IN THE PRESENT CASE IT DEALT WITH PAYMENT FOR USE OF EQUIPMENT. 6:1. IN THE REPORT DATED 07-09-2007 THE ASSESSING OFFICER HAS REITERATED THE ARGUMENTS MADE IN THE IMPUGNED ORDER .6.2 ON THE OTHER HAND THE LEARNED AR HAS VEHEMENTLY ARGUED THAT THE LEARNED ASSESSING OFFICER HAS NOT PROPERLY APPRECIATED THE FACTS OF T HE CASE AND SUBMITTED THAT THE BANDWIDTH CHARGES ARE PROVIDED EITHER BY WAY OF UNDERSEA CABLES OR BY SATELLITE EARTH STATIONS AND THE APPELLANT DOES NOT HAVE ANY CONTROL OVER THE EQUIPMENTS AS IT HAS ONLY LEASED A PART OF THE TRANSPONDER CAPACITY AND NOT LEASED THE TRANSPONDER. THEREFORE, THE RIGHT OF' US E OF THE EQUIPMENT IS NOT EXCLUSIVELY WITH THE APPELLANT. FURTHER, THE RIGHT TO USE EQUIPMENT MAIN LY ARISES IF THERE IS PHYSICAL EQUIPMENT AND SINCE THE EQUIPMENTS USED BY THE APPELLANT ARE NOT UNDER ITS CONTROL. THEREFORE, THE PAYMENTS MADE DO NOT HAVE THE CHARACTER OF ROYALTY. 6.3 ON THE ABOVE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ONLY ONE QUESTION ARISES FOR DECISION WHETHER THE REMITTANCES MADE BY THE APPELLANT COMPANY TO THE FOREIGN PARTIES WOULD FALL WITHIN TH E PURVIEW OF SEC. 195(1) WHICH REQUIRES DEDUCTION OF TAX AT SOURCE. BANDWIDTH IS BOUGHT AND SOLD TO CONSUMERS AND IT ACTS AS A CONDUIT ONLY. IN THE APPELLANT'S CASE THERE ARE NO EQUIPMENTS INSTALLED IN ITS PREMISES AND THE CONTRACT ENTERED WITH THE FOREIGN PARTIES IS ONLY FOR THE SERVICES. MERE USE OF EQUIPMENT IN PROVIDING BANDWIDTH SERVICES WOULD NOT AMOUNT TO TRANSFER OF RIGHT TO USE. AS A MATTER OF FACT THERE ARE NO GOODS INVOLVED IN THE TRANSACTION AND THE PAYMENTS ARE MADE ONLY FOR THE USE OF SERVICES. THE WORD 'ROYALTY' AND ITS MEANING WAS INTRODUCED VIDE FINANCE ACT, 1976 AND WAS DEFINED UNDER EXPLANATION 2 TO SEC. 9(1)(I) WHICH WAS FURTH ER EXPANDED TO INCLUDE 'THE RIGHT TO USE ANY INDUSTRIA L COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SEC,. 44B. THE AMENDMENT WAS MADE BY FINANCE ACT, 2001 BY INCORPORATING C1AUSE (IV A) W.E.F. 01-04-2002 I.E., APPLICABLE FOR A.Y. 2002-03. IN SIMPLE WORDS, THEREFORE, ROYALTY MEANS THE PAYMENT OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF' OR THE ITA NO. 435, 439 & 859/MDS/2010. :- 15 -: RIGHT TO USE, ANY COPY RIGHT OF LITERARY ARTISTIC O R SCIENTIFIC WORK BUT, DOES NOT INCLUDE THE WORDS 'US E' OR RIGHT TO USE, INDUSTRIAL, COMMERCIAL OR SCIENTIF IC EQUIPMENT. IN THE APPELLANT'S CASE THERE IS NO 'RIG HT TO USE EQUIPMENT. THEREFORE, THE PAYMENTS MADE DO NOT FALL UNDER 'ROYALTY'. ON SIMILAR FACTS THE ITAT , BANGALORE BENCH IN THE CASE OF ACIT VS. INFOSYS TECHNOLOGIES LTD. IN ITA NOS. 653 AND 969/BANG/2006 DATED 17-10-2007 HELD THAT ANY PAYMENT MADE TO DATABASE OWNERS OUTSIDE INDIA FOR ACCESSING SUCH DATABASES AND THE SERVICES PROVIDED BY SUCH TELECOM OPERATOR TO THE CUSTOMERS DO NOT AMOUNT TO TECHNICAL SERVICES OR ROYALTY U/S 9(1)(VI I) OF THE IT ACT. ACCORDINGLY, IT WAS HELD THAT NO TDS IS TO BE MADE. THE HON'BLE TRIBUNAL ALSO HELD THAT PAYMENTS FOR ACCESSING DATA IS LIKE READING A BOOK IN A LIBRARY WHICH COULD NOT BE PASSED ON TO ANYONE ELSE. SINCE THE COPYRIGHT WAS NOT FOR LITERARY, ART ISTIC OR SCIENTIFIC WORK, THE PAYMENT IS NOT TO BE TREATE D AS ROYALTY AND IT WAS HELD THAT NO TDS WAS REQUIRED TO BE MADE. THE HON'BLE ITAT, BANGALORE BENCH IN THE CASE OF ITO VS. MADHURA COATS PVT. LTD., IN ITA NO. 1711 AND 1712/BANG/2005 FOR AYS. 2005-06 AND 2006-07 VIDE ORDER DATED 28-09-2006, RELYING ON THE DECISION OF THE APEX COURT IN THE CASE OF BHARAT SANCHAR NIGAM LTD., (SUPRA)' WHEREIN, IT WAS HELD THAT PROVIDING TELECOM SERVICES DO NOT FALL UNDER THE CATEGORY OF 'GOODS', THE HON'BLE ITAT HEL D THAT PAYMENTS MADE FOR CONNECTIVITY FOR TRANSMISSION OF DATA WOULD NOT FALL INTO THE CATEGO RY 'ROYALTY' OR 'FEES FOR TECHNICAL. 6:4. IN VIEW OF THESE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE AND THE POSITION OF LAW SET OUT ABOVE, IT IS HELD THAT THE TRANSACTIONS IN RESPECT OF WHICH T HE IMPUGNED PAYMENTS WERE MADE WAS PURELY ON ACCOUNT OF SERVICES AND THERE IS NO TRANSFER OF RIG HT TO USE THE GOODS. IN THE RESULT, IT IS HELD THAT TH E ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THE PAYMENT AS ROYALTY AND INVOKING THE PROVISIONS OF SEC. 195 FOR BOTH THE ASSESSMENT YEARS. CONSEQUENTLY, THE IMPUGNED ORDER U/S, 195 R.W.S. 201(1) AND 201(1A) DATED 21-03-2006 FOR A.YS. 2002-03 AND - 2003-04 IS CANCELLED. 6. ON A QUERY FROM THE BENCH FROM THE LD. D.R. AS T O WHETHER THERE IS ANY CONTRARY DECISION OF ANY OTHER HIGH COURT, THE LD. D.R. REPLIED THAT THE HONBLE DELHI HIGH COURT DECISION IS A LONE DECISION ON THE ISSUE. ITA NO. 435, 439 & 859/MDS/2010. :- 16 -: 7. ON THE ABOVE FACTS, WHEN THERE IS ONLY ONE DECIS ION OF THE HIGH COURT, THEN THE SAME REQUIRES TO BE FOLLOWED B Y US. OUR VIEW FINDS SUPPORT FROM THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN CIT VS. GODAVARI DEVI SARAF [S MT] [1978] 113 ITR 589 [BOM] WE, THEREFORE, CONFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THE GROUNDS OF APPEAL S OF THE REVENUE. 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. AFTER GOING THROUGH THE OPERATIVE PORTION ABOVE SAI D, THERE IS NO IOTA OF DOUBT THAT THE PAYMENTS IN QUESTION MADE BY THE ASS ESSEE CANNOT BE SUBJECTED TO THE APPLICABILITY OF TDS PROVISIONS CO NTAINED IN THE ACT. THEREFORE, IN VIEW OF THE SAME AND IN ORDER TO MAIN TAIN CONSISTENCY, WE RELY ON THE ABOVE SAID ORDER OF THE ITAT AND DECIDE THE GROUNDS AGAINST THE REVENUE. WE RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE U PHELD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND DISMIS S THE REVENUE APPEAL. 14. ON THE THIRD GROUND, THE ASSESSEE HAS INCURRED CERT AIN OVERSEAS EXPENDITURE ON RECRUITMENT. IN THE ASSESS MENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO PRODUCE TDS DETAILS. AS P ER THE PROVISIONS OF SEC. 195 OF THE ACT PAYMENTS ARE MADE IN FOREIG N CURRENCY DURING THE FINANCIAL YEAR. THE LD. ASSESSING OFFICER RELI ED ON THE DECISIONS AND PROVISIONS OF SEC. 195 OF THE ACT ARE APPLICABLE AN D CBDT CIRCULAR AND CONCLUDED THAT PAYMENTS TOWARDS RECRUITMENT EXPENDI TURE ARE SUBJECTED TO TDS AND MADE DISALLOWANCE U/S.40A(I) OF THE ACT. ITA NO. 435, 439 & 859/MDS/2010. :- 17 -: AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEA L BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 15. IN THE APPELLATE PROCEEDINGS, THE ASSESSEE FILED W RITTEN SUBMISSIONS OBSERVED AT PAGE 9 AND 10 OF HIS ORDER AS UNDER:-. A) IN SO FAR RECRUITMENT EXPENSES ARE CONCERNED, THE APPELLANT SUBMITS THAT THE PAYMENT WAS FOR BUSINESS SERVICES ARE LIABLE TO BE TAXED IN INDIA IN THE ABS ENCE OF A P.E. B) THE LEARNED AO OUGHT TO HAVE APPRECIATED THAT THE AAR RULING IN STEFFEN, ROBERTSON AND KRISTEN CONSULTING ENGINESS AND SCIEN TISTS VS CIT 230 ITR 206 RELATES TO A CASE WHICH INVOLVED RENDERING TECHNICAL CONSULTANCY SERVICES. THE LEARNED AD OUGH T TO HAVE APPRECIATED THE FACTS OF THE CASE REFERRED BY HIM ARE ENTIRELY DIFFERENT FROM THAT OF THE APPELLANT. THE DECISION HE OUGHT TO HAVE KNOWN RELATED TO A RESIDENT OF A COUNTRY WITH WHICH INDIA HAD NO DTAA. C) THE LEARNED AO OUGHT TO HAVE APPRECIATED THE SERVICES AVAILED FROM OVERSEAS SERVICE PROVIDERS THE PROVISIONS OF D TAA CLEARLY EXCLUDE THE SAME FROM THE PURVIEW OF TAX LIABILITY IN INDIA. D) THE LEARNED AO OUGHT TO HAVE APPRECIATED THE PROVIS IONS OF SECTION 90 (2), THE PROVISION OF DTAA OR THAT INDIAN TAX LAW WHICHEVER IS MORE BENEFICIAL WOULD APPLY. E) THE LEARNED ASSESSING OFFICER ERRED IN NOT GIVING S UFFICIENT TIME TO COLLECT THE INFORMATION. 16. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) EXAMI NED THE FACTS, SUBMISSIONS, NATURE AND PURPOSE OF PAYME NT. THE ASSESSEE HAS INCURRED EXPENSES IN RELATION TO THE BUSINESS C ARRIED ON IN AUSTRALIA WHICH HAS DOUBLE TAXATION AGREEMENT. TH E FACTS OF THE CASE ARE THAT THE EXPENDITURE HAS BEEN INCURRED IN RESPE CT OF OVERSEAS ITA NO. 435, 439 & 859/MDS/2010. :- 18 -: OPERATIONS. THOUGH REMITTANCES ARE FOR BUSINESS A CTIVITIES AND LD. COMMISSIONER OF INCOME TAX (APPEALS) FOUND THAT DEC ISIONS RELIED BY THE LD. ASSESSING OFFICER ARE NOT APPLICABLE TO TH E FACTS. THE ASSESSEE HAS INCURRED RECRUITMENT COST AND DISPUTED THE QUA NTUM EXPENSES. THIS EXPENSES ARE INCURRED FOR PUTTING UP BRANCHES IN AUSTRALIA. THE PAYMENTS ARE MADE FOR OBTAINING SERVICES AND ARE N OT LIABLE FOR TAXATION AND PROVISIONS OF SEC. 195 OF THE ACT SHAL L NOT APPLY. THE REMITTANCES REPRESENTS THE BUSINESS EXPENSES INCURR ED FOR OVERSEAS OPERATIONS IN AUSTRALIA FOR THE PURPOSE OF CARRYING ON BUSINESS. THE PAYMENTS BY NON-RESIDENT FOR EARNING ANY INCOME FR OM SOURCES OUTSIDE INDIA NOT BE TAXED IN INDIA AND SUCH EXPENS ES ARE EXCLUSIVELY INCURRED FOR RECRUITMENT AND NOT IN THE NATURE OF ROYALTY OR TECHNICAL SERVICES FOR THE BUSINESS OF THE ASSESSEE IN AUSTR ALIA, WITH THESE OBSERVATIONS THE LD. COMMISSIONER OF INCOME TAX (AP PEALS) HAS DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITI ON AND SUSTAINED ?87,714/- IN HIS ORDER. AGGRIEVED BY THE COMMISSIO NER OF INCOME TAX (APPEALS) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 17. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT LD. COMMISSIONER OF INCOME TAX (APPE ALS) HAS ERRED IN DELETING THE RECRUITMENT EXPENSES AND OTHER EXPENSE S WHICH ARE INCURRED BY THE ASSESSEE IN CARRYING ON BUSINESS IN AUSTRALIA AND ALSO ITA NO. 435, 439 & 859/MDS/2010. :- 19 -: NOT APPRECIATED THE DOUBLE TAXATION AVOIDANCE AGREE MENT (DTAA) WITH AUSTRALIA AND THE LD. ASSESSING OFFICER DOES NOT MENTION ABOUT PERMANENT ESTABLISHMENT IN AUSTRALIA AND ALSO THE I NCOME IS TAXABLE IN INDIA IN RESPECT OF AUSTRALIA BUSINESS ACTIVITIES AND EXPENSES ARE SUBJECT TO TDS AND PRAYED FOR ALLOWING THE APPEAL. 18. CONTRA, THE LD. AUTHORISED REPRESENTATIVE RELIED ON THE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) AND ALSO SUBSTANTIATED HIS ARGUMENTS THAT THE EXPENSES ARE INCURRED FOR AUSTRALIA BRANCH AND ALSO NO INCOME HAS ACCRUED OR ARISE IN INDIA AND RELIED ON THE DECISION OF GE INDIA TECHNOLOGY CENTRE P. LTD VS. CIT 327 ITR 456 (SC) AND ALSO SUPPORTED THAT THERE IS NO TECHNICAL KNOW -HOW, PLAN AND DESIGNING FOR SERVICES RENDERED OUTSIDE IN DIA AND REIMBURSEMENT OF EXPENSES ARE NOT TAXABLE. 19. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. DEPAR TMENTAL REPRESENTATIVE EXPLAINED THAT ASSESSEE HAS NOT PRO VED THE NATURE OF EXPENDITURE INCURRED OUTSIDE INDIA AND ALSO NO EVID ENCE WAS PRODUCED. THE LD. AUTHORISED REPRESENTATIVE EXPLAIN ED THAT IS EXPENDITURE IN INCURRED FOR BRANCH OFFICE AT AUSTR ALIA WHICH DO NOT HAVE PERMANENT ESTABLISHMENT IN INDIA AND SUCH PAY MENTS ARE NOT IN ITA NO. 435, 439 & 859/MDS/2010. :- 20 -: THE NATURE OF TECHNICAL SERVICES OR TECHNICAL KNOWL EDGE. WE ON PERUSAL OF THE ASSESSMENT ORDER, FOUND THAT THE LD. ASSESSI NG OFFICER HAS NOT DISCUSSED ON THE PERMANENT ESTABLISHMENT OR THE TY PE OF EXPENDITURE INCURRED WITH COMPLETE DETAILS AND THE FINDINGS OF ASSESSMENT ORDER THAT THE ASSESSEE HAS FAILED TO PROVIDE DETAILS OF TDS AND SUMMARY OF EXPENDITURE INCURRED. WE ARE OF THE OPINION THAT TH E MATTER HAS TO BE RE-EXAMINED TO VERIFY TO THE EXPENDITURE AND GENUI NENESS OF PERMANENT ESTABLISHMENT AND BUSINESS CONNECTION OF THE ASSESSEE. HENCE, WE REMIT ENTIRE ISSUE TO THE FILE OF ASSESSI NG OFFICER TO VERIFY THE CLAIM AND PASS THE ORDER. THIS GROUND OF THE RE VENUE IS ALLOWED FOR STATISTICAL PURPOSE. 20. NOW WE ADJUDICATE ITA NO.439/MDS/2010 OF ASSESSMENT YEARS 2006-2007:- THE FIRST GROUND RAISED IN THIS A PPEAL IS WITH REGARD TO EMPLOYEE STOCK OPTION COST (ESOP). THE ASSESSEE HAS INCURRED AN AMOUNT OF ?1,15,91,445/- FOR ISSUE OF ESOP STOCK IN THE CURRENT FINANCIAL YEAR. THE LD. ASSESSING OFFICER ISSUED S HOW CAUSE NOTICE AS IT CANNOT BE ALLOWED BEING IN THE NATURE OF CAPITAL E XPENDITURE. THE ASSESSEE EXPLAINED THAT ESOP EXPENDITURE IS INCURR ED FOR THE PURPOSE OF BUSINESS AND RELIED ON THE DECISION OF CHENNAI T RIBUNAL IN THE CASE OF SSI LTD VS. DCIT IN ITA NO.1384/MDS2004 , SINCE THE DECISION OF THE TRIBUNAL IS NOT ACCEPTED BY THE DEPARTMENT, SECOND APPEAL IS ITA NO. 435, 439 & 859/MDS/2010. :- 21 -: PREFERRED IN RESPECT OF ITAT ORDER. THE LD. ASSESS ING OFFICER MADE AN ADDITION. AGGRIEVED BY THE ORDER THE ASSESSEE FILE D AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 21. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) RELYING ON THE DECISION OF SS I LTD (SUPRA) HELD THAT COST OF STOCK OPTION IS EXPENDITURE INCURRED FOR REMUNERATING ITS EMPLOYEES AND CONSEQUENTLY THE EXPENDITURE WILL HAV E TO BE CLASSIFIED UNDER REVENUE EXPENDITURE IN THE WAY AS OTHER REMUN ERATIONS TO EMPLOYEES ARE TREATED. FURTHER, THE ISSUE IS COVERE D BY FAVOURABLE ORDERS OF THE TRIBUNAL IN THE CASE OF SSI LTD VS. D CIT IN ITA NO.1954/MDS/2007 AND DISMISSED THE GROUND OF THE RE VENUE AND ALLOWED THE APPEAL. AGGRIEVED BY THE COMMISSIONER O F INCOME TAX (APPEALS) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 22. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE HAS ARGUED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS E RRED IN DELETING THE ADDITION RELYING ON THE ITAT ORDER WHICH IS D ISTINGUISHED AND CONSIDERED IN FAVOUR OF THE DEPARTMENT. THE DECISI ON RELIED BY COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT BECOM E FINAL AND PRAYED FOR ALLOWING THE APPEAL. ITA NO. 435, 439 & 859/MDS/2010. :- 22 -: 23. CONTRA, LD. AUTHORISED REPRESENTATIVE RELIED ON THE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) AND OPPOSED TH E GROUNDS. 24. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORD AND JUDICIAL DECISIONS CITED. THE ONLY CONTE NTION OF THE DEPARTMENT THAT THE EXPENDITURE IS IN THE NATURE O F CAPITAL IN NATURE AND THE DECISION RELIED BY THE COMMISSIONER OF INCO ME TAX (APPEALS) HAS NOT ATTAINED FINALITY. THE LD. AUTHORISED REPRE SENTATIVE ARGUED ON THE PURPOSE OF ISSUE OF ESOP AND ALSO THE TYPES OF EXPENDITURE INCURRED AND SUPPORTED HIS ARGUMENTS RELYING ON THE TRIBUNAL DECISION IN THE CASE OF SSI LTD (SUPRA). WE PERUSED THE ORD ER OF COMMISSIONER OF INCOME TAX (APPEALS) AND THE SUBMISSIONS OF BOTH COUNSELS AND FOUND THAT ESOP ARE IN THE NATURE OF BUSINESS EXPEN DITURE AND IT TAKES THE CHARACTERISTIC OF STAFF WELFARE AND THE SHARES ARE ISSUED TO THE EMPLOYEES TO WORK IN THE BEST INTEREST OF THE ASSES SEE. THESE SHARES ARE ALLOTTED THROUGH SEBI GUIDELINES AND EXPENDITUR E IS IN THE NATURE OF REVENUE EXPENDITURE AND CLAIMED DEDUCTION AND LD . AUTHORISED REPRESENTATIVE SUPPORTED HIS ARGUMENTS WITH DECISIO N OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. PVP VENTURES LTD 90 DTR 340 (MAD) WHEREIN IT HELD THAT STAFF WELFARE EXPENDITURE INCU RRED BY THE ASSESSEE IN RESPECT OF EMPLOYEES STAFF OPTION PLAN AS PER SE BI GUIDELINES IS AN ASCERTAINED LIABILITY AND IS ALLOWABLE AS EXPENDIT URE IN COMPUTATION OF ITA NO. 435, 439 & 859/MDS/2010. :- 23 -: INCOME. CONSIDERING THE JURISDICTIONAL HIGH COURT D ECISION, WE UPHOLD THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) A ND ALLOW THE EXPENDITURE. THE GROUND OF THE REVENUE IS DISMISSED . 25. THE SECOND GROUND RAISED BY THE REVENUE IS WITH REG ARD TO UNEARNED INCOME OF ?42,16,33,000/-. 26. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 8 AND WE DISMISS THE G ROUND OF THE REVENUE. 27. THE THIRD GROUND RAISED BY THE REVENUE IS WITH REGA RD TO NON DEDUCTION OF TDS U/S.40(A)(I) OF THE ACT EXPENDITUR E ON FOREIGN CURRENCY TOWARDS NETWORKING AND COMMUNICATION COST. 28. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS THE GROUND OF THE REVENUE. ITA NO. 435, 439 & 859/MDS/2010. :- 24 -: 29. THE FOURTH GROUND RAISED BY THE REVENUE WITH REGARD TO NETWORKING COST MADE IN INDIA U/S.40(A)(IA) OF THE ACT. 30. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS THE GROUND OF THE REVENUE. 31. THE FIFTH GROUND RAISED BY THE REVENUE WITH REGARD TO INTERNET DELIVERY CHARGES AND DIRECT COST U/S.40(A) (I) OF THE ACT. 32. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS THE GROUND OF THE REVENUE. 33. THE LAST GROUND RAISED BY THE REVENUE WITH REGARD T O DELETION OF FOREIGN CURRENCY U/S.40(A)(I) OF THE AC T. 34. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON ITA NO. 435, 439 & 859/MDS/2010. :- 25 -: SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 19 AND WE DISMISS THE GROUND OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 35. NOW WE ADJUDICATE ITA NO.859/MDS/2010 OF ASSESSMENT YEARS 2007-2008:- THE FIRST GROUND RAISED BY THE DE PARTMENT IS WITH REGARD TO EMPLOYEE STOCK OPTION COST (ESOP). 36. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2006-07 IN ITA NO.439/MDS/2010 AT PARA 24 AND WE DISMISS THE GROUND OF THE REVENUE. 37. THE SECOND GROUND RAISED BY THE DEPARTMENT IS WITH REGARD TO ADDITION OF UNEARNED INCOME OF ?29,37,55,000/-. 38. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 8 AND WE DISMISS THE G ROUND OF THE REVENUE. 39. THE THIRD GROUND RAISED BY THE REVENUE WITH REGARD TO DISALLOWANCE OF DEPRECIATION ON GOOD WILL. THE ASS ESSEE HAS ACQUIRED ITA NO. 435, 439 & 859/MDS/2010. :- 26 -: M/S. GLOBE TRAVEL DURING THE CURRENT YEAR AND SUBMI TTED DETAILS IN ASSESSMENT AND THE ACQUISITION COST WAS CAPITALIZED UNDER THE BLOCK OF BUSINESS ASSETS TO THE EXTENT OF ?11,27,14,945/- AN D DEPRECIATION CLAIMED AT 25%. THE ASSESSING OFFICER ISSUED NOTIC E ON DISALLOWANCE OF DEPRECIATION AS INTANGIBLE ASSET AND THE ASSESS EE FILED EXPLANATION ON ACQUISITION OF M/S. GLOBE TRAVEL AND DISCLOSED BLOCK OF ASSETS AS INTANGIBLE ASSET. THE LD. ASSESSING OFFICER CONTEN DED THAT THE EXPLANATIONS OF THE ASSESSEE THAT THE TOTAL ASSETS WERE ACQUIRED AT ?11,62,18,448/- FROM M/S. GLOBE TRAVEL AND SEGREGAT ED THE COMPUTERS, FIXTURE & FURNITURE AND PLANT & MACHINER IES SEPARATELY IN RESPECTIVE BLOCK AND REMAINING AMOUNT OF ?11,27,14, 945/- WAS ALLOTTED UNDER THE HEAD INTANGIBLES. THE ASSESSEE C LAIMED DEPRECIATION ON THE GOODWILL @25% UNDER THE BLOCK OF ASSETS AND THE SAME WAS DISALLOWED BY THE LD. ASSESSING OFFICER. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE COMMISSIONER OF INC OME TAX (APPEALS). 40. IN THE APPELLATE PROCEEDINGS BEFORE THE LD. COMMIS SIONER OF INCOME TAX (APPEALS) THE ASSESSEE FILED WRITTEN SU BMISSIONS AND EXPLAINED THE VALUE OF ASSET MANAGEMENT, AGREEMENT ENTERED WITH THE M/S. GLOBE TRAVEL AND ELABORATELY AT PAGE 4 TO 6 OF THE ORDER. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) BASED ON THE SUBMISSIONS AND FINDINGS OF THE LD. ASSESSING OFFIC ER RELIED ON THE ITA NO. 435, 439 & 859/MDS/2010. :- 27 -: JUDICIAL DECISIONS AND ALLOWED THE APPEAL OF THE AS SESSEE OBSERVED AT 5.3 OF HIS ORDER AS UNDER:- 5.3 I HAVE CAREFULLY EXAMINED THE FACTS OF THE CA SE AND THE VARIOUS SUBMISSIONS OF THE ID. AR. I HAVE ALSO PERU SED THE ASSET PURCHASE AGREEMENT BETWEEN THE APPELLANT AND THE PREVIOUS OWNER, MR. HERMAN NORONHA. THE ID. AR HAS ARGUED THAT THE OCCASION FOR SUBMISSION OF THE BREAK UP OF INTANGIBLES HAD NOT ARISEN AS THE CLAIM WAS DULY SUPPORTED BY T HE TAX AUDIT REPORT. HE STATED THAT THE APPELLANT HAD FURN ISHED DURING THE COURSE OF HEARING THE BREAK UP OF THE IN TANGIBLES INTO GOODWILL AND OTHER INTANGIBLES AND NO FURTHER DETAILS WERE CALLED FOR. THE APPELLANT HAS FURNISHED BEFORE ME E XPLANATION AND THE DETAILS WHICH HAS BEEN REPRODUCED ABOVE. T HE DECISION OF DCIT V. SHETH & SURA ENGG PVT. LTD. WOULD NOT BE APPLICABLE TO THE CASE OF THE APPELLANT SINCE IN THAT CASE, THE UNDISCLOSED INCOME ADMITTED DURING THE SEARCH OPER ATION INCLUDED CERTAIN PLANT & MACHINERY AND FURNITURE & FIXTURES FOR WHICH NO DETAILS COULD BE FURNISHED TO THE AO WHERE AS IN THE APPELLANT'S CASE, THE DETAILS HAVE BEEN DULY GIVEN. THE AO HAS ALSO: RELIED ON THE DECISIONS OF ITAT, DELHI IN THE CASE OF GURUJI ENTERTAINMENT NETWORK! LTD (L08 TTJ 180) AND ITAT, AHMEDABAD IN THE CASE OF BHARATBHAI J. VYAS (97 ITD 248) TO DENY THE CLAIM FOR DEPRECIATION. IN MY CONSIDERED O PINION, WITH DUE RESPECT! THESE CANNOT BE MADE APPLICABLE TO THE APPELLANT'S CASE. IN THE FIRST CASE, THE HON'BLE IT AT HAD CONCLUDED THAT GOODWILL IS NOT AN INTANGIBLE ASSET ENTITLED TO DE1RECIATION SINCE NE-DISPUTE ON THE ISSUE WAS RAIS ED BY THE APPELLANT. IN THE SECOND CASE, THE ISSUE WAS WHETHE R THE COMPENSATION PAID TO THE RETIRING PARTNER CAN BE TR EATED AS GOODWILL. IN THE APPELLANT'S CASE, HOWEVER, THE ID. AR HAD STRONGLY CONTENDED THAT GOODWILL IS IN THE NATURE O F 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' AN D HENCE ITA NO. 435, 439 & 859/MDS/2010. :- 28 -: ELIGIBLE FOR DEPRECIATION. IT IS ALSO A FACT THAT T HE APPELLANT HAS ACQUIRED A NEW BUSINESS AND IT IS NOT A CASE OF ANY COMPENSATION PAID FOR RETIREMENT OF PARTNERS. IN TH E APPELLANT'S CASE, THE AMOUNT WAS PAID TOWARDS DOMAI N AND CUSTOMER RELATIONSHIP CONTRACTS AS PART OF CONSIDER ATION FOR ACQUIRING THE BUSINESS. AS SUBMITTED BY THE ID. AR, THE APPELLANT HAS BOUGHT THE BUSINESS OF GLOBE TRAVELS WHICH HAD BEEN CARRYING ON THE BUSINESS FOR MORE THAN 12 YEAR S. THE SAID GLOBE TRAVELS HAD CONTRACTS WITH ALL MAJOR AIR LINES ON ACCOUNT OF WHICH THE BUSINESS DEVELOPED BY THEM FLO WED TO THE APPELLANT. IT IS ALSO NOT IN DISPUTE THAT THE A PPELLANT HAD ACQUIRED A VALUABLE RIGHT FOR WHICH COMPENSATION WA S PAID. BASED ON THESE FACTS, I AM OF THE CONSIDERED OPINIO N THAT THE APPELLANT HAD ACQUIRED A 'BUSINESS OR COMMERCIAL RI GHT OF SIMILAR NATURE' AS DEFINED U/S 32(L)(II). FURTHER, I FIND THAT THE LATER DECISION OF ITAT, MUMBAI AND ITAT, DELHI THE CASES OF KOTAK FOREX BROKERAGE LTD (SUPRA) AND HINDUSTHAN CO CA COLA BEVERAGES LTD (SUPRA) RESPECTIVELY SUPPORT THE CLAI M OF THE APPELLANT. BASED ON THE ABOVE DISCUSSIONS, I AM OF THE CONSIDERED OPINION THAT THE APPELLANT IS ENTITLED T O DEPRECIATION CLAIMED BY IT. ACCORDINGLY THIS GROUND OF APPEAL IS ALLOWED . AGGRIEVED BY THE COMMISSIONER OF INCOME TAX (APPEAL S) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 41. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ARG UED THAT COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN D ELETING THE DEPRECIATION ON INTANGIBLES AND GOODWILL; FURTHER INTANGIBLES ASSETS INCLUDING GOODWILL DOES NOT APPEAR WITHIN THE DEFI NITION OF SEC.32(1) ITA NO. 435, 439 & 859/MDS/2010. :- 29 -: (II) OF THE ACT AND RELIED ON THE JUDICIAL DECISION S AND PRAYED FOR ALLOWING THE APPEAL. 42. ON THE OTHER HAND, THE LD. AUTHORISED REPRESENTATIV E RELIED ON THE ORDERS OF COMMISSIONER OF INCOME TAX (APPEAL S) AND OPPOSED THE GROUNDS. 43. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERI AL ON RECORD AND JUDICIAL DECISIONS CITED. THE ONLY CONTE NTION OF THE LD. AUTHORISED REPRESENTATIVE THAT DEPRECIATION HAS T O BE ALLOWED ON INTANGIBLES ASSET BEING GOODWILL. THE GOODWILL TAK ES THE CHARACTERISTIC OF SEPARATE BLOCK AND ASSESSEE HAS PAID THE MONEY O VER AND ABOVE THE VALUE OF THE ASSETS TO THE SELLER AND SUCH EXCE SS AMOUNT IS THE GOODWILL CLASSIFIED AND FALLS WITHIN THE EXPLANATI ON OF SEC. 32(1)(II) OF THE ACT. THE HONBLE APEX COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD 348 ITR 0302 HAS HELD THAT PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING SAID EXPRES SION WHICH FINDS PLACE IN EXPLANATION 3(B). GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SEC. 32(1) OF THE ACT AND DISMISSED THE APPEAL. W E, RESPECTFULLY FOLLOWING THE APEX COURT DECISION, UPHELD THE ORDE R OF COMMISSIONER OF INCOME TAX (APPEALS) AND DISMISS THE GROUND OF T HE REVENUE. 44. THE FOURTH GROUND RAISED BY THE REVENUE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN REVER SING THE DECISION ITA NO. 435, 439 & 859/MDS/2010. :- 30 -: OF THE LD. ASSESSING OFFICER WHO HAS TREATED THE SU M OF ?43,64,69,634/- BEING PROFIT ON IP/VPN BUSINESS SOL D TO SIFY COMMUNICATIONS LTD (SCL) AS BUSINESS INCOME BUT LD. COMMISSIONER OF INCOME TAX (APPEALS) HELD THE ASSESSEES CONTENTION AS LONG TERM CAPITAL GAINS ON SLUMP SALE. THE LD. COMMISSIONER O F INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATE THAT M/S. SCL, W HICH HAS ACQUIRED THE IP/VPN BUSINESS IS STILL UTILIZING THE INFRASTR UCTURE FACILITIES OF THE ASSESSEE, WHILE THE ASSESSEE IS CLAIMING THAT THE U NIT HAS BEEN SOLD. 45. THE BRIEF FACTS OF THE CASE IS THAT IN THE CURRENT YEAR THE ASSESSEE HAS SHOWN LONG TERM CAPITAL GAINS OF ?43,6 4,69,634/- AND IN THE ASSESSMENT PROCEEDINGS, IT WAS EXPLAINED THAT I P/VPN BUSINESS WAS SOLD ON THE BASIS OF SLUMP SALE FOR A CONSIDERA TION OF ?50 CRORES AND THE NETWORTH OF THE BUSINESS WAS VALUED AT ?6.6 CRORES AND WAS IN THE NATURE OF PROFIT ON SALE OF IP/VPN BUSINESS AS THE ENTIRE BUSINESS WAS TRANSFERRED UNDER SLUMP SALE AS PER THE PROVISI ONS OF SEC.50B AND THE BALANCE OFFERED AS CAPITAL GAINS. THE ASSESSEE WAS ISSUED SHOW CAUSE NOTICE TO EXPLAIN THE TRANSFER OF SALE OF IP/ VPN LICENCE CANNOT BE CONSIDERED AS BUSINESS INCOME AS IT IS NOT A SALE O F UNDERTAKING OR A UNIT AS A WHOLE AS PER THE PROVISIONS OF SEC. 50B O F THE ACT. IN REPLY TO SHOW CAUSE NOTICE, THE ASSESSEE MADE ELABORATE SUBMISSIONS EXPLAINING THE NATURE AND TIME FRAME AND THE PROVIS ION OF SLUMP SALE WERE THE IP/VPN BUSINESS WERE SOLD REFERRED AT PARA 5 & 6 OF THE LD. ITA NO. 435, 439 & 859/MDS/2010. :- 31 -: ASSESSING OFFICER ORDER. THE LD. ASSESSING OFFICER CONSIDERING THE SUBMISSIONS, REVOKED THE PROFIT AS CAPITAL GAINS A ND TREATED THE DIFFERENCE AS BUSINESS INCOME. AGGRIEVED BY THE OR DER, THE ASSESSEE FILED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX ( APPEALS). 46. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THE FINDINGS OF THE A SSESSING OFFICER AND SUBMISSIONS MADE BY THE ASSESSEE BEFORE ASSESS ING OFFICER AND VALUATION REPORT OF DELOITTE HASKINS & SELLS WAS F ILED IN THE APPELLATE PROCEEDINGS AND OBSERVED AT 6.3.1 OF THE ORDER AS U NDER:- IT IS ALSO SEEN THAT SEC 2(19AA) COVERS EVEN A UN IT OR DIVISION OF THE BUSINESS OF AN ASSESSEE. ACCORDINGL Y, CORPORATE CONNECTIVITY (IP/VPN) BUSINESS FOR WHICH A SEPARATE LICENCE WAS MANDATED UNDER LAW WAS BUSINES S SEGMENT ON ITS OWN. THE PRE- REQUISITE FOR A SLUM S ALE UNDER SEC.50B IS A SINGLE PRICE FOR THE ENTIRE UNDERTAKIN G. THE LAW DOES NOT MANDATE THAT UNDERTAKING SHOULD NOT BE CAP ABLE OF BEING VALUED IN TERMS OF ITS COMPONENTS FOR A TRANS ACTION TO BE CLASSIFIED AS A SLUMP SALE. IN FACT SEC. 2(42C) DEFINING 'SLUMP SALE' SPECIFICALLY STATES THAT DETERMINATION OF VALUE OF ASSETS FOR CONVEYING / REGISTRATION SHALL NOT DETER THE TRANSACTION BEING ONE FOR SALE OF UNDERTAKING FOR A SLUMP PRICE. THE DECISIONS RELIED UPON BY THE AO ARE NOT APPLICABLE TO THE FACTS OF THE CASE, AS THEY RELATED TO A PERI OD BEFORE INTRODUCTION OF SEC 50B. THE APPELLANT IS ALSO SUPP ORTED BY THE DECISION OF HON'BLE ITAT, MUMBAI IN THE CASE OF GLAXO INDIA LIMITED V. JCIT[2009TLAL69ITATMUM]. HAVIN G REGARD TO THE ABOVE, I UPHOLD THE TREATMENT OF THE TRANSACTION AS A SLUMP SALE AND THE RESULTING CAPITAL GAINS AS LONG TERM CAPITAL GAIN. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. ITA NO. 435, 439 & 859/MDS/2010. :- 32 -: AND ALLOWED THE GROUND OF THE ASSESSEE. AGGRIEVED B Y THE COMMISSIONER OF INCOME TAX (APPEALS) ORDER, THE REV ENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 47. BEFORE US, THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE IS THAT IT IS NOT A SLUMP SALE AND THE NATURE OF INCOME HAS TO BE TREATED AS BUSINESS INCOME INSTEAD OF LON G TERM CAPITAL GAINS AND HE RELIED ON THE FINDINGS OF THE LD. ASSE SSING OFFICER AND PRAYED FOR ALLOWING THE APPEAL. 48. CONTRA, THE LD. AUTHORISED REPRESENTATIVE SUPPORTED HIS ARGUMENTS WITH JUDICIAL DECISIONS AND FINDINGS OF T HE COMMISSIONER OF INCOME TAX (APPEALS). 49. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORDS AND JUDICIAL DECISIONS CITED. THE LD. DEPA RTMENTAL REPRESENTATIVE CONTENTION ON THE ASPECT OF GAIN ON SALE TO BE AS BUSINESS INCOME. WE ON PERUSAL OF ORDER OF COMMISS IONER OF INCOME TAX (APPEALS) FOUND THAT THE ASSESSEE HAS PLACED MO RE RELIANCE ON THE VALUATION REPORT OF DELOITTE HASKINS & SELLS AND SO LD THE UNITS TO SUBSIDIARY COMPANY M/S. SIFY COMMUNICATIONS (SCL) A ND IT WAS EXPLAINED THAT SALE CONSIDERATION IS BASED ON FUTUR E EARNING CAPACITY AND EARNING BEFORE INTEREST AND DEPRECIATION BUT N OT ON INDIVIDUAL VALUE OF ASSETS. UNDER SEC. 2(42C) OF THE ACT, THE SLUMP SALE IS ITA NO. 435, 439 & 859/MDS/2010. :- 33 -: DEFINED AS SALE FOR LUMPSUM CONSIDERATION WITHOUT ASSIGNING ANY VALUE TO HE INDIVIDUAL ASSETS. AT THE TIME OF HE ARING, THE LD. AUTHORISED REPRESENTATIVE ARGUED THAT EVEN IF SOME ASSETS AND LIABILITIES ARE NOT TRANSFERRED IT WILL BE A SLUMP SALE. PRIME FACIE IT IS NOT CLEAR WHETHER SALE IS BY A LOCK, STOCK AND BARREL OR ASSIGNING THE VALUE OF INDIVIDUAL ASSETS. CONSIDERING APPARENT FACTS, V ALUATION REPORT AND DECISIONS, WE ARE OF THE OPINION THAT THE MATTER HA S TO BE RE- EXAMINED. WE REMIT THE DISPUTED ISSUE TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER AFRESH THE GROUNDS OF THE REVE NUE AND ALLOW THE GROUND FOR STATISTICAL PURPOSE. 50. THE FIFTH GROUND RAISED BY THE REVENUE IS WITH REGA RD TO DISALLOWANCE OF NETWORKING COST U/S.40(A)(IA) OF TH E ACT ?73,78,95,119/-. 51. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS THE GROUND OF THE REVENUE. 52. THE LAST GROUND RAISED BY THE REVENUE IS WITH REGAR D TO DISALLOWANCE U/S.40(A)(I) OF THE ACT ON DIRECT COST , CONTENT DEVELOPMENT COST AND LEGAL AND PROFESSIONAL CHARGES ITA NO. 435, 439 & 859/MDS/2010. :- 34 -: 53. WE HAVE CONSIDERED THE FACTS AND SUBMISSIONS MADE B Y THE LD. AUTHORISED REPRESENTATIVE AND DEPARTMENTAL REPR ESENTATIVE, ON SIMILAR ISSUE WAS ADJUDICATED BY US FOR THE ASSESSM ENT YEAR 2001-02 IN ITA NO.435/MDS/2010 AT PARA 13 AND WE DISMISS THE GROUND OF THE REVENUE. 54. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO .435, 439 & 859/MDS/2010 ARE PARTLY ALLOWED FOR STATISTICAL P URPOSE. ORDER PRONOUNCED ON WEDNESDAY, THE 8TH DAY OF JUNE, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' ) (G. PAVAN KUMAR) / JUDICIAL MEMBER / CHENNAI 1 / DATED:08.06.2016 KV 2 ) +#-34 54&- / COPY TO: 1 . '( / APPELLANT 3. ! 6- () / CIT(A) 5. 4 9: +#-# / DR 2. +,'( / RESPONDENT 4. ! 6- / CIT 6. :% ; / GF