DCIT, Gurgaon V. M/s. DLF Projects Ltd., Gurgaon

ITA 5178/DEL/2014

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 0951 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 31-07-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 19-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: R S SINGHVI SATYEJEET CAS
• Keywords: Depreciation; Double taxation relief; Permanent establishment; Advance ruling; Cost of acquisition; Revenue expenditure
• Section: 92

Judgement Text

ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 5178/DEL/2014 ASSESSMENT YEAR: 2009-10 DCIT, CIRCLE 1(1), GURGAON. VS DLF PROJECTS LTD. (FORMERLY DT PROJECTS LTD.), 3 RD FLOOR, SHOPPING MALL, ARJUN NAGAR, DLF CITY, PHASE-I, GURGAON. (PAN: AACCD3093R) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SURENDER PAL, SR. DR RESPONDENT BY: S/SHRI R.S. SINGHVI, SATYEJEET, CAS DATE OF HEARING : 30.08.2018 DATE OF PRONOUNCEMENT: 27.1 1.2018 ORDER PER SUDHANSHU SRIVASTAVA, J.M. THIS APPEAL HAS BEEN PREFERRED BY THE REVENU E AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEAL S), FARIDABAD DATED 24.07.2014 PERTAINING TO ASSESSMENT YEAR 2009- 10. 2.0 THE APPEAL PRIMARILY INVOLVES THREE ISSUES IN RESPECT OF WHICH DISALLOWANCE/S MADE BY THE ASSESSING OFFICER HAVE BEEN DELETED BY THE LD. CIT (APPEALS). THE ISSUES UNDER DISPUTE ARE - ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 2 A. DISALLOWANCE OF PROJECT MANAGEMENT EXPENSES OF RS.6,32,50,280/- ON GROUND OF NON DEDUCTION OF TAX AT SOURCE (TDS) U/S 195 OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) B. DISALLOWANCE OF INTEREST EXPENSES ON ESTIMATED R ATE OF 12%AMOUNTING TO RS.49,01,176/- ON THE GROUND THAT S AME PERTAINS TO CAPITAL WORK IN PROGRESS (CWIP) C. CAPITALIZATION OF SOFTWARE EXPENSES - RS.65,70,7 68/- 2.1 WITH RESPECT TO GROUND NO. 1 RELATING TO DISAL LOWANCE OF PROJECT MANAGEMENT EXPENSES, THE BRIEF FACTS ARE THAT THE RESPONDENT/ASSESSEE HAD MADE PAYMENT OF RS. 6,65,79 ,242/- (GBP 9,05,043) TO CYPRUS BASED COMPANY LAING O ROU RKE INDIA (HOLDINGS) LTD. (IN SHORT LOR CYPRUS) FOR SUPPLY OF MANPOWER IN ACCORDANCE WITH THE MANPOWER SUPPLY AGREEMENT EFFEC TIVE FROM 1 ST APRIL, 2008 FOR A PERIOD OF THREE YEARS. THE SAID EXPENSES WERE CLAIMED UNDER THE HEAD PROJECT MANAGEMENT EXPENSES AND THE PAYMENT WAS MADE AFTER DEDUCTING TDS ON 5% MARK-UP. HOWEVER, ON THE ACTUAL COST COMPONENT, WHICH WAS IN THE NATURE OF REIMBURSEMENT OF SALARIES, NO TDS WAS DEDUCTED B Y THE RESPONDENT BUT TDS WAS DEDUCTED BY LOR CYPRUS U/S 1 92 OF THE ACT. THE ASSESSING OFFICER MADE THE DISALLOWANCE OF SAID EXPENSES ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 3 U/S 40(A)(I) ON THE GROUND THAT THE RESPONDENT/ASSE SSEE HAD FAILED TO DEDUCT TDS ON THE ENTIRE AMOUNT U/S 195 O F THE ACT. THE LD. FIRST APPELLATE AUTHORITY HAS DELETED THE D ISALLOWANCE VIDE FINDING RECORDED AT PARA 6.9 TO 6.14 OF THE IMPUGNE D ORDER. 2.2 GROUND NOS. 2 & 3 ARE AGAINST DELETION OF DISA LLOWANCE OF INTEREST TO THE EXTENT OF RS. 49,01,176/- BY THE LD. CIT (A). THE ASSESSING OFFICER HAS CONSIDERED THE DISALLOWAN CE OF INTEREST BY HOLDING THAT INTEREST ATTRIBUTABLE TO CAPITAL WO RK IN PROGRESS (CWIP) IS NOT ALLOWABLE AS REVENUE EXPENSE. THE DIS ALLOWANCE HAS BEEN MADE BY ESTIMATING INTEREST @12% ON THE MONTH- END BALANCE OF THE CWIP WHICH WAS ADDED TO THE COST OF CWIP. THE LD. CIT (A) DELETED THE DISALLOWANCE. 2.3 GROUND NO. 4 IS ON THE ISSUE OF CAPITALIZATION OF SOFTWARE EXPENSES TO THE EXTENT OF RS. 65,70,768/-. THE ASSESSING OFFICER WAS OF THE VIEW THAT SOFTWARE EXPENSE OF RS . 1,03,95,322/- INCURRED BY THE RESPONDENT/ASSESSEE IS OF CAPITAL N ATURE AND SAME WAS REQUIRED TO BE CLUBBED WITH COMPUTER AND O THER PERIPHERALS. ACCORDINGLY, THE ASSESSING OFFICER MAD E DISALLOWANCE OF RS. 65,70,768/- AFTER ALLOWING DEPRECIATION @ 60 %. THE LD. FIRST APPELLATE AUTHORITY DELETED THE DISALLOWANCE. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 4 2.5 NOW THE REVENUE IS BEFORE THE ITAT AND HAS RAI SED THE FOLLOWING GROUNDS OF APPEAL: 1 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD . CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS. 6,32,50,280/- ON ACCOUNT OF NON-DEDUCTION OF TDS, B Y IGNORING THE FACT THAT AS PER MANPOWER SUPPLY AGREE4MENT FILED, THE CYPRUS COMPANY LOR CYPRUS IS THE SERVICE PROVIDER AND KEEPING IN VIEW THAT THE S ERVICES WERE RENDERED IN INDIA, THE PAYMENT RECEIVED BY LOR CYPRUS WAS ACCRUED AND EARNED IN INDIA AND HENCE TD S U/S. 195 WAS TO BE DEDUCTED BY THE ASSESSE COMPANY. 2 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD . CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS. 49,01,176/- MADE ON ACCOUNT OF DISALLOWANCE OF INTE REST EXPENSES WITHOUT APPRECIATING THE FACT THAT THE STA TEMENT OF THE ASSESSE IS CONTRADICTORY TO THE DOCUMENTS PRODUCED. 3 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L D. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS. 49,01,176/- RELATING TO DISALLOWANCE OF INTEREST EX PENSES WITHOUT APPRECIATING THE FACT THAT ON ONE HAND, THE ASSESSE IS SUBMITTING THAT THE PLANT AND MACHINERY WERE READY TO USE AFTER 4-5 DAYS OF ERECTION AND COMMISSIONING WHEREAS DETAILS OF CWIP SHOWS THAT PL ANT AND MACHINERY WERE PURCHASED AND DEPLOYED FROM MARCH 2008 TO SEPTEMBER 2008. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 5 4 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L D. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS. 65,70,768/- MADE ON ACCOUNT OF DISALLOWANCE FROM T HE SOFTWARE EXPENSES WITHOUT APPRECIATING THE FACT THA T SOFTWARE EXPENSES ARE OF ENDURING NATURE AND ARE TO BE TAKEN AS A PART OF COMPUTERS AND NEED TO BE CAPITAL IZED. 5. THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD , DELETE OR AMEND THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF APPEAL. 3.0 TAKING UP GROUND NO. 1, SH. SURENDER PAL, THE LD. DEPARTMENTAL REPRESENTATIVE FILED A PAPER-BOOK CONT AINING CASE LAWS RUNNING INTO 44 PAGES. IT WAS ARGUED THAT RESPONDENT/ASSESSEE WAS LIABLE TO DEDUCT TDS ON THE ENTIRE AMOUNT OF MANPOWER SUPPLY CHARGES PAID TO LOR, CYPR US. RELYING ON THE JUDGMENT OF THE HONBLE DELHI HIGH C OURT IN THE CASE OF CENTRICA INDIA OFFSHORE P. LTD. VS. CIT REP ORTED IN [2014] 364 ITR 336 (DELHI), IT WAS CONTENDED THAT THE AMOU NT REIMBURSED TO LOR, CYPRUS WAS IN THE NATURE OF FEE FOR TECHNICAL SERVICES (FTS) AND AS SUCH THE ASSESSEE W AS REQUIRED TO DEDUCT TDS ON ENTIRE AMOUNT. RELIANCE WAS ALSO P LACED ON DECISION OF THE AUTHORITY FOR ADVANCE RULINGS (AAR) IN THE CASE OF VERIZON DATA SERVICES INDIA P. LTD. AND AT & S INDI A P. LTD. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 6 3.1 IN RESPONSE, SH. R.S. SINGHVI, THE LD. AR A PPEARING ON BEHALF OF THE RESPONDENT/COMPANY SUPPORTED THE O RDER OF LD. CIT (A) AND CONTENDED THAT THE LD. FIRST APPELLATE AUTHORITY HAS PASSED A WELL REASONED ORDER AFTER TAKING INTO CONS IDERATION THE TERMS OF THE AGREEMENT AND HAS RIGHTLY DELETED THE DISALLOWANCE. THE LD. AR ALSO PLACED ON RECORD TWO PAPER BOOKS, O NE CONTAINING CASE LAWS AND THE OTHER CONSISTING DOCUM ENTS IN SUPPORT OF CLAIM OF PROJECT MANAGEMENT EXPENSES. TH E ATTENTION OF THE BENCH WAS DRAWN TOWARDS THE COPY OF INVOICE RAISED BY LOR, CYPRUS AND THE JOURNAL VOUCHER PLACED AT PAPER BOOK PAGES 6 & 7 WHEREIN THE MARK UP COMPONENT HAD BEEN SEPARATELY MENTIONED. IT WAS VEHEMENTLY ARGUED THAT THE RESPONDENT/ASSESSEE HAS RIGHTLY DEDUCTED TDS @ 42.2 3% ON THE MARK-UP AMOUNT OF GBP 43,097 BEING 5% OF THE ACTUAL COST AND FURTHER THAT THERE WAS NO NEED TO DEDUCT TDS ON THE ACTUAL COST WHICH IS MERELY IN THE NATURE OF REIMBURSEMENT. THE MAIN PLANK OF LD. ARS SUBMISSION WAS THAT THE TDS HAS DULY BE EN DEDUCTED ON PAYMENT OF SALARIES BY LOR CYPRUS AND AS SUCH TH E REIMBURSEMENT OF ACTUAL COST PORTION WAS NOT EXIGIB LE TO THE WITHHOLDING TAX IN VIEW OF JUDGMENT OF THE HONBLE APEX COURT IN ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 7 THE CASE OF GE INDIA TECHNOLOGY LTD. VS. CIT REPORT ED IN [2010] 327 ITR 456 (SC). 3.1.1 THE LD. AR ALSO SUBMITTED THAT THE ACTUAL PA YMENT MADE TO LOR CYPRUS HAS FURTHER BEEN DISBURSED TO RE SPECTIVE EMPLOYEES AFTER DEDUCTION OF TDS U/S 192 OF THE ACT AND AS SUCH THERE IS NO CASE OF ANY DEFAULT IN COMPLYING WITH T HE WITHHOLDING TAX PROVISIONS. REFERENCE WAS MADE TO THE SPECIFIC FINDING OF THE LD. CIT (APPEALS) RECORDED AT PAGES 29 AND 30 OF T HE IMPUGNED ORDER. IN SUPPORT, RELIANCE WAS ALSO PLACED ON THE DECISION OF COORDINATE BENCH OF ITAT AHMEDABAD IN THE CASE OF BURT HILL DESIGN P. LTD. VS. DDIT REPORTED IN [2017] 186 TTJ 652 AND THE JUDGMENT OF THEHONBLE BOMBAY HIGH COURT IN THE CAS E OF DIT VS. MARKS AND SPENCER RELIANCE INDIA P. LTD. (ITA NO. 8 93 OF 2014). 3.1.2 ON THE ISSUE OF NATURE OF MANPOWER SUPPLY SE RVICE VIS- A-VIS FTS, THE LD. AR COUNTERED THE ARGUMENT PUT FORTH B Y THE LD. DR AND SUBMITTED THAT THE AGREEMENT IS MERELY F OR SUPPLY OF MANPOWER AND EMPLOYEES SO SECONDED ARE UNDER THE FU LL CONTROL AND SUPERVISION OF THE RESPONDENT/ASSESSEE AND AS S UCH THE PAYMENT IS NOT IN THE NATURE OF FEE FOR TECHNICAL S ERVICES. IT WAS FURTHER ARGUED THAT AS PER ARTICLE 12 OF THE INDO-C YPRUS DTAA, THE SATISFACTION OF MAKE AVAILABLE CLAUSE IS IMPO RTANT FOR ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 8 TREATING ANY SERVICE TO BE IN THE NATURE OF TECHNIC AL OR CONSULTANCY SERVICES. THE LD. COUNSEL SUBMITTED THA T AS PER THE MANPOWER SUPPLY AGREEMENT, LOR CYPRUS HAS MERELY SU PPLIED EMPLOYEES ON SECONDMENT FOR EXECUTION OF THE PROJEC T OF RESPONDENT/ASSESSEE WITH NO RESPONSIBILITY OF SERVI CES RENDERED BY SAID EMPLOYEES AND AS SUCH THE PRE-REQUISITE CON DITION OF TECHNICAL SERVICES BEING MADE AVAILABLE REMAINED UNSATISFIED. THE LD. AR FURTHER PLACED RELIANCE OF DECISION OF T HE COORDINATE BENCH OF ITAT MUMBAI IN THE CASE OF DCIT VS. MAHANA GAR GAS LTD. REPORTED IN [2016] 158 ITD 1016 AND THE JUDGME NT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MARKS AND SPENCER (SUPRA) FOR THE PROPOSITION THAT MERE SECONDMENT OF EMPLOYEES COULD NOT BE TERMED AS FEE FOR TECHNICAL SERVICES. 4.0 ON GROUND NOS. 2 AND 3, THE LD. DR, WHILE DISP UTING THE CORRECTNESS OF THE IMPUGNED ORDER, CONTENDED TH AT INTEREST ATTRIBUTABLE TO CWIP CANNOT BE ALLOWED AS REVENUE E XPENSE. IT WAS FURTHER ARGUED THAT CWIP INCLUDES PLANT, EQUIPM ENTS AND CRANES WHICH ARE OF ENDURING NATURE AND AS SUCH THE ASSESSING OFFICER HAS CORRECTLY CAPITALIZED THE INTEREST AND MADE THE DISALLOWANCE. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 9 4.1 THE LD. AR, ON THE OTHER HAND, SUPPORTED THE O RDER OF THE LD. CIT (APPEALS) AND REITERATED THE SUBMISSION S MADE BEFORE THE LD. FIRST APPELLATE AUTHORITY. IT WAS FURTHER S UBMITTED THAT THE RESPONDENT/ASSESSEE IS A REAL ESTATE DEVELOPER AND CWIP IS IN FACT CURRENT WORK IN PROGRESS IN THE FORM OF CONSUM ABLES WHICH ARE USED AT DIFFERENT SITES. THE LD. AR ALSO RAISED A PLEA THAT THE ASSESSEE COMPANY HAS SUFFICIENT OWN FUNDS AND THAT THE ASSESSING OFFICER HAS FAILED TO PROVE ANY NEXUS BET WEEN THE BORROWED FUNDS AND CWIP. THE LD. AR ALSO POINTED OU T THAT THE ISSUE IS ALSO COVERED BY THE ASSESSMENT ORDER FOR A Y 2011-12 WHEREIN THE ASSESSING OFFICER HAS NOT MADE ANY SIMI LAR DISALLOWANCE OF INTEREST. 5.0 ON GROUND NO. 4, THE LD. DR RELIED ON THE ASSE SSMENT ORDER AND STATED THAT SOFTWARE EXPENSES ARE INCURRE D IN CONNECTION WITH COMPUTER AND AS SUCH SAME ARE LIABL E TO CAPITALIZED. THE LD. DR JUSTIFIED THE ACTION OF THE ASSESSING ON THE GROUND THAT EXPENSES TOWARDS ANNUAL MAINTENANCE CONTRACT (AMC), LICENSE FEE ETC ARE OF ENDURING NATURE. 5.1 ON THE OTHER HAND, THE LD. AR SUBMITTED THAT THE EXPENSES TOWARDS AMC, CONSUMABLES AND LICENSE FEE A RE INCURRED ON YEAR TO YEAR BASIS AND CANNOT BE CONSID ERED TO BE OF ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 10 ENDURING NATURE. THE LD. AR SUPPORTED THE FINDING O F THE LD. CIT (APPEALS) AND SUBMITTED THAT IN AY 2011-12, THE ASS ESSING OFFICER HIMSELF HAS ACCEPTED THE CLAIM OF AMC AS REVENUE EX PENDITURE. REFERENCE WAS ALSO MADE TO THE DECISION OF THE DELH I BENCH OF THE ITAT IN THE CASE OF SISTER CONCERN DLF HOME DEVELOP ERS LTD. VS. DCIT (ITA NO. 4757/DEL/12 AND THE JUDGMENTS OF THE HONBLE DELHI HIGH COURT IN THE CASES OF CIT VS. G.E. CAPIT AL SERVICES LTD. REPORTED IN [2008] 300 ITR 420 (DEL) AND CIT VS. AM WAY INDIA ENTERPRISES REPORTED IN (2012) 346 ITR 341 (DELHI). 6.0 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE ALSO GONE THROUGH THE ORDERS PASSED BY LOWER AUTHOR ITIES. AS FAR AS GROUND NO 1 OF THE APPEAL IS CONCERNED, IT IS SE EN THAT THE LD. FIRST APPELLATE AUTHORITY HAS DELETED THE DISALLOWA NCE OF PROJECT MANAGEMENT EXPENSES ON ACCOUNT OF ALLEGED FAILURE T O DEDUCT TAX AT SOURCE AFTER ELABORATELY DISCUSSING THE VARIOUS ASPECTS OF THE ISSUE IN HAND. IT IS SETTLED LAW THAT BEFORE THRUST ING LIABILITY TO DEDUCT TDS, THE FOLLOWING PRE-CONDITIONS MUST BE SA TISFIED: I. THERE MUST BE INCOME ELEMENT IN THE HANDS OF THE RECIPIENT II. THE INCOME MUST BE EARNED/DERIVED IN INDIA III. IN CASE THE PAYMENT IS MADE TO A NON-RESIDENT, SATISFACTION OF CONDITIONS MENTIONED IN THE RELEVAN T ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 11 ARTICLE OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA), IF ANY, IS TO BE SEEN. 6.1 IN THE PRESENT CASE, IT IS OBSERVED THAT THE P AYMENT OF MAN POWER SUPPLY CHARGES IS BEING MADE TO A NON- RE SIDENT COMPANY, LOR CYPRUS, WHICH IS A RESIDENT OF CYPRUS. FURTHER, INDIA IS HAVING DTAA WITH CYPRUS WHICH WAS OPERATIV E IN THE YEAR UNDER CONSIDERATION. MOREOVER, UNDISPUTEDLY, T HE INCOME (MARK-UP COMPONENT) FROM THE SUPPLY OF MAN POWER IS EARNED AND DERIVED IN INDIA. NOW THE MAIN QUESTION TO BE C ONSIDERED IS THE SATISFACTION OF THE RELEVANT ARTICLES OF THE DT AA WHICH WOULD ULTIMATELY DECIDE THE NATURE OF PAYMENT AND LIABILI TY OF WITHHOLDING TAX. 6.2 WHEN WE EXAMINE THE TERMS OF THE MANPOWER SUPP LY AGREEMENT AND THE INVOICE RAISED BY LOR CYPRUS PLAC ED AT PAPER BOOK PAGES 1-5 AND 6 RESPECTIVELY, IT IS EVIDENT TH AT THE NON- RESIDENT HAS ONLY SUPPLIED WORKFORCE/EMPLOYEES TO T HE RESPONDENT/ASSESSEE ON SECONDMENT BASIS AND FURTHER THAT THERE IS NO RESPONSIBILITY OF LOR CYPRUS WITH REGARD TO T HE SERVICES PERFORMED BY SECONDED EMPLOYEES. ALSO, AS RIGHTLY O BSERVED BY THE LD. CIT (APPEALS), THE EMPLOYEES ARE UNDER FULL MANAGEMENT AND SUPERVISION OF THE RESPONDENT/ASSESSEE. FURTHER , THE INVOICE ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 12 RAISED BY LOR CYPRUS SHOWS A CLEAR BIFURCATION OF T HE AMOUNT OF THE REIMBURSEMENT OF ACTUAL COST AND THE MARK UP @ 5% ON WHICH TDS HAS BEEN DEDUCTED BY THE RESPONDENT/ASSES SEE. THEREFORE, THE PAYMENT CAN CONVENIENTLY BE DIVIDED INTO TWO PARTS, ONE TOWARDS REIMBURSEMENT OF THE ACTUAL COST AND THE OTHER TOWARDS MARK-UP. FURTHER, IT SETTLED POSITION THAT TDS PROVISIONS WOULD ONLY COME INTO PLAY ONLY WHEN THER E IS AN ELEMENT OF INCOME INVOLVED. THE LD. CIT (APPEALS) H AS DISCUSSED THIS VERY ASPECT IN GREAT DETAIL VIDE FINDING RECOR DED IN PARA 6.13 WHICH IS REPRODUCED HEREUNDER FOR A READY REFERENCE : ANY PAYMENT, IN ORDER TO BE BROUGHT WITHIN THE SCO PE OF INCOME BY WAY OF FEES FOR TECHNICAL SERVICES U/S. 9 (1)(VII), SHOULD BE OR HAVE AT LEAST SOME ELEMENT OF INCOME I N IT. SUCH PAYMENT SHOULD INVOLVE SOME COMPENSATION FOR THE RE NDERING OF ANY SERVICES, WHICH CAN BE DESCRIBED AS INCOME I N THE HANDS OF THE RECIPIENT. WHEN THE EXPENDITURE INCUR RED IS REIMBURSED AS SUCH, WITHOUT HAVING ANY ELEMENT OF I NCOME IN THE HANDS OF RECIPIENT, IT CANNOT BE ASSUMED THE CH ARACTER OF SUCH INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA. IN THE CASE OF APPELLANT OUT OF THE TOTAL PAYMENT OF 90504 3 GBP A SUM OF 861946 GBP REPRESENTS, REIMBURSEMENT OF SALA RY AND HENCE AS SUCH WITHOUT ANY ELEMENT OF INCOME AND 430 97 GBP AS A MARK-UP OF LOR CYPRUS, WHICH IS CALCULATED AS @5% OF AMOUNT REIMBURSED I.E. 861946 GBP. ON THIS MARK UP OF ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 13 43097 GBP, TDS HAS BEEN DEDUCTED AND DEPOSITED INTO THE GOVT. ACCOUNT. THE AO HAS NOT DISPUTED THE PAYMENT OF 43097 GBP AND MERELY THE REST OF THE AMOUNT I.E. 86 1946 GBP HAS BEEN DISALLOWED WHICH IS ACTUALLY THE AMOUN T OF REIMBURSEMENT OF SALARY TO LOR CYPRUS LACKING ANY E LEMENT OF INCOME. IN VIEW OF THE ABOVE SAID JUDICIAL PRONOUNCEMENTS BY VARIOUS COURTS OF LAW, I AM OF TH E CONSIDERED OPINION THAT THE REIMBURSEMENT MADE BY T HE APPELLANT I.E. 861946 GBP WHICH IS EQUIVALENT TO RS . 6,32,50,280/- TO THE CYPRUS COMPANY DOES NOT CONSTI TUTE INCOME IN THE HANDS OF CYPRUS COMPANY. 6.3 WE FIND OURSELVES IN AGREEMENT WITH THE FINDIN G RECORDED BY THE LD. CIT (APPEALS) WHICH IS IN CONFO RMITY WITH THE PRINCIPLE LAID DOWN BY THE HONBLE APEX COURT IN TH E CASE OF GE INDIA TECHNOLOGY CEN. P. LTD REPORTED IN [2010] 32 7 ITR 456 (SC). IT IS UNDISPUTED THAT THE REIMBURSEMENT OF AC TUAL MANPOWER EXPENSE HAS NO ELEMENT OF ANY INCOME IN TH E CASE OF THE SERVICE PROVIDER LOR CYPRUS IN TERMS OF SECTION 195 OF THE ACT. ACCORDINGLY, WE ARE OF THE CONSIDERED VIEW THA T THE RESPONDENT/ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS ON THE ACTUAL COST COMPONENT WHICH IS IN THE NATURE OF REI MBURSEMENT OF SALARIES. THE FINDING OF THE LD. CIT (APPEALS) I N THIS REGARD NEEDS NO INTERFERENCE. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 14 6.4 SINCE, LOR CYPRUS DOES NOT HAVE ANY PERMANENT ESTABLISHMENT (PE) IN INDIA, APPLICABILITY OF ARTIC LE 7 IS RULED OUT AT THE VERY THRESHOLD. WHEN WE FURTHER ANALYZE THE VARIOUS ARTICLES OF INDO-CYPRUS DTAA, PARTICULARLY ARTICLE 12 ROYALTIES AND FEE FOR INCLUDED SERVICES, WE FIND THAT THE TR ANSACTION IN DISPUTE CANNOT BE TERMED AS FEES FOR INCLUDED SERVI CES AS DEFINED BY SUB-CLAUSE 4 OF ARTICLE 12 AS THERE IS AN EXPRES S REQUIREMENT THAT THE SERVICES MUST BE MADE AVAILABLE TO RECIPIE NT. HOWEVER, IN THE PRESENT CASE, THE NON-RESIDENT LOR CYPRUS HAS O NLY SUPPLIED MAN POWER TO THE RESPONDENT/ASSESSEE AND THERE IS N O CASE OF ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HO W OR PROCESS BEING MADE AVAILABLE TO THE RESPONDENT/ASSESSEE. IN THESE CIRCUMSTANCES, WE REACH THE CONCLUSION THAT REIMBUR SEMENT OF SALARY TO LOR CYPRUS IS NOT IN THE NATURE OF ANY TE CHNICAL OR CONSULTANCY FEE AND THAT THE SAME FALLS OUTSIDE THE PURVIEW OF ARTICLES 12 AND 13. OUR VIEW IS SUPPORTED FROM THE DECISION OF THE MUMBAI BENCH OF THE ITAT IN THE CASE OF DCIT VS . MAHANAGAR GAS LTD. (SUPRA) AND ADIT VS. MARKS AND SPENCERS RE LIANCE INDIA P. LTD. REPORTED IN [2013] 27 ITR(T) 448 WHIC H HAS BEEN AFFIRMED BY THE HONBLE BOMBAY HIGH COURT. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 15 6.5 ACCORDINGLY, WE ARE OF THE CONSIDERED VIEW THA T IT IS ONLY THE MARK UP WHICH IS LIABLE TO WITHHOLDING TAX U/S 195 OF THE ACT AND NOT THE REIMBURSEMENT OF ACTUAL COST TO LOR CYPRUS. 6.6 AT THIS JUNCTURE, IT WILL ALSO BE RELEVANT TO TAKE NOTE OF ANOTHER IMPORTANT SUBMISSION OF THE LD. AR IN WHICH IT HAS BEEN CLARIFIED THAT THE NON-RESIDENT LOR CYPRUS HAS DEDU CTED TDS U/S 192 OF THE ACT WHILE MAKING PAYMENTS TO THE SEC ONDED EMPLOYEES AND AS SUCH THERE IS NO LOSS TO THE REVEN UE. THIS FACT HAS ALSO BEEN NOTED BY THE LD. CIT (APPEALS) VIDE T HE FOLLOWING OBSERVATION IN PARA 6.13: WITHOUT PREJUDICE TO THE ABOVE, LOR CYPRUS HAS DEP OSITED TAX ON THE SALARY PAID BY IT FOR THE SERVICES RENDE RED BY ITS EMPLOYEES IN INDIA ON SECONDMENT TO THE APPELLANT, FOR WHICH NECESSARY PROOFS WERE FILED. HENCE, THERE IS ALSO NO LOSS TO THE REVENUE ALSO UNDER THESE CIRCUMSTANCES. 6.7 WE AGREE WITH THE OBSERVATIONS OF THE LD. CIT (APPEALS) AND FIND MERIT IN THE ARGUMENTS OF THE LD. AR WHICH IS CLEARLY SUPPORTED FROM THE DECISION OF THE COORDINATE BENCH OF THE ITAT AHMEDABAD IN THE CASE OF BURT HILL DESIGN P. LTD. V S. DDIT REPORTED IN [2017] 186 TTJ 652 AND THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIT VS. MARKS AND SPENCER RELIANCE INDIA P. LTD. (ITA NO. 893 OF 2014) WHEREI N IT HAS BEEN ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 16 HELD THAT WHEN THE PAYMENTS HAVE BEEN CHARGED TO TA X IN INDIA U/S 192, THE ASSESSEE COULD NOT BE TREATED AS ASSES SEE IN DEFAULT FOR NON-DEDUCTION OF TDS. WE HAVE NO HESITATION IN SUBSCRIBING TO THE VIEW TAKEN BY THE COORDINATE BENCH AND APPRO VED BY HONBLE BOMBAY HIGH COURT. 6.8 WE ALSO NOTE THAT THE CASES RELIED UPON BY THE LD DR ARE DISTINGUISHABLE ON FACTS AND DO NOT HELP THE CA USE OF THE REVENUE. 6.9 ACCORDINGLY, IN LIGHT OF OUR OBSERVATIONS IN T HE PRECEDING PARAGRAPHS, WE FIND NO JUSTIFICATION IN I NTERFERING WITH ORDER OF THE LD. CIT (APPEALS) AND HOLD THAT THE DI SALLOWANCE OF THE PROJECT MANAGEMENT EXPENSES AMOUNTING TO RS. 6,32,50,280/- U/S 40(A)(I) R.W.S. 195 OF THE ACT HA S RIGHTLY BEEN DELETED. ACCORDINGLY, GROUND NO. 1 OF THE REVENUES APPEAL STANDS DISMISSED. 7.0 COMING TO GROUND NOS. 2 AND 3, IT IS SEEN TH AT THE DISPUTE IN HAND IS REGARDING DISALLOWANCE OF INTEREST ALLEG EDLY ATTRIBUTABLE TO CWIP. AT THE OUTSET, WE FIND THAT T HE ASSESSING OFFICER HAS NOT GIVEN ANY BASIS FOR ESTIMATING THE INTEREST DISALLOWANCE @12% ON THE MONTHLY BALANCE OF CWIP. T HE ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 17 ASSESSMENT ORDER IS SILENT WITH REGARD TO THE BASIS OF SUCH ESTIMATION AND THE ASSESSING OFFICER HAS FAILED TO EVEN PROVE SLIGHTEST OF NEXUS BETWEEN THE BORROWED FUNDS AND T HE AMOUNT REFLECTED UNDER THE HEAD CWIP. IT IS A FUNDAMENTA L PRINCIPLE THAT THE ASSESSMENT HAS TO BE MADE AFTER DUE APPLIC ATION OF MIND AND ANY DISALLOWANCE OR ADDITION MUST BE BACKED BY LOGICAL REASONING AND SUPPORTED FROM FACTS OF THE CASE. FUR THER, WHILE MAKING THE DISALLOWANCE OF INTEREST, IT IS INCUMBEN T UPON THE ASSESSING OFFICER TO ESTABLISH AS TO WHY SUCH CLAIM IS DISALLOWED OR CAPITALIZED. HOWEVER, WE FIND THAT IN THE PRESEN T CASE, THE CAPITALIZATION AND THE CONSEQUENTIAL DISALLOWANCE O F INTEREST HAS BEEN MADE ON AN ARBITRARY BASIS WITHOUT EVEN APPREC IATING THE FACT OF AVAILABILITY OF OWN FUNDS AND WITHOUT ESTAB LISHING ANY NEXUS BETWEEN THE INTEREST EXPENSE, WHICH IS APPARE NTLY RELATED TO BUSINESS ACTIVITIES, AND THE BORROWED FUNDS. 7.1 WE FIND THAT THE LD. CIT (APPEALS) HAS COMPREH ENSIVELY DEALT WITH THIS ISSUE AND HIS FINDING IS REPRODUCED HEREUNDER: 7.3 I HAVE GONE THROUGH THE ASSESSMENT ORDER PASSE D BY THE AO, SUBMISSIONS FILED BY THE APPELLANT FROM TIM E TO TIME AND OTHER DISCUSSION HELD. THE FOLLOWING POINTS EME RGE FROM THEM:- ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 18 (A) THAT THE APPELLANT IS ENGAGED INTO THE BUSINES S OF CONSTRUCTION AS A CONTRACTOR. (B) THE PLANT AND MACHINERY OF THE APPELLANT BUSIN ESS IS IN THE SHAPE OF CRANES, CEMENT FEEDING PLANTS ETC. (C ) ITS QUIET UNDERSTANDABLE THAT THE CRANES OR O THER MACHINERY PURCHASED FROM VARIOUS SUPPLIERS CANNOT B E PUT TO USE IMMEDIATELY AT THE TIME OF PURCHASE, DUE TO TIM E LAG IN TRANSPORTING THESE ITEMS TO VARIOUS SITES AND THERE AFTER ASSEMBLING OF VARIOUS ITEMS AS PER THE REQUIREMEN T. (D) THE TIME PERIOD WHICH IS THE GESTATION PERIOD FROM THE DATE OF ITS PURCHASE/ PAYMENT TILL ITS USE IS BE ING SHOWN AS CWIP. IN THE YEAR UNDER CONSIDERATION, APPELLANT HAD 17 PROJECTS IN HAND FROM LOCATIONS AS FAR AWAY AS, MUMBAI, CHENNAI, GURGAON, COCHIN, KOLKATTA ETC. (E) ONLY THE PURCHASE COST THAT HAS BEEN INCURRED BY THE APPELLANT HAS BEEN SHOWN IN CWIP AND NO OTHER COSTS HAVE BEEN INCURRED ON THE ITEMS SHOWN IN CWIP. 7.4 BEFORE PROCEEDINGS FURTHER IT WOULD BE PROPER T O EXAMINE THE BUSINESS OF THE APPELLANT COMPANY. THE APPELLANT IS ENGAGED INTO THE BUSINESS OF CONSTRUCT ION AS A CONTRACTOR. IT HAS FIXED ASSETS IN THE SHARE OF PLA NT AND MACHINERY, FURNITURE AND FIXTURE ETC., ON 31 ST MARCH 2009, TO THE TUNE OF RS. 292.62 CR. OUT OF THESE TOTAL FIXE D ASSETS OF RS. 298.24CR. I.E. 2% OF THE TOTAL FIXED ASSETS APP EAR AS THE CLOSING CAPITAL WORK IN PROGRESS. MOREOVER THE CLOS ING CWIP AT THE END OF THE YEAR IS AT RS. 4,69,42,604/- AS COMP ARE TO RS. 22,26,69,694/- AT THE START OF THE YEAR. THE APPELL ANT HAS A SHARE CAPITAL AND RESERVE WORTH RS. 111,39,95,205/- THERE ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 19 ARE SECURED LOANS OF RS. 213,62,47,973/- ON WHICH I NTEREST OF RS. 26,58,49,339/- WAS PAID. AS THE COMPANY IS INTO THE BUSINESS OF CONSTRUCTIO N AS A CONTRACTOR THE PLANT AND MACHINERY IS IN THE SHAPE OF STEEL SHUTTERING, CRANES, BATCHING PLANT, GENERATORS ETC. THE APPELLANT WORKED FOR DIFFERENT CLIENTS AT DIFFERENT SITES AND FOR THESE PURPOSES AND THE PLANT AND MACHINERY IN THE S HAPE OF CRANES, BATCHING PLANT ETC. WERE DEPLOYED AT SEVERA L SITES. THE CRANES, BATCHING PLANTS OF DIFFERENT SIZES AND CAPACITIES WERE REQUIRED TO THE APPELLANT FOR DIFFERENT PROJEC TS. THE APPELLANT HAS PURCHASED CRANES, BATCHING PLANT S FROM DIFFERENT SUPPLIERS AND IN CERTAIN CASES ADVANCES W ERE GIVEN TO DIFFERENT SUPPLIERS AGAINST THE SUPPLIES TO BE M ADE. CRANES, BATCHING PLANT ARE HUGE IN TERMS OF SIZE AN D HAVE TO BE DESIGNED IN ACCORDANCE TO THE SPECIFIC REQUIREME NTS OF THE PROJECT AND THERE IS ALWAYS A POSSIBILITY OF A TIME LAG FROM THE DATE OF SUPPLIES OF THESE ITEMS TO THE DATE OF ACT UAL USES OF THESE EQUIPMENTS. THERE IS ALSO NO DOUBT THAT THE RE IS NO VALUE ADDITION MADE IN THESE ITEMS AND THE ONLY QUESTION IS IN REGARD TO THE TIME GAP BETWEEN ASSEMBLING AND REASSEMBLING OF THESE ITEMS. IT IS ALSO SEEN THAT IN CERTAIN CASES, ADVANCES WE RE GIVEN TO DIFFERENT SUPPLIERS FOR SUPPLYING EQUIPMENT, HOWEVE R, THE SUPPLIES WERE MADE SUBSEQUENTLY AND TILL THE TIME O F ACTUAL SUPPLY OF THESE ITEMS HAVE BEEN RECEIVED AND PUT TO USE, SUCH ADVANCES HAVE BEEN TREATED AS CWIP. AS PER THE DICTIONARY, MEANING OF CAPITAL WORK IN P ROGRESS (CWIP) IS AS BELOW:- ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 20 CAPITAL WIP IS REFERRED TO AS ASSETS UNDER CONSTRU CTION AND ARE REPRESENTED BY A SPECIFIC ASSET CLASS. IT I S AN ASSET ON THE BALANCE SHEET I.E. NOT CONSIDERED TO B E A FINAL PRODUCT, BUT MUST STILL BE ACCOUNTED FOR BECA USE FUNDS HAVE BEEN INVESTED TOWARDS ITS PURCHASE. THUS BY ITS VERY NATURE CWIP IS A WORK THAT HAS NOT BEEN COMPLETED BUT ON WHICH CAPITAL INVESTMENT HAS ALREA DY BEEN INCURRED. IN THE CASE OF APPELLANT, THERE IS NO DO UBT THAT THE CWIP IS BASICALLY AN ASSET WHICH HAS NOT REACHED TH E FINAL PRODUCT STAGE. THE DETAILS FILED BY THE APPELLANT D URING THE COURSE OF ASSESSMENT PROCEEDINGS AS WELL AS DURING THE COURSE OF APPELLATE PROCEEDINGS REVEAL THAT THERE I S A CLOSING CWIP OF RS. 4,69,42,604/- AS ON 31.03.2009, WHICH REPRESENTS THE FOLLOWING:- S.NO. PARTICULARS AMOUNT (RS.) 1 CAPITAL WORK IN PROGRESS - CONSTRUCTION PLANT AND EQUIPMENT 11,29,866 2 CAPITAL WORK IN PROGRESS - CRANES 4,37,38,406 3 CAPITAL WORK IN PROGRESS - BATCHING PLANT 20,44,598 4 ADVANCE ( DEBIT BALANCE ) TO CREDITORS FOR FIXED ASSETS 29,734 TOTAL 4,69,42,604 THE ABOVE DETAILS MAKES IT CLEAR THAT THE MAIN PAR T OF CWIP REPRESENTS EXPENDITURE INCURRED ON CRANES AMOUNTING TO RS. 4,37,38,406/- OUT OF THE TOTAL CWIP OF RS. 4,69,42, 604/-. SIMILARLY, THERE IS AN OPENING CWIP OF RS. 22,26,69 ,694/- AS ON 01.04.2008, AND RS. 1,65,12,229/- AS ON 31.03.2 010. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 21 THE ABOVE DETAILS MAKES IT CLEAR THAT THE CLOSING C WIP OF RS. 22,26,69,694/- STANDING IN A.Y, 2008-09 HAS COME DO WN TO RS. 4,69,42,604/- IN A.Y. 2009-10 AND RS. 1,65,12,2 29/- IN A.Y. 2010-11. THE SAID DETAILS LEAVES NO DOUBT THA T THE TIME GAP FOR PUTTING CWIP INTO USE IS NOT MORE THAN ONE YEAR IN ANY CASE. THE APPELLANT HAS A NET WORTH OF RS. 325.02 CRORES AGAINST WHICH THERE IS A CLOSING CWIP OF RS. 4.69 CRORES. THE AO WHILE MAKING DISALLOWANCE OF INTEREST PRESUMED THAT THE BORROWED FUNDS WERE ACTUALLY BEING USED FOR PURCHA SING ITEMS SHOWN UNDER THE HEAD CWIP. HOWEVER, THE AO HAS NOT BROUGHT ANYTHING ON RECORD TO PROVE THAT THERE IS A TIME GAP OF MORE THAN ONE YEAR IN CAPITALIZATION OF CWIP . ON THE OTHER SIDE, THE APPELLANT HAS STATED THAT CWIP IS M ERELY 1.44% OF ITS NET WORTH AND IT HAS SUFFICIENT FUNDS TO PURCHASE THE CAPITAL ITEMS. THE APPELLANT ALSO STATED THAT NORMALLY CWIP IS CAPITALIZED IN THE BOOKS WITHIN A PERIOD OF 3 TO 4 MONTHS ONLY. IN SUPPORT THEREOF COPIES OF LED GER ACCOUNTS WERE FILLED BY THE APPELLANT. ITS ALSO A FACT THAT IN ASSESSMENT PROCEEDINGS FO R A.Y. 2011- 12, THE SAME ISSUE HAS BEEN DECIDED BY THE AO IN T HE CASE OF THE APPELLANT IN WHICH NO DISALLOWANCE ON T HIS ACCOUNT HAVE BEEN MADE BY THE AO. THE FACTS OF A. Y. 2011-12 AS WELL AS A.Y. 2009-10 ARE IDENTICAL. IN SUPPORT OF ITS CONTENTION A COPY OF ASSESSMENT ORDER FOR A.Y. 2011-12 WAS ALSO FILED BY THE APPELLANT. 7.5 AFTER PURSUING THE FACTS OF THE CASE, THE OBSER VATION OF THE AO MADE IN THE ASSESSMENT ORDER AND THE COPY OF THE ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 22 ASSESSMENT ORDER FOR A.Y. 2011-12, THERE IS NO DOUB T THAT THERE IS NO MATERIAL ON RECORD THAT THE BORROWED FU NDS WERE ACTUALLY BEING USED FOR PURCHASING CWIP. IN THIS C ASE, CWIP IS MERELY ON ACCOUNT OF THE TIME LAG FROM THE DATE OF PURCHASE/ADVANCE TO THE DATE OF ACTUAL USE OF THE E QUIPMENT. IT IS A FACT THAT IN THE CASE OF APPELLANT, WHO IS WORKING AS A CONTRACTOR AT 17 DIFFERENT SITES ALL ACROSS THE COU NTRY, THAT PLANT AND MACHINERY HAS TO BE DEPLOYED AT DIFFEREN T LOCATIONS AND THERE IS BOUND TO BE A TIME LAG. THE AO HAS H IMSELF ACCEPTED THE EXPLANATION OF THE APPELLANT IN SUBSEQ UENT YEARS THEREFORE, THERE IS NO REASON TO MAKE DISALLO WANCE OF INTEREST EXPENDITURE OF RS. 46,01,176/-. 7.2 THE LD. DR WAS NOT ABLE TO CONTROVERT THE FACT UAL AND LEGAL FINDINGS OF THE LD. CIT (APPEALS) WHEREIN THE DISALLOWANCE HAS BEEN DELETED BY HOLDING THAT THE CWIP IS TOWARD S CURRENT BUSINESS NEEDS AND SAME COULD NOT BE CONSIDERED AS CAPITAL IN NATURE. THE LD. CIT (APPEALS) HAS ALSO HELD THAT TH E RESPONDENT/ASSESSEE HAS SUFFICIENT OWN FUNDS AND FU RTHER THAT THE NET WORTH OF THE COMPANY IS FAR MORE THAN THE V ALUE OF CWIP AND AS SUCH THERE IS NO NEXUS BETWEEN THE BORROWED FUNDS AND THE CWIP. WE ALSO NOTE THAT THE ASSESSING OFFICER H AS ACCEPTED THE CLAIM OF INTEREST IN AY 2011-12 WHEREIN, ON IDE NTICAL FACTS, NO SUCH DISALLOWANCE WAS MADE. IN THESE CIRCUMSTANCES, THE ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 23 DEPARTMENT CANNOT BE ALLOWED TO AGITATE THIS ISSUE IN THE YEAR UNDER REFERENCE. ACCORDINGLY, IN OUR CONSIDERED VIE W, THE ORDER OF LD. CIT (APPEALS) ON THIS ISSUE IS WELL REASONED AN D WARRANTS NO INTERFERENCE AND IS HEREBY UPHELD. CONSEQUENTLY, GR OUND NOS. 2 AND 3 ARE REJECTED. 8.0 GROUND NO. 4 IS ON THE ISSUE OF CAPITALIZATION OF SOFTWARE EXPENSES TO THE EXTENT OF RS. 65,70,768/-. THE ASSESSING OFFICER WAS OF THE VIEW THAT SOFTWARE EXPENSE OF RS . 1,03,95,322/- INCURRED BY THE RESPONDENT/ASSESSEE IS OF CAPITAL N ATURE AND SAME IS REQUIRED TO BE CLUBBED WITH COMPUTER AND O THER PERIPHERALS. ACCORDINGLY, THE ASSESSING OFFICER MA DE A DISALLOWANCE OF RS. 65,70,768/- AFTER ALLOWING DEPR ECIATION @ 60%. THE LD. FIRST APPELLATE AUTHORITY DELETED THE DISALLOWANCE BY OBSERVING AS UNDER: 8.3 I HAVE GONE THROUGH THE SUBMISSION FILED BY TH E APPELLANT FORM TIME TO TIME, ASSESSMENT ORDER PASS ED BY THE AO AND THE FACTS OF THE CASE. THE COMPANY IS I NTO THE BUSINESS OF CONSTRUCTION AS A CONTRACTOR. IT HAS A ROUND 17 SITES IN HAND AT DIFFERENT LOCATION AND HAVE MORE T HAN 800 EMPLOYEES AND HAVE AROUND 800 COMPUTERS. THE DETAILS OF COMPUTER SOFTWARE SUBMITTED BY THE A PPELLANT REVEALS THAT EXPENDITURE ON AMC, CONSUMABLES AND LI CENCE FEES WERE INCURRED DURING THE YEAR. THE AO TREATED THE ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 24 EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NA TURE AND ACCORDINGLY, ALLOWED DEPRECIATION ON THEM @ 60% AS AGAINST THE APPELLANT TREATING THE ENTIRE AMOUNT AS REVENUE EXPENDITURE. THE AO HAS NOT GIVEN ANY CONCRETE REA SONS FOR TREATING THE ENTIRE SOFTWARE EXPENSES AS CAPITAL IN NATURE. THE AO HAS SIMPLY SAID THAT AS PER PROVISIONS OF IN COME TAX ACT, SOFTWARE HAS BEEN CLUBBED WITH COMPUTERS FOR DEPRECIATION PURPOSES AND THEREFORE, SOFTWARE EXPEN SES ARE CAPITAL IN NATURE. ON THE OTHER SIDE, THE APPELLAN T SUBMITTED THAT THE SOFTWARE EXPENSES INCLUDE EXPENDITURE INCU RRED ON AMC, CONSUMABLES AND LICENCE FEES. THERESE EXPENSE S WERE NOT OF ENDURING NATURE AND THE DETAILS OF THE EXPENDITURE ITSELF SHOW THAT THE EXPENDITURE PERTAI NS TO ONLY ONE YEAR. SIMILARLY EXPENDITURE INCURRED ON CONSUM ABLES ITEMS INCLUDES PURCHASE OF SMALL ITEMS LIKE TRAININ G EXPENSES, AUTO CARD SOFTWARE, GATEWAY CHECKPOINT SO FTWARE ETC AND LICENCE FEES PERTAINS TO RENEWAL OF VARIOUS LICENCES FOR ONE YEAR ONLY. THE APPELLANT ALSO STATED THAT THE EXPENDITURE INCURRED ON AMC HAS BEEN ACCEPTED BY TH E AO IN THE ASSESSMENT PROCEEDINGS FOR THE A.Y. 2011-12. THUS THE FACT AS EVIDENT FROM THE VARIOUS DETAILS F ILED BY THE APPELLANT CLEARLY REVEALS THAT THE EXPENDITURE WAS INCURRED ON THE FOLLOWING THREE ACCOUNTS. A) ANNUAL MAINTENANCE COST B) CONSUMABLES C) LICENCE FEES. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 25 THE DETAILS FILED ALSO REVEALS THAT THERE IS NO SUC H ITEM WHICH IS ENDURING IN NATURE, RATHER EXPENSES WERE I NCURRED IN PURCHASE OF VARIOUS SOFTWARE ITEMS, LICENCE FEES FOR RENEWAL OF LICENCES, CONSUMABLES ETC. WITH A LIMITE D SHELF LIFE. THE EXPENDITURE INCURRED ON AMC IS DEFINITEL Y ONLY FOR ONE YEAR AND NO ENDURING BENEFIT CAN BE DERIVED THE RE FROM. SIMILARLY LICENCE FEES ARE BEING PAID ONLY FOR ONE YEAR AND NO ENDURING BENEFIT IS BEING DERIVED THERE FROM. AS FAR AS CONSUMABLE ITEMS ARE CONCERNED THERE ARE VARIOUS SOFTWARES PURCHASED FOR DIFFERENT PURPOSES AND THE WARRANTY FOR THESE SOFTWARES WERE NOT EXCEEDING TW ELVE MONTHS. AS THESE ITEMS ARE NOT FOR ANY ENDURING BEN EFIT THE ENTIRE EXPENDITURE CANNOT BE TREATED AS CAPITAL NA TURE. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AMWAY INDIA ENTERPRISES (2012) 346 ITR 341 OPINED THAT EXPENDITURE INCURRED ON PURCHASE OF SOFTWARE APPLIC ATION AND PAYMENT FOR CONSIDERATION FOR ACQUIRING LICENCE TO USE THOSE APPLICATION WOULD BE ALLOWED AS REVENUE EXPEN DITURE. SIMILARLY, IN THE FOLLOWING CASES IT HAS BEEN HELD THAT THE EXPENSES INCURRED FOR EITHER UPGRADE THE SYSTEM OR TO RUN THE SYSTEM IS ALLOWABLE AS REVENUE IN NATURE. A) CIT VS. ASAHI INDIA SAFETY GLASS LTD. (2012) 346 ITR 329 (DELHI) B) CHIEF CIT VS. O.K. PLAY INDIA LTD. (2012) 346 IT R 57 ( P & HS.37(1) C) CIT VS. GE CAPAITAL SERVICES LTD. (2007) 164 TAXMAN 46 (DEL.) ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 26 D) ORACLE INDIA PVT.LTD. VS. CIT (DELHI HIGH COURT) ITA NOS. 25/2012, 287/2008,417/2009, 447/2009, 461/2009 AND 683/2009 E) CIT VS. SOUTHERN ROADWAYS LTD. (2007) 288-ITR- 15 (MAD.) F) NAVEEN PROJECTS LTD. VS. CIT (2005) 1 SOT 232 (DELHI) G) CIT VS. CITICORP. OVERSEAS SOFTWARES LTD. (2004) 85 TTJ (MUMB.)87 H) CIT VS. JASPER INVESTMENTS LTD. (2007) 109 TTJ (MUM.)530 I) AJIT KUMAR C KAMADAR VS. CIT (2005) 1 SOT 183 (MUM) THE ABOVE FACTS OF THE CASE READ IN LIGHT OF THE VA RIOUS JUDICIAL PRONOUNCEMENTS MAKE IT CLEAR THAT THE ITEM SHOWN BY THE APPELLANT UNDER THE HEAD SOFTWARE EXPENSES DID NOT HAVE ANY ITEM IN THE NATURE OF CAPITAL EXPENDI TURE. THEREFORE, THE APPELLANT IS ENTITLED TO GET A RELIE F OF RS. 65,70,768/- AND GROUND NO. 4 IS ALLOWED. 8.1 ADMITTEDLY, THE EXPENSES CLAIMED UNDER THE HEA D SOFTWARE EXPENSE INCLUDE AMC, CONSUMABLES AND LICEN SE FEE. WE ARE CONSCIOUS OF THE FACT THAT THE EXPENSES TOWARDS AMC, CONSUMABLES AND LICENSE FEE ARE REGULAR FEATURE IN MODERN BUSINESS PARTICULARLY BIG ORGANIZATIONS LIKE THE RE SPONDENT/ ASSESSEE WHICH IS OBLIGED TO INCUR THESE EXPENSES E VERY YEAR. ALSO, THE VERY NATURE OF THESE EXPENSES IS SUCH THA T THE SUBSCRIBER/PURCHASER ONLY GETS THE RIGHT TO USE F OR A LIMITED ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 27 PERIOD OF TIME AND AS SUCH IT COULD NOT BE SAID THE SE EXPENSES PROVIDE ANY BENEFIT OF ENDURING NATURE. IT IS ALSO RELEVANT TO TAKE NOTE OF THE FACT THAT NO NEW ASSET HAS COMES INTO E XISTENCE BY INCURRING OF SUCH EXPENSES AND EVEN THE ASSESSING O FFICER HAS ACCEPTED THE CLAIM WITH REGARD TO AMC EXPENSES IN A Y 2011-12. 8.2 IT IS OUR CONSIDERED VIEW, THE FINDING AND REA SONING OF THE LD. CIT (APPEALS) THAT SOFTWARE EXPENSES ARE OF REVENUE NATURE IS WELL FOUNDED AND IN CONSONANCE WITH DECIS ION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. G.E. CAPITAL SERVICES LTD. REPORTED IN [2008] 300 ITR 42 0 (DEL) WHICH HAS BEEN FOLLOWED BY THE DELHI TRIBUNAL IN THE CASE OF THE SISTER- CONCERN OF THE RESPONDENT/ASSESSEE DLF HOME DEVELOP ERS LTD. (SUPRA). ACCORDINGLY, WE HEREBY CONFIRM THE ORDER O F THE LD. CIT (APPEALS) AND UPHOLD THE DELETION OF DISALLOWANCE O F SOFTWARE EXPENSES. THUS GROUND NO. 4 OF THE REVENUES APPEAL STANDS DISMISSED. 9.0 GROUND NO. 5 IS GENERAL IN NATURE AND REQUIRES NO SEPARATE ADJUDICATION. 10.0 IN THE FINAL RESULT, THE APPEAL OF THE REVENU E IS DISMISSED. ITA NO. 5178/DEL/2014 ASSESSMENT YEAR 2009-10 28 THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 27 TH NOVEMBER, 2018. SD/- SD/- (R.K. PANDA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 27 TH NOVEMBER, 2018 GS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER ASSISTANT REGISTRAR