Tejas Networks Limited, Bangalore V. ACIT, Bangalore

ITA 682/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1613 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-01-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 19-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CITI
• Assessee Lawyers: K R SEKAR
• Keywords: Depreciation; Double taxation relief; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 133A; 148

Judgement Text

PAGE 1 OF 17 ITA NO.682/ BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI GEORGE GEORGE K, J.M . AND SHRI A MOHAN ALANKAMONY, A.M ITA NO.682/BANG/2010 (ASSESSMENT YEAR 2004-05) TEJAS NETWORKS LTD., NO.58, 1 ST MAIN ROAD, J P NAGAR, 3 RD PHASE, BANGALORE-78. - APPELLANT VS THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-12(4), BANGALORE. - RESPONDENT APPELLANT BY : SHRI K R SEKAR, C.A. RESPONDENT BY : SHRI G V G OPALA RAO, CIT-I ORD ER PER GEORGE GEORGE K : THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED CIT(A)-III, BANGALORE DATED 16/2/2 010. THE ASST. YEAR CONCERNED IS 2004-05. 2. THE ASSESSEE COMPANY [THE ASSESSEE IN SHORT] H AD RAISED FOUR GROUNDS UNDER DIFFERENT HEADS WHICH ARE, FOR T HE SAKE OF CLARITY, REFORMULATED AS UNDER: 1. DISALLOWANCE OF ADVERTISEMENT AND PUBLICITY EXPENSES DUE TO NON-DEDUCTION OF TDS RS.3.76,418/- - EQUIPMENT HIRING CHARGES - RS. 82,870/- - SUBSCRIPTION CHARGES - RS. 1,18,548/- PAGE 2 OF 17 ITA NO.682/ BANG/2010 2 - PROVISION FOR ADVERTISEMENT EXPENSES - RS. 1,75,000/- 2. LEGAL AND PROFESSIONAL FEES - RS. 49,086/- 3. DISALLOWANCE OF SOFTWARE EXPENDITURE - RS.20,33,816/- 4. ADDITION OF NOTIONAL INTEREST INCOME OF - RS. 7,96,302/- 3. BRIEFLY STATED, THE NATURE OF BUSINESS OF THE AS SESSEE BEING SOFTWARE DEVELOPMENT, MANUFACTURING AND TRADING OF NETWORKING EQUIPMENT AND IT HAD FURNISHED ITS ORIGINAL RETURN OF INCOME FOR THE AY UNDER DISPUTE ON 29.10.2004, ADMITTING A LOSS OF RS.6.28 CRORES. THERE WAS A SURVEY OPERATION U/S 133A OF THE ACT IN THE BUSINESS PREMI SES OF THE ASSESSEE ON 7.2.2005 AND, SUBSEQUENTLY, THE ASSESSMENT WAS REOPE NED BY ISSUANCE OF A NOTICE U/S 148 OF THE ACT DT: 1.5.2007 AND IN COMPL IANCE, THE ASSESSEE HAD FURNISHED ITS RETURN OF INCOME ON 15.9.2008, ADMITT ING A LOSS OF RS.5.96 CRORES. 3.1. AFTER EXAMINING THE CASE IN DETAILS AND FOR T HE REASONS RECORDED IN THE IMPUGNED ASSESSMENT ORDER, THE AO H AD CONCLUDED THE ASSESSMENT, ARRIVING AT THE TOTAL INCOME OF THE ASS ESSEE AT RS.34.18 LAKHS AS AGAINST THE LOSS OF RS.5.96 CRORES ADMITTED. 4. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUES WITH THE LD CIT (A) FOR SOLACE. THE LD. CIT (A), AFTER DUE CONSIDE RATION OF THE ASSESSEES SUBMISSION AND ALSO PERUSAL OF RELEVANT RECORDS, HA D, AMONG OTHERS, OBSERVED UNDER VARIOUS HEADS, AS UNDER: (I.) ADVERTISEMENT AND PUBLICITY EXPENSES : OUT OF THE TOTAL ADDITION OF RS.5,51,41 8/-, THE CIT (A) HAD DELETED RS.1,75,000/- UNDER THE HEAD PURCHASE OF RA D MODEM FOR THE PAGE 3 OF 17 ITA NO.682/ BANG/2010 3 REASONS RECORDED IN HIS IMPUGNED ORDER (PARA 6.1.). THE BALANCE ADDITION OF RS.3,76,418/- [552418 175000] MADE BY THE AO W AS SUSTAINED BY THE CIT (A) FOR THE FOLLOWING REASONS: (I) HIRING CHARGES FOR VC EQUIPMENT RS.82870/-: 6 2..IN MY CONSIDERED OPINION, THE PAYMENTS MADE TOWARDS HIRING OF EQUIPMENT IS COVERED WITHIN THE EFINITION OF FEES FOR TECHNICAL SERVICES AND WOULD BE SUBJECT TO TDS UNDER SECTION 194J OF THE ACT. SINC E TDS HAS NOT BEEN EFFECTED ON THE SAME, THE PAYMENT MADE UNDER THIS HEAD TO THE TUNE OF RS.82,870/- IS LIABLE TO BE TAXED (II) PAYMENT TO LIGHT READING FOR SUBSCRIPTION CHAR GES OF READING MATERIAL RS.1,18,548/- : 6.2I HAVE PERUSED THE DOCUMENTARY EVIDENCE PRODUCED BY THE APPELLANT DURING THE HEARIN G AND DUE CONSIDERATION TO THE PROVISIONS OF LAW , I DO NOT AGREE WITH THE ARGUMENTS OF THE AR AND UPHOLD THE ACTION OF THE AO SINCE NO TDS WAS EFFECTED U/S 195( 1) ON THE PAYMENT TO A NON-RESIDENT.. (III) PROVISION FOR ADVERTISEMENT EXPENS ES RS.1,75,000/- : 6.3I HAVE CONSIDERED THE SUBMISSION MADE BY THE AR. HOWEVER, THE SUBMISSIONS OF THE AR CANNOT BE ACCEPTED. A COMPANY IS REQUIRED TO DEDUCT TAX AT SOURCE AT THE TIME OF MAKING PROVISIO NS AS IN MOST CASES THE PAYEE IS ALREADY KNOWN TO THE COMPA NY. AFTER PERUSING THE SAME AND HEARING TO THE ARGUMENT S OF THE AR, I UPHOLD THE ORDER OF THE AO ON THIS ACCOUN T AND SUSTAIN THE ADDITION MADE TO THE TUNE OF RS.1,75,00 0/- UNDER THIS HEAD. PAGE 4 OF 17 ITA NO.682/ BANG/2010 4 (2.) LEGAL AND PROFESSIONAL FEES : THE CIT (A) WAS OF THE VIEW TH AT OUT OF TOTAL PROVISION OF RS.3,49,086/-, IT WAS CONFIRMED THAT ON RS.3 LAKH S FOR WHICH TAX WAS DEDUCTED AT SOURCE AND PAID SUBSEQUENTLY AND, THUS, HE DIRECTED THE AO TO ALLOW THE SAME AFTER VERIFICATION. HOWEVER, WITH R EGARD TO THE BALANCE OF RS.49,086/- [349086 300000], THE OBSERVATION OF T HE LD. CIT (A) WAS THAT 7.0FURTHER, OUT OF BALANCE PROVISION OF RS.49,086/-, THE APPELLANT HAD REVERSED A SUM OF RS.24,543 IN THE MONTH OF APRIL, 2004. COPY OF TH E LEDGER EXTRACT OF THE LEGAL AND PROFESSIONAL FEES ACCOUNT EVIDENCING THE REVERSAL OF RS.49,086/- ON THIS ACC OUNT IS UPHELD. (3) DISALLOWANCE OF SOFTWARE EXPENDITURE OF RS.20,3 3,816/ - : 8.1. I HAVE CONSIDERED THE SUBMISSIONS OF THE A PPELLANT AND THE DOCUMENTARY EVIDENCES IN THE FORM OF INVOIC ES FOR PURCHASE OF SOFTWARE. IT IS OBSERVED THAT THE SAID AMOUNT OF SOFTWARE EXPENSES IS CAPITALIZED IN THE B OOKS OF ACCOUNTS ACCORDING TO THE ACCOUNTING POLICIES. THE DECISIONS CITED BY THE AR ARE DISTINGUISHED ON THE B ASIS OF THE FACTS OF THE INSTANT CASE. ACCORDINGLY, I UP HOLD THE ORDER OF THE AO IN TREATING THE AMOUNT PAID OF RS.20,33,816/- TOWARDS SOFTWARE EXPENDITURE AS CAPI TAL EXPENDITURE.. (4) ADDITION OF NOTIONAL INTEREST INCOME OF RS.7,96 ,302/ -: 9.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS M ADE BY THE APPELLANT AND THE FACTS NOTED BY THE ASSESSING OFFICER. THE COMPANY HAS ADVANCED LOAN TO SUBSIDIAR Y WITHOUT CHARGING ANY INTEREST ON THE SAME. THE DECI SION RELIED UPON BY THE APPELLANT IS DISTINGUISHED BASED ON THE PAGE 5 OF 17 ITA NO.682/ BANG/2010 5 FACTS OF THE CASE. I DO NOT FIND ANY NEXUS BETWEEN THE LOAN ADVANCED TO SISTER CONCERN AND THE BUSINESS PU RPOSE OF THE APPELLANT. 9.3. I ACCORDINGLY UPHOLD THE FINDINGS OF THE AO IN MAKING ADDITION TO THE TUNE OF RS.7,96,302/- ON ACC OUNT OF INTEREST RECEIVABLE. . 5. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE PR ESENT APPEAL. THE FORCEFUL ARGUMENTS PUT-FORTH BY THE LD. A R ARE SUMMARIZED AS UNDER: EQUIPMENT HIRING CHARGES: - THE CIT (A) OUGHT TO HAVE APPRECIATED THAT FOR THE RELEVANT ASSESSMENT YEAR, HIRING CHARGES WERE NOT LIABLE TO D EDUCTION OF TAX SAT SOURCE AS PER THE PROVISIONS OF S.194-I OF THE ACT; - THE CIT (A) HAD ERRED IN CONSIDERING THAT THE PAYMEN T MADE WAS COVERED WITHIN THE DEFINITION OF FEES FOR TECHNICA L SERVICES AND WOULD BE SUBJECTED TO DEDUCTION OF TAX AT SOURCE U/ S 194J OF THE ACT; SUBSCRIPTION CHARGES: - THE CIT(A) OUGHT TO HAVE APPRECIATED THAT SUBSCRIPT ION CHARGES WERE NOT IN THE NATURE OF FEES FOR TECHNICAL SERVIC ES AS PER THE DEFINITION UNDER THE ACT AND THE RELEVANT DOUBLE TA X AVOIDANCE AGREEMENT WITH THE COUNTRY OF RESIDENCE OF THE PAYEE; PROVISION FOR ADVERTISEMENT EXPENSES: - THE CIT (A) OUGHT TO HAVE APPRECIATED THAT THE SUM REPRESENTS PROVISION MADE AT THE END OF THE YEAR WHICH IS REVER SED SUBSEQUENTLY AND, HENCE, NO TAX WAS REQUIRED TO BE D EDUCTED AT SOURCE; PAGE 6 OF 17 ITA NO.682/ BANG/2010 6 LEGAL AND PROFESSIONAL FEES: - THE APPELLATE AUTHORITY OUGHT TO HAVE APPRECIATED TH AT THE SUM REPRESENTED PROVISION MADE AT THE END OF THE YEAR OU T OF WHICH RS.24543 HAS BEEN REVERSED IN APRIL, 2004. HE OUGH T TO HAVE APPRECIATED THAT NEITHER TDS NOR DISALLOWANCE U/S 4 0(A) (IA) WAS REQUIRED ON THE SAID SUM; DISALLOWANCE OF SOFTWARE EXPENSES: - THAT THE PURCHASE OF SOFTWARE DID NOT GIVE ANY ENDUR ING BENEFIT TO THE APPELLANT, BUT, ONLY ENSURED SMOOTH RUNNING O F FUNCTIONING OF THE BUSINESS; - THAT THE APPELLATE AUTHORITY HAD FAILED TO RELY ON TH E FINDING IN THE CASE OF AMWAY INDIA ENTERPRISES V. DICT REPORTED IN 301 ITR 1 (AT) WHICH HAD LAID DOWN CERTAIN TESTS FOR AS CERTAINING AS TO WHETHER THE EXPENDITURE ON PURCHASE OF SOFTWARE WAS TO BE TREATED AS REVENUE OR CAPITAL AND ALSO THE FINDING OF THE HONBLE TRIBUNAL IN THE CASE OF ROBERT BOSCH ENGINEERING AN D BUSINESS SOLUTIONS LIMITED V. ACIT [ITA NO: 980/B/2008; ADDITION OF NOTIONAL INTEREST INCOME: - THAT THESE LOANS WERE GRANTED TO THE WHOLLY OWNED SU BSIDIARY OF THE APPELLANT FOR BUSINESS PURPOSE; & - THE CIT (A) HAD ERRED IN NOT RELYING ON THE RULING O F THE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT (A) REPORTED IN (2006) 206 CTR 631 . 5.1. TO BUTTRESS HIS ARGUMENTS AND ALSO TO DRIVE HOME HIS POINTS, THE LD. A R CAME UP WITH VOLUMINOUS PAPER BOOKS IN THREE PARTS, CONSISTING OF, PRIMARILY, COPIES OF (I) CORRESPONDENCE WITH TH E LOWER AUTHORITIES; (II) LEDGER EXTRACTS, INVOICES, (III) CASE LAWS; (IV) RE PORT AND FINANCIAL STATEMENTS OF TEJAS COMMUNICATION PTE. LTD. ETC., PAGE 7 OF 17 ITA NO.682/ BANG/2010 7 5.2. ON THE OTHER HAND, THE LD. D R WAS VERY EMPHAT IC IN HIS URGE THAT THE AO HAD COME TO A CONCLUSION AFTER ANALYZING EACH ISSUE AT DEPTH AND THE FIRST APPELLATE AUTHORITY, AS A MATTER OF FA CT, DEALT WITH THE ISSUES IN A JUDICIOUS MANNER WHICH, ACCORDING TO THE LD. D R, REQUIRE NO INTERFERENCE AT THIS STAGE. IN A NUT-SHELL, IT WAS PLEADED BY THE LD. D R THAT THE IMPUGNED ORDER OF THE LD. CIT (A) UNDER CH ALLENGE REQUIRES TO BE SUSTAINED IN TOTO. 6. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS, A TTENTIVELY GONE THROUGH THE RELEVANT RECORDS AND ALSO THE EVID ENCES PRODUCED BY THE LD. A R COUPLED WITH VARIOUS JUDICIAL PRONOUNCEMENT S IN THE SHAPE OF PAPER BOOKS. 7. THE ISSUES RAISED ARE DEALT WITH IN A CHRONOLOG ICAL ORDER AS UNDER: I. EQUIPMENT HIRING CHARGES OF RS.82,870/- : WE FIND, THERE WAS A CONSIDERABLE FORCE IN THE ARGUMENT OF THE ASSESSEE THAT FOR THE AY UNDER CHALLENGE, TAX WAS LIABLE TO BE DEDUCTED U/S 194-I OF THE ACT ONLY ON RENT PAYABLE UNDER ANY LEASE, SUB-LEASE, TENANCY OR ANY OTHE R AGREEMENT OR ARRANGEMENT FOR THE USE OF ANY LAND OR ANY BUILDING, TOGETHER WITH FURNITURE, FITTINGS AND THE LAND APPURTENANT THERET O, WHETHER OR NOT SUCH BUILDING WAS OWNED BY THE PAYEE. ITS FURTHER CONTENTI ON WAS ALSO CARRYING WEIGHT IN THE SENSE THAT IT HAD NOT PAID ANY RENT TO WARDS ANY LAND, BUT , TOWARDS VC EQUIPMENT AND, THUS THE SAID PAYMENT WAS NOT COVERED UNDER THE TERM RENT AS DEFINED U/S 194 I OF THE ACT. H OWEVER, ON THE OTHER HAND, THE LD. CIT (A) HAD CANDIDLY OPINED THAT THE P AYMENT MADE TOWARDS PAGE 8 OF 17 ITA NO.682/ BANG/2010 8 HIRING OF EQUIPMENT WAS COVERED WITHIN THE DEFINITI ON OF FEES FOR TECHNICAL SERVICES, WITHOUT ATTRIBUTING ANY EVIDENCE FOR SUCH AN OPINION. THE AO HAD ALSO NOT DEALT WITH THIS ISSUE SEPARATELY, BUT, MADE A SWEEPING OBSERVATION THAT - 8.2. ON FURTHER EXAMINATION, IT IS NOTICE THAT TH E ASSESSEE COMPANY HAS NOT DEDUCTED TAX AT SOURCE TOWARDS EXPENSES OF RS.376418- (257870 FOR NKE ELECTRONICS AND COMMUNICATIONS AND RS.11854 8/- FOR LIGHT READING-NRI PAYMENT). 7.1 WE ARE, THEREFORE, OF THE FIR M VIEW THAT THE LD. CIT (A ) WAS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE AO ON THIS ACCOUNT. IT IS ORDERED ACCORDINGLY. PAYMENT TO LIGHT READING FOR SUBSCRIPTION CHARGES OF READING MATERIAL: 7.2 PAYMENTS WERE MADE TOWARDS CHARGES FOR SUBSCRIB ING TO READING MATERIALS. THE SAID SUBSCRIPTION CHARGES I S NOT COVERED EITHER WITHIN THE DEFINITION OF ROYALTY OR FEES FOR TECHNICA L SERVICES BOTH U NDER THE ACT AND UNDER THE TREATY LAWS. 7.3 WE RECALL THE FINDING OF THE HONBLE TR IBUNAL IN THE CASE OF WIPRO LTD. V. ITO REPORTED IN 2005-TIOL-32-ITAT-BAN G WHEREIN THE HONBLE BENCH HAD OBSERVED THUS FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE 5.2. THE EXPERIENCE MENTIONED IN THE DTAA SHOULD BE ONES OWN EXPERIENCE IN THE REALM OF INDUSTRIAL, COMMERCIAL AND SCIENTIFIC, AND NOT COMPILATION OF SOMEBODY ELSES EXPERIENCE. TO ILLUSTRATE, EXPERIEN CES OF PAGE 9 OF 17 ITA NO.682/ BANG/2010 9 EINSTEIN, THOMAS EDISON, ETC., ARE INSTANCES OF EXPERIENCE WITHIN THE DTAA, WHEREAS A BOOK ON SCIENTIFIC EXPERIENCE CANNOT COME WITHIN THE SCOPE OF THE LAW SET OUT IN THE DTAA. IT IS ALSO TO BE SEEN THA T SUCH EXPERIENCE SHOULD GIVE RISE TO SOME KNOWN FORM OF INTELLECTUAL PROPERTY RIGHTS. IN THIS CASE AS RIGH TLY POINTED OUT NO SUCH THING EXISTS. FURTHER, THE DEC ISION OF THE MADHYA PRADESH HIGH COURT IN HEG LTD. CASE (SUPR A - 263 ITR 230) IS APPLICABLE TO THE ISSUE ON HAND AND CONSEQUENTLY WE HOLD THAT RECEIPT OF WEB BASED MATE RIAL OFFERED BY GG, OUTSIDE INDIA IS NOT AMENABLE FOR TAX ATION IN INDIA. IT IS TRITE LAW THAT PROVISIONS OF SEC.1 95 CAN BE INVOKED ONLY IF THE PAYMENT IS OTHERWISE TAXABLE IN I NDIA. THE ONLY PROVISION INVOKED IS SEC.9 (1) (VI) TO BRIN G THE PAYMENT AS CHARGEABLE TO TAX IN INDIA. SINCE WE HO LD THAT THE SAID SECTION IS NOT ATTRACTED, PAYMENT MADE IS NOT SUBJECT TO DEDUCTION OF TAX AT SOURCE U/S 195. ON THIS BASIS, WE FEEL THE LAW IS VERY CLEAR THAT THE PAYMENTS TO GG IS NOT LIABLE FOR TAXATION IN INDIA, CONSEQUENTLY, THE ASSESSEE HAS NO OBLIGATION TO DEDU CT TAX U/S 195 OF THE I.T. ACT. WHEN THE LAW IS CLEAR AND UNAMBIGUOUS ON THE LIABILITY TO TAX, IT IS NOT POSSI BLE TO CONFIRM THE LIABILITY ON EMOTIONAL PLEA OF NATIONAL INTEREST AS HELD BY HONBLE SC IN AZADI BACHAO ANDOLAN CASE (SUPRA 263 ITR 706). 7.4 TO ILLUSTRATE FURTHER, WE EXTRA CT THE RELEVANT PORTION OF THE OBSERVATION OF THE HONBLE BENCH, ON A SIMILAR ISSU E, IN THE CASE OF ITO V. DE BEERS INDIA MINERALS (P) LTD. REPORTED IN 297 IT R 176 AND REPRODUCE THE SAME AS UNDER: 4.10. MR. K. R. SHEKAR HAS ALSO QUOTED AN EXAMPLE DURING THE COURSE OF HIS ARGUMENTS WHICH WE FEEL IS RELEVA NT AND APPLICABLE TO THIS CASE. WHEN A PATIENT VISITS A DOCTOR PAGE 10 OF 17 ITA NO.682 /BANG/2010 10 AND THE DOCTOR ADVISES HIM TO UNDERGO VARIOUS TEST S. THE PATIENT DOES SO. IN THE COURSE OF PERFORMING THE S CAN TESTS, THE SCAN CENTER USED CERTAIN EQUIPMENT. THE SCAN CENTER IS ACTUALLY PROVIDED THE SERVICE. THE PATIEN T IS INTERESTED IN THE END RESULT I.E., REPORT OF THE TE ST AND NOT IN THE TECHNICAL KNOW-HOW THAT IS USED IN THE S CAN REPORT. SUCH TECHNICAL KNOWLEDGE IS NOT PASSED ON TO THE PATIENT. IF THE PATIENT REQUIRES THE SCAN REPORT A GAIN, HE WOULD REQUIRE TO GET THE REPORT DONE ONCE AGAIN AND HE CANNOT DO IT BY HIMSELF. TECHNICAL SKILL, KNOWLEDGE , KNOW- HOW OR EXPERIENCE IS NOT PASSED ON, THOUGH IT IS UT ILIZED IN PREPARING THE REPORT. 7.5 ON A GLIMPSE OF THE IMPUGNED ORDER OF THE LD. CIT (A), WE FIND THAT THE REASONING IN UPHOLDING THE AOS STAND WAS RATHER VERY BRIEF, WITHOUT ELABORATING AS TO WHY THE REQUEST OF THE ASS ESSEE CANNOT BE ACCOMMODATED. FOR RECORD, WE REPRODUCE THE CIT (A) S OBSERVATION (AT THE COST OF REPETITION): 6.2I HAVE PERUSED THE DOCUMENTARY EVIDENCE PRODUCED BY THE APPELLANT DURING THE HEARING AND DUE CONSIDERATION TO THE PROVISIONS OF LAW , I DO NOT A GREE WITH THE ARGUMENTS OF THE AR AND UPHOLD THE ACTION OF THE AO SINCE NO TDS WAS EFFECTED U/S 195(1) ON THE PAYMENT TO A NON-RESIDENT.. 7.6 IN CONFORMITY WITH THE FINDINGS OF TH E HONBLE TRIBUNAL REFERRED SUPRA, WE ARE OF THE FIRM VIEW THAT THE CI T (A) WAS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE AO ON THIS SCORE. WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. PAGE 11 OF 17 ITA NO.682 /BANG/2010 11 II. PROVISION FOR ADVERTISEMENT EXPENSES RS. 1,75,000/- & LEGAL AND PROFESSIONAL FEE OF RS.49086/-: 7.7 THE BRIEF SUBMISSION OF THE ASSESSEE WAS THAT IT HAD CREATED PROVISION FOR ADVERTISEMENT EXPENSES OF RS.1.75 LAK HS AT THE YEAR-END I.E., 31.3.2004 ON WHICH NO TAX DEDUCTED AT SOURCE AND TH AT THE ENTIRE AMOUNT OF PROVISION WAS REVERSED ON APRIL 2004 AND TO EVID ENCE IT, THE ASSESSEE HAD PRODUCED THE COPY OF LEDGER EXTRACT OF THE ADVER TISEMENT ACCOUNT, REVERSING OF THE PROVISION. WITH REGARD TO THE LEG AL AND PROFESSIONAL FEE OF RS.49086/-, THE SUBMISSION OF THE ASSESSEE WAS THAT OUT OF THE TOTAL PROVISION OF RS.3.49 LAKHS, RS.3 LAKHS WAS EXPENDED IN APRIL, 2004 AFTER DEDUCTING TAX AT SOURCE. IT WAS FURTHER SUBMITTED THAT OUT OF BALANCE PROVISION OF RS.49086/-, IT HAD REVERSED RS.24543 I N APRIL, 2004 WHICH WAS EVIDENCED WITH A COPY OF LEDGER EXTRACT. 7.8 WITH DUE CONSIDERATION OF THE AS SESSEES SUBMISSION AND ALSO THE REASONING OF THE LD. CIT (A), WE ARE OF THE CON SIDERED VIEW THAT THE FIRST APPELLATE AUTHORITY WAS JUSTIFIED IN HIS STAND . WE UPHOLD THE ACTION OF THE LD. CIT (A) ON THIS COUNT WITH A RIDER THAT AS AND WHEN TAXES ARE DEDUCTED AND PAID TO THE GOVERNMENT EXCHEQUER ON TH E EXPENSES CLAIMED, THE SAID AMOUNTS COULD BE ALLOWED AS A DEDUCTION. IT IS ORDERED ACCORDINGLY. III. DISALLOWANCE OF SOFTWARE EXPENSES OF RS.20. 33 LAKHS: 7.9 THE CONTENTION OF THE ASSESSEE WAS THAT DURIN G THE PREVIOUS YEAR UNDER CHALLENGE, THE ASSESSEE HAD INCURRED EXPE NSES FOR THE PURPOSE OF SOFTWARE VIZ., PCB DESIGN STUDIO, VERILOG DESKTO P SIMULATOR, DX DESIGNER PAGE 12 OF 17 ITA NO.682 /BANG/2010 12 050, ALLEGRO PCB INTERFACE OF RS.20.33 LAKHS. ACCO RDING TO THE ASSESSEE, THESE WERE USED FOR (I) PCB DESIGN STUDIO FOR REVIEWING THE COMPLETE LAYOUT OF HIGH SPEED BOARD/PRINTED CIRCUIT BOARDS AND ITS MULTIPLE LAYER WHICH WERE THE PRODUCTS MANUFACTURED BY THE ASSESSEE; (II) VERILOG DESKTOP SIMULATOR TO SIMULATE THE VERILOG C ODE WHICH WAS A SOFTWARE LANGUAGE, THAT THE ASSESSEE MANUFACTURES PRODUCTS/BOARDS THAT HAVE PROGRAMMABLE DEVICES LIKE FPGA/CPLD DESIGNED IN VERILOG LANGUAGE . THE SAID SOFTWARE WAS USED TO CHECK THE VERILOG COD E; (III) DX DESIGNER SOFTWARE WAS USED FOR HIGH SPEED BOARD S SCHEMATICS DESIGN/PRINTED CIRCUIT BOARDS SCHEMATIC S DESIGN. THE SOFTWARE HELPS O MAKE THE SCHEMATICS ( THE CONNECTION DIAGRAMS) OF MOTHER-BOARD, BACKPLANE, DAUGHTER-CARDS AND ALL TYPES OF TELECOM BOARDS WHICH THE ASSESSEE DESIGNS. THE SOFTWARE THEN GENERATES NET-LIST WHICH WAS USED TO THE LAYOUT TOOL; & (IV) ALLEGRO PCB INTERFACE WAS USED AS LINK SOFTWARE TO CONNECT OUTPUT OF DX DESIGNER WITH PCB DESIGN STUDI O IT WAS, FURTHER, SUBMITTED THAT O THE AO HAD ERRED IN CAPITALIZING THE SOFTWARE EXPEN SES; THAT THE EXPENDITURE WAS MADE WITH A VIEW TO BRINGI NG INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT, THE SAME CAN BE PROPERLY CLASSIFIED AS CAPI TAL EXPENDITURE. THE TEST TO BE APPLIED WAS, WAS IT AN AID IN MANUFACTURING PROCESS OR A TOOL REQUIRED FOR MANUFA CTURE? O RELIES ON O ROBERT BOSCH ENGINEERING & BUSINESS SOLUTIONS LTD. V. ACIT ITA NO: 980/BANG/2008 O AMWAY INDIA ENTERPRISES V. DCIT 301 ITR 1 (AT); & PAGE 13 OF 17 ITA NO.682 /BANG/2010 13 O WITHOUT PREJUDICE, IF THE SOFTWARE EXPENSES WERE TO BE CONSIDERED AS CAPITAL IN NATURE, THE AO BE DIRECTED TO GRANT DEPRECIATION ON THE AMOUNT TREATED AS CAPITAL EXPENDITURE; 7.10 AFTER DUE CONSIDERATION OF THE ASSESSEES PLE A AND ALSO SCRUTINY OF THE DOCUMENTARY EVIDENCE IN THE SHAPE OF INVOICES FOR PURCHASE OF SOFTWARE, THE CIT(A) HAD OBSERVED THAT THE SAID AMOUNT OF SOFTWARE EXPENSES WAS CAPITALIZED IN THE BOOKS OF T HE ACCOUNTS OF THE ASSESSEE AND, THUS, HE HAD SUSTAINED THE ADDITION O F THE AO. 7.11 WE HAVE DULY CONSIDERED THE CONTEN TIONS OF THE ASSESSEE AND ALSO DILIGENTLY PERUSED THE REASONS SET-OUT BY THE AU THORITIES BELOW IN NEGATING THE ASSESSEES REQUEST. WE HAVE ALSO DULY PERUSED THE CASE LAWS, PRIMARILY, THE FINDING OF THE HONBLE SPECIAL BENC H IN THE CASE OF AMWAY INDIA ENTERPRISES CITED SUPRA WHEREIN THE HONBLE S PECIAL BENCH HAD OBSERVED THUS THE COMPUTER SOFTWARE HAS NOT BEEN DEFINED IN THE ACT. HOWEVER, AS PER NOTE 7 TO APPENDIX 1 TO INCOME-TAX RULES, 1962, THE COMPUTER SOFTWARE INCLUDES A COMPU TER PROGRAMME RECORDED ON ANY DISK, TAPE OR ANY OTHER MED IA OR INFORMATION STORAGE DEVICE. WHETHER, THE EXPENDI TURE ON PURCHASE OF SUCH SOFTWARE WAS REVENUE OR CAPITAL EXPENDITURE CAN BE DECIDED ON FUNCTIONAL TEST AND N OT ON THE BASIS THAT PURCHASER BECAME OWNER. WHERE THE L IFE OF THE ACQUIRED SOFTWARE WAS SHORT, SAY LESS THAN T WO YEARS IT MAY BE REVENUE EXPENDITURE. BUT PERIOD OF L IFE OF THE SOFTWARE MAY ALSO NOT BE DECISIVE. THE FUNCTI ONAL TEST WAS TO BE APPLIED. IF THE ADVANTAGE OBTAINED BY PURCHASE OF SOFTWARE WAS ONLY TO FACILITATE TRADING OPERATIONS OR MANAGEMENT MORE EFFICIENTLY, LEAVING T HE PAGE 14 OF 17 ITA NO.682 /BANG/2010 14 FIXED CAPITAL UNTOUCHED. IT WOULD BE REVENUE EXPENDITURE EVEN IF THE ADVANTAGE MAY ENDURE FOR A L ONG OR INDEFINITE PERIOD. IF IT RESULTS IN MORE RADICA L CHANGES, THE EXPENDITURE MAY BE CAPITAL IN NATURE. THE CHANGES WILL BE RADICAL WHEN MANUAL OPERATIONS ARE COMPUTERIZED. THE CASE REMANDED TO AO TO RE-DECIDE ON THE BASIS OF THE PRINCIPLES STATED. 7.12 THUS, THE ISSUE HAS NOT BEEN DECIDED BY THE HO NBLE BENCH DECISIVELY IN FAVOUR OF THE ASSESSEE. 7.13 AS RIGHTLY HIGHLIGHTED BY THE LD. CIT (A), THE CASE LAWS ON WHICH THE ASSESSEE PLACED RELIANCE CLEARLY DISTINGUI SHABLE AND ALSO THE EXPENSES ON SOFTWARE WERE CAPITALIZED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE, WE ARE OF THE FIRM VIEW THAT THE LD. CIT (A) WAS JUSTIFIED IN UPHOLDING THE STAND OF THE AO ON THIS COUNT. IT IS ORDERED ACCORDINGLY. 7.14 DURING THE COURSE OF THE HEARING, IT WAS PLEADED THAT IF THE SOFTWARE EXPENSES WERE TO BE TREATED TO BE CAPITAL IN NATURE, THE ALTERNATE PLEA OF THE CLAIM OF DEPRECIATION ON THE SAID EXPENSES BE CONSIDERED FAVOURABLY. AS OBSERVED BY THE LD. CIT (A ), THE AO SHALL LOOK INTO IN THIS ASPECT AND ACCEDE TO THE APPELLANTS C LAIM AFTER DUE VERIFICATION AND ALSO IN ACCORDANCE WITH THE PROVIS IONS OF LAW AT THAT RELEVANT PERIOD. IT IS ORDERED ACCORDINGLY. IV. ADDITION OF NOTIONAL INTEREST INCOME OF RS.7,96 ,302/-: 7.15 SEEKING SANCTUARY UNDER THE PROVISIONS OF SECT IONS 101, 102 AND 114 OF THE INDIAN EVIDENCE ACT, 1872, THE AO DI SALLOWED THE ENTIRE SUM OF RS.7.96 LAKHS. ON HIS PART, THE LD. CIT (A) UPHELD THE AOS ACTION PAGE 15 OF 17 ITA NO.682 /BANG/2010 15 WITH A BRIEF NARRATION THAT THERE WAS NO NEXUS BETW EEN THE LOAN ADVANCED TO SISTER CONCERN AND THE BUSINESS PURPOSE OF THE A SSESSEE. 7.16 IT WAS MAINTAINED BEFORE US THAT TEJAS SINGAP ORE WAS PRINCIPALLY ENGAGED IN THE BUSINESS OF DESIGNING, DE VELOPING, SELLING AND SERVING OF NET-WORKING EQUIPMENT AND SOFTWARE, THA T THE SISTER CONCERN WAS DEPENDENT ON ITS HOLDING COMPANY TO PROVIDE FINA NCIAL SUPPORT FOR CARRYING OUT ITS OPERATIONS. DURING THE PERIOD UNDE R DISPUTE, A LOAN OF RS.1.41 CRORE WAS EXTENDED, OUT OF WHICH, RS.56.58 LAKHS WAS REPAID, LEAVING A BALANCE OF RS.85.33 LAKHS AND AFTER DEBIT ING RS.7.64 LAKHS BEING EXCHANGE GAIN, THE BALANCE STOOD AS ON 31.3.2004 AT RS.77.68 LAKHS. AS PER THE REPORT OF THE DIRECTORS AND FINANCIAL STATE MENTS FOR THE YEAR- ENDED 31.3.2004 OF THE ASSESSEE, IT WAS RESOLVED TH AT THE COMPANY IS DEPENDENT ON ITS HOLDING COMPANY TO PROVIDE FINANCIA L SUPPORT AND THE DIRECTORS ARE SATISFIED THAT THE FINANCIAL SUPPORT WILL BE AVAILABLE AS AND WHEN REQUIRED. [SOURCE: P 11 OF PB AR]. 7.17 IT WAS FORCIBLY CONTENDED THAT THE PRINCIPLES LAID D OWN FOR EXTENDING INTEREST FREE LOAN TO ITS SISTER CONCERN WERE FULLY MET AND, THEREFORE, PLEADED THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN TURNING DOWN THE ASSESSEES LEGITIMATE CLAIM. TO ILLUSTRAT E FURTHER, THE PRINCIPLES FOR ACCOMMODATING INTEREST FREE LOAN TO SISTER CONC ERN IS JOTTED DOWN AS UNDER: (I) THE HOLDING COMPANY SHOULD HAVE DEEP INTEREST IN TH E BUSINESS OF THE SUBSIDIARY; (II) THE ASSESSEE SHOULD JUSTIFY/DEMONSTRATE THE DEEP INTEREST; PAGE 16 OF 17 ITA NO.682 /BANG/2010 16 (III) THERE SHOULD BE COMMERCIAL EXPEDIENCY IN EXTENDING THE INTEREST FREE LOAN; (IV) IF THERE WERE BOTH BORROWED FUNDS AND INTERNAL ACCRUALS, IT SHOULD BE ASSUMED THAT THE LOANS WERE EXTENDED OUT OF INTERNAL ACCRUALS; & (V) IF THERE WERE FUNDS AVAILABLE BOTH INTEREST FREE AN D OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 7.18 AT THIS JUNCTURE, WE RECALL THE RU LING OF THE HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT AND ANOTHER REPORTED IN 289 ITR 26 (SC) WHEREIN THE HONBLE COURT HAD OBSERVED THUS WE AGREE WITH THE VIEW TAKEN BY DELHI HIGH COURT IN CIT V. DALMIA CEMENT (BHARAT) LTD. (2002) 254 ITR 377 T HAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS O THE ASSESSEE ITSEL F), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF I N THE ARM-CHAIR OF THE BUSINESS AND OR IN THE POSITION O F THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE.AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT O F VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. 7.19 THE CRUCIAL ASPECT OF AS TO WHETHER THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT O F VIEW OF COMMERCIAL EXPEDIENCY HAS NOT BEEN LOOKED INTO BY THE AUTHORITIES BELOW. PAGE 17 OF 17 ITA NO.682 /BANG/2010 17 7.20 IN CONFORMITY WITH THE RULING OF THE HON BLE APEX COURT REFERRED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE SHOULD BE REMITTED BACK ON THE FILE OF THE AO FOR FRESH CONSI DERATION. ACCORDINGLY, THE MATTER IS REFERRED BACK TO THE AO WITH A SPECIF IC DIRECTION TO LOOK INTO THE ISSUE AFRESH - KEEPING IN VIEW THE OBSERVA TIONS OF THE HONBLE SUPREME COURT CITED SUPRA AND TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AFTER AFFORDING A RE ASONABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 8. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. THE ORDER PRONOUNCED ON FRIDAY, THE 4 TH DAY OF FEBRUARY, 2011 AT BANGALORE. SD/- SD/- (A MOHAN ALANKAMONY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/3/2/ BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.