RICH GRAVISS PRODUCTS P.LTD, MUMBAI V. ADDL CIT 7(2), MUMBAI

ITA 7772/MUM/2011

• Counselvise Citation: 777219914 RSA 2011
• Duration Of Justice: 2 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 15-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 17-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure; Double taxation relief; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND SANJAY GARG, (JM) .. , , ./I.T.A. NO.7772/MUM/2011 ( / ASSESSMENT YEAR : 2007-08) RICH GRAVISS PRODUCTS P LTD., FAIR LINK CENTRE, B WING, 7 TH FLOOR, (701-706), NEW LINK ROAD, BEHIND MONGINIS CAKE FACTORY, OFF LINK ROAD, ANDHERI (W), MUMBAI- 400058 / VS. THE ADDL. COMMISSIONER OF INCOME TAX -7(2), AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020 ( !' / APPELLANT) .. ( #$!' / RESPONDENT) ! ./ % ./PAN/GIR NO. : AABCR3402K !' & / REVENUE BY : MR.VIJAY MEHTA #$!' ' & /ASSESSEE BY : MR.DURGA DUTT ( ) ' *+ / DATE OF HEARING : 15.7.2014 ,- ' *+ /DATE OF PRONOUNCEMENT : 28 .8.2014 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A GAINST THE ORDER OF THE CIT(A)-13, MUMBAI, DATED 06.06.2011 RELEVANT TO ASSESSMENT YEAR 2007-08. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APP EAL: 1. (I) COMMISSIONER OF INCOME TAX (APPEALS)-13, MU MBAI [HEREINAFTER REFERRED TO AS CIT(A)] ERRED IN CONFIRMING DISALLOW ANCE OF PROFESSIONAL FEES OF RS.41,84,737 U/S. 40(A)(I) OF THE I.T.ACT O N THE GROUND THAT TAX HAS NOT BEEN DEDUCTED ON THE SAID PAYMENT MADE TO R PC A NON-RESIDENT YOUR APPELLANT SUBMITS THAT FEES PAID TO RPC ARE NO T CHARGEABLE UNDER THE I.T.ACT AND HENCE PROVISION U/S. 195 IS NOT APPLICA BLE TO THE SAID PAYMENT. I.T.A. NO. 7772/MUM/2011 2 (II)THE CIT(A) ERRED IN NOT ADJUDICATING THE GROUND S IN APPEAL RELATING TO DISALLOWANCE OF LEGAL/PROFESSIONAL FEES OF RS.41,84 ,737/- PAID TO M/S. RICH PRODUCTS CORPORATION (RPC), USA MADE BY AO TREATING THE SAME AS CAPITAL IN NATURE NOT ALLOWABLE U/S 37(I) OF THE I.T ACT. YOUR APPELLANT SUBMITS THAT PROFESSIONAL FEE PAID T O RPC IS FOR THE PURPOSE OF ITS BUSINESS ACTIVITY AND SAME SHALL BE ALLOWED AS DEDUCTIBLE BUSINESS EXPENDITURE. 2. THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF ARCHITECT FEES OF RS.45,000/- ON THE GROUND THAT THE EXPENDITURE INCU RRED IS CAPITAL IN NATURE. YOUR APPELLANT SUBMITS THAT THE ARCHITECT FEE IS IN CURRED IN THE NORMAL COURSE OF CARRYING ON THE BUSINESS ACTIVITY AND SAM E SHALL BE ALLOWED AS BUSINESS EXPENDITURE. 3 (I) THE CIT(A) ERRED IN CONFIRMING THE DISALLOWAN CE OF SOFTWARE EXPENSES OF RS.97,968/- BY HOLDING THAT THE APPELLA NT HAS NOT DEDUCTED TAX U/S. 194J OF THE ACT ON SOFTWARE EXPENSES AND H ENCE COVERED BY SEC 40(A)(IA) OF THE I.T.ACT. YOUR APPELLANT SUBMITS THAT ON THE FACT AND CIRCUMS TANCES OF THE CASE, NO TDS IS DEDUCTIBLE ON THE SOFTWARE EXPENSES AND THE AO OUGHT TO HAVE ALLOWED THE SAME AS DEDUCTIBLE EXPENDITURE. (II) IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO TH E ABOVE, THE CIT(A) ERRED IN NOT ALLOWING DEPRECIATION ON THE COMPUTER SOFTWA RE EXPENSES OF RS.97,968/- AS THE TDS HAS NOT BEEN DEDUCTED ON THE SAME. 4. (I) THE CIT(A) ERRED IN MAKING ADDITION OF RS.2, 29,980/- BEING DIFFERENCE BETWEEN OPENING CENVAT OF RS.80,102/- AN D CLOSING CENVAT OF RS.310,082/- U/S. 145A OF THE I.T ACT. (II) THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.2,36,021/- ON PROTECTIVE BASIS TO THE TOTAL INCOME ON ACCOUNT OF THE ALLEGED ADJUSTMENTS OF EXCISE DUTY AND VAT ON CLOSING STOCK OF RAW MATE RIAL U/S. 145A OF THE I.T.ACT. YOUR APPELLANT SUBMITS THAT ON THE FACTS OF THE CAS E, NO ADJUSTMENTS WAS REQUIRED TO BE MADE U/S. 145A OF THE ACT AND THAT A O SHALL BE DIRECTED TO DELETE THE ADDITION MADE TO TOTAL INCOME. 2. VIDE GROUND NO.1 THE ASSESSEE HAS OBJECTED TO TH E CONFIRMATION OF DISALLOWANCE OF PROFESSIONAL FEES OF RS. 41,84,737/ - U/S. 40(A)(I) OF THE ACT. THE ASSESSEE HAD PAID CONSULTANCY SERVICES FEE OF RS.41 ,84,737/- TO M/S. RICH I.T.A. NO. 7772/MUM/2011 3 PRODUCTS CORPORATION (HEREINAFTER RPC), USA, FOR EXPLORING THE EXPORT MARKET WITHOUT MAKING ANY TDS ON THE PAYMENT. THE AO HELD THAT THE EXPENDITURE WAS FOR EXPLORING NEW MARKET WAS A LEGAL / PROFESSIONAL FEE AND IT WAS A CAPITAL EXPENDITURE, SINCE EXPLORING EXPORT MARKET WOULD GI VE AN ADVANTAGE OF ENDURING BENEFIT. ACCORDINGLY, THE AO HELD THAT THE ABOVE P AYMENT WAS NOT ALLOWABLE U/S 37(1) OF THE ACT. HE FURTHER HELD THAT THE EXPENDI TURE WAS ALSO IN THE NATURE OF FEES FOR TECHNICAL SERVICES ON WHICH THE ASSESSEE WAS REQUIRED TO MAKE TDS. SINCE THE ASSESSEE DID NOT DEDUCT TDS, THE AO HELD THAT THE EXPENDITURE WAS NOT ALLOWABLE U/S. 40(A) (I) ALSO. HOWEVER, IT WA S CONTENDED BY THE ASSESSEE THAT THE TDS WAS NOT DEDUCTIBLE ON THE SAID PAYMENT SINCE THE PAYEE WAS A FOREIGN RESIDENT AND THE SAME WAS NOT TAXABLE IN IN DIA. THE AO DID NOT ACCEPT THE SAID CONTENTION OF THE ASSESSEE BY PLACING REL IANCE UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT (IN TL. TAXATION) V. SAMSUNG ELECTRONICS CO. LTD. [ITA NO.2808 OF 2005] (320 ITR 209). ACCORDINGLY HE DISALLOWED THE SAID EXPENDITURE AND ADDED THE SAME INTO THE INCOME OF THE ASSESSEE. 3. THE LEARNED CIT(A) ALSO HELD THAT THE EXPENDIT URE INCURRED ON EXPLORING NEW MARKET WAS CAPITAL EXPENDITURE. IN THIS REGARD , HE RELIED UPON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF J K CHEMICALS LTD 207 ITR 985 (BOM). HE FURTHER OBSERVED FROM THE AGREEME NT OF THE ASSESSEE ENTERED WITH THE SAID M/S. RICH PRODUCTS CORPORATIO N THAT THE SAID AGREEMENT DID NOT STATE THAT THE SERVICES WOULD NOT BE PROVIDED I N INDIA. HE, THEREFORE, HELD THAT THE INCOME OF M/S. RICH PRODUCTS CORPORATION W AS TAXABLE IN INDIA AS FEES FOR TECHNICAL SERVICES MADE AVAILABLE IN INDIA. REFERRING TO THE EXPLANATION INSERTED BELOW SEC. 9(2) BY FINANCE ACT 2007 WITH R ETROSPECTIVE EFFECT FROM I.T.A. NO. 7772/MUM/2011 4 1.6.1976, THE LD CIT(A) HELD THAT THE FEE FOR TECHN ICAL SERVICES WOULD BE DEEMED TO ACCRUE OR ARISE IN INDIA IN THE HANDS OF NON-RES IDENTS, WHETHER OR NOT THE NON- RESIDENT HAD A RESIDENCE OR PLACE OF BUSINESS OR BU SINESS CONNECTION IN INDIA. THE LD CIT(A) FURTHER HELD THAT SINCE THE TECHNICAL SERVICES WERE UTILISED / MADE AVAILABLE TO THE ASSESSEE IN INDIA, THE INCOME OF M /S. RICH PRODUCTS CORPORATION (M/S RPC) WAS TAXABLE IN INDIA. ACCORDINGLY HE HEL D THAT THE ASSESSEE SHOULD HAVE DEDUCTED TAX AT SOURCE AND SINCE THE ASSESSEE HAD FAILED TO DEDUCT THE TAX AT SOURCE, HE CONFIRMED THE DISALLOWANCE MADE U/S 4 0(A)(I) OF THE ACT. 4. WE HAVE HEARD THE REPRESENTATIVES OF THE PARTIES AND HAVE ALSO GONE THROUGH THE RECORD. BOTH THE TAX AUTHORITIES HAVE T AKEN THE VIEW THAT (A) THE ABOVE SAID EXPENDITURE WAS CAPITAL EXPENDITURE, SIN CE IT WAS HAVING ENDURING BENEFIT AND (B) THE INCOME OF THE RECIPIENT NON-RES IDENT WAS TAXABLE IN INDIA AND HENCE THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOUR CE, APPARENTLY U/S 195 OF THE ACT. WITH REGARD TO THE NATURE OF EXPENDITURE, THE LD A.R HAS SUBMITTED THAT THE ASSESSEE HAD PAID THE CHARGES IN CONNECTION WITH PR OMOTING THE SALE OF ASSESSEES NEW PRODUCT LINE -FROZEN DESSERTS AND VEGGIE MAGIC. HE HAS FURTHER SUBMITTED THAT THE SAID AMOUNT WAS NEITHER PAID IN CONNECTION WITH SETTING UP OF ANY NEW UNIT, NOR IT WAS PAID FOR ACQ UIRING ANY TANGIBLE OR NON- TANGIBLE ASSET. HE HAS ALSO SUBMITTED THAT THE SAI D EXPENDITURE DID NOT BRING ANY NEW ASSET INTO EXISTENCE FOR THE USE OF ASSESSE E. ACCORDINGLY HE HAS CONTENDED THAT THE SAID EXPENDITURE CANNOT BE CATEG ORIZED AS CAPITAL EXPENDITURE ON ANY COUNT. ON THE CONTRARY, THE LD D.R HAS PLACED RELIANCE ON THE ORDER PASSED BY LD CIT(A). I.T.A. NO. 7772/MUM/2011 5 5. WE HAVE ALREADY NOTICED THAT THE PAYMENT WAS MADE TO THE M/S RPC, A USA COMPANY FOR PROVIDING MARKETING AND SALE SUPPOR T TO PROMOTE NEW/PROPOSED PRODUCTS OF THE ASSESSEE VIZ. FROZEN DESSERTS AND VEGGIE MAGIC. AS SUBMITTED BY LD A.R, THE SAID PAYMENT DID NOT BR ING ANY NEW ASSET NOR IT WAS PAID TO SET UP ANY NEW UNIT. THOUGH THE TAX AUTHOR ITIES HAVE HELD THAT THE SAID PAYMENT WOULD BRING ADVANTAGE OF ENDURING BENEFIT, YET THEY HAVE NOT BROUGHT ANY MATERIAL ON RECORD TO SUBSTANTIATE THEIR VIEW. HOWEVER, IT IS IN THE COMMON KNOWLEDGE OF EVERYBODY THAT THE EFFECT OF SALE PROM OTION OF ACTIVITIES IS UNPREDICTABLE AND SOMETIMES, IT MAY HAVE SHORT LIFE ALSO. SO FAR AS THE DECISION OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE O F M/S J.K.CHEMICALS LTD (SUPRA) IS CONCERNED, WE NOTICE THAT THE DECISION W AS RENDERED IN RESPECT OF THE EXPENDITURE INCURRED FOR SETTING UP OF NEW UNIT, WH ICH IS NOT THE CASE HERE. HENCE, IN OUR VIEW, THE SAID DECISION IS NOT APPLIC ABLE TO THE FACTS OF THE INSTANT CASE. UNDER THESE SET OF FACTS, WE ARE UNABLE TO AG REE WITH THE VIEW TAKEN BY THE TAX AUTHORITIES. ACCORDINGLY WE HOLD THAT THE SAID PAYMENT IS A REVENUE EXPENDITURE IN THE HANDS OF THE ASSESSEE. 6. THE AO HELD THAT THE PAYMENT MADE TO M/S RPC WAS IN THE NATURE OF FEE FOR TECHNICAL SERVICES. HE FURTHER HELD THAT THE ASSES SEE WAS LIABLE TO DEDUCT TAX AT SOURCE FROM THE SAID PAYMENT AND IN THIS REGARD, HE PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT I N THE CASE OF SAMSUNG ELECTRONICS LTD (SUPRA). THE LD CIT(A) HAS ALSO HE LD THAT THE SAID PAYMENT IS IN THE NATURE OF FEE FOR TECHNICAL SERVICES AND THE SA ME IS TAXABLE IN THE HANDS OF M/S RPC, EVEN IF IT DOES NOT HAVE PERMANENT ESTABLI SHMENT IN INDIA. I.T.A. NO. 7772/MUM/2011 6 7. BEFORE US, THE LD A.R HAS SUBMITTED THAT THE SAID DECISION IN THE CASE OF SAMSUNG ELECTRONICS LTD (SUPRA), HAS SINCE BEEN REVERSED BY HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P L TD VS. CIT (327 ITR 456)(SC). HE HAS FURTHER CONTENDED THAT THE SAID PA YMENT HAD BEEN MADE FOR MARKETING AND SALES SUPPORT AND HENCE IT WILL NOT F ALL IN THE CATEGORY OF FEE FOR TECHNICAL SERVICES. HE HAS SUBMITTED THAT THE CON SIDERATION PAID FOR RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICE S ONLY FALL IN THE CATEGORY OF FEE FOR TECHNICAL SERVICES AS DEFINED U/S 9(1)(V II) OF THE ACT. IN THIS REGARD, HE HAS PLACED RELIANCE ON THE DECISION RENDERED BY DELHI BENCH OF TRIBUNAL IN THE CASE OF ADIDAS SOURCING LTD. VS. ASST. DIT (2013)(5 5 SOT 245). HE HAS INVITED OUR ATTENTION TO PARAGRAPH 3.7 AND 3.8 OF THE SAID DECISION AND SUBMITTED THAT THE TRIBUNAL HAS CONSIDERED THE EXPRESSIONS MANAGE RIAL, TECHNICAL AND CONSULTANCY SERVICES USED IN SEC. 9(1)(VII) OF TH E ACT AND HAS FINALLY HELD THAT THE PROCUREMENT SERVICES WILL NOT FALL IN ANY OF TH E ABOVE SAID THREE CATEGORIES. WE HAVE GONE THROUGH THE ABOVE SAID DECISION. IN T HE ABOVE SAID CASE, THE ASSESSEE THEREIN, PERFORMED SERVICES TO SOURCE OR P ROCURE GOODS ON BEHALF OF ANOTHER COMPANY. THE QUESTION THAT WAS CONSIDERED BY THE TRIBUNAL WAS WHETHER THE PROCUREMENT SERVICE WOULD FALL IN THE C ATEGORY OF MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES IN TERMS OF FEE FOR TECHNICAL SERVICES U/S 9(1)(VII) OF THE ACT. THE TRIBUNAL HELD THAT THE PROCUREMENT SERVICES WOULD NOT FALL IN ANY OF THE ABOVE SAID THREE CATEGORIES. IN THE INSTANT CASE ALSO, THE NON- RESIDENT COMPANY HAS PROVIDED SUPPORT FOR MARKETING AND SALES PROMOTION ACTIVITIES. HENCE, BY FOLLOWING THE DECISION RENDE RED BY THE DELHI BENCH OF TRIBUNAL IN THE ABOVE CITED CASE, WE HOLD THAT THE PAYMENT MADE FOR SALES I.T.A. NO. 7772/MUM/2011 7 PROMOTION ACTIVITIES, IN OUR VIEW, WILL NOT FALL IN THE CATEGORY OF FEE FOR TECHNICAL SERVICES AS DEFINED U/S 9(1)(VII) OF THE ACT. 8. FROM THE FOREGOING DISCUSSIONS, IT IS SEEN THAT THE GROUNDS TAKEN BY THE TAX AUTHORITIES FOR DISALLOWING THE AMOUNT ARE NOT FOUND TO BE CORRECT. THE LD CIT(A) HAS TAKEN A VIEW THAT THE AGREEMENT WITH M/S RPC DOES NOT PROVIDE THAT THEIR SERVICES SHALL BE RESTRICTED TO FOREIGN COUNT RIES ALONE AND THEY MAY BE RENDERING SERVICES IN INDIA ALSO. ACCORDINGLY, THE LD CIT(A) HAS HELD THAT M/S RPC HAS MADE AVAILABLE ITS SERVICES IN INDIA. BY MAKING THESE KIND OF OBSERVATIONS, IT APPEARS THAT THE LD CIT(A) IS MAKI NG REFERENCE TO INDO-US DTAA. THERE SHOULD NOT BE ANY DISPUTE THAT UNDER I NDO-US DTAA, THE GEOGRAPHICAL AREAS FOR PROVIDING SERVICES ARE NOT R ELEVANT. WHAT IS REQUIRED TO BE SEEN IS THAT WHETHER M/S RPC, A USA BASED COMPAN Y, COULD BE SUBJECTED TO TAX IN TERMS OF INDO-US TREATY OR UNDER INDIAN INCO ME TAX ACT. LD. CIT(A) HAS HELD THAT M/S RPC HAS MADE AVAILABLE ITS CONSULTA NCY SERVICES TO THE ASSESSEE HEREIN. WE HAVE ALREADY HELD THAT THE SALES PROMOT ION OR MARKETING SERVICES WILL NOT FALL IN THE CATEGORY OF FEE FOR TECHNICAL SERV ICES AND HENCE THE QUESTION OF EXAMINING WHETHER THE SERVICES WERE MADE AVAILABLE OR NOT DOES NOT ARISE. WE NOTICE THAT THE AGREEMENT ENTERED BETWEEN THE ASSES SEE AND M/S RPC SPECIFICALLY PROVIDE THAT THE SERVICES SHALL BE PRO VIDED FROM OUTSIDE INDIA AND IT WILL NOT HAVE PERMANENT ESTABLISHMENT IN INDIA. F URTHER WE NOTICE THAT THE PAYMENT WAS MADE IN FOREIGN CURRENCY TO M/S RPC. SINCE THE TAX AUTHORITIES HAVE FAILED TO SHOW THAT THE PAYMENT RECEIVED BY M/ S RPC WAS LIABLE TO TAX IN INDIA EITHER IN TERMS OF INDIAN INCOME TAX ACT OR I N TERMS OF INDO-US DTAA, IN OUR VIEW, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TDS ON SUCH PAYMENTS MADE TO I.T.A. NO. 7772/MUM/2011 8 A FOREIGN RESIDENT, AS PER THE RATIO OF THE DECISIO N RENDERED BY HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P L TD (SUPRA), WHEREIN THE HONBLE APEX COURT HAS HELD THAT THE SUM CHARGEABL E TO TAX IN INDIA WOULD BE HIT BY THE PROVISIONS OF SEC. 195 OF THE ACT. 9. THE LD A.R HAS ALSO TAKEN AN ALTERNATIVE CONT ENTION IN RESPECT OF THIS ISSUE. HE HAS SUBMITTED THAT THE EXPLANATION BELOW SEC. 9(2) OF THE ACT, PROVIDING THAT THERE IS NO REQUIREMENT OF HAVING PE RMANENT ESTABLISHMENT, WHICH WAS REFERRED BY LD CIT(A), WAS FIRST INSERTED BY F INANCE ACT, 2007 W.R.E. FROM 1.6.1976 AND LATER AMENDED BY FINANCE ACT, 2010. H E HAS SUBMITTED THAT, BY THE TIME THE AMENDMENT WAS BROUGHT INTO THE ACT, TH E ASESSEE HAD ALREADY PAID THE AMOUNT TO M/S RPC. ACCORDINGLY HE HAS SUBMITTE D THAT THE DISALLOWANCE CANNOT BE MADE U/S 40(A)(IA) OF THE ACT ON THE BASI S OF SUBSEQUENT AMENDMENT BROUGHT INTO THE ACT WITH RETROSPECTIVE EFFECT. FO R THIS PROPOSITION, HE HAS PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (A) M/S KERALA VISION LTD VS. ACIT (ITA NO.794/COC H/2013 DT. 06.06.2014) (B) INFOTECH ENTERPRISES LTD VS. ACIT (ITA NO.115 & 2184/HYD/2011) (C) CHANNEL GUIDE INDIA LTD VS. ACIT (139 ITD 49)( MUM) WE NOTICE, FROM THE ABOVE SAID DECISIONS CITED ABOV E, THE CO-ORDINATE BENCHES OF TRIBUNAL HAVE TAKEN THE VIEW AS CANVASSED BY LD A.R . IN THE INSTANT CASE, THE ASSESSEE HAD PAID THE AMOUNT TO M/S RPC BEFORE THE EXPLANATION WAS INSERTED U/S 9(2) OF THE ACT WITH RETROSPECTIVE EFFECT. ACC ORDINGLY, WE ARE INCLINED TO FOLLOW THE RATIO OF THE ABOVE SAID DECISIONS IN THE INSTANT CASE ALSO. 10. IN VIEW OF FOREGOING OBSERVATIONS, IN OUR VIEW, THE FINDINGS OF THE LOWER AUTHORITIES ON THIS ISSUE ARE NOT SUSTAINABLE IN TH E EYES OF LAW. HENCE, WE SET I.T.A. NO. 7772/MUM/2011 9 ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND DIRE CT THAT THE DISALLOWANCE MADE BY THE AO TO BE DELETED. GROUND NO. 1 IS ALLOWED. 11. GROUND NO. 2 RELATES TO THE DISALLOWANCE OF ARC HITECT FEES OF RS.45,000/-. THE ASSESSEE HAD AVAILED THE SERVICES OF AN ARCHITE CT IN CONNECTION WITH VASTU WORK AND SITE VISITS. THERE IS NO DISPUTE BETWEEN THE PARTIES THAT THE SAID SERVICES HAVE BEEN RENDERED IN RESPECT OF AN EXISTI NG FACTORY BUILDING. THE AO HELD THAT THE ABOVE SAID PAYMENT WAS CAPITAL IN NAT URE, SINCE THE BENEFIT WOULD ACCRUE FOR MORE THAN ONE YEAR. ACCORDINGLY HE DISA LLOWED THE SAID CLAIM. THE LD CIT(A) ALSO CONFIRMED THE SAME. 12. WE HAVE HEARD THE PARTIES ON THIS ISSUE. T HE UNDISPUTED FACT REMAINS THAT THE SAID PAYMENT WAS MADE TO THE ARCHITECT IN CONNECTION WITH AN EXISTING FACTORY BUILDING. IT APPEARS THAT THE ARCHITECT HAS CARRIED OUT SOME WORK TO SUIT THE VAASTU. THUS, IT IS SEEN THAT THE EXPENDITURE HAS BEEN INCURRED IN CONNECTION WITH AN EXISTING FACTORY BUILDING AND IT IS NOT THE CASE OF THE REVENUE THAT A NEW ASSET HAS COME INTO EXISTENCE DUE TO SPE NDING OF THE ABOVE SAID AMOUNT. THERE IS NO MATERIAL ON RECORD TO SUBSTANT IATE THE VIEW OF THE TAX AUTHORITIES THAT THE CONSULTATION PROVIDED BY THE A RCHITECT WOULD HAVE ENDURING BENEFIT. HENCE, IN OUR VIEW, THE ABOVE SAID PAYMEN T CANNOT BE CONSIDERED AS CAPITAL IN NATURE. ACCORDINGLY, WE SET ASIDE THE O RDER OF LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THE ABOVE SAID ADDITION . 13. GROUND NO.3 RELATES TO THE DISALLOWANCE OF SOFT WARE EXPENSES OF RS.97,968/-. THE AO NOTICED THAT THE ASSESSEE HAS CLAIMED A SUM OF RS.2,24,202/- AS SOFTWARE CHARGES. THE AO HELD THA T THE PURCHASE OF SOFTWARE WOULD FALL IN THE CATEGORY OF ROYALTY. SINCE THE ASSESSEE DID NOT DEDUCT TAX AT I.T.A. NO. 7772/MUM/2011 10 SOURCE, HE DISALLOWED THE ABOVE SAID CLAIM BY INVOK ING THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT. 14. THE LD CIT(A) NOTICED THAT THE ABOVE SAID C LAIM INCLUDED A SUM OF RS.1,26,234/- PERTAINING TO NET WORKING CHARGES, IN TERNET CHARGES, REPAIRS ETC. ACCORDINGLY, THE LD CIT(A) DELETED THE ABOVE SAID S UM OF RS.1,26,234/-. WITH REGARD TO THE BALANCE AMOUNT OF RS.97,968/-, THE LD CIT(A) HELD THAT THE SOFTWARE WAS AN INTANGIBLE ASSET FALLING IN THE CAT EGORY OF KNOW HOW, PATENTS, COPYRIGHTS, LICENCES, FRANCHISES ETC. ACCORDINGLY HE HELD THAT THE SOFTWARE WAS ONLY A LICENSE/RIGHT GIVEN TO THE ASSESSEE TO USE T HE SAID SOFTWARE TO THE EXCLUSION OF OTHERS AND IT AMOUNTED TO ACQUISITION OF INTANGIBLE ASSETS. HAVING HELD SO, THE LD CIT(A) HOWEVER HAS CONCURRED WITH T HE VIEW OF THE AO THAT THE SAID PAYMENT MADE FOR USE OF A LICENSE WAS ROYALTY AND NOT PURCHASE AND SALE OF GOODS. SINCE THE ASSESSEE DID NOT DEDUCT TAX A T SOURCE FROM THE SOFTWARE PURCHASES, THE LD CIT(A) CONFIRMED THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT BY FOLLOWING THE DECISION RENDERED BY HONBLE K ARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS LTD (320 ITR 209). 15. HENCE, THE QUESTION THAT ARISES BEFORE US I S WHETHER THE SOFTWARE PURCHASES WOULD FALL IN THE CATEGORY OF ROYALTY A ND HENCE THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT IS JUSTIFIABLE. THE L D A.R HAS INVITED OUR ATTENTION TO PAGE 17 OF THE PAPER BOOK, WHEREIN THE DETAILS O F PURCHASE OF SOFTWARE IS GIVEN AS UNDER:- 16-05-2006 1,716 18-05-2006 31,980 02-06-2006 31,980 26-08-2006 12,792 18.12.2006 13,000 27.12.2006 6,500 I.T.A. NO. 7772/MUM/2011 11 THE LD A.R HAS SUBMITTED THAT THE PAYMENT OF ROYA LTY WAS INCLUDED WITHIN THE PURVIEW OF THE PROVISIONS OF SEC. 194J OF THE ACT B Y THE TAXATION LAWS (AMENDMENT) ACT, 2006 W.E.F. 13.07.2006 BY INSERTIN G CLAUSE (BA) IN SEC. 194J(1). ACCORDINGLY HE HAS SUBMITTED THAT THE PUR CHASE OF SOFTWARE EFFECTED PRIOR TO THE DATE OF 13.07.2006 WOULD NOT BE HIT BY THE PROVISIONS OF SEC. 194J OF THE ACT AND HENCE THE QUESTION OF DISALLOWANCE OF P URCHASES MADE PRIOR TO THAT DATE WOULD NOT ARISE, VIZ., IN RESPECT OF THE FIRST THREE PURCHASES LISTED ABOVE. HE HAS FURTHER SUBMITTED THAT THE QUESTION WHETHER THE LICENSING OF SOFTWARE WILL FALL IN THE CATEGORY OF ROYALTY OR NOT WAS ALWAYS A MATTER OF DISPUTE. THE SAID DISPUTE WAS SETTLED AT REST BY THE FINANCE ACT, 201 2 BY INSERTING EXPLANATION 4 TO SEC. 9(1)(VI) WITH RETROSPECTIVE EFFECT FROM 1.6.19 76. THE LD A.R HAS SUBMITTED THAT THE ASSESSEE HAD PURCHASED THE SOFTWARE MUCH P RIOR TO THE INSERTION OF EXPLANATION 4 AND ACCORDINGLY CONTENDED THAT THE DI SALLOWANCE CANNOT BE MADE U/S 40(A)(IA) OF THE ACT ON THE BASIS OF SUBSEQUENT AMENDMENT BROUGHT INTO THE ACT WITH RETROSPECTIVE EFFECT. IN THIS REGARD, HE HAS PLACED RELIANCE ON THE CASE LAWS SUBMITTED BY HIM EARLIER. ON THE CONTRARY, TH E LD D.R HAS PLACED RELIANCE ON THE PROVISIONS OF SEC. 9(1)(VI) AND SEC. 194J OF THE ACT TO SUBMIT THAT THE PAYMENT MADE FOR PURCHASE OF SOFTWARE WOULD BE HIT BY THE PROVISIONS OF SEC. 194J AND HENCE THE ASSESSEE IS LIABLE TO DEDUCT TAX AT SOURCE U/S 194J OF THE ACT FROM THE SAID PAYMENT, FAILING WHICH THE SAME IS LI ABLE TO BE DISALLOWED U/S 40(A)(IA) OF THE ACT. 16. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES. AS SUBMITTED BY LD D.R, THE TRANSFER OF ALL OR ANY RIGHT FOR USE OR RIGHT TO USE A COMPUTER SOFTWARE (INCLUDING GRANTING OF LICENSE) IS INCLUDE D IN THE DEFINITION OF ROYALTY UNDER EXPLANATION 4 TO SEC. 9(1)(VI) OF THE ACT. F URTHER THE PROVISIONS OF SEC. I.T.A. NO. 7772/MUM/2011 12 194J ALSO BRINGS ROYALTY UNDER ITS PURVIEW. HOWE VER, DURING THE COURSE OF HEARING, THE DR WAS FAIR ENOUGH TO AGREE WITH THE C ONTENTION OF THE LEARNED AR THAT THE TRANSACTIONS/PAYMENTS MADE BY THE ASSESSEE BEFORE THE INSERTION OF CLAUSE (BA) IN SEC. 194J, WHICH HAS BEEN INSERTED W ITH EFFECT FROM 13.7.2006, WILL NOT BE HIT BY THE PROVISIONS OF SEC. 194J OF THE AC T. ACCORDINGLY, IT IS HELD THAT SECTION 194J WILL NOT BE ATTRACTED TO THE PAYMENTS MADE BY THE ASSESSEE FOR PURCHASE OF SOFTWARE BEFORE 13.07.2006. 17. THE LD A.R HAS ALSO POINTED OUT THAT THE DIS PUTE WITH REGARD TO THE NATURE OF PAYMENT MADE FOR PURCHASE OF SOFTWARE WAS SETTLE D AT REST ONLY BY FINANCE ACT, 2012 THROUGH WHICH THE EXPLANATION 4 TO SEC. 9 (1)(VI) WAS INCLUDED AND THE SAID EXPLANATION NOW CLARIFIES THAT THE PAYMENTS MA DE FOR GETTING RIGHT TO USE SOFTWARE SHALL FALL IN THE CATEGORY OF ROYALTY. THE SAID AMENDMENT WAS GIVEN RETROSPECTIVE EFFECT FROM 1.6.1976, ACCORDINGLY HE SUBMITTED THAT THE DISALLOWANCE CANNOT BE MADE U/S 40(A)(IA) OF THE AC T ON THE BASIS OF SUBSEQUENT AMENDMENT BROUGHT INTO THE ACT WITH RETROSPECTIVE E FFECT. FOR THIS PROPOSITION, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (A) M/S KERALA VISION LTD VS. ACIT (ITA NO.794/COC H/2013 DT. 06.06.2014) (B) INFOTECH ENTERPRISES LTD VS. ACIT (ITA NO.115 & 2184/HYD/2011) (C) CHANNEL GUIDE INDIA LTD VS. ACIT (139 ITD 49)( MUM) WE NOTICE FROM THE ABOVE SAID DECISIONS CITED ABOVE THAT THE CO-ORDINATE BENCHES OF TRIBUNAL HAVE TAKEN THE VIEW AS CANVASSE D BY LD A.R. IN THE INSTANT CASE, THE PAYMENTS FOR PURCHASE OF SOFTWARE HAVE BE EN MADE DURING THE PERIOD FROM 1.4.2006 TO 31.3.2007. THE AMENDMENT TO SEC. 9(1)(VI) HAS BEEN BROUGHT BY FINANCE ACT, 2012 W.R.E. FROM 1.6.1976. HENCE, THERE IS MERIT IN THE CONTENTION OF THE ASSESSEE THAT A LIABILITY CANNOT BE IMPOSED ON THE ASSESSEE IN I.T.A. NO. 7772/MUM/2011 13 RESPECT OF A PAST TRANSACTION ON THE STRENGTH OF TH E AMENDMENT BROUGHT INTO THE ACT SUBSEQUENTLY WITH RETOSPECTIVE EFFECT. THIS CO NTENTION OF THE ASSESSEE SHALL APPLY TO THE ENTIRE AMOUNT OF RS.97,968/-, WHICH WA S DISALLOWED U/S 40(A)(IA) OF THE ACT FOR NON-COMPLIANCE WITH THE PROVISIONS OF S EC. 194J OF THE ACT. ACCORDINGLY, WE ARE OF THE VIEW THAT THE TAX AUTHOR ITIES ARE NOT JUSTIFIED IN DISALLOWING THE SAME U/S 40(A)(IA) OF THE ACT ON TH E BASIS OF AN AMENDMENT BROUGHT INTO THE ACT SUBSEQUENT TO 31.3.2007 WITH R ETROSPECTIVE EFFECT. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 18. THE NEXT ISSUE RELATES TO THE ADDITION OF RS.2 ,36,021/- MADE U/S 145A OF THE ACT IN RESPECT OF EXCISE DUTY AND VAT COMPONENT INCLUDED IN RAW MATERIALS AND WORK IN PROGRESS. THE AO ORIGINALLY MADE ADDIT ION OF RS.2,84,973/- RELATING TO FINISHED GOODS ALSO. HOWEVER, THE LD CIT(A) DEL ETED THE ADDITION RELATING TO THE FINISHED GOODS, BUT SUSTAINED THE ADDITION RELA TING TO RAW MATERIALS AND WORK IN PROGRESS. REFERRING TO THE PARAGRAPH 21 AN D 22 OF THE ASSESSMENT ORDER, THE LD A.R HAS SUBMITTED THAT THE ADDITION O F RS.2,36,021/- CONFIRMED BY LD CIT(A) ALSO INCLUDES A SUM OF RS.23,905/- AND RS .22,647/- PERTAINING TO THE EXCISE DUTY AND VAT COMPONENT RELATING TO FINISHED GOODS. ACCORDINGLY HE HAS SUBMITTED THAT BOTH THE ABOVE SAID AMOUNTS SHOULD B E DELETED, SINCE THEY RELATE TO THE FINISHED GOODS. WE FIND MERIT IN THIS SUBMI SSION AND ACCORDINGLY DIRECT THE AO TO DELETE THE ADDITION OF RS.23,905/- AND RS .22,647/- OUT OF THE ADDITION OF RS.2,36,021/- SUSTAINED BY LD CIT(A). 19. WE NOTICE THAT THE ASSESSEE HAS SUBMITTED A L ETTER DATED 27.11.2009 BEFORE THE AO AND THE SAME IS AVAILABLE IN PAGE 23 OF THE PAPER BOOK. AS PER I.T.A. NO. 7772/MUM/2011 14 THIS LETTER, THE ASSESSEE IS FOLLOWING INCLUSIVE ME THOD OF VALUATION FOR FINISHED GOODS. ACCORDINGLY, WE NOTICE THAT THE LD CIT(A) H AS DELETED THE ADDITION PERTAINING TO THE FINISHED GOODS. HOWEVER, IN RESP ECT OF RAW MATERIAL AND PACKING MATERIAL, THE ASSESSEE IS FOLLOWING EXCLUS IVE METHOD OF VALUATION, I.E., THE ASSESSEE IS ACCOUNTING THE TAXES PAID ON RAW MA TERIALS & PACKING MATERIALS UNDER SEPARATE HEAD. IN THE ASSESSMENT ORDER, THE AO IS MAKING REFERENCE TO WORK IN PROGRESS ALSO AND THERE SHOULD NOT BE ANY DISPUTE THAT THE WORK IN PROGRESS IS AN INTERMEDIARY PRODUCT DURING THE MANU FACTURE OF FINISHED GOODS AND THE WIP WOULD INCLUDE MAINLY THE COST OF RAW MA TERIAL CONSUMED THEREIN. HENCE, THE ADJUSTMENT MADE TO THE PURCHASE VALUE OF RAW MATERIALS SHOULD AUTOMATICALLY TAKE CARE OF WORK IN PROGRESS ALSO. T HE CONTENTION OF THE ASSESSEE BEFORE AO WAS THAT THE VALUATION OF RAW MATERIALS, PACKING MATERIALS AND CLOSING STOCK, EVEN IF IT IS ADJUSTED IN TERMS OF SEC. 145A , WOULD HAVE NIL IMPACT ON THE PROFIT OF THE ASSESSEE. IN THE ALTERNATIVE, THE AS SESSEE HAS SUBMITTED THAT THE ADJUSTMENT HAS BEEN MADE IN THE IMMEDIATELY PRECEDI NG YEAR UNDER SOME OTHER METHOD AND IF THE SAME METHOD IS FOLLOWED, THEN THE ADDITION WOULD WORK OUT TO RS.38,234/- ONLY. WE NOTICE THAT THE ASSESSING OFF ICER AS WELL AS LD CIT(A) DID NOT ADDRESS THE ABOVE SAID SUBMISSIONS MADE BY THE ASSESSEE. 20. THE INCLUSIVE METHOD AND EXCLUSIVE METHOD A RE TWO DIFFERENT METHODS OF ACCOUNTING THE TRANSACTIONS. PROFITABILITY WOULD NO T BE AFFECTED UNDER EITHER OF METHODS. THE ASSESSEE HAS ADMITTED THAT IT IS FOLL OWING EXCLUSIVE METHOD FOR ACCOUNTING TAXES RELATING TO RAW MATERIALS / PACKIN G MATERIALS. HOWEVER, UNDER SEC. 145A OF THE ACT, THE INCLUSIVE METHOD HAS TO B E FOLLOWED. IN THAT CASE, IN OUR VIEW, IT IS THE DUTY OF THE ASSESSEE TO PREPARE FINANCIAL STATEMENTS UNDER I.T.A. NO. 7772/MUM/2011 15 INCLUSIVE METHOD IN ORDER TO SATISFY THE AO THAT TH ERE WAS NIL EFFECT ON THE PROFITABILITY. FROM THE LETTER DATED 27.11.2009 RE FERRED SUPRA, WE NOTICE THAT THE AO HAS FOLLOWED SOME METHODOLOGY TO WORK OUT THE AD DITION IN THE IMMEDIATELY PRECEDING YEAR, MEANING THEREBY, THE ASSESSEE DID N OT APPEAR TO HAVE FURNISHED REVISED FINANCIAL STATEMENT PREPARED UNDER INCLUSIV E METHOD. HENCE, THE AO HAD TO RESORT TO ADOPT SOME METHODOLOGY TO MAKE THE ADD ITION. IF THE ASSESSEE FAILS TO FURNISH THE REVISED FINANCIAL STATEMENT IN THIS YEAR ALSO, THE AO HAS GOT NO OTHER OPTION, BUT TO ADOPT SOME METHOD TO WORK OUT THE ADDITION TO BE MADE. HENCE, THE ASSESSEE HAS MADE AN ALTERNATIVE SUBMISS ION THAT THE SAME METHODOLOGY AS ADOPTED BY THE AO IN THE IMMEDIATELY PRECEDING YEAR SHOULD BE FOLLOWED IN THIS YEAR ALSO. WE FIND MERIT IN THE A LTERNATIVE CONTENTION. FROM THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THIS ISSUE NEEDS TO BE EXAMINED AFRESH AT THE END OF THE AO IN THE LIGHT OF SUBMISS IONS MADE SUPRA. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE A ND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA. 21. IN THE RESULT, THE APPEAL FILED BY THE ASSE SSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 28TH AUG , 2014. ,- ( ./ 0 1 28TH AUG, 2014 - ' ) 2 SD SD ( /SANJAY GARG) ( .. / B.R. BASKARAN ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER . ( ) MUMBAI: 28TH AUG,2014. I.T.A. NO. 7772/MUM/2011 16 . . ./ SRL , SR. PS ! '#$%& '&($ / COPY OF THE ORDER FORWARDED TO : 1. !' / THE APPELLANT 2. #$!' / THE RESPONDENT. 3. ( 4* ( ) / THE CIT(A)- CONCERNED 4. ( 4* / CIT CONCERNED 5. 56 #* 7 , + 7 , . ( ) / DR, ITAT, MUMBAI CONCERNED 6. 8) / GUARD FILE. 9 ( / BY ORDER, TRUE COPY : (ASSTT. REGISTRAR) + 7 , . ( ) /ITAT, MUMBAI