ACIT CIRCLE 25-(1), DELHI vs. VALUE FIRST DIGITAL MEDIA PVT. LTD. , GURGAON HARYANA

The Revenue Department has preferred the instant appeals against the orders dated 30.01.2019 for A.Y. 2012-13; 30.01.2020 for A.Y. 2014-15 and 30.03.2019 for A.Y. 2016-17 impugned herein passed by the Ld. Commissioner of Income tax (Appeals)-42, New Delhi, (in short “Ld. Commissioner”) u/s 250 of the Income Tax Act, 1961 (in short “the Act”). In all these appeals the facts and issues involved are almost similar. Therefore, for the sake of brevity, we are disposing of these appeals, by this consolidated order.

ITA no. 3143/Del/2019 (A.Y. 2012-13):

“1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in allowing set-off of brought forward business losses and unabsorbed depreciation pertaining to the demerged undertaking (M/s Gingersoft Media pvt. Ltd.) for the period 01.04.2011 to 29.02.2012 amounting to Rs. 4,76,08,087/-, in allowing claim of set-off of Rs. 18,50,582/- pertaining to the brought forward unabsorbed depreciation of the demerged undertaking M/s Gingersoft Media Pvt. Ltd. for the period prior to 01.04.2011 and in allowing claim of carry forward of business losses of Rs. 8,32,95,763/- pertaining to brought forward business losses of the demerged undertaking M/s Gingersoft Media Pvt. Ltd. for the period prior to 01.04.2011.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the above without appreciating that the above brought forward losses and unabsorbed deprecition pertaining to the E-commerce division of M/s Gingersoft Media Pvt. Ltd. which demerged into an independent company and not to the A&S division which was demerged to the assessee company.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the above without appreciating that in the Audit Report itself the Auditor had observed that the losses have been retained by M/s Gingersoft Media Pvt. Ltd. by perversely holding that the above observation of the Auditor is not relevant and the assessee is entitled for the benefit of brought forward business losses and unabsorbed depreciation on the same ratio on which the assessee have been transferred as per Section 72A and thus effectively allowing benefit of brought forward losses and unabsorbed depreciation to the assessee company as well as to M/s Gingersoft Media Pvt. Ltd. (transferor company) as it retained brought forward losses and unabsorbed depreciation.

4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 8,31,45,470/- made by the AO u/s 40(a)(i) of the Income tax Act, 1961 on the non- deduction of TDS on server hosting and sms charges by holding them as Royalty payments without appreciating the retrospective amendment made in Section 9(1)(vi) vide Finance Act, 2012 which clarified the Royalty. 3. On the facts and in the circumstances of the case, the order of Ld. CIT(A) is perverse.

4. The appellant craves, leave or reserving right to amend modify, alter, add of forego any ground(s) of appeal at any time before or during the hearing of this appeal.

4.1 The Gingersoft Media Pvt. Ltd. (Gingersoft), a wholly owned subsidiary (WOS) of the Assessee had two operative divisions i.e. Advertisement & Sampling ('A & S division') and E-Commerce division, which was involved in a similar business. The A & S division was transferred along with all assets and liabilities with all rights, obligations, licenses, registrations etc. to the Assessee, in pursuance to a scheme of demerger under Sections 391 to 394 of the Companies Act, 1956 with effect from February 29, 2012.

4.2 After giving effect to the merger of the A & S division of Gingersoft, the Assessee filed its revised return under section 139(5) of the Act for the assessment year under consideration on 08th November 2013 whereby declared an income of Rs. 4,43,79,200/- and also claimed a set-off of Rs. 4,76,08,087/- representing the loss of the A & S Division of Gingersoft for the year under consideration upto 29 February 2012 and further a set-off of Rs. 18,50,582/- representing brought forward of unabsorbed depreciation of A & S Division with its Income from Other Sources. The Assessee further sought to carry forward business losses amounting to Rs. 8,32,95,763/-, of the A&S Division of the said demerged company.

4.3 The revised return of the Assessee came into scrutiny assessment and resulted into passing of the assessment order dated 11th March 2015 under section 143(3) of the Act, wherein the income of the Appellant was assessed at Rs. 17,85,33,921/- by making the following disallowances :

“a. Denied set-off of brought forward losses of the A & S Division claimed by the Appellant amounting to Rs. 4,76,08,087/- and unabsorbed depreciation amounting to Rs. 18,50,582/- on the ground that the business losses were not transferred to the Appellant under the scheme of demerger. Further, carry forward of losses amounting to Rs. 8,32,95,763 /- pertaining to the A&S Division was denied to the Appellant on the ground that the same pertained to the E- Commerce Division on Gingersoft and were not transferred to the Appellant vide the demerger scheme. b. Disallowed payments amounting to Rs. 8,31,45,470/- made by the appellant to foreign services providers for on account of server hosting charges and SMS charges under section 40(a)(i) of the Act. The assessing officer relied upon the retrospective amendment to Section 9(l)(vi) of the Act, whereby definition of royalty has been amended to include "process" which shall be deemed to have always included transmission by satellite (including up linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. Based on above, the assessing officer also held that the payments made by the appellant in relation to SMS purchase ad server hosting charges falls within the meaning of Royalty and hence liable to deduction of tax at source u/s 195 of the Act.

4.4 The Assessing Officer, while making the aforesaid disallowance held as under: a) The accumulated losses of M/s Gingersoft Media Pvt. Ltd. amounting to Rs. 8,32,95,763 /- (upto 01.04.2011) prior to demerger pertains to its Ecommerce division only and not to its A&S Division (which was merged with the assessee company) as on 29.02.2012. Further as admitted by the transferor and the transferee company in their respective audited financial statements, the said losses have been retained by M/s Ginger Soft Media Pvt. Ltd. (transferor company) and not transferred to the assessee company (transferee company). Thus the question of allowing the claim of carry forward of business losses being brought forward (prior to 01.04.2011) and set off of unabsorbed depreciation of earlier years of the merged division u/s 72A (4) of the Income Tax Act does not arise. b) Further, losses M/s Gingersoft Media Pvt. Ltd. pertaining to the A&S division amounting to Rs. 4,76,08087/- (for the period 01.04.2011 to 29.02.2012 which is the appointed date) were also retained by the transferor company i.e. M/s Gingersoft Media Pvt. Ltd. and were not transferred to the transferee company i.e. M/s Value First Digital Media Pvt Ltd (assessee company) as admitted by the transferor and the question of allowing the claim of set-off of the said business losses of the merged division u/s 72A(4) of the Income Tax Act does not arise and hence the assessee's claim of set off is invalid and not tenable.

5.1 The Assessee further contended before the Commissioner that in order to claim tax losses and unabsorbed deprecation under section 72A of the Act, only condition to be satisfied is that the losses and depreciation being claimed pertains to the demerged undertaking. The e-commerce division of Ginger Soft Media Pvt Ltd. was not in existence till financial year 2009-10 and therefore, the losses pertaining to F.Y. 2007-08, 2008-09, 2009-10 entirely pertains to A & S division of M/s Ginger Soft Media Pvt Ltd. With regard to the losses for financial year 2010-11 and 2011-12, the Assessee relied on the provisions of Section 72A(4)(b) of the Act. Accordingly, the Assessee worked out the losses much before assignment to the A & S division of Gingersoft at 86.32%.

6. The learned Commissioner perused and reproduced the provisions of Section 72A(4) of the Act, which read as under:

4) Notwithstanding anything contained in any other provisions of this Act, in the case of demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall—

(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in 1 hands of the resulting company;

(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.

6.1 The Ld. Commissioner though held “that as per provisions of section 72A of the act, such loss or unabsorbed depreciation to be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be”, however with regard to working out the losses much before assignment to the A & S division of Gingersoft at 86.32%, directed the AO “ to verify and if this ratio is found to be correct on verification of data, then this ratio may be applied for each year of loss/depreciation as per the provisions of section 72A of the act”, by concluding as under:

“6.11 As discussed above, the loss or unabsorbed depreciation in this case on the date of demerger pertained to two operative divisions i.e. Advertisement and Sampling ('A&S division') and E- Commerce division. Thus, it is a case where loss or unabsorbed depreciation is not directly relatable to the A& S Division transferred to the resulting company. It is evident from the aforesaid provisions of section 72A of the act that in such a case, such loss or unabsorbed depreciation to be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.

6.12 As regards the argument of the AO that the loss or unabsorbed depreciation cannot be allowed to be set off and carried forward because of the specific note in the financial statement that the said losses have been retained by M/s Ginger Soft Media Pvt. Ltd. (transferor company) and not transferred to the assessee company (transferee company). I find that the AO's argument does not carry force because the scheme of the act (refer section 72A) do provide to allow set off and carry forward of losses or unabsorbed depreciation in the case of a demerger and such scheme nowhere provide any restriction/condition vis-a-vis the treatment of such losses in the books of account of the assessee. It may be interesting to note that there is every possibility that books results as per company's account may not tally with taxable profits. This does not mean that the AO would substitute the taxable profits with book profits on his own. This is possible only as per the scheme of the act. Since, the provisions of income tax act for allowing set off and carry forward of loss and unabsorbed depreciation do not provide for any dependency on treatment of such losses at the time of demerger in the books of accounts, therefore, the action of the AO is without merit.

6.13 As regards the submission of the appellant regarding the fact of allocation of 86.32% of the loss ought to be assigned to the A&S division on the ground that e- commerce division of Ginger Soft Media Pvt. Ltd. was not in existence till financial year 2009-10 and therefore, claimed that the losses pertaining to F.Y. 2007-08, 2008- 09, 2009-10 entirely pertain to A&S division of M/s Ginger Soft Media Pvt. Ltd. In this regard, I do not find merit in the argument of the appellant because the appellant's claim of set off and carry forward is not exactly in sync with the provisions of section 72A of the act.

6.14 It is reiterated that section 72A provides for a specific mechanism to apportion such loss or unabsorbed depreciation between the demerged company and the resulting company. As discussed above, section 72A provides for such loss or unabsorbed depreciation between the demerged company and the resulting company to be apportioned in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be. AO is directed to allow such loss or unabsorbed depreciation in line with the provisions of section 72(A) of the act after duly verifying the data in respect of claim of loss/unabsorbed deprecation. Accordingly, the AO is directed to limit the claim of loss/deprecation of each year in the ratio of assets retained by demerged company and transferred to the resulting company. The appellant has computed this ratio at 86.32% which may be verified by the AO. If this ratio is found to be correct on verification of data, then this ratio may be applied for each year of loss/depreciation as per the provisions of section 72A of the act. Hence, the ground of appeal is "partly allowed" statistically.

6.2 With regard to not allowing set- off of brought forward losses amounting to Rs. 2,33,64,078/- with the current year's business income of the appellant u/s 72 of the Act, by the AO , the ld. Commissioner directed the AO “ to examine the claim and allow the set off as per section 72 of the Income Tax Act”, by concluding as under:

Vide Ground No. 3.5, the Assessee has challenged the action of the AO in not allowing set- off of brought forward losses amounting to Rs. 2,33,64,078/- with the current year's business income of the appellant u/s 72 of the Act.

Appellant's Submission:

7.1 The appellant had filed detailed written submission which is summarized as under:

3.5 Without prejudice to above, the Learned AO erred on facts as well as in law in not allowing set-off of brought forward losses amounting to INR 2,33,64,078 with the current year's business income of the Appellant under section 72 of the Act.

Findings:

7.2 In this regard, the appellant challenged that the AO did not allow the set off of brought forward of losses amounting to Rs. 2,33,64,078/- with the current years business income of the appellant u/s 72 of the Act. I find that the AO has not dealt with this claim in the assessment order. The AO is directed to examine the claim and allow the set off as per section 72 of the Income Tax Act.”

“9. We have heard both the parties and perused all the relevant material available on record. From the perusal of the Assessment order, it can be seen that while calculating set off of carry forward loss, the Assessing officer has not allowed the set-off of business losses and unabsorbed depreciation of the demerged business undertakings in proportion to the asset taken over by the assessee, though the Assessing Officer mentioned that to the extent of Rs. 2,82,88,938.56 should be allowed. The fact also remains that the demerged company has not claimed depreciation on the same. Thus, the CIT (A) as well as the Assessing Officer failed to appreciate the proper implementation of provisions related to set off of business losses and unabsorbed depreciation in respect of resulting company. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for calculating the correct amount of set off of carry forward loss as per Section 72A after taking into account the unabsorbed depreciation. Needless to say the assessee be given opportunity of hearing by following principals of natural justice. Ground No. 3 to 3.5 are partly allowed for statistical purpose.”

9.1 Considering the peculiar facts and circumstances, we are of the considered opinion that the facts of the instant case require determination by the Assessing officer for calculation of the correct amount of set off of business losses and carry forward losses as per section 72A of the Act and after taking into consideration the unabsorbed deprecation and the facts, as to whether Ginger Soft Media Pvt. Ltd. has claimed any such set off and/or carry forward losses and/or depreciation individually. Consequently, the case is remanded to the file of the AO for the aforesaid factual determination.

In case, the AO will out find that the said Ginger Soft Media Pvt. Ltd. that is has not claimed such set off and carry forward losses and depreciation qua A & S Division, then the Assessee shall be entitled for the said set off and carry forward of losses and depreciation as claimed in its revised return of income. In the result, GROUND Nos. 1 to 3 are allowed for statistical purposes.

11.1 The Assessee in response to the show cause, submitted its reply dated 28-01-2015 before the AO, who though considered the same, however not found satisfactory and held as under:

“The submission submitted by the Assessee Company was examined and we concluded that The Assessee’s above contention was not satisfactory. However as per the amendments made in Section 9(l)(vi) of the Finance Act, 2012 which is applicable retrospectively from 1st June, 1976, the definition of royalty has been amended to include "process" which shall be deemed to have always included transmission by satellite(including up linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process in secret As a result of the above mentioned amendment which is effective retrospectively.

The payments made by the assessee company in relation to SMS purchase and server hosting charges falls within the meaning of Royalty and hence liable to deduction of tax at source u/s 195 of the act.

"As per Section 195 Any person responsible for paying to a non resident, not being a company or to a foreign company, any interest or any other sun chargeable under the provisions of this Act ( not being income chargeable under the head Salaries) shall, at the time of credit of such income to the account of the payee or at the time of the payment thereof in cash or by the issue of a cheque or draft or by any other mode , whichever is earlier, deduct income tax thereon at the rates in force".

Since the Assessee Company did not deduct the TDS u/s 195 on account of Rs. 8,31,45,470/- the same shall be disallowed u/s 40a(ia) of the Act resulting in the income of the Assessee company being increasedJhy-Ater-8,31,45,470/-. However, penalty u/s 271(l)(c) is not initiated as the amendment is with retrospective effect.”

- The assessee, purchases international SMS for its international business, which broadly comprises of trading in SMS i.e. it purchases SMS from a foreign aggregator and sells to another aggregator / foreign customer. The payment of SMS charges to Foreign Service providers is not taxable in India as the SMS facility received is in connection with earning of income from non- residents. Also, the payment for SMS charges is not taxable as Royalty both under the provisions of the Income-tax Act and tax treaty. - Ld. AO has grossly erred in treating payment for procurement of SMS as royalty following retrospective amendment made in Section 9(l)(vi) of the Act in the definition of Royalty to include 'process' which shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar technology, whether or not such process is secret. - An explanation can clarify the substantive provision. However, it cannot be contrary to the conditions mentioned in the principle provision itself. Where the definition of Royalty includes a "secret process", by way of an explanation, requirement of the process not to be secret cannot be done away with.

- The assessee is engaged in trading of international SMS, wherein it merely purchases SMS for onwards sales to foreign customers. It has no other role in the delivery of services. Thus, even assuming (without conceding) that payment to foreign vendors for international SMS is in the nature of Royalty under Section 9(l)(vi)

19 2050/Del/2021/Del/2021 & ITA no. 5127/Del/2019 of the Act, such royalty payment should not be taxed in India as it pertains to property utilized for the purpose of earning income from a source outside India.

- The fact in the current case are that International SMS are being purchased from foreign vendors for onwards sale to foreign clients and no part of the service is being delivered in India. Thus, the payment for SMS cannot be taxed as Royalty, as it gets excluded under Section 9(l)(vi)(b) of the Act.

- Server hosting services procured from the non-resident vendors is a standard facility and has been incorrectly classified as royalty applying definition of process introduced to Section 9(l)(vi) of the Act by the Finance Act 2012. This payment, at the very outset does not qualify to be Royalty and thus does not attracts tax withholding under Section 195 of the Act. Further, as discussed above, amendment in section 9(l)(vi) would not preclude availability of treaty benefit to the non-resident vendors. Thus, even in the case of server hosting services it is submitted that the payment should not be treated as Royalty under respective DTAAs.

- The declarations taken from the non-resident vendors on their tax residency being outside India. Further, the certificate of incorporation/tax residency certificates obtained from the foreign vendors are enclosed in the paper book. Further, the Appellant is in the process of obtaining the Tax Residency Certificates from the foreign vendors and request your good self to provide some time to submit the same.

“8.5 I find that the appellant has emphasized based on case laws that expression 'use or right to use equipment' signifies that the right is given for effective control over the equipment and the equipment is virtually at its disposal. In other words, if the owner of the equipment stays in control of it, it is a case of providing services with the equipment and in such a situation, the payment cannot be construed as Royalty.

8.6 The appellant invited my attention to the decision of Hon'ble Delhi High Court in the case of New Skies Satellite BV (ITA 473/2012). Hon'ble Delhi High Court held that the introduction of explanation 5 & 6 in the income tax act would not apply to DTAA without amendment of DTAA articles. It is also important to take note that in the given set of facts, the element of control of the equipment is not with the payer. There is no such finding on record that element of control of the equipment remains with the payer. Further, it is also not a case where the secret process has been passed on as per the terms of the agreement. I find that it is a case of providing technical services. In the present case, the technical services to provide SMS services are in the nature of standard services and are not in the nature of special & exclusive needs of the customer. It is settled position based on the decision of Apex Court in the case of Kotak Securities Ltd. (Civil Appeal No. 3141 of 2016 dated 29 March 2016) that "Technical services" & "Managerial and Consultancy service" denotes services that cater to special & exclusive needs of the consumer/user and a "facility", even if termed as a service, which is available to all users, does not come within the ambit of "technical services" in Explanation 2 of s. 9(l)(vii) of the act. Hence, such services to provide SMS and server hosting services are not covered as FTS.

8.7 I find that it is a case where the appellant has not been allowed "use of process" and it is only a case of facility offered to several customers like the appellant. Therefore, the use of facility does not fall under equipment royalty or process royalty.

8.8 It may be relevant to take note of the decision of Hon'ble Delhi Tribunal in the case of Bharti Airtel Ltd vs. ITO (TVS) [2016] 178 TTJ 70S wherein meaning of process post insertion of Explanation 6 by Finance Act 2012 has been explained:

As per this Explanation, the "expression 'process' includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar technology, whether or not such process is secret." However, the Explanation does not do away with the requirement of successful exclusivity of the right in respect of such process being with the person claiming 'royalty'for granting its usage to a third party. None of the FTOs have any exclusive ownership or rights in respect of such process, and hence in our view the payment in question cannot be considered as royalty. The telecom operators merely render Telecommunications Services to the subscribers, as well as interconnecting telecom operators with the aid of their network and the process embedded therein. This is a standard facility which is used by the FTO itself. Thus the insertion of Explanation 6 to Section 9(l)(vi) does not alter the decision taken by us on this issue.

14. The Revenue Department has also challenged the deletion of the addition under consideration referred to above. The main contention of the Revenue/Department is that the learned Commissioner did not appreciate the retrospective amendment made in Section 9(1)(v) which came into effect vide Finance Act, 2012, whereby the term “Royalty” has been clarified.

15. We observe that the learned Commissioner not only thoroughly examined the peculiar facts and circumstances of the case but also relied upon the judgments passed by the Hon’ble Apex Court and the Hon’ble Delhi High Court in the cases of Kotak Securities Ltd. (Civil Appeal no. 3141 of 2016 dated 29.03.2016); and New Skies Satellite BV (ITA 473/2012) respectively and held that where the Assessee has not been allowed "use of process" and it is only a case of facility offered to several customers like the Appellant/Assessee, therefore, the use of facility does not fall under equipment “royalty” or “process royalty”.

“12. We have heard both the parties and perused all the relevant material available on record. From the perusal of the facts it can be seen that the assessee purchases international SMS for its international business, which broadly comprises of trading in SMS i.e. it purchases SMS from a foreign customer and sells to another foreign customer. It has no other role in the delivery of services. Thus, even assuming that payment to foreign vendors for international SMS is in the nature of Royalty under Section 9(1) (vi) of the Act, such royalty payment should not be taxed in India as it pertains to property utilized for the purpose of earning income from a source outside India. In the present case, International SMS are being purchased from foreign vendors for onwards sale to foreign customers. The assessee does not have any other role in the delivery of services. Thus, no part of the service is being delivered in India. Therefore, the payment of SMS charges to Foreign Service providers is not taxable in India as the SMS facility received is in connection with earning of income from non-residents. Also, the payment for SMS charges is not taxable as royalty both under the provisions of the Income Tax Act and DTAA. The case laws cited by the Revenue does not apply in the present case as the ratio laid down in those matter depends upon the fact that there was a royalty element in each of those case laws. But in present case there is no element of royalty and besides that no service has been performed or delivered in India. Thus, this factual aspect is ignored by the CIT(A) as well as the Assessing Officer. Ground Nos. 4 to 4.4 are allowed.”

Consequently the appeal i.e. ITA 3143/Del/2019 filed by the Revenue Department is allowed for statistical purposes.

“1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 7,49,22,035/- on account of disallowance u/s 40(a)(ia) of the IT Act, 1961 on the expenses incurred towards server hosting charges and SMS charges paid on non-residents claimed by the assessee?"

2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 14,89,739/- the provision of section 14A are applicable vide CBDT Circular No. 5/2014 dated 11.02.2014, through which it has taken a view : that disallowance of expenditure for earning exempt income under section 14A read with Rule 8D would be attracted even if the corresponding exempt income has not been earned during the financial year?"

3. The appellant craves leave to add, alter, amend, append, or delete any of the above

ITA no. 5127/Del/2019 [AY 2016-17]:

“1. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the disallowance of Rs. 4,73,59,553/- and Rs.40,60,394/- made by the AO u/s 37 as well as u/s 40(a)(i) on the non-deduction of TDS on SMS charges and Web-hosting charges on account of non- submission of details and documentary evidences and also by holding them as Royalty Payments.

2. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the disallowance of Rs.4,73,59,553/- and Rs.40,60,394/- made by the AO u/s 37 as well as u/s 40(a)(i) on the non-deduction of TDS on SMS charges and1 Web- hosting charges without appreciating the judgments given in case of “Verizon Communications Singapore Pte Ltd. Vs Income Tax Officer, International Taxation-l", [2014] 361 1TR 575 (Madras), and given in the case of ITO vs FL Smidth Ltd. by the Hon ’ble ITA T Chennai.

3. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the disallowance of R.s.4,73,59,553/- and Rs.40,60,394/- made by the AO u/s 37 as well as u/s 40(a)(i) on the non-deduction of TDS on SMS charges and Web-hosting charges without appreciating that the judgement of Hon’ble ITAT Delhi in case of Bharti Airtel Ltd. v. 1TO/TDS) was given in the context of IUC.

4. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the disallowance of Rs.4,73,59,553/- and Pis.40,60,394/- made by the AO u/s 37 as well as u/s 40(a)(i) on the non-deduction of TDS on SMS charges and Web-hosting charges without appreciating that the Ld. CIT(A) himself had dismissed the appeal of the assessee on identical issues for the AY 2013-14 making the order perverse.

5. On the facts and circumstances of the case the Ld. C1T(A) erred in deleting the disallowance of Rs.4,73,59,553/- and Rs.40,60,394/- made by the AO u/s 37 as well as u/s 40(a)(i) on the non-deduction of TDS on SMS charges and Web-hosting charges without appreciating that the disallowances were also made by the AO u/s 37 on account of non-submission of details and justification of above expenditure.

6. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting disallowance 25% of Travelling & conveyance and Business promotion Expenditure amounting to Rs. 45,97,602/- without appreciating that the onus of establishing that the expenditure has been incurred wholly and exclusively for the purpose of business is on the assessee making the order perverse.

7. On the facts and circumstances of the case the Ld. CIT(A) erred in deleting disallowance u/s I4A amounting to Rs. 23,55,653/- on the ground that no exempt income has been claimed by the assessee relying on various judgements of the Hon'ble Delhi High Court without appreciating that the Circular No. 5/2014 by the Board has not been quashed by the Hon 'ble Courts in any of the judgements and without appreciating the judgement given by the Hon'ble ITAT Amritsar in case of Lally Motors India (P.) Ltd. v. The Principal Commissioner of Income Tax-2, Jalandhar, wherein it has held after considering the above judgements of the Hon 'ble Delhi High Court that disallowance u/s I4A can be made even when there is no exempt income.

8. On the facts and circumstances of the case the order of Ld. CIT(A) is perverse.

9. The appellant craves, leave or reserving the right to

“ In this regard, the assessee humbly submits that during the subject FY, the assessee incurred INR 14,007,407 towards travelling and conveyance, 1NR 3,602,939 towards business promotion & advertisement, and INR 4,383,000 towards advances written off. The same can be evidenced from Note 29 - Other expenses of the audited financial statements. Details of same is enclosed as Annexure 10, Annexure 11 and Annexure 12 respectively.

- With respect to the advances written off, appearing in Note 29 - Other expenses of the audited financial statement, it is submitted that the same being not allowable under section 37 of the Act has already been added to the total income while filing the income tax return. The same can be evidenced from the computation shared with your good self.

With respect to provision for doubtful debts, it is humbly submitted that during the subject FY, the management of the Company anticipated doubtful debts of INR 4,586,158 against which a provision was created in the books. The same can be evidenced from Note 29 - Other expenses of the audited financial statements. Provision for doubtful debts being not an allowable expense under section 36(l)(vii) of the Act has already added back to the total income while filing the income tax return.

With respect to corporate social responsibility (‘CSR expenses’), it is humbly submitted that during the subject FY, the assessee has debited INR 1,000,000 in the profit or loss account. The same can be evidenced from Note 29 - Other expense of the audited financial statements. Since CSR expense is not an allowable expense under section 37 of the Act, the same has accordingly been added back to the total income while filing the income tax return. The same can be evidenced from the computation of income shared with your good self and Point no 7 of Part A - 01 of the Income tax return, filed electronically ”

Though the assessee has submitted the details of the expenditure on Travelling and Conveyance of Rs. 1,40,07,407/- and expenditure on Business promotion & Advertisement of Rs. 43,83,000/- but failed to offer any justification for the above expenditure. Complete bills and vouchers pertaining to above expenditures were also not produced for examination and verification. Thus, in absence of the examination of the bills and vouchers and justification”

Particular AY 2011- AY 2012- AY AY 2014- AY 2015- AY 2016-17 12 13 2013-14 15 16 Total 43,27,18 79,21,14, 1,19,75, 1,31,14,9 1,61,11, 2,11,20,89, expenses ,352 511 00,671 7,170 36,206 584 debited into profit and loss account Total 46,80,13 91,44,47, 1,35,23, 1,44,37,0 1,69,91, 2,16,79,59, sales ,038 057 57,148 3,690 22,526 528 credit into profit and loss account

Travelling & conveyance expenses

Expendit 1,13,75, 1,41,84, 1,82,91, 1,42,12,8 1,37,74, 1,40,07,407 ure 181 765 119 66 851 Ratio 2.63% 1.79% 1.53% 1.08% 0.85% 0.66% against total expenses Ratio 2.43% 1.55% 1.35% 0.98% 0.81% 0.65% against total sales

Business promotion & advertisement expenses

Expendit 28,97,77 44,47,35 25,44,02 20,15,99 42,39,05 36,02,939 ure 5 0 9 0 5 Ratio 0.67% 0.56% 0.21% 0.15% 0.26% 0.17% against total expenses Ratio 0.62% 0.49% 0.19% 0.14% 0.25% 0.17% against total sales

7.8 I find from the table above that the trend of incurring the expenditure in question is indicative of downward trend in the subject year which further supports the case of the appellant. Accordingly, I do not find merit in making adhoc disallowance of claim of expenses under the head “Travelling”, “business promotion”, “provision for doubtful debts”. Hence, the ground of appeal is allowed.

33. We observe that the learned Commissioner while deleting the addition in hand taken into consideration the fact that AO has no where given a finding or discussed any material to even indicate that expenditure claimed by the Assessee is excessive. As regards bills/vouchers, the notice/questionnaire issued by the AO does not ask for the same. It is not the case here that any specific finding regarding bogus expenditure, is made by the AO. The learned Commissioner in order to verify the claim of the Assessee also asked the Assessee to submit the trend of such claim of expenses, over the year, which the Assessee filed. On perusing the same, the learned Commissioner held that trend of incurring the expenditure in question is indicative of down trend in the said year, which further supports the case of the Assessee. The learned Commissioner ultimately did not find any merit in making disallowance of expenses under the head “travelling, business promotion, provision for doubtful debts”.

34. We have given thoughtful consideration to the peculiar facts and circumstances of the case and find that the AO failed to give any finding qua the expenditure claimed about its excessiveness and it is a fact that the AO has also not made any observation about defective vouchers/bogus expenditure as well. Thought complete bills and vouchers pertaining to expenditures claimed were not produced for examination and verification before the AO, however, the AO after seeking details from Assessee vide show cause notice dated 19.11.2018, which was replied by the Assessee on 14.12.2018, neither controverted the documents filed by the Assessee nor pointed out any specific defect nor asked the Assessee to file further documents/reply in support of its case. Hence, in cumulative effects, we are inclined not to interfere in the decision on the issue in hand by the Ld. Commissioner. Consequently, Ground no. 6 stands dismissed.

35. Ground no. 7 relates to the deletion of disallowance u/s 14A to the tune of Rs. 23,55,653/-. ld. Sr. DR Shri Shankar Lal Verma to substantiate ground No. 7, claimed that the ld. Commissioner erred in deleting the disallowance under consideration by relying upon various judgments of the Hon’ble Delhi High Court, but without appreciating that the Circular No. 5/2014 by the CBDT has not been quashed by the Hon’ble Courts in any of the 37 2050/Del/2021/Del/2021 & ITA no. 5127/Del/2019 judgments and without appreciating the judgment given by the Bench of Hon’ble ITAT, Amritsar in the case of Lally Motors India Pvt. Ltd, Jalandhar vs. PCIT-2, Jalandhar in ITA No. 218(Asr)/2017, wherein it was held that the disallowance can be made u/s. 14 of the Act, even when there is no exempt income. Further, where the Assessee has suo moto made a disallowance or has made a claim that no expenditure has been incurred in earning the exempt income, the Assessing Officer needs to verify the correctness of such a claim with regards to the accounts of the Assessee and in case he is satisfied that the claim is incorrect, he must record such satisfaction in an objective manner and then only can resort to the method prescribed in Rule 8D of the Income-tax Rules, 1962 (for short “the Rules”), as held by the Hon’ble Apex Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2017) 394 ITR 449 (SC) and also in Maxopp Investment Ltd. & Ors. v. CIT (2018) (402 ITR 640)(SC). In the present case, the Assessing Officer has worked out the expenses u/s. 14A as per the provisions of section 8D of the Rules and the Assessing Officer has also referred the case law Maxopp Investment Ltd. & Ors. v. CIT (supra) in the assessment order.

35.1 We have given thoughtful consideration to the peculiar facts and circumstances of the case. We observe that the ld. Commissioner while deleting the addition under consideration not only taken into consideration the admitted fact of the case that 38 2050/Del/2021/Del/2021 & ITA no. 5127/Del/2019 the Assessee did not earn any exempt income, but also relied upon the judgments passed by Hon’ble Apex Court in the case of Chettinad Logistcs (P.) Ltd., (2018) 257 Taxman 2 (SC) and the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Del). As the Ld. Commissioner before coming to the conclusion in deleting the addition in hand respectfully followed the latest judgment of Hon’ble Apex Court in the case of Chettinad Logistcs (P.) Ltd. (supra) and it is not the case here of the Revenue Department that the Assessee has made any incorrect claim and therefore, the Assessing Officer has satisfied himself and recorded such satisfaction in an objective manner and resorted to the method prescribed in Rule 8D. Even we do not find any justifiable reason or material to reverse the definite findings given by the ld. Commissioner in deleting the addition under consideration. We in para no. 23 of this order qua Assessee did not earn any exempt income and therefore no disallowance u/s 14A of the Act is warranted. In cumulative effects, Ground No. 7 also stands dismissed.

and 5127/Del/ 2019 [A.Y. 2016-17] stands dismissed.

Order pronounced in open court on 08/02/2023.