ADDL CIT SP RG 22, MUMBAI vs. DSP MERRILL LYNCH LTD, MUMBAI

The Ld. AR submitted that, 100% of the amount received from M/s. Merrill Lynch has been allowed to be eligible for deduction u/s. 80O for AYs 1990-91 to 1993-94 and also during subsequent AY 1995-96. The Ld. AR further submitted that the nature of services rendered and the agreements across these years have remained the same and that the agreements were approved by CBDT/ CCIT as required under the Act. The Ld. AR drew our attention to the nature of services rendered as per the agreement to M/s. Merrill Lynch as submitted before the lower authorities as extracted below: “In terms of the agreement with Merrill Lynch (ML), the appellant provided professional services with respect to Investment Banking Transactions in the Financial Services Industry in view of the appellant's pre-eminent position in the financial sector. The information/services was provided mainly for managing Global Depository receipts & 2198/Mum/2011 DSP Merrill Lynch Limited (GDR's) / Other debt issues by Indian Companies outside India i.e. used outside India. More particularly, the appellant provided the following services -  Advise on the structure of the offering in relation to the Indian regulations and the investment criteria of the investors, documentation, preparation of the offer documents and marketing materials.  Advise on marketing of the offering, advise on the relevant legislation in India including Income-tax Act, FERA Act etc.  Advise on permissions/ approvals required from Govt of India / RBI and other regulatory authorities. The appellant had received fees of Rs.55,080,550/- from ML during the previous year relevant to the assessment year under appeal in respect of the information/ services provided to ML.”

The Ld. AR argued that from the above it is clear that the information provided by the assessee to M/s. Merrill Lynch have been used outside India and this is substantiated by the fact that the GDR/debt offering is made in international markets and that the marketing for the same is done by lead managers overseas. The Ld. AR drew our attention to Circular No.700 dated 23.03.1995 to submit that the CBDT in the said circular has clarified that as long as the technical and professional services that are rendered from India and are received by a foreign government and enterprise outside India, deduction u/s. 80O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India. Further the Ld. AR drew our attention to the below findings of the coordinate bench in assessee's own case for AY 1995- 96 (ITA 2727/Mum/2004 dated 02.01.2020) where it has been held that: “6. Upon careful consideration of factual matrix as enumerated in the Preceding paragraphs, we are of the considered opinion that no addition would be sustainable in law merely on the basis of suspicion, conjectures or surmises. The assessee had placed on record sufficient documentary evidences to substantiate its claim u/s 80-0 with respect to services rendered to MLINT. The claim was duly supported by the confirmatory letter of MLINT as well as RBI approval letter which specifically prohibited devolvement of foreign exchange to the assessee. On the contrary, except for mere suspicion & allegation, nothing was brought on record by Ld. AO to counter the assessee's claim. It is beyond doubt that the assessee was acting as co-lead manager in the aforesaid issues but & 2198/Mum/2011 DSP Merrill Lynch Limited the allegations of Ld.AO that the fee was received in that capacity through MLINT is without any corroborative evidences. Therefore, the conclusion of Ld. CIT(A) could not be faulted with and hence concurring with the same, we dismiss the appeal filed by the revenue.”

The Ld. AR also drew our attention to the notes to accounts in the financial statements where it has been mentioned that the assessee ha co-lead managed four transactions in the international capital market where M/s. Merrill Lynch as lead manager. The Ld. AR accordingly submitted that, the nature of services rendered by the assessee is very much within the purview of the nature of services eligible for deduction u/s. 80O and that the revenue has not disputed the eligibility of the assessee for the said deduction. The Ld. AR further submitted that once the nature of services has been accepted to be eligible then the revenue cannot restrict the deduction to 50% without any valid basis except that the nomenclature mentioned in the bank inward remittance does not mentioned the nature of service. With regard to amount received from M/s. John Govett the Ld. AR made similar submissions.

The Ld. DR on the other hand, vehemently argued that the assessee has not produced sufficient evidences and the burden of proof lies with the assessee to demonstrate that the conditions as prescribed u/s. 80O have been fulfilled. The Ld. DR further argued that the Ld. CIT(A) has merely relied on the agreements without verifying the actual service utilization abroad. The Ld. DR also argued that the reliance placed by the assessee on earlier year assessments cannot be ground for allowing the deduction in the year under consideration since each assessment year is independent and the impugned issue has to be examined based on the facts pertaining to each year. The Ld. DR submitted that there is no justification for

We have heard the parties and perused the material on record. The assessee has claimed deduction under section 80-O of the Act towards services rendered to various parties as tabulated above. The provisions of section 80-O read as under – 80-O - Deduction in respect of royalties, etc., from certain foreign enterprises. Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical or professional services rendered or agreed to be rendered out- side India to such Government or enterprise by the assessee, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of an amount equal to fifty per cent of the income so received in, or brought into, India, in computing the total income of the assessee Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf. Explanation.—For the purposes of this section,— ( i) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange; & 2198/Mum/2011 DSP Merrill Lynch Limited (ii) "foreign enterprise" means a person who is a non-resident. (iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India.

The contention of the assessee is that the consideration received from the parties is towards supply of information with regard to Indian Regulations, documentation and regulatory requirements, market related information, information regarding government approvals etc., and that these information helps in issue of debt instruments such as GDR etc outside India. The assessee further contents that the services rendered are within the purview of eligibility u/s.80-O of the Act as confirmed by the CBDT Circular No.700 dated 23.03.1995. The revenue's contention is that the assessee has merely submitted the agreements with these parties and has not submitted any documentary evidences regarding rendering of services. In this regard we notice that the Notes to Accounts forming part of the financial statements mentions that the assessee has contributed to closure of certain financial transactions in the international market where M/s.Merill Lynch International (MLINT) has been the lead manager. Accordingly, in our considered view, it cannot be held that the assessee has not rendered any services more so when the same is supported by existence of agreement and receipts in foreign currency. Further we notice from the findings of the CIT(A), as extracted in the earlier part of this order, we notice that the CIT(A) has denied 50% of the claim towards receipts from MLINT for the reason that the FIRC does not specify the services against which the payments are received. We also notice that as far as the receipts from MLINT is concerned, the deduction u/s.80-O had been allowed at 100% for AY 1990-91 to 1993-94 and from the records it is noticed that that the revenue has not preferred any appeal with regard to the same. However, the revenue challenged the action of allowing the claim for AY 1995-96 and the & 2198/Mum/2011 DSP Merrill Lynch Limited coordinate bench vide order dated 02.01.2020 has deleted the disallowance (refer relevant findings extracted in the earlier part of this order). It is also relevant to mention that for AY 1996-97 while considering the similar receipt from MLINT, where the AO restricted the deduction to 5% the coordinate bench remitted the issue back to the AO vide order dated 22.10.2019. From the perusal of the said order we notice that for the said assessment year, the lower authorities has made the disallowance based on certain specific findings with regard to rendering of services which was not substantiated. However for the year under consideration with regard to MLINT, the CIT(A) has allowed 50% and has denied the balance only for the reason that the FIRC does not mention the nature of service rendered. We further notice that no specific findings are recorded with regard to eligibility of the deduction vis-à-vis the nature services and therefore we see merit in the contention of the ld AR that the decision of the coordinate bench for AY 1995-96 is applicable since the revenue for the year under consideration also has sustained the addition merely on the basis of suspicion, conjectures or surmises without considering the documentary evidences placed on record by the assessee. Further we see that there is no basis for the CIT(A) to consider the expenses at an adhoc percentage of 33.91%. In view of these discussions we direct the AO delete the disallowance made towards deduction claimed u/s.80-O towards receipts from MLINT.

With regard to claim of deduction u/s.80-O towards receipts from M/s.John Govett, we notice that the reason as mentioned by the CIT(A) for denial is that the information furnished by the assessee is very general and very vague and that whether the assessee had really supplied the information is not substantiated. The AO has held that the services are rendered only in India to be used in India thereby & 2198/Mum/2011 DSP Merrill Lynch Limited denied the entire deduction claimed by the assessee. In this regard we notice that the AO has allowed 100% of the deduction claimed towards receipts from M/s.John Govett in AY 1995-96 and on perusal of the appeal filed by the revenue for the said AY we notice that the revenue has not challenged the said allowance by the AO. However, it is relevant to note that the AO made a 5% allowance for AY 1996-97 and the coordinate bench while deciding the issue has remitted the issue back to the AO for a de-novo consideration. From the perusal of these facts we notice that the nature of services rendered by M/s.John Govett have not been factually examined and the assessee did not bring any new material on record in this regard. Considering the facts stated herein above, we are of the view that the basis on which is the AO has denied the claim needs to be examined i.e. whether the services are rendered from India are services are rendered in India since the CBDT circular number 700 dated 23.03.1995 has clarified that "as long as the technical and professional services are rendered from India and are received by a Foreign Government or enterprise outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilises the benefit of such services in India". This is so since the AO has not recorded any factual findings in this regard and that the CIT(A) has merely stated that the assessee failed to submit details. Accordingly following the decision of the coordinate bench for AY 1996-97 we remit the issue of deduction u/s.80-O towards receipts from M/s.John Govett back to the AO for examination. The AO is directed to call for necessary details and decide keeping in mind the clarification provided by CBDT in the above circular.

With regard to the deduction allowed by the CIT(A) with regard to receipts from M/s.Dresdner Bank, BFCE, and SBC we notice that the CIT(A) has held that & 2198/Mum/2011 DSP Merrill Lynch Limited the nature of services rendered are within the scope of deduction u/s.80-O and that the AO has allowed the deduction for these parties in AY 1993-94. We notice from the perusal of records that the AO has allowed the deduction for earlier years and that the revenue has not disputed the said allowance. Therefore, we see no reason to take a different view considering that the revenue has not brought any new material on record to rebut the claim of the assessee that the nature of services rendered to these parties has not undergone any change. Accordingly, we dismiss the grounds raised by the revenue in this regard.

We heard the parties and perused the material on record. The Ld. AR submitted that the assessee has purchased only to right to use the software and the software as it is not acquired and accordingly argued that the mere license to use software does not result in any benefit of enduring nature to the assessee. In this regard, we notice that the Hon'ble Bombay High Court in the case of CIT vs & 2198/Mum/2011 DSP Merrill Lynch Limited Raychem RPG Limited (2012) 21 taxmann.com 507 (Bom) as considered has similar issue and held that: “1. Two questions of law raised by the Revenue in this appeal, which read thus: "(a) Whether on the facts and circumstance of the case and in law, the Hon'ble Tribunal was justified in deleting the additions in respect of disallowance of software expenditure to the extent of Rs. 23,62,368 as capital expenditure as software used for the first time will have to be considered as capital in nature? (b) **** 2. As regards the first question, Tribunal relying upon its order in the assessee's own case relating to asst, yr. 2001-02 held that the software expenditure was a revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus: "7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading retracing system and other products and impugned software is an enterprises resources planning (ERP) package and hence it facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit-making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs. 20.60 lakhs are revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the learned Authorized Representative of the assessee."

In our view, no fault can be found in the aforesaid order of Tribunal holding that software expenditure was allowable as revenue expenditure.”

During the course of hearing our attention is also drawn to the copy of invoices (page 119 and 120 of paper book) to substantiate the fact that the assessee has acquired only the right to use the software. Considering the facts and circumstances of the case and respectfully following the above decision of the & 2198/Mum/2011 DSP Merrill Lynch Limited Hon'ble High Court we hold that amount spent towards purchase of Software Licenses cannot be treated as capital in nature. Accordingly, we direct the AO to delete the disallowance made in regard.

The Ld. AR in this regard, submitted that the AO while computing the interest u/s. 234B has reduced the self-assessment tax paid by the assessee on 30.06.1994 towards interest first and the balance amount is adjusted towards tax. The Ld. AR further submitted that, the said treatment by the AO has resulted in excess interest to be paid u/s. 234B which is not correct. The Ld. AR submitted that an identical issue has been considered by the coordinate bench in assessee’s own case for AYs 1990-91, 1993-94 and 1994-95 (ITA No. 5480 to 5483/Mum/1998 dated 30.09.2003) where it has been held that: “4. The first three grounds relate to the charge of interest us. 2348. Under section. 140A as amended w.e.f. 1.4.1889, where any tax is payable on the basis of the return after taking into account the advance tax, such amount shall be paid by the assessee together with interest payable u/s, 2348 for any default or delay in payment of the advance tax, before furnishing the return and the return has to by accompanied by proof of payment of tax and Interest. There is an Explanation to sub-sec. (1) which says that where the amount paid by the assesses as above falls short of the aggregate of tax and interest as above, the amount so paid shall first be adjusted towards the interest payable as aforesaid and the balance, if any, shall be adjusted towards the tax payable, The assessee had paid Rs.1,12,50,000 a advance lax. It had also paid self-assessment tax u/s. 140A on 29.12.1990 in the amount of Rs. 11,87,419. According to the assessee, the total interest us. 2348 would be Rs.33,48,109 and not Rs.33,85,082 as charged by the Assessing Officer. The assessee's contention is that no interest was payable by it u/s. 2348 at the time of fling the return and paying the self-assessment u/s. 140A and therefore there was no question of reducing any amount towards interest u/s. 234B, resulting in a higher amount of lax payable by the assessee giving rise to additional liability towards interest u/s. 234B. It says that as per section 234B(2)(1) where tax is paid by the assessee as self- assessment tax u/s. 140A, Interest shall be calculated in accordance with sec. 2348(1) upto the date on which the self-assessment tax is paid and reduced by the interest, if any, paid u/s, 140A towards the interest chargeable under this section. Per contra, if no interest is paid u/s, 2348, along with the sell assessment tax paid u/s. 140A, there is no question of reducing any such Interest from the amount paid as self-assessment tax u/s. & 2198/Mum/2011 DSP Merrill Lynch Limited 140A. If the computation is made on this basis, there would be a lesser balance amount of tax payable, on complete of the assessment, on which section 234B interest would be payable. It is contended that in the method adopted by the Assessing Officer, a higher amount of tax would be shown as payable on completion of the regular assessment and consequently a higher amount of interest has been charged. It is claimed that the method adopted by the Assessing Officer is not authorized by law.

In order to appreciate the controversy, a comparison of the methods adopted by the assessee as well as the Assessing Officer would be useful:- A As per AO As per assesse Tax on Income assessed 1,74,48,298 1,74,48,298 Less: TDS credit allowed 6,71,889 6,71,889 Advance tax paid 1,12,50,000 1,12,50,000 Balance tax payable 55,24,409 55,24,409 B Interest paid by assessee on Self-assessment uls, 140A: Section 234C 21,741 21,741 Section 234B Nil Nil Self-assessment tax paid on 29.12.90 (including 11,87,419 11,87,419 sec. 234C interest) C. Computation of Interest u/s, 234B a) On Rs.55,24,408 @ 2% p.m. for 9 months 9,94,394 9,94,394 (1.4.90 to 21.12.90) As par AO As per assessee b) On Rs.53,63,125 2% p.m. for 27 months 28,90,588 -- (1.1.91 to 29.3.63) On Rs.43,68,731 2% p.m. for 27 months 11.1.92 -- 23,53,715 to 29.3.03) Total interest u/s. 234B 38,85,082 --- --- 33,48,109 The amount on which interest in respect of (b) above was computed is es under :- Balance tax payable 55,24,409 55,24,409 Lass: Amount paid on self-assessment after 1,71,284 -- reducing Interest u/s, 234B as computed at (a) above and interest u/s. 234(c) as per return Amount paid on self-assessment after reducing -- 11,65,679 Interest u/s. 234C pald u/s. 140A (21,741) Balance amount of tax payable On which 53,53,125 43,55,731 interest is computed at (b) above & 2198/Mum/2011 DSP Merrill Lynch Limited The above comparative table would bring out the controversy in a nutshell. It will be seen that whereas the Assessing Officer has treated only the amount of Rs. 1,71,264 as amount paid as self-assessment tax u/s. 140A, the assessee has treated the amount of Rs.11,65,078 as self-assessment tax which has resulted in a lesser amount of tax outstanding on assessment, resulting in a lesser amount of Interest changeable u/s. 2340. The question is which of the two methods is correct.

We heard the parties and perused the material on record. It is the submission of the assessee is that the AO while computing the interest u/s. 234B has adjusted the self-assessment tax paid by the assessee on 30.06.1994 against the interest u/s.234B calculated up to the said date and adjusted the balance against the tax & 2198/Mum/2011 DSP Merrill Lynch Limited payment. In perusal of the above findings of the coordinate bench it is clear that the facts for the year under consideration are identical and accordingly, we directed to the AO re-compute the interest u/s. 234B as per ratio laid down by the coordinate bench in the above decision.

Ground No.5 & 6 in assessee's appeal are general not warranting any specific adjudication.

In the result, appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.