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Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH & SHRI GIRISH AGRAWAL
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, CHENNAI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.903/CHNY/2019 Assessment Year: 2011-12 Servoint Global Solutions Deputy Commissioner of Limited Income Tax, Central Circle- No. 4/600 & 4/197, 7th 6(1), Chennai. Vs. Street, Dr. VSI Estate, Phase-II, Thiruvanmiyur, Chennai-600 041. PAN: AAACI0947 F (Appellant) (Respondent) Present for: Appellant by : Shri S. P. Chidambaram, CA Respondent by : Shri Chinthapalli Mehar Chand, JCIT Date of Hearing : 24.05.2022 Date of Pronouncement : 19.08.2022 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is directed against the order of ld. CIT(A)-16, Chennai vide ITA No. 257/CIT(A)-15/2014-15 dated 01.01.2019 against the order of Ld. DCIT, Corporate Circle-6(1), Chennai passed u/s 143(3) r.w.s. 92CA(3) of the Income-tax Act,1961 (hereinafter referred to as the Act), dated 23.02.2015 for AY 2011-12.
The first issue involved in the present appeal before us relates to disallowance of payments made towards purchase of software by the Assessee u/s. 40(a)(i) of the Act amounting to Rs.2,61,69,512/- for non-deduction of tax at source u/s.195 of the Act.
3 Brief facts of the case are that the Assessee is in the business of development and export of software. Assessee
2 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 company filed its return of income for the Assessment Year 2011 – 12 on 28.11.2011 reporting income as “NIL” and book profit of Rs.3,04,65,035/- u/s.115JB of the Act. The case was selected for scrutiny u/s. 143(3) of the Act and statutory notices were issued. During the course of the assessment proceedings, the learned Assessing Officer found that the Assessee has purchased software licenses from M/s. Acqueon Technologies, USA amounting to Rs.2,61,69,512/- and claimed the same as expenses in the profit and loss account. The learned Assessing Officer noted that, according to the provisions of Section 9(1)(vi) of the Act, transfer of license of software has to be treated as royalty and the consideration paid for such transfer amounts to income deemed to accrue or arise in India. The Assessing Officer held that since the Assessee has not deducted tax as required u/s.195 of the Act, therefore the provisions of Section 40(a)(i) are attracted to disallow the said payment.
During the course of assessment proceedings, Assessee submitted that the payment under reference is not subject to TDS, since the purchase of software license is in the nature of goods under the Sales Tax / VAT Act. However, the submissions of the Assessee were not accepted by the learned Assessing Officer who held that the payments of the Assessee towards the use of license for a software is a taxable income in the hands of the non-resident as it is a royalty income as per the Section 9(1)(vi) r.w.s. 115A of the Act and since the deduction of tax at source was not done on the payment made, provisions of Section 40(a)(i) of the Act becomes applicable. Accordingly, the learned Assessing Officer disallowed the claim of deduction for the impugned payment.
Aggrieved, Assessee carried the matter before the learned Commissioner of Income Tax (Appeals) who after considering the
3 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 detailed submissions made by the Assessee passed his decision wherein he sustained the disallowance for payment towards purchase of software from M/s. Acqueon Technologies, USA. Aggrieved, by the decision of the learned Commissioner of Income Tax (Appeals), the Assessee is in appeal before the Tribunal.
We have heard the rival contentions, perused the records and submissions made by the Assessee. At the outset, the learned Counsel for the Assessee, Mr. S.P. Chidambaram, CA, relied upon the order passed by the co-ordinate bench in the Assessee’s own case for the immediately preceding Assessment Year i.e. 2010–11 in I.T.A. No.756/Chny/2020 dated 04.03.2022 and took us through the order; wherein in paragraph no. 10, it has been held that the purchase of copyrighted articles does not fall within the scope of section 9(1)(vi) of the Act and the corresponding ground of the Assessee was allowed. Relevant paras 9 and 10 from the said decision are reproduced as under:
“9. Further, the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Limited Vs. Commissioner of Income Tax reported in [2021] 125 taxmann.com 42 (SC), vide order dated 2nd March, 2021 has held that "the amount paid by the resident Indian end-user / distributors to non-resident computer software manufacturers / suppliers, as consideration for resale / use of computer software through EULAs I distribution agreement, is not a payment of royalty for use of copyright in computer software, and thus, same does not give rise to any income taxable in India", which squarely covers the issue before us in respect of the payment made for purchase of software license by the Assessee from the non-resident M/s. Acqueon Technologies Inc. USA. 10. Respectfully following the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Limited Vs. CIT (supra) and also the decision of the Co-ordinate Bench of the Tribunal in the Assessee's own case (supra) on the identical set of facts, we set aside the order of the learned Commissioner of Income Tax (Appeals) and delete the addition made by the learned Assessing Officer in respect of disallowance of Rs.2,77,70,700/- made towards payment of software license fee u/s. 40(a)(i) of the Act.”
4 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 7. We find that the present appeal before us on the identical facts is covered by the decision of the co-ordinate bench in the Assessee’s own case of the immediately preceding Assessment Year 2010–11 (supra) which had dealt with the very basis for sustaining the disallowance by the learned Commissioner of Income Tax (Appeals) in the first appeal and the co-ordinate bench had held in favor of the assessee by allowing its claim for deduction for purchase of software license from M/s. Acqueon Technologies Inc. USA. It is noted that in the present appeal before us, the assessee has purchased the software license from the same vendor i.e. M/s. Acqueon Technologies Inc. USA.
Respectfully following the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Limited Vs. CIT (supra) and also the decision of the Coordinate Bench of the Tribunal in the Assessee’s own case (supra) on the identical set of facts, we set aside the order of the learned Commissioner of Income Tax (Appeals) and delete the addition made by the learned Assessing Officer in respect of disallowance of Rs. 2,61,69,512/- made towards payment of software license fee u/s.40(a)(i) of the Act. Accordingly, ground nos. 2 to 5 are allowed.
9 The second issue involved in the present appeal before us relates to disallowance of interest expenditure amounting to Rs.1,15,80,890/- by the Ld. AO u/s. 36(1)(iii) of the Act.
9.1. In the course of assessment, Ld. AO noted that assessee had incurred interest expenditure to the tune of Rs. 8,49,09,595/-. From the schedule 20.04 to the notes to the financial statement for the relevant year Ld. AO noted that assessee has advanced interest free loan to Serviont Employees Shares Trust and thus, asked the assessee to submit explanation for the same. Assessee
5 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 submitted that it has advanced interest free loan of Rs.4,68,06,683/- to Serviont Employees Shares Trust in the AY 2007-08 for the purpose of purchasing its own shares. It further submitted that the shares so purchased by the Trust would be allotted to the employees at a beneficial price and when the employees exercised the option to subscribe to the shares as per the Employees Stock Option Scheme (in short “Scheme”) and pays the consideration. The consideration received from the employees is in turn utilized by the Trust for repayment of loan granted by the assessee. Assessee submitted that the balance loan outstanding as on 31.03.2011 was Rs.2,64,25,283/- which is only in relation to the Scheme for the benefit of the employees of the assessee company. Ld. AO completed the assessment by holding that advancement of loan to employee Share Trust was not for the business purpose since it did not derive any benefit from the same. Consequently, by applying the methodology prescribed under Rule 8D(2) (ii) formula, Ld. AO computed the amount of Rs.1,15,80,890/- for the purpose of making disallowance u/s. 36(1)(iii) of the Act. Aggrieved, assessee went into appeal before the Ld. CIT(A). Ld. CIT(A) upheld the disallowance made by the AO on the sole premise that shares were issued to other companies also and not the employees alone during the past years. Aggrieved, the assessee is in appeal before the Tribunal.
9.2. Before us, Ld. Counsel reiterated the submissions made before the authorities below and placed on record a gist of arguments and a paper book containing 237 pages. For the sake of clarity and bringing facts in proper perspective he submitted that the said Trust was established for the sole benefit and welfare of the employees to participate in the ESOP Scheme of the assessee. He further submitted that in the past assessment years
6 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 the employees of the assessee have purchased 78,727 shares and during the year under consideration these employees have exercised their options under the Scheme and purchased 4,035 shares of the assessee from the Trust at a beneficial price. Accordingly, Ld. Counsel emphasized that advancing loan to Trust is for the benefit and welfare of its employees which has a direct business connection.
9.3 By referring to another submission placed on record on 07.07.2021 containing 48 pages made through e-mail, Ld. Counsel referred to the extract of annual report for the FY 2006- 07 relevant to AY 2007-08 and annual report of the year under consideration i.e. AY 2011-12. From the Balance Sheet for AY 2007-08, he pointed out that assessee had its own fund comprising of share capital and reserves and surplus amounting to Rs.,61,10,65,928/- whereas the interest free loan advanced to Serviont Employees Shares Trust is only of Rs.4,68,06,683/- which evidently demonstrates that loans advanced to the Trust were out of the surplus fund available with the assessee. He further pointed out from the Annual Report of the year under consideration that the loan outstanding is remaining at an amount of Rs.2,64,25,283/- as the trust has been repaying the loan component as and when employees have exercised their option of purchasing the shares of the assessee. Ld. Counsel thus submitted that unless interest payment is directly related to the diverted funds, it cannot be said that interest incurred by the assessee was for non-business purpose. Thus, when there is no direct nexus of utilization of borrowed funds, no disallowance is warranted for which he placed reliance on the decision of Coordinate bench of Bangalore, ITAT in the case of Vistar Financial Services Pvt. Ltd. Vs ACIT in ITA No. 684/Bang/2019
7 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 dated 27.07.2019, relevant extract of which is reproduced as under:
“We, after considering the facts and circumstances of the case, and legal position and judicial decisions on the availability of surplus fund are of the opinion that the assessee has granted interest free advance to its Welfare Trust not out of the Borrowed funds as envisaged by the learned Authorised Representative duly supported by the financial statements and the Hon'ble Apex Court decisions. The assessee has to prove that the advances are not out of Borrowed funds and the onus lies on the assessee to satisfy that non-interest bearing funds have been provided to the Welfare Trust. Accordingly, we are of the opinion that the assessee company as per the Balance Sheet has Reserves and Surplus of Rs.30,01,46,634 and whereas the amount advanced is Rs.5,08,10,000 to Welfare Trust out of surplus funds. We are of the substantive opinion that the addition made by the Assessing Officer cannot be sustained on applying the above said judicial decisions and provisions of Section 36(1)(iii) of the Act. Hence we set aside the order of CIT (Appeals) and direct the Assessing officer to delete the addition and allow the ground of appeal of the assessee.” 9.4. Ld. Counsel further submitted that the methodology adopted by the Ld. AO for computing the amount of disallowance, formula prescribed under Rule 8D(2)(ii) has been used which is contrary to the provisions of law. Ld. Counsel further submitted that the said trust has been set up wherein the beneficiary are employees of the company and it has been formed to allot shares in the Scheme for the benefit of the employees of the assessee company. The said loan was provided for the betterment of welfare of employees which is purely and exclusively for the purpose of business of the assessee. Ld. Counsel for the assessee also submitted that in the immediately succeeding assessment years 2012-13 and 2013-14, ld. CIT(A) on identical facts has categorically held that advancement of loan to the trust has business connection and thus deleted the disallowance made by the Ld. AO towards interest against which Department is not in appeal before the Tribunal. For this Ld. Counsel placed reliance on the decision of Hon’ble Supreme Court in the case of CIT Vs. Radhasoami Satsang 193 ITR 321 (SC).
8 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 9.5. Per contra, the Ld. Sr. DR relied on the order of the Ld. CIT(A) and submitted that in the past, the trust has sold shares of the assessee to two Mauritius entities of “Sansar Group”. He thus, contended that the disallowance has been rightly made by the AO and sustained by the Ld. CIT(A).
We have heard rival submissions and gone through the facts and circumstances of the case. At the outset, we note that it is an undisputed fact that the loan by the assessee was granted in the AY 2007-08 and not in the year under consideration before us. Trust has been set up for the welfare and benefit of the employees of the assessee company for the purpose of issuing shares under the ESOP Scheme at beneficial price to them. We also take note of the fact that in the year in which the loan has been granted, assessee had its own fund comprising of share capital and reserve and surplus totaling to Rs.61.10 Cr. It is also an undisputed fact that that the trust has sold 78,727 shares of the assessee to the employees in the past and 4035 shares in the year consideration and the loan outstanding as on 31.03.2011 is of Rs.2.65 Cr. as against what was initially granted in the sum of Rs. 4.68 Cr. We also note that there is an ESOP Scheme which is in place for the benefit of employees of the assessee for which a trust has been set up through which employees exercise their options under the ESOP scheme and purchase shares of the assessee company at a beneficial price.
10.1. We note that the impression of the Ld. AO that interest free advance is for non-business purpose is a short-sighted approach for the reason that the advance has been given to the Trust of the employees of the assessee, who held the shares on behalf of the employees of the assessee and are beneficiaries of the said Trust. We also note that employees stock options are meant for boosting
9 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 the morale of the work-force who are critical to the growth of the organization and, therefore, we are inclined to find favour with the submissions made by the Ld. Counsel that the interest free advance to the trust is for business purposes. Further, we note that even though the assessee has claimed interest on borrowings as a charge to the P&L Account, it has to be admitted that this is a transaction of yesteryear for the ESOP acquired out of interest free funds provided to the employees Trust who held such shares on behalf of the eligible employee beneficiaries. As and when the vesting of shares happens, the employees make payment to the Trust, which in turn, returns the money advanced to the assessee. Such funds collected from employees go to reduce the interest free advance. The interest free advance constitute positive action on the part of the assessee in earmarking funds for issue of shares in favour of the eligible employees. Thus, the conclusion of the Ld. AO that this is not for business purpose cannot be held to be correct and the arrangement of employees stock options effected from interest free advances constitute expenses for the benefit of employees which is an allowable expenditure.
10.2. Further, we note that there is availability of surplus funds in the year in which the interest free advance has been granted to the trust and there is no direct nexus which has been established by the Ld. AO to demonstrate that the interest free advances have been given out of the borrowed funds. For this, we find force from the decision of the Hon’ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. (2019) 102 taxmann.com 552 (SC) dated 02.01.2019 wherein it has been held as under:
“7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available
10 ITA No.903/Chny/2019 Serviont Global Solutions, A.Y: 2011-12 with the assessee. The tribunal has also followed its own order for Assessment year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the high Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.” 11. Accordingly, considering the facts and circumstances of the case and the legal position covered by the judicial decisions , we are of the opinion that the addition made by the Ld. AO and confirmed by the Ld. CIT(A) cannot be sustained. Accordingly, we delete the addition and allow ground nos. 6 to 8 of the assessee.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 19th August, 2022.
Sd/- Sd/- (MAHAVIR SINGH) (GIRISH AGRAWAL) Vice President Accountant Member Dated: 19th August, 2022 Jd.(Sr.PS) Copy to: 1. The Appellant: 2. The Respondent:. 3. CIT(A)-16, Chennai 4. CIT , Chennai 5. The DR, ITAT, Chennai Bench, Chennai [