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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’, NEW DELHI
Before: SHRI N.K. BILLAIYA & MS. SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM:
These three appeals are filed by the assessee against the order dated 24.03.2015, 22.03.2019 and 12.10.2018 passed by the CIT(A)-IX, New Delhi for Assessment Years 2010-11, 2011-12 & 2013-14 respectively.
The grounds of appeal are as under:
ITA No. 4389/Del/2015, A.Y. 2010-11 1.0 That on the facts and in the circumstances of the case and in law, the order passed by the Learned Commissioner of Income-tax
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(Appeals) (“Learned CIT(A)”) is erroneous and bad in law.
2.0 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the assessed income of Rs.5,16,94,850 determined by the Learned Assessing Officer (“Learned AO”) vide his order passed under section 143(3) of the Act.
3.0 Denial of set off and carry forward of losses and unabsorbed depreciation of demerged business undertakings of Cellnext 3.1 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding that the business loss and unabsorbed depreciation amounting to Rs.9,95,67,606 and Rs.2,24,16,480 respectively did not pertain to the demerged business undertakings and are consequently not eligible for set-off and carry- forward in the hands of the appellant. 3.2 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the denial of the set off of brought forward loss amounting to Rs.1,92,18,032 of the demerged business undertakings under section 72A of the Act during the captioned assessment year. 3.3 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the denial of the set off of unabsorbed depreciation of the demerged business undertakings amounting to Rs. 1,48,81,461 under section 72A of the Act during the captioned assessment year. 3.4 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in holding that the appellant has failed to controvert the findings of the Learned AO and has failed to show that the conditions stipulated in Section 72A are fulfilled in this case. 3.5 Without prejudice to the above, on the facts and circumstances of the case the Learned CIT(A) erred in not directing the Learned AO to allow the set-off of business losses and unabsorbed depreciation amounting to Rs.9,95,67,606 and Rs.2,24,16,480 respectively of the demerged business undertakings in proportion to the assets taken over by the Appellant.
4.0 Disallowance of SMS and server hosting charges 4.1 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the disallowance of server hosting charges and SMS purchase charges amounting to Rs. 1,66,90,240 under section -40(a)(1) of the Act. 4.2 That on the facts and in the circumstances of the case and in
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law, the Learned CIT(A) erred in upholding that the expenses incurred on account of sewer hosting charges and SMS purchase charges were royalty in nature as per Section 9(1 )(vi) of the Act. 4.3 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the disallowance of server hosting charges and SMS purchase charges under section 40(a)(i) of the Act even though the Learned AO failed to elucidate how these charges are tenable in India as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreements between India and country of residence of the service providers. 4.4 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the disallowance of server hosting charges and SMS purchase charges under section 40(a)(i) of the Act by applying retrospective amendments introduced by the Finance Act, 2012 to a transaction which took place in Financial year 2009-10 i.e. prior to the introduction of amendments by Finance Act 2012.
Other Grounds
5.0 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the disallowance of Rs.3,28,300 on account of rental charges paid holding the same was not incurred wholly and exclusively for the purpose of business under section 37 of the Act.
6.0 That on the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in upholding the denial of credit of taxes deducted at source amounting to Rs.5,76,814.”
ITA No. 4658/Del/2019, A.Y. 2011-12
1.0 That on the facts and in circumstances of the case and in law, the order passed by the Learned Commissioner of Income Tax (Appeals) [“Ld. CIT(A)"] is erroneous and bad in law.
2.0 Denial of set off and carry forward of losses and unabsorbed depreciation of demerged business undertakings of Cellnext Solution Limited. 2.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in dismissing the Appellant’s ground of appeal on setoff of business loss and unabsorbed depreciation amounting to INR
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3,44,47,508 and INR 75,35,019 respectively. 2.2 That on the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in enhancing the income of the Appellant by INR 34,677,567 by holding that business loss and unabsorbed depreciation was disallowed by the AO and confirmed by the CIT(A) in AY 2010-11. 2.3 The Ld. CIT(A) grossly erred in relying on earlier year’s i.e. AY 2010-11 of the then Ld. CIT(A) without appreciating the fact that the order was not a reasoned order and did not address the flaws of the Learned Assessing officer’s (Ld. AO) order. 2.4 That on the facts and circumstances of the case and in law, the Learned CIT(A) erred in not directing the AO to dispose the rectification application filed for AY 2010-11 considering the fact that it was a mistake apparent from record wherein the Ld. AO contradicted his own observation. 2.5 Without prejudice to above, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not directing the Ld. AO to allow the set-off of business losses and unabsorbed depreciation amounting to INR 3,44,47,508 and INR 37,15,251 respectively of the demerged business undertakings in proportion to the assets taken over by the Appellant.
3.0 Disallowance of Server Hosting Charges paid to non- residents of INR 22,992,319 3.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in disallowing Server Hosting Charges (i.e. charges for access to an overseas database) of INR 27,741,633 (including INR 47,49,344 paid to residents in India) under section 40(a)(i) of the Act treating it as royalty under section 9(1 )(vi) of the Act. 3.2 That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of server hosting charges under section 40(a)(i) of the Act by applying retrospective amendments introduced by the Finance Act, 2012 to a transaction which took place in Financial year 2009-10 i.e. prior to the introduction of amendments by Finance Act 2012. 3.3 Without prejudice to above, on facts and circumstances of case and in law, the Ld. CIT(A) failed to appreciate the fact that the Appellant could not have withheld tax on payments of server hosting charges due to impossibility of performance of task since the definition of ‘Royalty’ as defined under section 9(1 )(vi) of the Act was amended by Finance Act, 2012. 3.4 That on the facts and circumstances of the case and in law,
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the Ld. CIT(A) failed to appreciate that payment made to non-resident vendor towards server hosting charges were for the purpose of earning income from a source outside India, specifically covered by the exception under section 9(1 )(vi)(b) of the Act. 3.5 That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that payments were made to non-resident vendors who were eligible to claim benefit of the Double Taxation Avoidance Agreement (DTAA) signed between India and the country of their residence since the said payments are not taxable as per the definitions contained in the applicable DTAA.
4.0 Disallowance of amounts paid to residents of INR 47,49,344 4.1 That on facts and circumstances of case and in law, the Ld. CIT(A) erred in disallowing the payment made to resident payees, amounting to INR 47,49,344 under section 40(a)(i) of the Act as the said section only covers payments to non-residents 4.2 That on facts and circumstances of case and in law, the Ld. CIT(A) erred in disallowing the payment made to resident payees without appreciating the nature of transaction and applicability of withholding taxes on it.
5.0 Disallowance of rent due to non-deduction of tax at source 5.1 That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of INR 29,28,609 on account of payment of rental charges for non-deduction of taxes under the provision of section 194-I of the Act. 5.2 That on facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the said payments were actually reimbursements made to a group company and did not represent actual payment of rent. 5.3 That on facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that no tax is to be deducted at source on cost-to-cost reimbursement made by the Appellant. 5.4 That on the facts and circumstances of the case and in law, the Ld. CIT(A) grossly erred in appreciating the fact that requisite tax was appropriately withheld by Group company while making rent payment to the vendor.
Other grounds
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6.0 The on facts and in the circumstances of case and in law, the Ld. CIT(A) erred in not giving proper credit of prepaid taxes.
7.0 The on facts and in the circumstances of case and in law, the Ld. CIT(A) erred in not disposing the grounds of appeal on levy of interest under section 234B and 234C of the Act.
8.0 That the above grounds of appeal are mutually exclusive and without prejudice to each other.
ITA No. 487/Del/2019, A.Y. 2013-14
1.0 That on the facts and in circumstances of the case and in law, the order passed by the Learned Commissioner of Income Tax (Appeals) [“Ld. CIT(A)”] is erroneous and bad in law.
2.0 Disallowance of SMS Purchase Charges and Server Hosting Charges paid to non-residents 2.1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in disallowing SMS Purchase Charges of INR 56,277,820 (i.e. international connectivity charges) and Server Hosting Charges of INR 24,701,338 (i.e. charges for access to an overseas database) under section 40(a)(i) of the Act treating it as royalty under section 9(1 )(vi) of the Act.
2.2 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that payment made towards SMS purchase charges were for the purpose of earning income from a source outside India, specifically covered by the exception under section 9(1 )(vi)(b) of the Act. 2.3 That on the facts and in circumstances of the case and in law, the Ld. CIT(A) was not justified in denying the fact that server hosting charges paid to Rackspace has already been allowed by Hon’ble Mumbai Tribunal in the case of ITO vs People Interactive (I) P Ltd [ITA No 2179 to 2182 of 2009] relying upon the decision of Delhi High Court judgment in the case of Asia Satellite Telecommunications Co ltd [323 ITR 340], 2.4 That on the facts and circumstances of the case and in law, Ld. AO erred on ignoring the fact that Rackspace is one of the party to whom the appellant has paid server hosting charges.
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2.5 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that payments were made to non-resident vendors who were eligible to claim benefit of the Double Taxation Avoidance Agreement (DTAA) signed between India and the country of their residence. 2.6 That on facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in concluding that Tax Residency Certificate is a pre- requisite to claim benefit under DTAA.
3.0 That the above grounds of appeal are mutually exclusive and without prejudice to each other. 4.0 That the Appellant craves leave to add, alter, amend and/or rescind any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at the time of or before the hearing of this appeal as per the law.
We are taking up the brief facts of Assessment Year 2010-11 bearing ITA No. 4389/Del./2015.
The assessee company is a Private Limited Company incorporated under the Companies Act, 1956 on 17.10.2003. Its main Business is to provide messaging product, services and value added services for various communication media and to provide services enabling Mobile messaging via software development & Sales for managing inbound & outbound SMS, MMS, and EMS. During the year the assessee company has taken over two undertakings of Cellnext Solutions Limited, namely Cellpush Business Undertaking and Mobile Value Added Services Business Undertaking in a scheme of arrangement. The Merger took place in accordance with the provisions under Sections 391 to section 394 of the Companies Act, 1956. The schemes of arrangement envisaging the merger was approved by the Hon’ble Delhi High Court vide order dated 27/03/2012. As a result of this merger assessee was entitled to claim set off of all the brought forward business losses and unabsorbed depreciation pertaining to the two demerged undertakings of Cellnext Solutions Limited in accordance with the provisions of section 72A of the Income tax Act, 1961. During the year the
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brought forward business losses and unabsorbed depreciation of Cellnext Solutions Limited (Demerged Company) has been adjusted against ‘Income under the head Business and Profession’ and ‘Income under the head Other Sources’ of appellant Company (Resulting Company) to the extent of Rs 1,92,18,031 and Rs 1,48,81,461 respectively. The Assessing Officer disallowed the entire claim of set off of brought forward business losses and unabsorbed depreciation. During the year assessee had paid a sum of Rs. 1,66,90,240/- to a foreign parties as server hosting charges and towards charges for purchase of SMS, the Assessing Officer treated the said payment as royalty and disallowed the entire amount paid for non deduction of TDS. Assessee’s Gurgaon business premises are on rent. During the year it had paid a sum of Rs. 57,91,192/-as rent to the landlord for the use of the same. The Assessing Officer held that rent payable was Rs 54,62,892/-. Consequently added a sum of Rs. 3,28,300/- in the assessable income of the assessee.
Being aggrieved by the Assessment Order, the assessee preferred appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
The Ld. AR submitted that Ground No. 1 and 2 general in nature and therefore the same is not adjudicated above.
As regards Ground No. 3 to 3.5 regarding denial of set off and carry forward of losses and unabsorbed depreciation of demerged business undertakings of Cellnext. The Ld. AR submitted that the CIT(A) erred in upholding the finance of the Assessing Officer that the business loss and unabsorbed depreciation amounting to Rs. 9,95,67,606/- and Rs. 2,24,16,480/- respectively did not pertain to the demerged business undertakings and are consequently not eligible for set off and carry forward in the hands of the assessee. The Ld. AR further submitted that CIT(A) erred in upholding the denial of the set off of unabsorbed depreciation of the demerged business undertakings amounting to Rs. 1,48,81,461/- u/s 72A
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of the Act during the present assessment year the denial of set off of brought forward loss amounting to Rs. 1,92,18,032/- of the demerged business undertakings u/s 72A of the Act during the assessment year. The Ld. AR further submitted that the CIT(A) was incorrect in giving the finding that the assessee has not fulfilled the condition set out u/s 72A. In fact, the CIT(A) should have directed the Assessing Officer to allow the set-off of business losses and unabsorbed depreciation amounting to Rs. 9,95,67,606/- and Rs. 2,24,16,480/- respectively of the demerged business undertakings in proportion to the asset taken over by the assessee. The Ld. AR submitted that the assessee company is the resulting company and the demerged company has not claimed any losses or carried forward any setoff. The Ld. AR submitted the definition of merge u/s 2(19AA) of the Act as well as Section 78(2) along with 72A(4) and (5). The Ld. AR also quoted Rule 9 of the Income Tax Rules, wherein no conditions has been given as regard merger of the companies. Under 72A(4), the assessee company should not have to give the books of accounts in respect of demerger of subsequent assessee. The Ld. AR further pointed out that the Assessing Officer in fact by calculating this addition in respect of set off of carry forward loss mentioned that to the extent of Rs.2,82,88,938.56/- should be allowed and only Rs. 58,10,553.44/- should be made as addition. The Ld. AR submitted that neither the Assessing Officer as well as the CIT(A) has given any finding as to why the addition has been made to the effect of 3,40,99,493/- when the demerge company has not claimed depreciation on the same.
The Ld. DR as regards Ground No. 3 to 3.5 submitted that CIT(A) has given its finding in page 5 of the order and requested the Bench that the matter may be restored back to the file of the CIT(A). In alternative submissions, the Ld. DR submitted that the Assessing Officer has given computation in the order and the same should be upheld.
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
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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.
As regards Ground No. 4 to 4.4 relating to disallowance of SMS and server hosting charges amounting to Rs. 1,66,90,240/- u/s 40(a)(i) of the Act. Ld. AR submitted that the CIT(A) erred in upholding that the expenses incurred on account of server hosting charges and SMS purchase charges were royalty in nature as per Section 9(1)(vi) of the Act. The Ld. AR further submitted that the CIT(A) erred in upholding the disallowance of server hosting charges and SMS purchase charges u/s 40(a)(i) of the Act even though the Assessing Officer failed to give the proper reasoning as to how these charges are taxable in India as royalty u/s 9(1)(vi) of the Act. The Ld. AR submitted that the Assessing Officer totally ignored that the Double Taxation Avoidance Agreements between India and country of residence of the service providers is applicable in the present case and the server hosting charges & SMS purchase charges cannot be termed as royalty. The Ld. AR further submitted that applying retrospective amendments introduced by the Finance Act, 2012 to a transaction which took place in financial year 2009- 10 i.e. prior to the introduction of amendments is also not permissible under the Act. The Ld. AR submitted that this is only server hosting charges & SMS purchase charges and does not have any element of income, therefore,
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this is not a royalty. To demonstrate this, the Ld. AR pointed out Explanation 2 with respect to royalty as well as Explanation 5 of Section 9(1)(vi) of the Income Tax Act, 1961 and further elaborated that Explanation 6 not come in the present case. The Ld. AR also pointed out Article 12 of the DTAA and submitted that the Treaty will over-ride the provisions of the Income Tax Act. The Ld. AR relied upon the following decisions:
i) Asia Satellite Telecommunications Co. Ltd. vs. DIT 332 ITR 340
ii) ITO vs. People Interactive(I) P Ltd. ITA No. 2180/Mum/2009
iii) PCIT vs. M. Tech India P. Ltd. 381 ITR 31 (Del HC)
iv) CIT vs. Vinzas Solutions India P. Ltd. 292 CTR 332 (Mad HC)
v) Bharti Airtel Ltd. vs. ITO 178 TTJ 708 (Del Tri.)
vi) American Chemical Society vs. DCIT ITA No. 6811/Mum/2017
vii) Rackspace, US Inc. vs. DCIT (ITA No. 1634/Del/2016
viii) DCIT vs. Magnon Solutions Pvt. Ltd. ITA No. 5878/Del/2014
ix) EPRSS Prepaid Recharge Services India (P.) Ltd. vs. ITO (2018) 100 taxmann.com 52 (Pune – Trib.)
x) DDIT vs. Savvis Communication Corporation ITA No. 7340/Mum/2012
The Ld. AR also relied upon following decisions on the preposition that unilateral amendment cannot have a binding effect on a Tax Treaty and retrospective amendment in the Act cannot create any liability on the assessee:
i) CIT vs. Siemens Aktiongesellschaft 310 ITR 320 (Bom HC)
ii) DIT vs. Nokia Network OY 358 ITR 259 (Del HC)
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iii) DIT vs. Infrasoft Ltd. 220 Taxman 274 (Del HC)
iv) Ashok Piramal Management Corpn. Ltd. vs. ACIT (2016) 161 ITD 234
v) Holcim Services South Asia Ltd. vs. DCIT 157 ITD 892 (Mum Tri.)
The Ld. AR has also given an alternate submission that the services and the expenses have incurred outside India and the assessee being non-resident, there should not be any assessment in India and there is no obligation to deduct tax at source on the assessee.
As regards Ground Nos. 4 to 4.4, the Ld. DR submitted that the Explanation 6 of royalty has retrospective effect. The Ld. DR further submitted that the server hosting and SMS charges all these activities comes under the provisions of process and thus rightly added as royalty. In fact Article 12(3) of the DTAA, the word “process” is also used and its meaning should be taken from Income Tax Act itself. The Ld. DR relied upon the decision of the various High Courts and Tribunals. The Ld. DR also relied upon the decision of Verizon Communications Singapore Pte. Ltd. Vs. ITO, Int. Tax. 361 ITR 575 (Mad HC), CIT – Int. Tax. vs. Infosys Technologies Ltd. 204 Taxman 311 (Karn. HC) and CIT- Int. Tax. vs. Samsung Electronics Co. Ltd. 345 ITR 494 (Kar. HC).
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
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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.
As regards Ground No. 5 relating to disallowance of Rs. 3,28,300/- on account of rental charges paid, the Ld. AR submitted that the Assessing Officer quoted a wrong section i.e. Section 69C of the Act. The CIT(A) also made modification and applied Section 37(1), whereas both these sections are not at all applicable when there is a rent agreement between the third party. While computing the rent payable the Assessing Officer failed to consider the increase in the rent which is payable. The Ld. AR submitted that the Assessing Officer ought not to have disallowed such amount on presumption basis.
The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that there is a rent agreement between the assessee and the third party and as per the escalation clause of the said agreement the rent was increased. The Assessing Officer ignored this aspect and relying on the old agreement, quoted Section 69C which is not at all applicable as the assessee explained the increased rent with the documentary evidences. The CIT(A) also while modifying the order of the Assessing Officer applied Section 37(1), which is not at all applicable when
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there is a rent agreement between the third party. While computing the rent payable the Assessing Officer failed to consider the increased in rent which is payable. Thus, Assessing Officer as well as the CIT(A) were not right in making this addition. Ground No. 5 is allowed.
As regards Ground no. 6 relating to denial of credit of taxes deducted at source amounting to Rs. 5,76,814/-, the Ld. AR requested that the same should be set aside to the file of the Assessing Officer in respect of reconciliation as per the records available.
As regard Ground No. 6, the Ld. DR submitted that the TDS is applicable as the income derived is royalty in nature and there is no application made by the assessee under section 195(2) of the Act .
We have heard both the parties and perused all the relevant material available on record. Since the issue herein is decides as there is no royalty involved in the transaction, the issue of TDS whether arise or not has to be looked into by the Assessing Officer on the other aspects and be reconciled as per the submissions of the Ld. AR. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer and decide this issue after taking into account the findings given by us. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose.
In result, appeal being ITA No. 4389/DEL/2015 for A.Y. 2010-11 is partly allowed for statistical purpose.
Now we are taking up ITA No. 4658/Del/2019 (A.Y. 2011-12)
During the year the brought forward business losses and unabsorbed depreciation of M/s Cellnext Solutions Limited (Demerged Company) has been adjusted against 'Income under the head Business and Profession’ and ‘Income under the head Other Sources’ of assessee Company (Resulting
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Company) to the extent of Rs 3,44,47,508/-.The Assessing Officer disallowed the set off of brought forward business losses and unabsorbed depreciation on the plea that no entry of losses has made in the assessee’s books. The total brought forward business losses of the demerged undertakings of M/s Cellnext Solutions limited were of Rs.8,03,49,575/-.The assessee has set off of Rs,3,44,47,508/- only to the extent of current year business income. The Assessing Officer while computing the income has allowed set off 82.96% of Rs.3,44,47,508/-. During the year assessee paid a sum of Rs.2,77,41,633/- to foreign parties as server hosting charges, the Assessing Officer treated the said payment as royalty and disallowed the entire amount paid for non deduction of TDS. During the year Cellnext Solutions Limited had charged the proportionate rent of Rs. 29,28,609/- to the assessee for space occupied and used by the appellant. Cellnext Solution Limited is wholly owned subsidiary of appellant of which two undertakings are merged with the assessee. Cellnext had paid total rent of Rs. 45,05,550/- to Dais Overseas Pvt. Ltd. and TDS of Rs. 4,50,555/- was duly deducted and deposited as per the provisions of section 194I. During the year assessee had Income from Other Sources of Rs. 1,46,96,961/- and unabsorbed depreciation of Rs.75,35,019/-. Thus, the Assessing Officer made addition of Rs. 73,04,959/- on account of inappropriate set off claimed by the assessee, additions of Rs. 2,77,41,633 on account of non deduction of TDS u/s 195, addition of Rs. 29,28,609/- on account of non deduction of TDS u/s 195I and additions of Rs. 46,31,736/- on account of unearned revenue.
Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
As regards Ground no. 1, the same is general in nature, therefore is dismissed.
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As regards Ground No. 2 to 2.5 setoff loss of demerged company same argument has been made by the Ld. AR only with the modification that CIT(A) has enhanced the addition without justifying the same.
The Ld. DR also submitted the same.
We have given the detailed findings on this issue hereinabove. 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. Thus, Ground Nos. 2 to 2.5 are partly allowed for statistical purpose.
As regards Ground No. 3 to 3.5 the same argument has been taken by the Ld. AR as given under Ground no. 4 to 4.4 in Assessment Year 2010-11 as the issue is identical.
The Ld. DR also submitted that the issue is identical.
We have heard both the parties and perused all the relevant material available on record. Since the issue is identical, therefore, we follow the same reasoning given by us in A.Y. 2010-11 for this issue hereinabove and the same will apply in the present assessment year as well. Thus, Ground Nos. 3 to 3.5 are allowed.
As regards Ground No. 4 to 4.2, the Ld. AR submitted that the payment made to resident payees, amounting to Rs. 47,49,344 does not come under the purview of Section 40(a)(i) of the Act as the said section only
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covers payments to non-residents. Therefore, the Assessing Officer was not right in making this addition.
The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that in relation to payments made to resident vendors, the applicability of withholding tax on these pay-outs has not been discussed by the Assessing Officer and the Assessing Officer has not given any opportunity to the assessee to clarify the position on withholding taxes on resident pay-outs. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for fresh adjudication. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground Nos. 4 to 4.2 are partly allowed for statistical purpose.
As regards Ground Nos. 5 to 5.4 relating to rent due to non-deduction of taxes at source, the Ld. AR submitted that the assessee made rental payments amounting to Rs. 1,29,01,020 and party wise details of the rent paid and deduction of tax thereon along with the agreement was submitted to the Assessing Officer on 05.02.2014. Out of the total rent amount, the assessee deducted tax on rent of Rs. 87,21,214 and an amount of Rs. 16,09,941 was paid to Cellnext. Cellnext had deducted tax on this amount under Section 194I of the Act. Further, on the remaining amount of Rs. 25,69,365, no tax has been deducted since the rent paid each of the parties was below the exemption threshold of Rs. 1,80,000/- as prescribed under Section 194I of the Act. The said payment was a cost-to-cost reimbursement of rental expenditure incurred by Cellnext on behalf of the assessee. During the year, the Cellnext has proportionately appropriated the rent of Rs. 29,28,609 to the assessee for the space occupied and used by the assessee. The Ld. AR further submitted that Cellnext has made total payment of Rs.
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45,05,550 to Dals Overseas Private Limited and accordingly deducted tax at source of Rs. 4,50,555 under Section 194I of the Act. Thus, deduction of tax at source by the assessee would result in double taxation of tax on aforesaid income.
The Ld. DR submitted that it is not disputed that the payment made by the assessee is in the nature of rent and that the same was paid to the group concern without any proper rent agreement. Further, there is no evidence given by the assessee to demonstrate that the rent payment was a temporary affair on cost to cost basis. The assessee therefore, could not prove the payment was in the nature of rent and therefore the assessee was in default on account of non deduction of TDS as required u/s 194I of the Act which leads to disallowance of the said payment u/s 40(a)(ia) of the Act. The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee made rental payments amounting to Rs. 1,29,01,020 and party wise details of the rent paid and deduction of tax thereon along with the agreement was submitted to the Assessing Officer on 05.02.2014. Out of the total rent amount, the assessee deducted tax on rent of Rs. 87,21,214 and an amount of Rs. 16,09,941 was paid to Cellnext. Cellnext had deducted tax on this amount under Section 194I of the Act. Further, on the remaining amount of Rs. 25,69,365, no tax has been deducted since the rent paid each of the parties was below the exemption threshold of Rs. 1,80,000/- as prescribed under Section 194I of the Act. The said payment was a cost-to-cost reimbursement of rental expenditure incurred by Cellnext on behalf of the assessee. These contentions of the assessee appears to correct from the submissions and the documents produced before the Revenue authorities. But these documents were totally ignored by the Assessing Officer as well as by the CIT(A). During the year, the Cellnext has proportionately appropriated the rent of Rs. 29,28,609 to the assessee for the space occupied and used by the assessee.
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From the perusal of the records it can be seen that Cellnext has made total payment of Rs. 45,05,550 to Dals Overseas Private Limited and accordingly deducted tax at source of Rs. 4,50,555 under Section 194I of the Act. Thus, deduction of tax at source by the assessee would result in double taxation of tax on aforesaid income. Therefore, the CIT(A) as well as Assessing Officer was not right in disallowing the rent due to non-deduction of tax at source. Ground Nos. 5 to 5.4 is allowed.
As regards Ground No. 6 relating to non giving of proper credit of prepaid taxes, the Ld. AR submitted that direction may be given.
The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. Since the prepaid taxes has not been considered by the Assessing Officer while determined the total income. It will be appropriate to remand back this issue to the file of the Assessing Officer for considering the aspect of prepaid taxes and giving proper credit to that effect. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose.
As regards Ground no. 7, the Ld. AR submitted that interest under Section 234C should be re-computed and be given proper effect.
The Ld. DR submitted that interest under Section 234C has not been adjudicated by the CIT(A) and relied upon the Assessment Order.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that interest under Section 234B and Section 234C were not adjudicated upon by the CIT(A), therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer
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to decide it after verifying all the aspect of the income of the assessee relating to interest under Section 234B and 234C of the Act. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 7 is partly allowed for statistical purpose.
In result, appeal being ITA No. 4658/Del/2019 for A.Y. 2011-12 is partly allowed for statistical purpose.
Now we are taking up ITA No. 487/Del/2019 (AY 2013-14)
The assessee filed its original return of income under section 1391 of the Act on 29.11.2013 declaring an income of Rs. 54,65,300/- and revised return showing income of Rs. 54,65,300 was electronically filed on 19.12.2014. The return of Income was revised to claim the additional amount of credit of TDS which the appellant was eligible to claim after merger of undertakings of Cellnext Solutions Limited. The assessee’s return was selected for scrutiny assessment and notice was issued by the Assessing Officer. The Assessing Officer assessed the total income at Rs. 8,90,37,553/- by making following additions: i) Disallowance of payment amounting to Rs.8,09,79,158/- made by the assessee to foreign services providers on account of server hosting charges and SMS charges under Section 40(a)(i)/37(1) of the Act. ii) Disallowance of expenses amounting to Rs. 14,38,554 under Section 14A of the Act. iii) Disallowance of interest expenses amounting to Rs. 11,54,541 under Section 40(a)(ia) of the Act.
Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
As regards Ground No. 1, the same is general in nature, hence dismissed.
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As regards to Ground Nos. 2 to 2.6, the Ld. AR submitted that the same is identical to the Ground Nos. 4 to 4.2 for Assessment Year 2010-11.
The Ld. DR also submitted that the issue is identical.
We have heard both the parties and perused all the relevant material available on record. Since the issue is identical, therefore, we follow the same reasoning given by us in A.Y. 2010-11 for this issue hereinabove and the same will apply in the present assessment year as well. Thus, Ground Nos. 2 to 2.6 are allowed. Hence, appeal being ITA No. 487/Del/2019 (AY 2013-14) is allowed.
In result, two appeals being ITA No. 4389/DEL/2015 for A.Y. 2010-11 and ITA No. 4658/Del/2019 for A.Y. 2011-12 are partly allowed for statistical purpose and appeal being ITA No. 487/Del/2019 for AY 2013-14 is allowed. Order is pronounced in the open court on 21st November, 2019. Sd/- Sd/-
(N.K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 21st November, 2019. *BR* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR
Asst. Registrar, ITAT, New Delhi
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Sl. Particulars Date No. 1. Date of dictation: 24/10/2019 2. Date on which the draft of order is placed 25/10/2019 before the Dictating Member: 3. Date on which the draft of order is placed 21/11/2019 before the other Member: 4. Date on which the approved draft of order 21/11/2019 comes to the Sr. PS/PS: 5. Date of which the fair order is placed before 21/11/2019 the Dictating Member for pronouncement: 6. Date on which the final order received after 21/11/2019 having been singed/pronounced by the Members: 7. Date on which the final order is uploaded on 21/11/2019 the website of ITAT: 8. Date on which the file goes to the Bench 21/11/2019 Clerk 9. Date on which files goes to the Head Clerk: 10. Date on which file goes to the Assistant Registrar for signature on the order: 11. Date of dispatch of order: