DCIT, GURGAON vs. M/S. DLF PROJECTS LTD., GURGAON

PER SUDHANSHU SRIVASTAVA, J.M.

This appeal has been preferred by the revenue against the

order of the Ld. Commissioner of Income Tax (Appeals),

Faridabad dated 24.07.2014 pertaining to assessment year 2009-

10.

2.0 The appeal primarily involves three issues in respect of

which disallowance/s made by the assessing officer have been

deleted by the Ld. CIT (Appeals). The issues under dispute are - 1

ITA No. 5178/Del/2014 Assessment year 2009-10

a. Disallowance of Project Management Expenses of

Rs.6,32,50,280/- on ground of non deduction of Tax at

Source (TDS) u/s 195 of the Income Tax Act, 1961

(hereinafter called ‘the Act’)

b. Disallowance of interest expenses on estimated rate of

12%amounting to Rs.49,01,176/- on the ground that same

pertains to Capital Work In Progress (CWIP)

c. Capitalization of Software expenses - Rs.65,70,768/-

2.1 With respect to Ground no. 1 relating to disallowance

of project management expenses, the brief facts are that the

respondent/assessee had made payment of Rs. 6,65,79,242/-

(GBP 9,05,043) to Cyprus based company Laing O’ Rourke India

(Holdings) Ltd. (in short LOR Cyprus) for supply of manpower in

accordance with the Manpower Supply Agreement effective from

1st April, 2008 for a period of three years. The said expenses were

claimed under the head ‘Project Management Expenses’ and the

payment was made after deducting TDS on 5% mark-up.

However, on the actual cost component, which was in the nature

of reimbursement of salaries, no TDS was deducted by the

respondent but TDS was deducted by LOR Cyprus u/s 192 of the

Act. The assessing officer made the disallowance of said expenses

ITA No. 5178/Del/2014 Assessment year 2009-10

u/s 40(a)(i) on the ground that the respondent/assessee had

failed to deduct TDS on the entire amount u/s 195 of the Act.

The Ld. first appellate authority has deleted the disallowance vide

finding recorded at Para 6.9 to 6.14 of the impugned order.

2.2 Ground Nos. 2 & 3 are against deletion of disallowance

of interest to the extent of Rs. 49,01,176/- by the Ld. CIT (A).

The assessing officer has considered the disallowance of interest

by holding that interest attributable to Capital Work in Progress

(CWIP) is not allowable as revenue expense. The disallowance has

been made by estimating interest @12% on the month-end

balance of the CWIP which was added to the cost of CWIP. The

Ld. CIT (A) deleted the disallowance.

2.3 Ground no. 4 is on the issue of capitalization of

software expenses to the extent of Rs. 65,70,768/-. The assessing

officer was of the view that Software expense of Rs. 1,03,95,322/-

incurred by the respondent/assessee is of capital nature and

same was required to be clubbed with Computer and other

peripherals. Accordingly, the assessing officer made disallowance

of Rs. 65,70,768/- after allowing depreciation @ 60%. The Ld.

first appellate authority deleted the disallowance.

ITA No. 5178/Del/2014 Assessment year 2009-10 2.5 Now the Revenue is before the ITAT and has raised the

following grounds of appeal: “1. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 6,32,50,280/- on account of non-deduction of TDS, by ignoring the fact that as per ‘Manpower Supply Agree4ment’ filed, the Cyprus Company LOR Cyprus is the service provider and keeping in view that the services were rendered in India, the payment received by LOR Cyprus was accrued and earned in India and hence TDS u/s. 195 was to be deducted by the assesse company. 2. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 49,01,176/- made on account of disallowance of interest expenses without appreciating the fact that the statement of the assesse is contradictory to the documents produced. 3. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 49,01,176/- relating to disallowance of interest expenses without appreciating the fact that on one hand, the assesse is submitting that the plant and machinery were ready to use after 4-5 days of erection and commissioning whereas details of CWIP shows that plant and machinery were purchased and deployed from March 2008 to September 2008.

ITA No. 5178/Del/2014 Assessment year 2009-10 4. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 65,70,768/- made on account of disallowance from the software expenses without appreciating the fact that software expenses are of enduring nature and are to be taken as a part of computers and need to be capitalized. 5. That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal.”

3.0 Taking up ground no. 1, Sh. Surender Pal, the Ld.

Departmental Representative filed a paper-book containing case

laws running into 44 pages. It was argued that

respondent/assessee was liable to deduct TDS on the entire

amount of manpower supply charges paid to LOR, Cyprus.

Relying on the judgment of the Hon’ble Delhi High Court in the

case of Centrica India Offshore P. Ltd. vs. CIT reported in [2014]

364 ITR 336 (Delhi), it was contended that the amount

reimbursed to LOR, Cyprus was in the nature of Fee for

Technical Services (FTS) and as such the assessee was required

to deduct TDS on entire amount. Reliance was also placed on

decision of the Authority for Advance Rulings (AAR) in the case of

Verizon Data Services India P. Ltd. and AT & S India P. Ltd.

ITA No. 5178/Del/2014 Assessment year 2009-10

3.1 In response, Sh. R.S. Singhvi, the Ld. AR appearing

on behalf of the respondent/company supported the order of Ld.

CIT (A) and contended that the Ld. first appellate authority has

passed a well reasoned order after taking into consideration the

terms of the agreement and has rightly deleted the disallowance.

The Ld. AR also placed on record two paper books, one

containing case laws and the other consisting documents in

support of claim of project management expenses. The attention

of the Bench was drawn towards the copy of invoice raised by

LOR, Cyprus and the Journal voucher placed at Paper Book

Pages 6 & 7 wherein the mark up component had been

separately mentioned. It was vehemently argued that the

respondent/assessee has rightly deducted TDS @ 42.23% on the

mark-up amount of GBP 43,097 being 5% of the actual cost and

further that there was no need to deduct TDS on the actual cost

which is merely in the nature of reimbursement. The main plank

of Ld. AR’s submission was that the TDS has duly been deducted

on payment of salaries by LOR Cyprus and as such the

reimbursement of actual cost portion was not exigible to the

withholding tax in view of judgment of the Hon’ble Apex Court in

ITA No. 5178/Del/2014 Assessment year 2009-10

the case of GE India Technology Ltd. vs. CIT reported in [2010]

327 ITR 456 (SC).

3.1.1 The Ld. AR also submitted that the actual payment

made to LOR Cyprus has further been disbursed to respective

employees after deduction of TDS u/s 192 of the Act and as such

there is no case of any default in complying with the withholding

tax provisions. Reference was made to the specific finding of the

Ld. CIT (Appeals) recorded at Pages 29 and 30 of the impugned

order. In support, reliance was also placed on the decision of

coordinate bench of ITAT Ahmedabad in the case of Burt Hill

Design P. Ltd. vs. DDIT reported in [2017] 186 TTJ 652 and the

judgment of theHon’ble Bombay High Court in the case of DIT vs.

Marks and Spencer Reliance India P. Ltd. (ITA No. 893 of 2014).

3.1.2 On the issue of nature of manpower supply service vis-

a-vis FTS, the Ld. AR countered the argument put forth by the

Ld. DR and submitted that the agreement is merely for supply of

manpower and employees so seconded are under the full control

and supervision of the respondent/assessee and as such the

payment is not in the nature of Fee for Technical Services. It was

further argued that as per Article 12 of the Indo-Cyprus DTAA,

the satisfaction of ‘Make available’ clause is important for

ITA No. 5178/Del/2014 Assessment year 2009-10

treating any service to be in the nature of technical or

consultancy services. The Ld. counsel submitted that as per the

Manpower Supply Agreement, LOR Cyprus has merely supplied

employees on secondment for execution of the project of

respondent/assessee with no responsibility of services rendered

by said employees and as such the pre-requisite condition of

technical services being ‘made available’ remained unsatisfied.

The Ld. AR further placed reliance of decision of the coordinate

bench of ITAT Mumbai in the case of DCIT vs. Mahanagar Gas

Ltd. reported in [2016] 158 ITD 1016 and the judgment of the

Hon’ble Bombay High Court in the case of Marks and Spencer

(Supra) for the proposition that mere secondment of employees

could not be termed as fee for technical services.

4.0 On ground nos. 2 and 3, the Ld. DR, while disputing

the correctness of the impugned order, contended that interest

attributable to CWIP cannot be allowed as revenue expense. It

was further argued that CWIP includes plant, equipments and

cranes which are of enduring nature and as such the assessing

officer has correctly capitalized the interest and made the

disallowance.

ITA No. 5178/Del/2014 Assessment year 2009-10

4.1 The Ld. AR, on the other hand, supported the order of

the Ld. CIT (Appeals) and reiterated the submissions made before

the Ld. first appellate authority. It was further submitted that the

respondent/assessee is a real estate developer and CWIP is in

fact current work in progress in the form of consumables which

are used at different sites. The Ld. AR also raised a plea that the

assessee company has sufficient own funds and that the

assessing officer has failed to prove any nexus between the

borrowed funds and CWIP. The Ld. AR also pointed out that the

issue is also covered by the assessment order for AY 2011-12

wherein the assessing officer has not made any similar

disallowance of interest.

5.0 On ground no. 4, the Ld. DR relied on the assessment

order and stated that software expenses are incurred in

connection with computer and as such same are liable to

capitalized. The Ld. DR justified the action of the assessing on

the ground that expenses towards Annual Maintenance Contract

(AMC), License Fee etc are of enduring nature.

5.1 On the other hand, the Ld. AR submitted that the

expenses towards AMC, consumables and license fee are

incurred on year to year basis and cannot be considered to be of

ITA No. 5178/Del/2014 Assessment year 2009-10

enduring nature. The Ld. AR supported the finding of the Ld. CIT

(Appeals) and submitted that in AY 2011-12, the assessing officer

himself has accepted the claim of AMC as revenue expenditure.

Reference was also made to the decision of the Delhi Bench of the

ITAT in the case of sister concern DLF Home Developers Ltd. vs.

DCIT (ITA NO. 4757/Del/12 and the judgments of the Hon’ble

Delhi High Court in the cases of CIT vs. G.E. Capital Services Ltd.

reported in [2008] 300 ITR 420 (Del) and CIT vs. Amway India

Enterprises reported in (2012) 346 ITR 341 (Delhi).

6.0 We have considered the rival submissions and have

also gone through the orders passed by lower authorities. As far

as ground no 1 of the appeal is concerned, it is seen that the Ld.

first appellate authority has deleted the disallowance of project

management expenses on account of alleged failure to deduct tax

at source after elaborately discussing the various aspects of the

issue in hand. It is settled law that before thrusting liability to

deduct TDS, the following pre-conditions must be satisfied:

i. There must be income element in the hands of the recipient ii. The income must be earned/derived in India iii. In case the payment is made to a non-resident, satisfaction of conditions mentioned in the relevant

ITA No. 5178/Del/2014 Assessment year 2009-10

Article of the Double Taxation Avoidance Agreement (DTAA), if any, is to be seen.

6.1 In the present case, it is observed that the payment of

man power supply charges is being made to a non- resident

company, LOR Cyprus, which is a resident of Cyprus. Further,

India is having DTAA with Cyprus which was operative in the

year under consideration. Moreover, undisputedly, the income

(mark-up component) from the supply of man power is earned

and derived in India. Now the main question to be considered is

the satisfaction of the relevant Articles of the DTAA which would

ultimately decide the nature of payment and liability of

withholding tax.

6.2 When we examine the terms of the Manpower Supply

agreement and the invoice raised by LOR Cyprus placed at Paper

Book pages 1-5 and 6 respectively, it is evident that the non-

resident has only supplied workforce/employees to the

respondent/assessee on secondment basis and further that there

is no responsibility of LOR Cyprus with regard to the services

performed by seconded employees. Also, as rightly observed by

the Ld. CIT (Appeals), the employees are under full management

and supervision of the respondent/assessee. Further, the invoice 11

ITA No. 5178/Del/2014 Assessment year 2009-10

raised by LOR Cyprus shows a clear bifurcation of the amount of

the reimbursement of actual cost and the mark up @ 5% on

which TDS has been deducted by the respondent/assessee.

Therefore, the payment can conveniently be divided into two

parts, one towards reimbursement of the actual cost and the

other towards mark-up. Further, it settled position that TDS

provisions would only come into play only when there is an

element of income involved. The Ld. CIT (Appeals) has discussed

this very aspect in great detail vide finding recorded in Para 6.13

which is reproduced hereunder for a ready reference:

“Any payment, in order to be brought within the scope of income by way of fees for technical services u/s. 9(1)(vii), should be or have at least some element of income in it. Such payment should involve some compensation for the rendering of any services, which can be described as income in the hands of the recipient. When the expenditure incurred is reimbursed as such, without having any element of income in the hands of recipient, it cannot be assumed the character of such income is deemed to accrue or arise in India. In the case of appellant out of the total payment of 905043 GBP a sum of 861946 GBP represents, reimbursement of salary and hence as such without any element of income and 43097 GBP as a mark-up of LOR Cyprus, which is calculated as @5% of amount reimbursed i.e. 861946 GBP. On this mark up of

ITA No. 5178/Del/2014 Assessment year 2009-10

43097 GBP, TDS has been deducted and deposited into the Govt. Account. The AO has not disputed the payment of 43097 GBP and merely the rest of the amount i.e. 861946 GBP has been disallowed which is actually the amount of reimbursement of salary to LOR Cyprus lacking any element of “income”. In view of the above said judicial pronouncements by various courts of law, I am of the considered opinion that the reimbursement made by the appellant i.e. 861946 GBP which is equivalent to Rs. 6,32,50,280/- to the Cyprus Company does not constitute income in the hands of Cyprus Company.”

6.3 We find ourselves in agreement with the finding

recorded by the Ld. CIT (Appeals) which is in conformity with the

principle laid down by the Hon’ble Apex Court in the case of GE

India Technology Cen. P. Ltd reported in [2010] 327 ITR 456

(SC). It is undisputed that the reimbursement of actual

manpower expense has no element of any income in the case of

the service provider LOR Cyprus in terms of section 195 of the

Act. Accordingly, we are of the considered view that the

respondent/assessee was not required to deduct TDS on the

actual cost component which is in the nature of reimbursement

of salaries. The finding of the Ld. CIT (Appeals) in this regard

needs no interference.

ITA No. 5178/Del/2014 Assessment year 2009-10

6.4 Since, LOR Cyprus does not have any Permanent

Establishment (PE) in India, applicability of Article 7 is ruled out

at the very threshold. When we further analyze the various

Articles of Indo-Cyprus DTAA, particularly ‘Article 12 – Royalties

and Fee for Included Services’, we find that the transaction in

dispute cannot be termed as fees for included services as defined

by sub-clause 4 of Article 12 as there is an express requirement

that the services must be made available to recipient. However, in

the present case, the non-resident LOR Cyprus has only supplied

man power to the respondent/assessee and there is no case of

any technical knowledge, experience, skill, know-how or process

being made available to the respondent/assessee. In these

circumstances, we reach the conclusion that reimbursement of

salary to LOR Cyprus is not in the nature of any technical or

consultancy fee and that the same falls outside the purview of

Articles 12 and 13. Our view is supported from the decision of

the Mumbai bench of the ITAT in the case of DCIT vs. Mahanagar

Gas Ltd. (Supra) and ADIT vs. Marks and Spencers Reliance

India P. Ltd. reported in [2013] 27 ITR(T) 448 which has been

affirmed by the Hon’ble Bombay High Court.

ITA No. 5178/Del/2014 Assessment year 2009-10

6.5 Accordingly, we are of the considered view that it is

only the mark up which is liable to withholding tax u/s 195 of

the Act and not the reimbursement of actual cost to LOR Cyprus.

6.6 At this juncture, it will also be relevant to take note of

another important submission of the Ld. AR in which it has been

clarified that the non-resident LOR Cyprus has deducted TDS

u/s 192 of the Act while making payments to the seconded

employees and as such there is no loss to the revenue. This fact

has also been noted by the Ld. CIT (Appeals) vide the following

observation in Para 6.13:

“Without prejudice to the above, LOR Cyprus has deposited tax on the salary paid by it for the services rendered by its employees in India on secondment to the appellant, for which necessary proofs were filed. Hence, there is also no loss to the revenue also under these circumstances.”

6.7 We agree with the observations of the Ld. CIT (Appeals)

and find merit in the arguments of the Ld. AR which is clearly

supported from the decision of the coordinate bench of the ITAT

Ahmedabad in the case of Burt Hill Design P. Ltd. vs. DDIT

reported in [2017] 186 TTJ 652 and the judgment of the Hon’ble

Bombay High Court in the case of DIT vs. Marks and Spencer

Reliance India P. Ltd. (ITA No. 893 of 2014) wherein it has been

ITA No. 5178/Del/2014 Assessment year 2009-10

held that when the payments have been charged to tax in India

u/s 192, the assessee could not be treated as assessee in default

for non-deduction of TDS. We have no hesitation in subscribing

to the view taken by the coordinate bench and approved by

Hon’ble Bombay High Court.

6.8 We also note that the cases relied upon by the Ld DR

are distinguishable on facts and do not help the cause of the

Revenue.

6.9 Accordingly, in light of our observations in the

preceding paragraphs, we find no justification in interfering with

order of the Ld. CIT (Appeals) and hold that the disallowance of

the project management expenses amounting to Rs.

6,32,50,280/- u/s 40(a)(i) r.w.s. 195 of the Act has rightly been

deleted. Accordingly, ground no. 1 of the revenue’s appeal stands

dismissed.

7.0 Coming to ground nos. 2 and 3, it is seen that the dispute

in hand is regarding disallowance of interest allegedly

attributable to CWIP. At the outset, we find that the assessing

officer has not given any basis for estimating the interest

disallowance @12% on the monthly balance of CWIP. The

ITA No. 5178/Del/2014 Assessment year 2009-10

assessment order is silent with regard to the basis of such

estimation and the assessing officer has failed to even prove

slightest of nexus between the borrowed funds and the amount

reflected under the head ‘CWIP’. It is a fundamental principle

that the assessment has to be made after due application of mind

and any disallowance or addition must be backed by logical

reasoning and supported from facts of the case. Further, while

making the disallowance of interest, it is incumbent upon the

assessing officer to establish as to why such claim is disallowed

or capitalized. However, we find that in the present case, the

capitalization and the consequential disallowance of interest has

been made on an arbitrary basis without even appreciating the

fact of availability of own funds and without establishing any

nexus between the interest expense, which is apparently related

to business activities, and the borrowed funds.

7.1 We find that the Ld. CIT (Appeals) has comprehensively

dealt with this issue and his finding is reproduced hereunder:

“7.3 I have gone through the assessment order passed by the AO, submissions filed by the appellant from time to time and other discussion held. The following points emerge from them:-

ITA No. 5178/Del/2014 Assessment year 2009-10

(a) That the appellant is engaged into the business of construction as a Contractor. (b) The plant and machinery of the appellant business is in the shape of cranes, cement feeding plants etc. (c ) Its quiet understandable that the cranes or other machinery purchased from various suppliers cannot be put to use immediately at the time of purchase, due to time lag in transporting these items to various sites and thereafter assembling of various items as per the requirement. (d) The time period which is the gestation period from the date of its purchase/ payment till its “use “is being shown as CWIP. In the year under consideration, appellant had 17 projects in hand from locations as far away as, Mumbai, Chennai, Gurgaon, Cochin, Kolkatta etc. (e) Only the purchase cost that has been incurred by the appellant has been shown in CWIP and no other costs have been incurred on the items shown in CWIP. 7.4 Before proceedings further it would be proper to examine the business of the appellant company. The appellant is engaged into the business of construction as a Contractor. It has fixed assets in the share of plant and machinery, furniture and fixture etc., on 31st March 2009, to the tune of Rs. 292.62 Cr. Out of these total fixed assets of Rs. 298.24Cr. i.e. 2% of the total fixed assets appear as the closing capital work in progress. Moreover the closing CWIP at the end of the year is at Rs. 4,69,42,604/- as compare to Rs. 22,26,69,694/- at the start of the year. The appellant has a share capital and reserve worth Rs. 111,39,95,205/- there

ITA No. 5178/Del/2014 Assessment year 2009-10

are secured loans of Rs. 213,62,47,973/- on which interest of Rs. 26,58,49,339/- was paid. As the company is into the business of construction as a contractor the plant and machinery is in the shape of steel shuttering, cranes, batching plant, generators etc. The appellant worked for different clients at different sites and for these purposes and the plant and machinery in the shape of cranes, batching plant etc. were deployed at several sites. The cranes, batching plants of different sizes and capacities were required to the appellant for different projects. The appellant has purchased cranes, batching plants from different suppliers and in certain cases advances were given to different suppliers against the supplies to be made. Cranes, batching plant are huge in terms of size and have to be designed in accordance to the specific requirements of the project and there is always a possibility of a time lag from the date of supplies of these items to the date of actual uses of these equipments. There is also no doubt that there is no value addition made in these items and the only question is in regard to the time gap between assembling and reassembling of these items. It is also seen that in certain cases, advances were given to different suppliers for supplying equipment, however, the supplies were made subsequently and till the time of actual supply of these items have been received and put to use, such advances have been treated as CWIP. As per the dictionary, meaning of capital work in progress (CWIP) is as below:-

ITA No. 5178/Del/2014 Assessment year 2009-10

“Capital WIP is referred to as Assets under construction and are represented by a specific asset class. IT is an asset on the balance sheet i.e. not considered to be a final product, but must still be accounted for because funds have been invested towards its purchase”. Thus by its very nature CWIP is a work that has not been completed but on which capital investment has already been incurred. In the case of appellant, there is no doubt that the CWIP is basically an asset which has not reached the final product stage. The details filed by the appellant during the course of assessment proceedings as well as during the course of appellate proceedings reveal that there is a closing CWIP of Rs. 4,69,42,604/- as on 31.03.2009, which represents the following:- S.No. Particulars Amount (Rs.)

1 Capital Work in progress-Construction plant 11,29,866 and equipment

2 Capital Work in Progress-Cranes 4,37,38,406

3 Capital Work in Progress-Batching Plant 20,44,598

4 Advance ( debit balance ) to creditors for fixed 29,734 assets

Total 4,69,42,604

The above details makes it clear that the main part of CWIP represents expenditure incurred on cranes amounting to Rs. 4,37,38,406/- out of the total CWIP of Rs. 4,69,42,604/-. Similarly, there is an opening CWIP of Rs. 22,26,69,694/- as on 01.04.2008, and Rs. 1,65,12,229/- as on 31.03.2010.

ITA No. 5178/Del/2014 Assessment year 2009-10

The above details makes it clear that the closing CWIP of Rs. 22,26,69,694/- standing in A.Y, 2008-09 has come down to Rs. 4,69,42,604/- in A.Y. 2009-10 and Rs. 1,65,12,229/- in A.Y. 2010-11. The said details leaves no doubt that the time gap for putting CWIP into use is not more than one year in any case. The appellant has a net worth of Rs. 325.02 Crores against which there is a closing CWIP of Rs. 4.69 Crores. The AO while making disallowance of interest presumed that the borrowed funds were actually being used for purchasing items shown under the head CWIP. However, the AO has not brought anything on record to prove that there is a time gap of more than one year in capitalization of CWIP. On the other side, the appellant has stated that CWIP is merely 1.44% of its net worth and it has sufficient funds to purchase the capital items. The appellant also stated that normally CWIP is capitalized in the books within a period of 3 to 4 months only. In support thereof copies of ledger accounts were filled by the appellant. It’s also a fact that in assessment proceedings for A.Y. 2011- 12, the same issue has been decided by the AO in the case of the appellant in which no disallowance on this account have been made by the AO. The facts of A.Y. 2011-12 as well as A.Y. 2009-10 are identical. In support of its contention a copy of assessment order for A.Y. 2011-12 was also filed by the appellant. 7.5 After pursuing the facts of the case, the observation of the AO made in the assessment order and the copy of the

ITA No. 5178/Del/2014 Assessment year 2009-10

assessment order for A.Y. 2011-12, there is no doubt that there is no material on record that the borrowed funds were actually being used for purchasing CWIP. In this case, CWIP is merely on account of the time lag from the date of purchase/advance to the date of actual use of the equipment. It is a fact that in the case of appellant, who is working as a contractor at 17 different sites all across the country, that plant and machinery has to be deployed at different locations and there is bound to be a time lag. The AO has himself accepted the explanation of the appellant in subsequent years therefore, there is no reason to make disallowance of interest expenditure of Rs. 46,01,176/-.”

7.2 The Ld. DR was not able to controvert the factual and

legal findings of the Ld. CIT (Appeals) wherein the disallowance

has been deleted by holding that the CWIP is towards current

business needs and same could not be considered as capital in

nature. The Ld. CIT (Appeals) has also held that the

respondent/assessee has sufficient own funds and further that

the net worth of the company is far more than the value of CWIP

and as such there is no nexus between the borrowed funds and

the CWIP. We also note that the assessing officer has accepted

the claim of interest in AY 2011-12 wherein, on identical facts, no

such disallowance was made. In these circumstances, the

ITA No. 5178/Del/2014 Assessment year 2009-10

department cannot be allowed to agitate this issue in the year

under reference. Accordingly, in our considered view, the order of

Ld. CIT (Appeals) on this issue is well reasoned and warrants no

interference and is hereby upheld. Consequently, ground nos. 2

and 3 are rejected.

8.0 Ground no. 4 is on the issue of capitalization of

software expenses to the extent of Rs. 65,70,768/-. The assessing

officer was of the view that Software expense of Rs. 1,03,95,322/-

incurred by the respondent/assessee is of capital nature and

same is required to be clubbed with ‘Computer and other

peripherals’. Accordingly, the assessing officer made a

disallowance of Rs. 65,70,768/- after allowing depreciation @

60%. The Ld. first appellate authority deleted the disallowance by

observing as under:

“8.3 I have gone through the submission filed by the appellant form time to time, assessment order passed by the AO and the facts of the case. The company is into the business of construction as a contractor. It has around 17 sites in hand at different location and have more than 800 employees and have around 800 computers. The details of computer software submitted by the appellant reveals that expenditure on AMC, Consumables and Licence fees were incurred during the year. The AO treated the

ITA No. 5178/Del/2014 Assessment year 2009-10

expenditure incurred on software as “capital” in nature and accordingly, allowed depreciation on them @ 60% as against the appellant treating the entire amount as revenue expenditure. The AO has not given any concrete reasons for treating the entire software expenses as capital in nature. The AO has simply said that as per provisions of income tax act, software has been clubbed with computers for depreciation purposes and therefore, software expenses are capital in nature. On the other side, the appellant submitted that the software expenses include expenditure incurred on AMC, Consumables and licence fees. Therese expenses were not of enduring nature and the details of the expenditure itself show that the expenditure pertains to only one year. Similarly expenditure incurred on consumables items includes purchase of small items like training expenses, auto card software, gateway checkpoint software etc and licence fees pertains to renewal of various licences for one year only. The appellant also stated that the expenditure incurred on AMC has been accepted by the AO in the assessment proceedings for the A.Y. 2011-12.

Thus the fact as evident from the various details filed by the appellant clearly reveals that the expenditure was incurred on the following three accounts.

a) Annual Maintenance Cost b) Consumables c) Licence Fees.

ITA No. 5178/Del/2014 Assessment year 2009-10

The details filed also reveals that there is no such item which is enduring in nature, rather expenses were incurred in purchase of various software items, licence fees for renewal of licences, consumables etc. with a limited shelf life. The expenditure incurred on AMC is definitely only for one year and no enduring benefit can be derived there from. Similarly licence fees are being paid only for one year and no enduring benefit is being derived there from. As far as consumable items are concerned there are various software’s purchased for different purposes and the warranty for these software’s were not exceeding twelve months. As these items are not for any enduring benefit the entire expenditure cannot be treated as “Capital Nature”.

The Hon’ble Delhi High Court in the case of CIT Vs. Amway India Enterprises (2012) 346 ITR 341 opined that expenditure incurred on purchase of software application and payment for consideration for acquiring licence to use those application would be allowed as revenue expenditure.

Similarly, in the following cases it has been held that the expenses incurred for either upgrade the system or to run the system is allowable as revenue in nature.

a) CIT Vs. Asahi India Safety Glass Ltd. (2012) 346 ITR 329 (Delhi) b) Chief CIT Vs. O.K. Play India Ltd. (2012) 346 ITR 57 ( P & HS.37(1) c) CIT Vs. GE Capaital Services Ltd. (2007) 164 Taxman 46 (Del.)

ITA No. 5178/Del/2014 Assessment year 2009-10

d) Oracle India Pvt.Ltd. Vs. CIT (Delhi High Court) ITA Nos. 25/2012, 287/2008,417/2009, 447/2009, 461/2009 and 683/2009 e) CIT Vs. Southern Roadways Ltd. (2007) 288-ITR- 15 (Mad.) f) Naveen Projects Ltd. Vs. CIT (2005) 1 SOT 232 (Delhi) g) CIT Vs. Citicorp. Overseas Softwares Ltd. (2004) 85 TTJ (Mumb.)87 h) CIT Vs. Jasper Investments Ltd. (2007) 109 TTJ (Mum.)530 i) Ajit Kumar C Kamadar Vs. CIT (2005) 1 SOT 183 (Mum) The above facts of the case read in light of the various judicial pronouncements make it clear that the item shown by the appellant under the head “Software Expenses” did not have any item in the nature of “Capital expenditure.

Therefore, the appellant is entitled to get a relief of Rs. 65,70,768/- and ground No. 4 is allowed.”

8.1 Admittedly, the expenses claimed under the head

software expense include AMC, consumables and license fee. We

are conscious of the fact that the expenses towards AMC,

consumables and license fee are regular feature in modern

business particularly big organizations like the respondent/

assessee which is obliged to incur these expenses every year.

Also, the very nature of these expenses is such that the

subscriber/purchaser only gets the ‘right to use’ for a limited

ITA No. 5178/Del/2014 Assessment year 2009-10

period of time and as such it could not be said these expenses

provide any benefit of enduring nature. It is also relevant to take

note of the fact that no new asset has comes into existence by

incurring of such expenses and even the assessing officer has

accepted the claim with regard to AMC expenses in AY 2011-12.

8.2 It is our considered view, the finding and reasoning of

the Ld. CIT (Appeals) that software expenses are of revenue

nature is well founded and in consonance with decision of the

Hon’ble Jurisdictional High Court in the case of CIT v. G.E.

Capital Services Ltd. reported in [2008] 300 ITR 420 (Del) which

has been followed by the Delhi Tribunal in the case of the sister-

concern of the respondent/assessee DLF Home Developers Ltd.

(supra). Accordingly, we hereby confirm the order of the Ld. CIT

(Appeals) and uphold the deletion of disallowance of software

expenses. Thus ground no. 4 of the revenue’s appeal stands

dismissed.

9.0 Ground no. 5 is general in nature and requires no

separate adjudication.

10.0 In the final result, the appeal of the revenue is

dismissed.

ITA No. 5178/Del/2014 Assessment year 2009-10 The order is pronounced in the open court on 27th November,

2018.

Sd/- Sd/-

(R.K. PANDA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 27th NOVEMBER, 2018 ‘GS’