M/S ANSYS SOFTWARE PVT. LTD.,,BANGALORE vs. CIT, BANGALORE

This appeal by the assessee is directed against the order dated 22.03.2012 passed by the Commissioner of Income-tax, Bangalore-1, Bangalore [CIT] u/s. 263 of the Income-Tax Act, 1961 [“the Act”].

The assessee is a company engaged in the business of import and sale of computer software rendering technical support services and software development services. For the AY 2006-07, the assessee filed return of income on 08.11.2006 declaring total income of Rs.2,92,48,080. An order of assessment u/s. 143(3) of the Act was passed on 10.11.2009, accepting total income returned by the assessee. Before passing such an order, the AO noticed that the assessee had the following international transactions with Ansys Inc., USA, which was its holding company:-

Since the above transactions are international transactions, the ALP in respect of international transactions, the Arms Length Price (ALP) in respect of international transaction had to be determined in view of the provisions of section 92 of the Act. The AO made a reference to the TPO in terms of section 92CA of the Act. The TPO in his order dated 10.08.2009 accepted the transaction as at arm’s length, requiring no further adjustment.

The CIT in exercise of his powers u/s. 263 of the Act was of the view that the aforesaid order of AO was erroneous and prejudicial to the interests of revenue. According to the CIT, schedule 15 to profit & loss account contained the following details of the payments made by the Assessee to Ansys Inc., USA:-

According to the CIT, the above payments made to Ansys Inc., USA, were in the nature of royalty and therefore in terms of section 195 of the Act, the assessee ought to have deducted tax at source on the aforesaid payments and since the assessee failed to do so, the aforesaid amounts which were claimed as expenditure in the profit & loss account ought to have been disallowed and added to the total income of assessee u/s. 40(a)(ia) of the Act. Since the AO failed to do so and did not make enquiries in this regard, the order of AO was erroneous and prejudicial to the interests of revenue. A show cause notice u/s. 263 dated 05.03.2012 was accordingly issued by the CIT.

The assessee vide reply dated 20.03.2012 took a stand that the assessee deducted tax on the following payments:-

The assessee pointed out that the ITAT in assessee’s own case for AYs 2002-03 to 2004-05 in its order dated 27.07.2006 held that there is no obligation for deduction of tax at source on similar payments in those assessment years. The assessee took a stand that after the passing of the order by the ITAT, the assessee stopped deducting tax at source as the payments in question cannot be regarded as in the nature of royalty. The assessee also took a stand that the mere fact that there is a reference to the TPO in respect of international transactions for purchase of software by itself would go to show that the AO made enquiries before completing the assessment on the payments for purchase of computer software. The further stand taken by the assessee was that there are two views possible on the issue and the AO has taken one view and therefore, it cannot be said that the order of AO was erroneous and prejudicial to the interests of revenue.

In view of the discussion made above, the assessment order is set aside with a direction to make a fresh assessment order by invoking the provisions of section 40(a)(i) of the Act in respect

Aggrieved by the aforesaid order of CIT, the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee reiterated the stand of the assessee on the correctness of the order passed u/s. 263 of the Act and arguments advanced in this regard are identical to the reply given by the assessee to show cause notice u/s. 263 of the Act. According to him, when the AO passed the order, there was an order in favour of revenue by the Tribunal and therefore he did not make any addition. He placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. G.M. Mittal Stainless Steel P. Ltd., 263 ITR 255 (SC) wherein the Hon’ble Apex Court held that when assessment order is passed on a view of the jurisdictional High Court and when that decision of the High Court is not in appeal to Supreme Court, the CIT cannot revise an order u/s. 263, even if High Court’s decision is later on reversed by the Supreme Court. Reference was also made to the decision of the Hon’ble High Court of Karnataka in the case of CIT v. Sasken Communication Technologies Ltd. in order dated 04.08.2014, wherein the Hon’ble High Court took the view that when there are two views possible on an issue and the AO has taken one view and if there is a retrospective amendment to the law on that view due to which the view of the AO becomes erroneous, jurisdiction u/s. 263 of the Act cannot be invoked.

The ld. DR relied on the order of the CIT and submitted that on the merits of the issue as to, whether there is an obligation to deduct tax at source on payments made to Ansys Inc., USA, it is irrelevant because jurisdiction u/s. 263 has been invoked by the CIT on the ground that the AO before completing the assessment failed to make adequate and proper enquiries with regard to such obligation. According to him, in the present case, there was a failure on the part of the AO to make enquiries in this regard and therefore jurisdiction u/s. 263 of the Act was rightly invoked by the CIT.

We have given a careful consideration to the rival submissions. As rightly contended by the ld. DR, the jurisdiction u/s. 263 of the Act has been invoked by the CIT on the ground that AO, before completing the assessment, failed to make proper and adequate enquiry with regard to the TDS obligation on payments made to Ansys Inc., USA and disallowance u/s. 40(a)(ia) of the Act. It is clear from para 7.1 of the impugned order that though in the earlier paras the CIT has discussed the nature of payments as being in the nature of royalty, the conclusion of the CIT for invoking jurisdiction u/s. 263 of the Act are justified in the light of failure on the part of AO to make enquiries, which he ought to have made before completing assessment. In this regard, we are also of the view that a mere reference of international transaction on purchase of software to the TPO for determination of ALP cannot be the basis to say that the AO made adequate and due enquiries before completing the assessment. The law is well settled that failure on the part of the AO to make proper and adequate enquiries renders his order erroneous and prejudicial to the interests of revenue. The Hon’ble Delhi High Court in the case of Gee Vee Enterprises v. ACIT, 99 ITR 375 (Del), has explained this aspect of the effect of failure to make enquiry as follows: -

On the facts of the present case, we are satisfied that there was a failure on the part of AO to make any enquiry with regard to payments made to Ansys Inc., USA in the light of provisions of section 40(a)(ia) of the Act. In that view of the matter, we are of the view that the jurisdiction u/s. 263 of the Act was rightly invoked by the CIT. We are also of the view that the CIT has remanded the matter to the AO for fresh consideration and has not concluded on the issue, as was sought to be canvassed by the ld. counsel for the assessee before us. Therefore, the Assessee is at liberty to agitate on the issue on merits without any fetters. In the facts and circumstances of the case, we find no merit in this appeal by the assessee and the same is accordingly dismissed.

In the result, the appeal by the assessee is dismissed.