Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: Shri N.V.Vasudevan, VP & Shri B.R.Baskaran, AM
Per B.R.Baskaran, AM : The assessee has filed this appeal challenging the order dated 18.11.2016 passed by the learned CIT(A)-7, Bengaluru and it relates to assessment year 2011-2012.
The assessee is aggrieved by the decision rendered by the learned CIT(A) on the following issues:-
(a) Disallowance made u/s 14A of the Act. (b) Disallowance of purchase cost of software u/s 40(a)(ia) of the Act. (c) Disallowance of interest levied on late remittance of TDS. (d) Non-granting of TDS credit.
2 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. 3. The facts relating to the case are stated in brief. The assessee is engaged in the business of undertaking works contract for interior decorations. The first issue relates to disallowance made u/s 14A of the Act. During the course of assessment proceedings the Assessing Officer noticed that the assessee has received dividend income of Rs.14.79 lakhs and claimed the same as exempt. The assessee did not disallow any expenditure u/s 14A of the Act. Hence, the Assessing Officer computed the disallowance as per the provisions of section 14A of the Act, by applying Rule 8D of the Income-tax Rules at Rs.26.35 lakhs and disallowed the same. In the appellate proceedings, the learned CIT(A) confirmed the same.
We heard parties on this issue and perused the record. The learned AR submitted that the assessee had sold its vacant piece of land to M/s.ITC Limited and received a sum of Rs.21.40 crores as sale proceeds. The assessee has invested a sum of Rs.14 crore in the schemes of Mutual Fund, which has generated dividend income of Rs.14.79 lakh. The learned AR further submitted that the assessee has not used any loan funds for making the impugned investment. Further the own funds available with the assessee is also in excess of value of investment. Accordingly, by placing reliance on the decision rendered by the Hon’ble High Court of Karnataka in the case of CIT v. Karnataka State Industrial & Infrastructure Development Corporation Limited [(2016) 65 taxmann.com 295 (Kar.)], the learned AR contended that no disallowance could be made out of interest expenditure. The learned AR also placed reliance on the decision rendered by the Hon’ble
3 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. Supreme Court in the case of Pr.CIT v. Sintex Industries Ltd. [(2018) 93 taxmann.com 24 (SC)] to contend that no disallowance out of interest and administrative expenses u/s 14A of the Act could be made when the assessee has utilized its surplus funds for making minor investment.
On the contrary, the learned Departmental Representative submitted that the assessee was having mixed funds and hence it cannot be said that the assessee has invested only non-interest bearing funds for making the investment. The learned DR placed reliance on the decision rendered by the Hon’ble Supreme Court in the case of Max Investments 91 taxmann.com 154.
We heard the rival contentions on this issue and perused the record. From the financial statements furnished by the assessee, we noticed that the assessee is having own funds of Rs.1212 lakh and Rs.2636 lakh as at the beginning and at the end of the current financial year. The investment made by the assessee stands at Rs.1051 lakh and Rs.1057 lakh during the same period. Thus it is seen that the own funds available with the assessee is in excess of the value of investment and hence the decision rendered by the Hon’ble Karnataka High Court in the case of Karnataka State Industrial & Infrastructure Development Corporation Limited (supra) shall apply to the facts of the present case. Hence, the disallowance out of interest expenditure is no called for. The learned DR submitted that the assessee has used the mixed funds. However, from the submission made by the assessee,
4 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. we noticed that the assessee has made the impugned investment out of the sale proceeds of land sold to M/s.ITC Limited. Hence, we noticed that the assessee is able to show the nexus between the funds utilized and the investment made.
With regard to the disallowance made out of administrative expenses under Rule 8D(2)(iii) of the I.T.Rules, the assessee has placed reliance on the decision rendered by the Hon’ble Supreme Court in the case of Syntex Industries Limited (supra) in order to contend that no disallowance out of administrative expense should be made. We noticed that the Hon’ble Supreme Court has dismissed the SLP and did not render any decision. Further the facts available in the case of Syntex Industries Limited (supra) show that the assessee had made minor investments out of surplus funds, while in the instant case the assessee has not shown that it had surplus funds and further investments made by it could be regarded as minor in nature. Hence, in our view, the assessee cannot take support of the above said decision.
However, we noticed that the assessee has made investment in Mutual Funds units which does not involve use of much of administrative capabilities. Accordingly, we are of the view that the provisions of Rule 8D(2)(iii) should not be applied to the facts of the present case. Since the assessee has received exempt income, some disallowance is called for to meet the requirements of sec.14A of the Act. Accordingly, we direct the A.O. to make lump sum disallowance of
5 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. Rs.25,000/- towards administrative expenses and, in our view, the same would meet the requirements of sec.14A of the Act.
The next issue contested by the assessee relates to disallowance of expenditure claimed towards software purchase. The assessee had purchased a software named AutoCAD version 2011 at a cost of Rs.1,10,775 and claimed the same as revenue expenditure. The A.O., however, held the same to be capital in nature. The A.O. also noticed that the assessee has not deducted tax at source u/s 194J of the Act. Accordingly, he proceeded to disallow the depreciation by invoking the provisions of section 40(a)(ia) of the Act. In the appellate proceedings, the learned CIT(A) took support of the decision rendered by the Hon’ble Karnataka High Court in the case of M/s.Samsung Electronics Company Limited [(2011) 203 taxmann.com 477 (Kar.)] and held that the payment made for purchase of software is in the nature of royalty. Accordingly, he directed the A.O. to treat the expenditure on purchase of software as revenue in nature. Since the assessee has failed to deduct tax at source on the said payment, the learned CIT(A) confirmed the disallowance made u/s 40(a)(ia) of the Act.
Since the revenue has not filed any appeal challenging the order passed by Ld CIT(A), the issue that requires consideration is whether the disallowance of cost of software u/s 40(a)(ia) of the Act is justified or not. The Ld A.R submitted that the decision holding that the payment made
6 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. towards purchase of software is in the nature of Royalty attracting TDS provisions, was rendered by the Hon’ble Karnataka High Court in the case of Samsung Electronics Company Ltd. (supra) on 15.10.2011, whereas the impugned transaction of purchase of software has taken place before 31.03.2011. The Ld A.R submitted that the law relating to nature of software purchases was pronounced by the Hon’ble High Court only on 15.10.2011, where as the impugned transaction has taken place prior to that. She submitted that before the decision of Hon’ble High Court, the assessee was under bonafide belief with the support of certain case laws that there was no requirement to deduct tax at source from the payment made towards software purchases. Accordingly, by placing her reliance on the decision rendered by the co- ordinate bench in the case of Allegis Services India Pvt. Ltd. v. DCIT [(2017) 51 CCH 0083], the learned AR submitted that the liability to deduct tax at source, in the facts of the present case, cannot be fastened upon the assessee retrospectively.
We heard the learned DR and perused the record. We noticed that an identical issue was considered by the co- ordinate bench in the case of Allegis Services India Pvt. Ltd. (supra) and identical disallowance made was deleted by the co-ordinate bench on the reasoning that the TDS liability cannot be fastened upon the assessee retrospectively. For the sake of convenience, we extract below the operating portion of the order passed by the co-ordinate bench:-
“4. Ground Nos.2 to 5 are regarding disallowance under Section
7 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd.
40(a)(ia) of the Income Tax Act, 1961 (in short 'the Act') of payment towards software licenses treated by the Assessing Officer as royalty for want of TDS. The assessee has also raised additional grounds which are as under : Corporate tax matters 21. “ Without prejudice to the grounds 2 to 4, the Learned CIT(A) has failed to appreciate that during the Financial Year 2008-09 relevant to the Assessment Year 2009-10, the Appellant was not liable to withhold tax on the payments made as there was no provision under the Act mandating the deduction of tax at source on the payments made on purchase of computer software and there were many favorable judicial precedence including the jurisdictional tribunal rulings.
Without prejudice to the grounds 2 to 4, the learned CIT(A) erred in not appreciating the fact that explanation 5 to Section 9(1)(vi) was inserted vide Finance Act, 2012 with effect from 1 June 1976 and was hit by the doctrine of ‘impossibility of performance’.”
The additional grounds raised by the assessee are not new issues but an additional plea/argument raised by the assessee regarding the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act. Therefore in view of the fact that the substantial issue has been raised in the main ground, the additional grounds raised by the assessee on the same issue are admitted for consideration and adjudication along with the Ground Nos.2 to 5.
The learned Authorised Representative of the assessee has submitted that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. 320 ITR 209, the assessee was under the bona fide belief that the payment on account of software licenses does not fall under the definition of royalty and therefore the assessee was under no obligation to deduct tax at source on the said payment for software license. He has further submitted that there were number of judicial precedents on this issue wherein this Tribunal has held that the payment made for purchase of software does not fall under the definition of royalty provided under Section 9(1)(vi) of the Act. Thus he has submitted that a subsequent amendment or a decision cannot be thrust upon the assessee for deduction of tax in respect of a transaction completed much prior to the said decision. In support of his contention, he has
8 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. relied upon decision of the co-ordinate bench of this Tribunal dt.23.11.2016 in the case of ACIT Vs. Aurigene learned Authorised Representative has submitted that disallowance made by the Assessing Officer is not justified when there was no such law or declaration of law at the time of payment made by the assessee to cast the duty on the assessee to deduct tax. 6. On the other hand, the learned Departmental Representative has submitted that the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) though was subsequent to the transaction in question however, the said decision has not brought into statute any new law but it is only a declaration and interpretation of existing law. He has relied upon the orders of the authorities below. 7. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the transaction in question regarding payment of purchase of software was completed in the F.Y.2008-09 whereas the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) was passed on 15.10.2011 much later than the time of transaction carried out by the assessee. It is also not in dispute that this issue of considering the payment for purchase of software as royalty is a highly debatable issue and various High Courts have taken divergent views on this issue. The co-ordinate Bench of this Tribunal in the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd. (supra) has considered an identical issue in paras 3 to 5 as under : “ 03. We heard the rival submissions and gone through the relevant orders. The assessee resubmitted the plea taken before the lower authorities and placed on the ruling of the Hon'ble Bangalore ITAT in Sonata Information Technology Ltd v. ACIT (103 ITD 324) which had held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. license
9 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section194J/195 of the Act. It is submitted that liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment thedefinition of royalty with retrospective effect from 01.04.1976) or asubsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in:
• ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com115) • Kerala Vision Ltd v. ACIT (46 taxmann.com 50) • Sonic Biochem Extractions (P.) Ltd v. ITO (35 taxmann.com 463) • Channel Guide India Ltd v. ACIT (25 taxmann.com 25) • DCIv. Virola International (20 14(2) TMI 653) • CIT v. Kotak Securities Ltd. (20 taxmann.com 846).
The relevant portion of the CIT(A) order is extracted as under : “ Disallowance of expenses under 40(a)(i) / 40(a)(ia) : 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., whereas the liability to deduct tax for the appellant was the F.Y. 2010-11. The appellant
10 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. has relied on the judgment of Cochin Tribunal in the case of Kerala Vision Ltd and Agra Tribunal in the case of Virola International, wherein it was held that – "The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to have clairvoyance of knowing how the law will change in future." Further, software payment was included in definition of royalty only vide Explanation to section 9(1)(vi)inserted retrospectively vide Finance Act, 2012 and when the purchase was made, the appellant did not have the benefit of clarification brought by the retrospective amendment. It is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. This view has been upheld by the Bangalore Tribunal in the case of DCIT vs M/s WS Atkins India Pvt Ltd (ITA No 14671Bang12014 and the Mumbai Tribunal in the case of Channel Guide India Ltd. vs ACIT ([2012] 25 taxmann.com 25). 5.2 The ITAT 'C' Bench in the case M/s WS Atkins India Pvt. Ltd and in the case of Infotech Enterprises Ltd of the Hyderabad Bench of the Tribunal wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not d o n e a n d s u b s e q u e n t l y b e c o m e t a x a b l e o n a c c o u n t o f a retrospective legislation. It has also referred to in the case of Sonic Biochem Extractions Pvt. Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations:- "The a ss es s ee p ur c has ed so ftwa re, c api ta li zed the p aym ent to the computers account as the so ftware came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer involved the provisions o f s ectio n 40(a) (i a) and di sal lo w
11 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. ed the d epr ecia ti o n cla im ed . The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business." 5.3 Relying on the above decision, the ITAT `C’Bench, Bangalore upheld the order of the CIT(A) who had observed that the assessee did not have the benefit of the clarification brought brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be deducted u/s 194J. The law as extant on the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability for deducting tax at source retrospectively. 5.4 In view of the above decisions, it is correct to say that i t i s no t p o s s i b l e to fa s t en l i a b i l i t y f o r d ed uc ti ng ta x a t source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of t h e c l a r i f i c a t i o n b r o u g h t a b o u t b y t h e r e t r o s p e c t i v e amendment. The contentio n of the appellant is corr ect that the s o ftw ar e payment disallowed by the AO did not warrant withholding o f the tax u/s 40(a) (ia) and 40(a)(ia) (by an order of corrigendum dt 20.11.2015) o f the Ac t. Therefore disallowance made by the AO on account of software payment want of withholding of tax is hereby deleted.”
12 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd.
The CIT(A) followed the decision of this Tribunal in M/s WS Atkins India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises Ltd in ITA 115/HYD/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not d o n e a n d s u b s e q u e n t l y b e c o m e t a x a b l e o n a c c o u n t o f a retrospective legislation. It has also referred to the decisions of the Delhi & Mumbai Tribunal in SMS Demag Pvt Ltd , 132 ITJ 498 & Sonic Biochem Extractions Pvt. Ltd. 23 ITR (Trib) 447, respectively. We uphold the decision of the CIT(A) and dismiss the grounds raised by the Revenue.”
Thus it is clear that the co-ordinate Bench of this Tribunal while deciding this issue has taken note of various decisions in favour of the assessee on the point that the payment for purchase of software does not fall in the definition of royalty. Respectfully following the decision of co-ordinate Bench of this Tribunal, we delete the disallowance made by the Assessing Officer.”
Consistent with the view taken on the above case, we also hold that the assessee cannot be fastened with the liability to deduct tax at source retrospectively and accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the A.O. to delete the impugned addition.
The next issue contested by the assessee relates to the disallowance of interest payable on belated remittance of TDS amount. The Ld A.R placed her reliance on the decision rendered by the Kolkatta bench of Tribunal in the case of M/s Narayani Ispat P Ltd (ITA No.2127/Kol/2014 dated 30-08- 2017) and contended that the above said interest expenditure is allowable as deduction.
13 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. 14. On the contrary, the Ld D.R took support of the decision rendered by Hon’ble Madras High Court in the case of CIT vs. Chennai Properties & Investments Ltd (1999)(239 ITR 435), wherein it was held that the interest paid would take the colour from the nature of Principal amount required to be paid, but not paid in time. Accordingly it was held that the interest paid on belated payment of TDS cannot be considered as compensatory in nature and accordingly held that the same is not allowable as deduction.
In view of the decision rendered by Hon’ble Madras High Court in the case cited above, we decide this ground against the assessee. Accordingly we uphold the decision taken by Ld CIT(A) on this issue.
The last issue relates to the TDS credit of Rs.4,70,214/-. During the course of assessment proceedings, the AO asked the assessee to reconcile the Gross receipts shown by the assessee with the figures shown in Form 26AS statement. It was noticed that the assessee has claimed TDS credit in respect of certain receipts, which were offered either in earlier years or in subsequent years. Accordingly, by taking support of sec.199 of the Act, the AO disallowed TDS credit of those receipts, which were not offered during the year under consideration. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. A perusal of provisions of Rule 37BA read with
14 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. sec.199 of the Act would show that, as per Rule 37BA(3)(i), the credit for tax deducted at source and paid to the Central Government shall be given for the assessment year for which such income is assessable. Hence, the AO was justified in restricting the TDS credit to the extent that related to the income offered by the assessee during the year under consideration.
However, the provisions of Rule 37BA(3)(ii) also states as under:- “Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.” This provision mandates the AO to allow the credit for TDS in the same proportion in which the income is assessable to tax. Before us, the Ld A.R prayed that the benefit of above provision may be given to the assessee. When questioned as to whether the assessee has moved any petition before the AO for allowing TDS credit in other years, the Ld A.R replied in negative.
In our view, the assessee should not be denied the benefit of credit of TDS as provided in Rule 37BA(3)(ii) of I.T Rules. Accordingly we restore this issue to the file of the AO for examining the claim of the assessee. We also direct the assessee to move appropriate petition before the AO in this
15 ITA No.400/Bang/2017. M/s.Teekays Interior Solutions Pvt.Ltd. regard, which shall be considered in a liberal manner by the AO. Accordingly, the order passed by Ld CIT(A) on this issue stands modified as discussed above.
In the result, the appeal of the assessee is partly allowed.
Order pronounced on this 15th day of February, 2019.
Sd/- Sd/- (N.V.Vasudevan) (B.R.Baskaran) Vice-President ACCOUNTANT MEMBER Bangalore ; Dated : 15th February, 2019. Devdas* Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT, Bengaluru. 4. CIT(A)-7, Bengaluru 5. DR, ITAT, Bangalore 6. Guard file. True copy BY ORDER, (Asstt. Registrar) ITAT, Bangalore