JCIT (OSD), CHENNAI vs. SIFY TECHNOLOGIES LIMITED, CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

These are the appeals filed by the Revenue against the

consolidated orders passed by the Commissioner of Income Tax

(Appeals)-17, Chennai in ITA Nos. 69/11-12, 3/13-14 & 18/15-

16/CIT(A)-17 dated 28.03.2016 for assessment years 2009-10,

2010-11 & 2011-12, respectively, and the order of the Commissioner

of Income Tax (Appeals)-17 in ITA No. 52/15-16/CIT(A)-17 dated

31.03.2017 for assessment year 2010-11 on the order passed u/s.

143(3) r.w.s. 147.

networking services and development of software. While making

the assessments for assessment years 2009-10, 2010-11 & 2011-12

u/s. 143(3), the Assessing Officer disallowed expenditure on ESOP,

addition of unearned income and made disallowances u/s. 40(a)(ia),

on networking cost, content development cost, direct cost and legal

and professional charges. Aggrieved, the assessee filed appeals and

the CIT(A) allowed the assessee’s appeals.

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appeals with the common grounds of appeal. One of the common

grounds is extracted as under:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2 The learned CIT(A) ought to have appreciated that the difference in issue price of ESOPs partakes the character of share premium and the shortfall is akin to short receipt of premium and hence not an allowable item of expenditure. 3. The CIT(A) erred in deleting the addition of Unearned income to the tune of Rs.35.48 Crores made by the Assessing Officer. 3.1 The CIT(A) erred in not appreciating the fact that the assessee used to raise invoices against services to be rendered and once the invoices are raised , that constitutes a sale to be recognised. The assessee is following mercantile system of accounting and hence income has to be charged on accrual basis. Therefore the year of chargeability is the year in which the relevant invoice is raised. 3.2 The CIT(A) failed to appreciate the fact that since expenses are booked immediately at the time of incurring, the assessee necessarily has to offer the / income from providing web server certificates fully at the time of receipt. 3.3 The CIT(A) ought to have followed the decision of the Kerala High Court in the case of Southern Cables & Engineering Works (289 ITR 167) and the decision of the Hon’ble Supreme Court in the case of Chowringee Sales Bureau P Ltd. (87 ITR 542) wherein it was held that if a receipt is a trading receipt, the fact that it was not shown as such in the books does not prevent the taxability of such income. 4.1 The CIT(A) erred in deleting the disallowance u/s 40(a)(ia) of Networking costs made by the Assessing Officer. 4.2 The CIT(A) ought to have appreciated the fact that the assessee is in the business of providing digital certificates-based authentication service for website and corporates/individuals and also providing IP /

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VPN services, for which it has paid the networking costs to the service providers like Bharti Airtel Ltd., BSNL etc. for the usage of internet bandwidth services, which comes under the purview of explanation (b) to sub section (1) of section 194J and therefore, the disallowance u/s 40(a)(ia) was justified. 4.3 It is submitted that the decision of the CIT(A) for the AY 2005-06 in assessee’s own case on a similar issue was taken up in appeal before the ITAT and against the adverse decision of the ITAT, the matter has been taken in appeal to the Honble High Court. 5 The learned CIT(A) has failed to appreciate the ratio of the ruling of the AAR in the case of Steffen Robertson and Kirsten Consulting Engineers & Scientists [1998] 230 ITR 206 wherein it has been held that even if the payment to non residents have been made for services rendered abroad, if the benefits thereof are derived in India, then 40(a)(i) would be applicable. 5.1 The learned CIT(A) has therefore erred in holding that Section 40(a)(i) is not attracted in the case of expenses of the nature of content development charges, direct cost and legal and professional charges. 6. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

appeal. Per contra, the Ld. AR submitted that this Hon’ble Tribunal

decided all the above issues in its favour in the orders in DCIT vs

Sify Technologies Ltd in ITA No. 1076/Mds/2011 dated 04.10.2013

for assessment year 2008-09 and in ITA Nos. 435,439 &

859/Mds/2010 dated 08.06.2016 for assessment years 2001-02,

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2006-07 & 2007-08, respectively. So, he pleaded that on the same

reasons these appeals may be allowed.

material. The relevant portions of the orders, supra, issue wise are

extracted as under:

“5.1 On Employees Stock Option Plan:

“24. We heard the rival submissions, perused the material on record and judicial decisions cited. The only contention of the Department that the expenditure is in the nature of capital in nature and the decision relied by the Commissioner of Income Tax (Appeals) has not attained finality. The ld. Authorised Representative argued on the purpose of issue of ESOP and also the types of expenditure incurred and supported his arguments relying on the Tribunal decision in the case of SSI Ltd (supra). We perused the order of Commissioner of Income Tax (Appeals) and the submissions of both counsels and found that ESOP are in the nature of business expenditure and it takes the characteristic of staff welfare and the shares are issued to the employees to work in the best interest of the assessee. These shares are allotted through SEBI guidelines and expenditure is in the nature of Revenue expenditure and claimed deduction and ld. Authorised Representative supported his arguments with decision of Jurisdictional High Court in the case of CIT vs. PVP Ventures Ltd 90 DTR 340 (Mad) wherein it held that staff welfare expenditure incurred by the assessee in respect of Employees Staff Option Plan as per SEBI guidelines is an ascertained liability and is allowable as expenditure in computation of income. Considering the jurisdictional High Court decision, we uphold the order of Commissioner of Income Tax (Appeals) and allow the expenditure. The ground of the Revenue is dismissed.”

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5.2 On Unearned income:

“8. We heard the rival submissions and perused the material on record and judicial decisions cited. The ld. Authorised Representative contention that unearned income as per sec. 145(2) in respect of any class of income to be disclosed and notified in the Central Government by Official Gazette. We have considered the submissions of the ld. Authorised Representative and also findings of the Commissioner of Income Tax (Appeals) who relied on the earlier year orders. We found that similar issue was decided by the Co- ordinate Bench in favour of the assessee in assessee’s own in ITA No.1084/Mds/2012, for the assessment year 2002-2003, dated 20.11.2012, where the Tribunal observed in para Nos. 5 to 7 as under:- ‘’5. The DR vehemently submitted that the CIT(A) has wrongly deleted the addition which was deservingly made by the Assessing Officer. Accordingly, he prayed for restoring the same. 6. Opposing the submissions of the DR, the AR representing the assessee has submitted that the issue in hand has already been adjudicated by the Coordinate Bench of Chennai ITAT in assessee’s own case i.e. I.T.A. No. 1954/Mds/2007 decided on 26.05.2009 for the assessment year 2003- 04 and also produced copy of the order. In rebuttal, the DR could not point out any distinguishing feature and only pleaded that the said order is yet to become final. 7. We have heard both parties and also perused the relevant findings as well as case law cited. The only bone of contention between the parties is that the assessee has treated the amount in question as unearned income, whereas; per Revenue, section 145(2) of the “Act” is applicable and he amount in question has to be treated as income of the current year. We find that the same very issue had arisen in assessment year 2003-04 in I.T.A. No. 1954/Mds/2007 (supra), wherein the Coordinate Bench had decided it in favour of the assessee as under: “Ground No. 4

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4.1 The learned CIT(A) erred in directing the assessing officer to delete the addition of Rs.39,68,208 recorded in the assessee's books for the relevant previous year as 'unearned income'. 4.2 The learned CIT(A) ought to have noted that the impugned income had accrued to the assessee, as the assessee was following mercantile system of accounting. 4.3 The learned CIT(A) ought to have seen that the assessee adopted a device to postpone the income for the purpose of Income Tax only. 4.4 The learned CIT(A) failed to appreciate that the Hon'ble Supreme Court in the case of CIT v. Thanthi Trust (239 ITR 502) has approved in principle the proposition that book entries to have a legal effect and cannot be ignored merely because they are book entries. 31. It was noticed by the AO during assessment proceeding that in the balance sheet as on 31.03.2003 Rs. 45,67,354 was shown as 'unearned income' under the head 'current liabilities' as against Rs. 15,13,162 shown as on 31.03.2002. The details furnished by the assessee showed that Rs. 39,68,208 received during the year ending 31.03.2003 was not offered for tax and was carried forward to next year. The assessee explained as under. "For revenue relating to development of e-learning software. The invoices are raised on the basis of payment milestones where as revenue are recognized on the basis of the modules developed and delivered. Though the payments has been received on the basis of invoices, if the products are not delivered sify e- learning needs to refund the amount in full to the customer." 32. The AO rejected the explanation and added Rs. 39,68,208 for the reasons given in his order as under: "4. The system of accounting followed by the assessee was mercantile. In such method of accounting the receipt on sale needs to be re

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recognized once an sales invoice was raised. Once a customer is billed, there can be no other treatment except to recognize the sale in the assessee's books. It is also a fact admitted by the assessee that payments were received on the basis of invoices (see para E-3). The non recognition of a sale in these circumstances does not depend upon final approval of the customer, who has been making payments on the basis of invoices, raise assessee. The argument of the assessee that it needs to refund the amounts to customer under certain circumstances does not hold ground. In case a customer returns the products sold by the assessee and the assessee is required to refund the payments received from the customer, the assessee can book the same as sales returns. Hence, the system adopted by the assessee cannot be accepted and so the unrecognized income of Rs.39,68,208 is now treated as income." 33. The CIT(A) deleted the addition and his order has been challenged by the department in the present appeal. 34. We have considered the rival submissions in the light of material on record. It was explained by the learned AR that the software development was the major source of income. In the written submission filed by the AR before the CIT(A) the break- up of receipts was shown as under. Sl.No Particulars Amount (₹ In lacs) c The major service income are as under:- Income from software 1175 development (IDC) LMNK Income from software 162 development non LMNK Income from IT training 48 Income from software services - 3 LMS Income from - LL 2 Miscellaneous others 4 Total 1394

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5.3 On Networking Cost:

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“13. We heard the rival submissions and perused the material on record and judicial decisions cited. Similar issue was dealt in ITA No. 1084/Mds/2012, for the assessment year 2002-2003, dated 20.11.2012, where the Tribunal observed in para No.13 as under:- ‘’13. We have heard the rival contentions and gone through the relevant findings as well as case law above said. The only issue between the parties is that per Revenue, the payment in question made by the assessee is liable to TDS provisions as comprised in Chapter XVII B of the “Act” which the assessee is disputing. We notice that the Coordinate Bench in I.T.A. No. 1277 and 1283/Mds/2008 (supra) decided on 02.02.2012 [in which one of us N.S. Saini, A.M. Member of the Bench) has held as under:4. We have heard the rival submissions and perused the orders of the lower authorities as well as the cited decisions. We find that the Ld. CIT(A) has decided this issue by observing as under: “6. I have carefully considered the facts of the case and the rival submissions and also examined the issues carefully with reference to applicability of sec. 195, which has been denied by the appellant. The appellant company is engaged in the business of providing networking and e-commerce services by way of internet. In order to carry out its business of providing broadband internet connectivity the appellant company has entered into agreements with certain non-resident companies. The assessee therefore made certain remittances in foreign currency towards connectivity charges and bandwidth charges which are called telecommunication charges without deduction of tax at source. The Assessing Officer examined the matter and found that the equipments used by the appellant company through which connectivity was provided are used by the assessee. Therefore, it treated the payment as royalty for the use of the equipments. Consequently,

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the Assessing Officer held that the appellant committed default u/s 195 in so far as it had not deducted tax at source. He therefore, worked out short deduction of tax u/s. 201(1) at Rs.3,45,99,751/- and Rs.3,33,39,659/- for A.Ys. 2002-03and 2003-04 respectively. The Assessing Officer also charged interest u/s. 201(1A) amounting to Rs.1,99,6S,927/- and Rs.1,52,71,474/- for A.Ys. 2002-03 and 2003-04 respectively. The Assessing Officer has, therefore, taken the following arguments for raising the impugned demands. (1) The service provided by the Telecommunication service Provider in the case is different from that provided by the nonresident companies in the present case. (2) Telephone is fundamentally different from a bandwidth service. (3) The bandwidth service is not a specified service. 4) Equipment of the nonresident company through which connectivity is provided is used by the assessee the requisite bandwidth along with equipments is for exclusive for the assessee which cannot be used by others nor by the non- resident company; on termination of the agreement the assessee must cease to use the service and all equipment of the non-resident company. Thus the payment by the assessee can be treated as royalty for use of equipment. The ITO further argued that case has to be distinguished from the case of BSNL and Others Vs. Union of India (Supreme Court). In that case the Supreme Court dealt with the issue of using standard facility provided to an average

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householder or consumer whereas in the present case it dealt with payment for use of equipment. 6:1. In the report dated 07-09-2007 the Assessing Officer has reiterated the arguments made in the impugned order 6.2 On the other hand the learned AR has vehemently argued that the learned Assessing Officer has not properly appreciated the facts of the case and submitted that the bandwidth charges are provided either by way of undersea cables or by satellite earth stations and the appellant does not have any control over the equipments as it has only leased a part of the transponder capacity and not leased the transponder. Therefore, the right of' use of the equipment is not exclusively with the appellant. Further, the right to use equipment mainly arises if there is physical equipment and since the equipments used by the appellant are not under its control. Therefore, the payments made do not have the character of royalty. 6.3 On the above facts and in the circumstances of the case, only one question arises for decision whether the remittances made by the appellant company to the foreign parties would fall within the purview of sec. 195(1) which requires deduction of tax at source. Bandwidth is bought and sold to consumers and it acts as a conduit only. In the appellant's case there are no equipments installed in its premises and the contract entered with the foreign parties is only for the services. Mere use of equipment in providing bandwidth services would not amount to transfer of right to use. As a matter of fact there are no goods involved in the transaction and the payments are made only for the use of services. The word "royalty" and its meaning was introduced vide Finance Act, 1976 and was defined

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under explanation 2 to sec. 9(1)(i) which was further expanded to include 'the right to use any industrial commercial or scientific equipment but not including the amounts referred to in sec,. 44B. The amendment was made by Finance Act, 2001 by incorporating c1ause (iv a) w.e.f. 01-04-2002 i.e., applicable for A.Y. 2002-03. In simple words, therefore, royalty means the payment of any kind received as a consideration for the use of' or the right to use, any copy right of literary artistic or scientific work but, does not include the words 'use' or right to use, industrial, commercial or scientific equipment. In the appellant's case there is no "right to use equipment. Therefore, the payments made do not fall under 'royalty'. On similar facts the ITAT, Bangalore Bench in the case of ACIT Vs. Infosys Technologies Ltd. in ITA Nos. 653 and 969/Bang/2006 dated 17-10-2007 held that any payment made to database owners outside India for accessing such databases and the services provided by such telecom operator to the customers do not amount to technical services or royalty u/s 9(1)(vii) of the IT Act. Accordingly, it was held that no TDS is to be made. The Hon'ble Tribunal also held that payments for accessing data is like reading a book in a library which could not be passed on to anyone else. Since the copyright was not for literary, artistic or scientific work, the payment is not to be treated as royalty and it was held that no TDS was required to be made. The Hon'ble ITAT, Bangalore Bench in the case of ITO Vs. Madhura Coats Pvt. Ltd., in ITA No. 1711 and 1712/Bang/2005 for AYs. 2005-06 and 2006-07 vide order dated 28-09-2006, relying on the decision of the Apex court in the case of Bharat Sanchar Nigam Ltd., (Supra)' wherein, it was held that providing telecom services do not fall under the category of 'goods', the

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Hon'ble ITAT held that payments made for connectivity for transmission of data would not fall into the category 'royalty' or 'fees for technical. 6:4. In view of these facts and In the circumstances of the case and the position of law set out above, it is held that the transactions in respect of which the impugned payments were made was purely on account of services and there is no transfer of right to use the goods. In the result, it is held that the Assessing Officer was not justified in treating the payment as royalty and invoking the provisions of sec. 195 for both the assessment years. Consequently, the impugned order u/s, 195 r.w.s. 201(1) and 201(1A) dated 21-03-2006 for A.Ys. 2002-03 and - 2003-04 is cancelled.” 6. On a query from the Bench from the ld. D.R. as to whether there is any contrary decision of any other High Court, the ld. D.R. replied that the Hon’ble Delhi High Court decision is a lone decision on the issue. 7. On the above facts, when there is only one decision of the High Court, then the same requires to be followed by us. Our view finds support from the decision of the Hon’ble Bombay High Court in CIT Vs. Godavari Devi Saraf [Smt] [1978] 113 ITR 589 [Bom] We, therefore, confirm the order of the ld. CIT(A) and dismiss the grounds of appeals of the Revenue. 8. In the result, both the appeals of the Revenue are dismissed.” After going through the operative portion above said, there is no iota of doubt that the payments in question made by the assessee cannot be subjected to the applicability of TDS provisions contained in the “Act”. Therefore, in view of the same and in order to maintain consistency, we rely on the above said order of the ITAT and decide the grounds against the Revenue’’.

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We respectfully following the above decision, we upheld the order of the Commissioner of Income Tax (Appeals) and dismiss the Revenue appeal.”

5.4 On Content Development Costs:

“53. We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in ITA No.435/Mds/2010 at para 13 and we dismiss the ground of the Revenue.”

5.5 On Direct Costs:

“32. We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in ITA No.435/Mds/2010 at para 13 and we dismiss the ground of the Revenue.

5.6 Legal and Professional Charges”

“53. We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in ITA No.435/Mds/2010 at para 13 and we dismiss the ground of the Revenue.”

Following, the co-ordinate bench decisions, supra, on the above

issues the Revenue’s appeals on the above issues are dismissed.

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No. 1650/Chny/2017, while making the re-assessment u/s. 143(3)

r.w. 147, the Assessing Officer made disallowance u/s. 14A r.w.r. 8D

and refuse to allow brought forward unabsorbed depreciation

pertaining to assessment year 2001-01. Aggrieved, the assessee

filed an appeal and the CIT(A) allowed the appeal.

grounds of appeal:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2.1 The learned CIT(A) has erred in holding that investments made in subsidiary companies are not liable for disallowance u/s. 1 4A when the provisions of the said Section as well as Rule 8D does not provide for any such exception. 2.2 The learned CIT(A) ought to have followed the decision of Hon’ble Karnataka High Court in the case of United Breweries Ltd v DCIT (241 Taxmann 299). 2.3 The learned CIT(A) erred in relying on the decision of ITAT Chennai in the case of EIH associated holes v DCIT which has not become final. 3. The learned CIT(A) ought to have appreciated the fact that in the assessee’s case the set off period of eight years had expired and thus the assessee is not eligible for set off of such unabsorbed depreciation pertaining to AY 2001-02 as per the amended provisions of Section 32(2) of the Act. 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer be restored.”

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appeals. Per contra, the Ld. AR submitted that since the assessee

was not having any exempt income, as per jurisdictional High Court

decisions in the cases of Redington (India) Ltd vs ACIT (392 ITR

633) (Mad) and CIT vs Chettinad Logistics Pvt. Ltd., (248 Taxman

55) (Mad), no disallowance could be made 14A r.w.r. 8D.

8.1 With regard to set off of brought forward unabsorbed

depreciation, the AR relied on the Delhi High Court decision in the

case of PCIT vs British Motor Car Co. (1934) ltd., reported in 400

ITR 569 (Delhi) and invited our attention the head not which is

extracted as under:

“Section 32 of the Income-tax Act, 1961 - Depreciation - Unabsorbed depreciation (Scope of) - Whether amendment in section 32(2) dispensed with restriction against set off and carry forward that was limited to 8 years beyond which benefit could not be claimed - Held, yes - Whether unabsorbed depreciation that was carried forward up to assessment year 2001-02 would be carried forward to assessment year 2002-03 and become part thereof and it would be governed by provisions of section 32(2) as amended by Finance Act, 2001 and would be available for carry forward and set off against profits and gains of subsequent years without any limit whatsoever.”

earned any exempt income, in accordance with the Jurisdictional

High Court decisions, supra, no disallowance can be made u/s. 14A

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appeal. With regard to the set off of brought forward unabsorbed

depreciation for assessment year 2001-02 against the income for

assessment year 2010-11, since the issue is decided by the Hon’ble

Delhi High Court, supra, in favour of assessee, we do not find any

merit in the ground of the Revenue’s appeal. The Revenue’s appeal

for assessment year 2010-11 in ITA No. 1650/Chny/2017 is

dismissed.

1795/Chny/2016 for assessment years 2009-10, 2010-11 & 2011-12

and ITA No. 1650/Chny/2017 for assessment year 2010-11 are

dismissed.

Order pronounced in the open court on 18th December, 2018 at Chennai.

Sd/- Sd/- (जॉज�माथन) (एसजयरामन) (GEORGE MATHAN) (S. JAYARAMAN) या�यकसद!य/Judicial Member लेखासद!य/Accountant Member

चे�नई/Chennai, 3दनांक/Dated: 18th December, 2018 JPV आदेशक.%�त5ल6पअ7े6षत/Copy to: 1. अपीलाथ'/Appellant 2. %&यथ'/Respondent 3. आयकरआयु9त ) अपील(/CIT(A) 5. 6वभागीय%�त�न�ध/DR 6. गाड�फाईल/GF 4. आयकरआयु9त/CIT