ITO WD 1(1)(3), MUMBAI vs. FLYTXT MOBILE SOLUTIONS P.LTD, MUMBAI

The present appeal has been preferred by the Revenue against the order dated 05.10.2015 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.

The issue raised in ground Nos.1 & 2 is against the deletion of disallowance by Ld. CIT(A) to the tune of Rs.24,00,000/- as made by the AO under section 40(a)(ia) of the Act towards software usage charges paid by the assessee. The Revenue further raised the issue whether the Ld. CIT(A)

The facts in brief are that during the course of assessment proceedings AO observed that a sum of Rs.24 lakhs was charged to the P & L account on account of software usage charges and he accordingly raised a query upon the assessee to furnish detail of the same. The assessee replied to the AO’s query by submitting that the said sum was paid pursuant to a consent terms filed before Hon’ble Delhi High Court on which no TDS was deducted. According to the AO the TDS should have been deducted on the said payment failing which the same could not be allowed under section 40(a)(ia) of the Act.

In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after considering the detailed submissions which have been incorporated in para 3.1 by observing and holding as under: “3.2. I have gone through the assessment order as well the submissions m by the AR of the appellant company. The AO is of the opinion that appellant company should have deducted the TDS for the software charges paid of Rs.24,00,000/-. Whereas the AR of the appellant argues that the software charges paid of Rs.24,00,000/- is not covered by the definition of Royalty for which he is highly relying on the Notification no.21/2012 [F.No.142/10/2012- SO(TPL) S.O. 1323(E) issued by the CBDT on 13.06.2012 which is narrated above. I have also gone through the Notification as issued by the CBDT, wherein CBDT categorically gave the finding that for acquisition of software locally there is no need to deduct TDS. So accordingly this ground of appeal is allowed.”

The Ld. D.R. vehemently submitted before us that the order of Ld. CIT(A) was completely against the law and more so when the circular on which the Ld. CIT(A) relied was

Ld. D.R. submitted that there are three conditions envisaged in the Notification No. 21/2012 dated 13.6.2012 which are required to be complied with by the assessee simultaneously otherwise the TDS has to be deducted and deposited but the Ld. CIT(A) has not given any findings in that regard. Besides the order of Ld. CIT(A) is cryptic and therefore the same deserved to be reversed and the order of AO should be restored.

The Ld. A.R., on the other hand, while countering the argument of the Ld. D.R. submitted that the payment for the said software usage charges were made on 06.01.12 and there was no provision in the Income Tax Act till that date for deduction of tax at source from the payment of software usage charges even if the same is considered to be covered by the provision of section 9 of the Act. The Ld. A.R. submitted that explanations 4, 5 & 6 were inserted to section 9 by Finance Act, 2012 w.e.f. 01.06.1976 but the fact of the matter is that as on the date of payment even this amendment was not on the statute books bringing it within the definition of royalty. While countering the arguments of the Ld. D.R. the Ld. A.R. submitted that though the circular was effective w.e.f. 01.07.12 on which the Ld. CIT(A) placed reliance but even otherwise the provision of tax deduction at source could not be applicable as the assessee could not have foreseen the amendment in the subsequent year which took

After carefully perusing the material on record and hearing both the parties, we find that in the present case the payment for royalty charges was made under consent terms before the Hon’ble Delhi High Court on which no TDS was deducted. It is true that explanation 4 to 6 were inserted to section 9 by the Finance Act, 2012 with retrospective effect from 01.06.1976 but at the same time there is merit in the submissions of the Ld. A.R. that as on the date of payment the assessee could not have foreseen the amendment which was to take place in the subsequent year making the deduction of TDS from software applicable from the retrospective effect. Thus, in view of these facts, we are of the considered view that the Ld. CIT(A) has correctly allowed the appeal of the assessee and accordingly we uphold the same by dismissing the ground Nos.1 & 2.

The issue raised in ground No.3 is against the deletion of addition of Rs.1,03,22,354/- by Ld. CIT(A) as made by the AO on the basis of AIR information.

The facts in brief are that AO during the course of assessment proceedings observed from the AIR information vis-à-vis books of accounts of the assessee that there was difference of Rs.1,03,22,354/- and accordingly the assessee

In the appellate proceedings, the Ld. CIT(A) deleted the addition after considering the submission of the assessee by observing and holding as under: “4.3 I have carefully gone through the submissions of the appellant and the documents attached to them. It is clear that the customers of the appellant deducted TDS on provisions made in the books of account whereas the appellant recorded the sales in its books of account in the following financial year.

The Ld. D.R. vehemently relied on the order of AO and submitted that the particular income which accrued during the year has to be taxed in that particular year and the excuse of

The Ld. A.R., on the other hand, submitted that a customer of the assessee Aircel Cellular Ltd. deducted TDS on the provisions made in the books of accounts at the year end which the assessee was not aware of as there was no confirmation of the same from the said customer. The Ld. A.R. submitted that the assessee issued the invoice in the next financial year and the same was included in the sale of the assessee in that year and the payment was also received in the next year. The Ld. A.R. also submitted that no TDS was claimed in the next year. Finally, the Ld. A.R. argued that no loss of revenue is caused to the department as the income has been offered to tax and therefore the appeal of the department should be dismissed as the order of Ld. CIT(A) is correctly passed considering all the facts of the case.

Having heard both the parties and carefully perusing the relevant material placed before us, we find that in this case TDS has been deducted by the customer on the provisions created in the books of accounts whereas the assessee invoiced and recorded the sale in the next financial year. We observe that the Ld. CIT(A) has taken a very balanced and correct view of the matter and also recorded the finding of the fact that there is no escapement of tax as the income stands offered to tax in the next financial year when the assessee invoiced the customer and it is irrelevant that the customer

In the result, the appeal of the Revenue is dismissed.