ACIT, CHENNAI vs. AREVA T & D INDIA LIMITED, CHENNAI

Both the appeals of the Revenue and assessee are directed against the common order passed by the Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai, dated 29.05.2014 and pertain to assessment year 2007-08. Therefore, we heard both the appeals together and disposing of the same by this common order.

Let’s first take the assessee’s appeal in I.T.A. No.2090/Chny/2014.

The first issue arises for consideration is disallowance of ₹1,06,65,000/- provision for contingencies.

When the appeal is taken up for hearing, the Ld.counsel for the assessee submitted that he is not pressing this ground of appeal. In view of this, this ground of appeal is dismissed as not pressed.

The next ground of appeal is with regard to disallowance of depreciation on non-compete fee.

Shri Tushar Jarwal, the Ld.counsel for the assessee, submitted that depreciation on non-compete fee of ₹83,05,664/- was allowed by this Tribunal in the assessee's own case for assessment year 2006-07 in I.T.A. No.561/Mds/2011. On a query from the Bench, when the first claim for depreciation was made?

On the contrary, Shri S. Bharath, the Ld. Departmental Representative, submitted that the non-compete fee does not give any commercial right to the assessee. Therefore, according to the Ld. D.R., it cannot be considered as capital asset for allowing depreciation under Section 32(1) of the Income-tax Act, 1961 (in short 'the Act'). Moreover, the Ld. D.R. submitted that it is not known whether the depreciation was allowed for the assessment years 2001-02 to 2006-07 as claimed by the assessee. This fact was also not brought to the notice of this Bench which heard the case for assessment year 2006-07. Referring to the order of the CIT(Appeals), the Ld. D.R. submitted that the assessee has not claimed the depreciation in the return of income, therefore, there is no question of allowing the claim of depreciation at this stage.

We have considered the rival submissions on either side and perused the relevant material available on record. For the assessment year 2006-07, this Tribunal allowed depreciation on non-compete fee by placing reliance on the judgment of Madras High Court in M/s Pentasoft Technologies Ltd. (supra). The assessee claims that the depreciation was allowed right from the assessment year 2001-02 to 2005-06 and it was disallowed only during the year under consideration. However, the copies of earlier orders are not available on record. Even on query from the Bench, the Ld.counsel for the assessee could not file copies of the assessment orders. Moreover, it was also not brought to the notice of the earlier Bench with regard to depreciation allowed by the Assessing Officer from the assessment year 2001-02 to 2005-06.

The next issue arises for consideration is disallowance of depreciation on goodwill.

Shri Tushar Jarwal, the Ld.counsel for the assessee, submitted that the depreciation was allowed by this Tribunal in the assessee's own case for assessment year 2006-07 in I.T.A.

We heard the Ld.counsel for the assessee and the Ld. Departmental Representative. The Ld. D.R. submitted that he is placing reliance on the observation made by the Assessing Officer as well as on the grounds of appeal. As rightly submitted by the Ld.counsel for the assessee, this Tribunal by placing reliance on the judgment of Delhi High Court in the assessee's own case for assessment year 2005-06, allowed depreciation on the goodwill.

The next issue arises for consideration is disallowance made by the Assessing Officer under Section 40(a)(i) of the Act in respect of the payment made to non-resident without deducting tax at source.

Shri Tushar Jarwal, the Ld.counsel for the assessee, submitted that the assessee has made three payments to the non- resident. According to the Ld. counsel, the first payment was made to Kema, Netherlands towards testing fee to the extent of ₹25,48,440/-. The assessee also paid to Areva T&D Finance, France towards reimbursement of cost recovery from Syrian customer. In fact, according to the Ld. counsel, the CIT(Appeals) allowed the claim of the assessee, therefore, the Revenue is in appeal before this Tribunal. According to the Ld. counsel, the next payment is made to Converteam, USA towards erection and commissioning charges of ₹7,59,050/-. According to the Ld. counsel, testing fee was paid to test the products manufactured by the assessee. The testing technology was not made available to the assessee. Therefore, according to the Ld. counsel, the payment made for testing cannot be construed as fee for technical services.

Referring to the payment made to Converteam, USA, the Ld.counsel for the assessee submitted that the payment was made for the purpose of erection and commissioning, which are integral part of the purchase of machinery. On a query from the Bench, is there any agreement between the parties or any invoice which discloses that the payment for erection and commissioning charges is inclusive of cost of machinery purchased by the assessee? The Ld.counsel submitted that the agreement and invoice are not available. Referring to the payment made to Areva T&D Finance, France, the Ld.counsel submitted that it is only a reimbursement of the expenses. The Ld.counsel clarified that there was no agreement for reimbursement of expenditure. According to the Ld. counsel, it is only a reimbursement, therefore, the CIT(Appeals) allowed the claim of the assessee. Hence, the Revenue is challenging the same in its appeal.

On the contrary, Shri S. Bharath, the Ld. Departmental Representative, submitted that Kema, Netherlands is performing no independent function. According to the Ld. representative, it is testing the transformers manufactured by the assessee. Referring to Section 9(1)(vii) of the Act, the Ld. D.R. submitted that the service rendered by the non-resident for testing the machinery manufactured by the assessee was utilised for doing business in India. Since the services rendered by the non-resident by testing the transformers manufactured by the assessee were used in the business carried on by the assessee in India and for the purpose of earning income in India, according to the Ld. D.R., the income earned by the non-resident by way of testing fee is taxable in India.

We have considered the rival submissions on either side and perused the relevant material available on record. The assessee is a resident in India and paid testing fee to Kema, Netherlands for the purpose of testing the transformers manufactured by it. The claim of the assessee before this Tribunal is that the technology of testing the transformers was not made available to the assessee, therefore, the payment is not taxable in India. The Ld.counsel placed his reliance on the decision of Delhi Bench of this Tribunal in Romer Labs Singapore Pte. Ltd. v. ADIT (2013) 30 taxmann.com 362. We have gone through this decision of Delhi Bench. In the case before Delhi Bench, the Singapore company tested the components manufactured by the assessee. The test reports were sent to the company in India. The Singapore company was not having any permanent establishment in India. Therefore, this Tribunal found that in view of the Indo-Singapore Treaty, more particularly Article 12(4) of Double Taxation Avoidance Agreement, the income is not taxable in India. A similar agreement for Double Taxation Avoidance Agreement was entered into between the Government of India and Government of Netherlands. As per Article 12(4), “fees for technical services” means payment to any person for consideration for technical or consultancy services for such services to make available technical knowledge, experience, skill, know-how or processes, etc. As in the case before Delhi Bench and in the case in our hand also, the transformers manufactured by the assessee are sent to Netherlands for testing and the Netherlands company sent only report. Therefore, the knowledge of testing was not made available to the assessee. Hence, it cannot be considered as fee for technical services. In view of the above, this Tribunal is of the considered opinion that the payment made to Kema, Netherlands is not liable to deduct tax at source.

Now coming to payment made to Areva T&D Finance, France, the assessee claims that it is only a reimbursement of cost.

Now coming to payment made to Converteam, USA, the claim of the assessee before this Tribunal is that erection and commissioning charges are integral cost of machinery. However, no material evidence is produced before this Tribunal to indicate that the erection and commissioning charges are integral part of the cost of machinery. No agreement or invoice was produced either before the Assessing Officer or before this Tribunal. However, this Tribunal is of the considered opinion that the matter needs to be re- examined by the Assessing Officer. Accordingly, the orders of both the authorities below are set aside and the issue with regard to Converteam, USA is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter in the light of the material that may be filed by the assessee and thereafter decide the issue afresh in accordance with law, after giving a reasonable opportunity to the assessee.

The next issue arises for consideration is disallowance of claim for warranties.

We heard both the Ld.counsel for the assessee and the Ld. Departmental Representative. According to the Ld. counsel, the provision was made on the scientific basis. On a query from the Bench how this provision was made and what is the method? The Ld.counsel could not explain the expenditure incurred on the earlier years. Therefore, this Tribunal is of the considered opinion that the matter needs to be re-examined by the assessee. Accordingly, the orders of both the authorities below are set aside and the issue with regard to disallowance of provision for warranties is remitted back to the file of the Assessing Officer. The Assessing Officer shall re- examine the matter and find out the method for provision made by the assessee after comparing the expenditure made in the earlier years and thereafter decide the issue afresh in accordance with law, after giving a reasonable opportunity to the assessee.

The next issue arises for consideration is with regard to additional depreciation claimed by the assessee.

The Ld.counsel for the assessee purchased the machinery during the assessment year 2006-07 and claimed depreciation. The Assessing Officer allowed 50% of the additional depreciation and the balance additional depreciation was claimed during the year under consideration. On a query from the Bench, the Ld.counsel submitted that the copy of assessment order for assessment year 2006-07 is not readily available even with the assessee. This Tribunal is of the considered opinion that for claiming additional depreciation, the assessee has to establish that the machinery was purchased and installed. If the depreciation could be allowed in the earlier assessment year, the balance depreciation can be claimed in the subsequent year. This Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer.

Now coming to Revenue’s appeal in I.T.A.

The first issue arises for consideration is depreciation on UPS.

We heard the Ld. D.R. and Ld.counsel for the assessee.

Now with regard to disallowance made under Section 40(a)(i) of the Act, this Tribunal examined this issue elaborately in the earlier part of this order and it was remitted back to the file of the Assessing Officer.

In the result, both the appeals of the assessee and Revenue are partly allowed for statistical purposes.