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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI ABRAHAM P.GEORGE & SHRI GEORGE MATHAN
आदेश / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER:
No.853/Mds/2013 is an appeal filed by the Revenue against the Order of the Commissioner of Income Tax (Appeals), LTU, Chennai, in dated 08.01.2013 for the AY 2006-07.
Shri Prabhu Mukunth Arun Kumar, Jr. Standing Counsel, represented on behalf of the Revenue and Shri R.Vijayaraghavan, Adv., represented on behalf of the assessee.
ITA No.687/Mds/2013 – Assessee’s appeal:
In the assessee’s appeal, the assessee has raised the following grounds:
The order of the Commissioner of Income Tax (Appeals), LTU is contrary to law, facts and circumstances of the case.
2. The Commissioner of Income Tax (Appeals), LTU erred in re-opening of the assessment as the appellant had furnished all the materials and particulars fully and truly while completing the assessment u/s.143(3). 2.1. The Commissioner of Income Tax (Appeals), LTU ought to have appreciated that addition made in the reassessment has arisen only due to change of opinion or is a case of review on the same set of facts and not on account of concealment of any particulars by the appellant; hence the order is to be quashed as being without jurisdiction. 2.2 The Appellant relies on the decision of the Supreme Court in the case of CIT V. Kelvinator of India Limited, reported in 320 ITR 561 (SC). 3. The Commissioner of Income Tax (Appeals), LTU erred in confirming the disallowance of Rs.95,07,58,118/- u/s.40(a)(i) as the Appellant had not deducted TDS from the payments made to Hardy Exploration and Production India Inc u/s.195. 3.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that payment made to HEPI was for the purchase of crude oil and hence payment is not subject to tax in India.
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3.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that Section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax. 3.3 The Hon’ble Supreme Court in G.E. Technology Center vs. CIT (327 ITR 256) has held that if there is no income chargeable to tax in India then there is no requirement for deducting tax at source under the Income Tax Act, 1961. 3.4 The Commissioner of Income Tax (Appeals), LTU ought to have appreciated that the disallowance u/s.40(a)(ia) can be made only in respect of amounts outstanding and payable as on 31st March and not on amounts which have been paid during the previous year. Appellant relies on the decision Special bench in the case of Merilyn Shipping and Transports V. ACIT, reported 16 ITR (Trib) 1 (Vis)(SB). 3.5 Without prejudice, if any disallowance u/s.40(a)(ia) is warranted, it should, at best be restricted to the profit accruing to M/s.HEPI on sale of crude to the Appellant, on which tax Liability accrues to M/sHEPI and not the entire payment, i.e. the entire revenue to M/s.HEPI.
4. The Appellant craves leave to file additional grounds at the time of hearing.
3.1 Ground Nos.1 & 4 are general in nature.
3.2 At the time of hearing, the Ld.AR did not wish to press the grounds against the re-opening of the assessment and consequently Ground Nos.2, 2.1 & 2.2 of the assessee’s appeal stands dismissed as not pressed.
3.3 In regard to Ground Nos.3 to 3.5, it was submitted by the Ld.AR that the issues were against the action of the Ld.CIT(A) in confirming the disallowance made by the AO in respect of the purchase of crude oil by invoking the provisions of Sec.40(a)(i) of the Act on account of the non- deduction of TDS in respect of the payments made to M/s.Hardy Exploration & Production India (in short “M/s.HEPI”) u/s.195. It was a submission that in the course of the assessment, the AO following the decision of the Hon’ble Supreme Court in the case of M/s.Transmission Corporation of AP Ltd., reported in 239 ITR 587 had held that the & 853/Mds/2013 :- 4 -: assessee was liable to deduct TDS u/s.195(1) in respect of the purchase price of crude oil purchased from M/s.HEPI. It was a submission that M/s.HEPI was the PE of foreign company and the assessee had purchased the crude oil from M/s.HEPI to an extent of Rs. Rs.95,07,58,118/-. The AO had disallowed the same. It was submitted by the Ld.AR that M/s.HEPI was assessed to tax in India and the assessment in the case of M/s.HEPI for the AY 2006-07 was completed on 30.03.2012 on ‘Nil’ income. The Ld.AR drew our attention to Page Nos.13 to 17 of the Paper Book which was a copy of the Assessment Order in the case of M/s.HEPI for the AY 2006-07. It was a submission that as per the decision of the Hon’ble Supreme Court in the case of M/s.GE India Technology Cen. (P)
Ltd., reported in 327 ITR 456 (SC), if the payment did not contain the element of income, the payer cannot be made liable for deduction of TDS.
It was a submission that this had been reiterated in Circular issued by CBDT in Circular No.3/2015 dated 12.02.2015 read with Instruction No.02/2014 dated 26.02.2014. It was a submission that as per the said Circular, Para No.4, which reads as follows:
4. As disallowance of amount under section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purposes of tax deduction at source, the Central Board of Direct taxes, in exercise of powers conferred under section 119 of the Act, hereby clarifies that for the purpose of making disallowance of ‘other sum chargeable’ under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the Assessing Officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per Instruction No.2/2014 dated 26.02.2014 of CBDT. Further, where determination of ‘other sum chargeable’ has been made under sub-sections (2), (3) or (7) of section 195 of the Act, such a determination will form the basis for disallowance, if any, under section 40(a)(i) of the Act.
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3.4 No tax was deductible at source in respect of the payments made by the assessee for the purchase of the crude oil from M/s.HEPI.
3.5 In reply, the Ld.DR submitted that the Ld.CIT(A) has followed the decision of the Hon’ble Supreme Court in the case of M/s.GE India Technology Cen. (P) Ltd., referred to supra, upheld the disallowance. It was a submission that in the course of the assessment, the assessee had been completed on 30.11.2011 and on the said date, the copy of the Assessment Order in the case of M/s.HEPI was not available. It was also a submission that a perusal of the assessment in the case of M/s.HEPI clearly shows that M/s.HEPI was assessed at a positive income for the relevant Assessment Year but the same was set off against the carry forward business losses. He vehemently supported the order of the AO & the Ld.CIT(A) on this issue. It was a submission that the assessee having not taken the necessary Certificate u/s.195(2), the assessee was duty bound to deduct the TDS which it has failed to deduct and consequently, the disallowance was liable to be upheld.
3.6 We have considered the rival submissions. A perusal of the decision of the Hon’ble Supreme Court in the case of M/s.GE India Technology Cen.
(P) Ltd., shows that it is only when the remittances made to a non- resident is chargeable under the act, then the requirement to deduct TDS will arise. The provisions of Sec.195(2) gets attracted to cases only where the payments made is a composite payment, in which certain portion of & 853/Mds/2013 :- 6 -: the payment has an element of income chargeable to tax in India and the payers seeks a determination of the appropriate portion of the same. A perusal of the decision of the Hon’ble Supreme Court in the case of M/s.Transmission Corporation of AP Ltd., shows that TDS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. By keeping these two decisions in mind, if we look at the Assessment Order in the case of M/s.HEPI, it shows that under the normal provision of IT Act, M/s.HEPI has admitted profits and gains of business at Rs.27.66 Crs. This has been set off against the carry forward business losses of the earlier years.
There is also computation of the tax liability u/s.115JB of the Act. Under such computation, the net profit disclosed by M/s.HEPI in the P&L A/c is Rs.27.12 Crs. and after set off unabsorbed business losses M/s.HEPI still has a taxable book profit of Rs.16.34 Crs. Against such tax liability u/s.115JB, M/s.HEPI has also claimed set off TDS. Thus, the claim of the assessee that the decision of the Hon’ble Supreme Court in the case of M/s.GE India Technology Cen. (P) Ltd., would apply and TDS is liable to be made when the remittances is on sum chargeable under the Act would come into play. Now, M/s.HEPI having income chargeable under the Act in India and having been assessed to such tax under the Act in India and the assessee having not obtained the necessary Certificate u/s.197(2), we are of the view that the disallowance made by the AO on account of non- deduction of TDS in respect of the purchase of the crude oil from M/s.HEPI & 853/Mds/2013 :- 7 -: by the assessee, which has also been upheld by the Ld.CIT(A) is on a right footing and does not call for any interference.
3.7 In the result, the appeal filed by the assessee stands dismissed.
ITA No.853/Mds/2013 – Revenue’s appeal:
In the Revenue’s appeal, the Revenue has raised the following grounds:
1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.
2. The CIT(A) erred in holding that the expenditure incurred by the assessee towards purchase of software is revenue in nature. 2.1 The CIT(A) ought to have appreciated that the assessee had obtained enduring benefit in respect of the above expenditure. 2.2 The CIT(A) erred in not appreciating that the relied upon decision of the Hon’ble High Court of Madras in the case of Southern Roadways is distinguishable on facts, as the same was rendered in connection with Asst. Year 1996-97 to 1997-98 which is prior to the Asst.Year 2003-04 and hence not applicable to the facts of the present case. 2.3 The CIT(A) ought to have appreciated that with effect from Asst.Year 2003-04, computer software was also made eligible for depreciation 60% along with computers and ought to have held that the expenditure on software is capital in nature for the year under consideration. 2.4 It is submitted that the relied upon order of the CIT(A) in dated 20/09/05 in assessee’s own case has not been accepted by the Department and an appeal to ITAT has been preferred against the same. 3. 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.
4.1 It was submitted by the Ld.DR that the issues in the Revenue’s appeal was against the action of the Ld.CIT(A) in holding that the expenditure incurred by the assessee towards purchase of software was Revenue in nature. The Ld.DR submitted that the software purchased was from M/s.Aspen Tech for the system which is used by the refinery for making decision support solutions for optimizing production. It was a & 853/Mds/2013 :- 8 -: submission that Special Bench of Delhi High Court in the case of M/s.Amway India Enterprises reported in 301 ITR 1 Delhi (AT) (SB)
(2008) had laid down test as follows:
Our conclusions on the issue under consideration thus can be summarized, as under: (i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon’ble Supreme Court in the case of TCS (supra). (ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time. It can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied. (iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital, or revenue Held or its utility to a businessman which may touch either capital or revenue field.
4.2 It was a submission that applying the said test clearly shows that the expenditure on the software was capital in nature.
4.3 In reply, the Ld.AR submitted that the issue was squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of M/s.Southern Roadways Ltd., reported in 304 ITR 84. He vehemently supported the order of the Ld.CIT(A) on this issue.
4.4 We have considered the rival submissions. A perusal of the order of the Ld.CIT(A) on this issue clearly shows that the assessee had paid software license fees and maintenance fees to M/s.Aspen Tech for the & 853/Mds/2013 :- 9 -: systems which is used by the refinery for making decision support solutions for optimizing production. These payments are made on yearly basis and towards maintenance of the software. The expenditure is in nature of recurring one. A perusal of the decision of the Hon’ble Jurisdictional High Court in the case of M/s.Southern Roadways Ltd., referred to supra, shows that the Hon’ble Jurisdictional High Court has held as follows:
“that expenditure incurred on software packages was revenue expenditure and that such software enhances the efficiency of the operation and was not an aid in the manufacturing process and therefore there is no enduring benefit or acquisition of any capital asset by an assessee. The concept of enduring benefit must respond to the changing economic realities of the business. The expenses incurred by installation of software packages in the present computer world, which revolves on the modem communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. However, such software itself does not work on a stand alone basis. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure.”
4.5 A perusal of the order of the Ld.CIT(A) shows that the Ld.CIT(A) has decided this issue by following the decision of the Hon’ble Jurisdictional High Court of Madras and the facts as have been recorded by the Ld.CIT(A) on this issue has not been dislodged by the Revenue. This being so, we have no reason to interfere with the order of the Ld.CIT(A) on this issue.
4.6 In the result, the appeal filed by the Revenue is dismissed. & 853/Mds/2013 :- 10 -:
4.7 In the result, the appeal filed by the assessee in is dismissed and the appeal filed by the Revenue in ITA No.853/Mds/2013 is dismissed.
Order pronounced in the Open Court on December 07, 2017, at