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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
आयकर अपील�य अ�धकरण, “सी” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I T.A. No. 1429/Mds/2017 �नधा�रण वष�/Assessment Year:2008-09 The Deputy Commissioner of M/s. K7 Computing Pvt. Ltd., Income Tax, Vs. No. 144/7, Rayala Techno Park, Corporate Circle 4(2) Kottivakkam, Chennai 600 041. Chennai 600 034. [PAN:AABCK1942M] (अपीलाथ� /Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से / Appellant by : Shri N. Madhavan, Addl. CIT ��यथ� क� ओर से/Respondent by : Shri S. Sridhar, Advocate सुनवाई क� तार�ख/ Date of hearing : 02.11.2017 घोषणा क� तार�ख /Date of Pronouncement : 08.11.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) 8, Chennai dated 23.03.2017 for the assessment year 2008-09. The Revenue has raised the following grounds: “1. The order of the CIT(A) is contrary to law and facts of the case.
2. The CIT(A) erred in deleting the disallowance made u/s 40(a)(i) to the extent of Rs 40,17,375/- in respect of subscription charges paid to Commtouch Software Ltd (CSL). 2.1 The Assessing Officer has sought to tax the payments as fees for technical services, on account of the payments having been debited to subscription account in the books of account. 2.2 The subscription payment has been made for product approval given by certain testing sites which is done through a machine based window. The online testing has been done for the services rendered in India. Hence the fees paid is nothing but technical services paid to non-residents which attract TDS as per section 195(1). 2.3 The CIT(A) failed to appreciate that as per the agreement dated 28.06.2006 with CSL, the OEM shall pay Commtouch 15% (10% for Anti Spam - SDK services and 5% for the VOD-SDK services) from the OEM Net generated by bundled products or any individual products sold by OEM in worldwide markets which is nothing but Fees for Technical Services 2.4 The CIT(A) has admitted fresh evidence in the form of Revenue Sharing Agreement, which was not produced at the assessment stage. 2.5 Under sub rule (3) to rule 46A, a condition was imposed that such evidence shall not be taken into account by the CIT(A) unless the AO, was confronted with the same. 2.6 The Order of the CIT(A) violates Rule 46A.
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.” 2. Brief facts of the case are that the assessee is engaged in the business of anti-virus security software development and filed its return of income on 29.09.2008 declaring income of ₹.21,55,901/-. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short] on 29.01.2010. Subsequently, the case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued on 13.08.2009. In response thereto, the assessee filed various details as called for. After examining the accounts of the assessee and considering the submissions made during the course of assessment proceedings, the assessment was completed under section 143(3) of the Act by determining the taxable income of the assessee at ₹.56,71,641/- after making various disallowances.
3. The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee and facts and circumstances, the ld. CIT(A) partly allowed the appeal filed by the assessee.
Aggrieved, the Revenue is in appeal before the Tribunal and by relying on the grounds of appeal, the ld. DR has submitted that without giving an opportunity of being heard to the Assessing Officer, taking cognizance of the copy of the agreement with CSL, the ld. CIT(A) has erred in deleting the disallowance of ₹.40,17,375/- made under section 40(a)(i) of the Act and pleaded that the order of the ld. CIT(A) on this issue should be set aside in view of the provisions of Rule 46A of the IT Rules. On the other hand, the ld. Counsel for the assessee supported the order passed by the ld. CIT(A).
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In the assessment order, the Assessing Officer observed that the assessee paid subscription charges overseas for an amount of ₹.1,12,17,420/- without deduction of tax at source and therefore, disallowed the same. On appeal, by filing copy of the agreement with CSL, the assessee contended before the ld. CIT(A) that the amount is not any payment made abroad but only revenue sharing arrangement with two foreign companies namely Norman Data Defence Systems AG (NDDS) and Commtouch Software Ltd(CSL). The amount received from customers who purchased the embedded software of the assessee-company was shared with NDDS and CSL and that no separate payment, as such, was made to NDDS and CSL by the assessee and therefore, the question of deducting any tax at source does not arise in their case. After considering the submissions of the assessee and on perusal of the agreement dated 28.6.2006 entered into by the assessee with CSL, the ld. CIT(A) has observed the terms of fees and payment and the same are reproduced as under: Fees and Payment Terms: OEM shall pay Commtouch 15% (10% for the Anti Spam - SDK services and 5% for the VGD-SDK Services) from the OEM Net Revenue generated by bundled products or any individual products sold by OEM in worldwide markets. For example - if a product sold to a customer for $1,000 per year, then, the OEM net revenues will be $
750 per year (after 25% deduction of the sales and marketing cost). Commtouch shall get$ 112.5 ($750*15%) per year for the AS & VOD services.
After considering the above terms of fees and payments, the ld. CIT(A) has observed and held as under: “It is seen from the above that the appellant entered into revenue share agreement and transferred part of the revenue generated from bundled products to CSL. In view of the above, the disallowance of Rs.40,17,375/- made by the Assessing Officer is deleted. As far as the disallowance with regard to NDDS is concerned, the disallowance made by the Assessing Officer is confirmed in the absence of evidence to the contrary. The appellant gets the relief of Rs.40, 17,375/ - on this ground.
The above terms of fees and payments given in the agreement entered into between the assessee and CSL is not available before the Assessing Officer and the Assessing Officer was not given an opportunity of being heard to the above evidence produced before and considered by the ld. CIT(A) while deleting the disallowance made under section 40(a)(i) of the Act, which is clearly in violation of Rule 46A. In view of the above, we set aside the order of the ld. CIT(A) on this issue and remit the matter back to the file of the Assessing Officer to decide the issue afresh in accordance with law after verification of agreement, etc, as may be filed by the assessee. The assessee is also directed to file complete particulars before the Assessing Officer for verification. Thus, the ground raised by the Revenue is allowed for statistical purposes.
In the result, the appeal filed by the Revenue is allowed for statistical purposes.
Order pronounced on the 08th November, 2017 at Chennai.