NTT GLOBAL DATA CENTERS & CLOUD INFRASTRUCTURE INDIA PRIVATE LIMITED (ERSTWHILE NETMAGIC IT SERVICES PRIVATE LIMITED),MUMBAI vs. DCIT-10 (3)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B”, MUMBAI BEFORE SHRI ABY T VARKEY, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud v. National e-assessment Centre Infrastructure India Private Limited {Now known as National {Erstwhile Netmagic IT Services Faceless Appeal Centre} Private Limited} Delhi 7th Floor, Hiranandani Business Park Sakinaka S.O., Mumbai - 400072 PAN: AACCN2366D (Appellant) (Respondent) Assessee Represented by : Shri Vijay Mehta, Shri Arpit Doshi & Ms. Payal Mehta Department Represented by : Shri S. Srinivasu

Date of Conclusion of Hearing : 05.12.2023 Date of Pronouncement : 07.02.2024 O R D E R PER S. RIFAUR RAHMAN (AM)

ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 2. Assessee has raised following grounds in its appeal: -

“1 Disallowance of finance lease rental payments of INR 6,47,09,747/-: 1.1 The order passed by CIT(A) is bad in law and ought to be quashed as the CIT(A) has not expressed any opinion on the main ground raised by the Appellant as to deductibility of finance lease rental payments. The CIT(A) has conveniently ignored all the contentions raised by the Appellant and proceeded to opine on without prejudice ground raised by the Appellant without giving any reason for determining otherwise on the main ground. 1.2 The CIT(A) grossly erred, on the facts and circumstances of the case and in law, in disallowing finance lease rental payments of INR 6,47,09,747/- without appreciating the fact that the expenses incurred are in the nature of rental charges for use of the capital asset and not for 'acquisition of capital asset. 1.3 The CIT(A) grossly erred in overlooking the Circular No. 2 dated 9-2-2001 issued by the Central Board of Direct Taxes (CBDT) and disregarded the Supreme Court decision in case of I.C.D.S Ltd 29 Taxmann.com 129 (SC), wherein it has been held that the lessor is the owner of the asset. The natural corollary of the said Circular and the Supreme Court decision is that the lease rental payment made by the lessee even under finance lease is a revenue expenditure and allowable under section 37(1) of the Act. 2. Disallowance of expenses of INR 4,14,46,637/-treating the same as provisions: 2.1 The CIT(A) grossly erred, on the facts and circumstances of the case and in law, in disallowing expenses on the alleged ground that the said expenses are not incurred / paid in relevant assessment year and are mere provisions without considering the detailed submissions and supportings provided by the Appellant. The CIT(A) ought to haveappreciated that the services are pertaining to and availed by the Appellant in the year under consideration and the invoices are also dated in the year under consideration. 2.2 The CIT(A) ought to have appreciated that the Appellant is following the mercantile system of accounting and as per mercantile system of accounting all the expenses relating to earning of revenues for the stipulated period should be booked in that year itself. The CIT(A) also ought to have appreciated that the

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited liability is ascertained liability and non-payment of liability does not mean that it is contingent in nature. 2.3 Without prejudice to the above, deduction ought to be allowed in subsequent assessment year i.e. A.Y. 2016-17. 3. Non-grant of foreign tax credit 3.1 The CIT(A) grossly erred in not granting the credit for foreign taxes paid by the Appellant in country outside India in respect of the fees for technical services and thereby subjecting the same income to double taxation alleging non-submission of relevant clauses of tax treaties and this being a consequential ground without appreciating that the Appellant had in fact made a detailed submissions along with all the supportings of foreign tax credit paid. Further, it is submitted that the claim of foreign tax credit is independent to other grounds and not consequential.”

i) Total discounted value of total lease rental (principal component) is recognised as the asset with corresponding lease liability. ii) Depreciation is recorded on leased assets as per the Companies Act. iii) Each instalment payment is split into two components for accounting purpose i.e., the principal and finance/interest charges. The finance/ interest charges are expensed out in the profit and

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited loss account. The balance portion of the lease rentals i.e, the principal amount is deducted from the lease liability recognised at the inception of lease.

i) Added back depreciation claimed on leased asset as per Companies Act, 1956. ii) The leased asset has not been added to tax block of assets. Hence, no depreciation is claimed on leased assets for tax purposes. iii) Lease rentals (principal amount as well as interest component) paid are claimed as revenue expenditure. Only interest component of lease rent payment is debited to profit and loss account and hence principal portion which is not debited in profit and loss account (INR 6,47,09,747/-) is claimed as deduction in computation of income.

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 7. Aggrieved assessee preferred appeal before Ld. CIT(A) and filed detailed submissions, after considering the detailed submissions Ld.CIT(A) upheld the order of the Assessee Officer.

“Lease rental paid by the Assessee (lessee) is a revenue expenditure 8. The Assessing Officer in his order has mentioned that the payment made by the Assessee is for acquisition of leased assets. However, is evident from the lease agreements that lease rentals paid by the Assessee (i.e. lessee) are for 'use of the leased assets' and not for 'acquisition of such leased assets. 9. To support the above, during the course of hearing, the attention of the Bench was 9. drawn to the relevant clauses of the Master Lease and Finance Agreement entered into between the Assessee and one of the lessor (Cisco Systems Capital India Private Ltd). The review of agreements clearly showcases that the lessee at no point in time gets ownership rights in the leased asset.

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 10. For ready reference of your Honours, we reproduce herewith relevant clauses of said agreement as under: Page No. of Clause / Extract Paper Contentions Book / Para No. Page 45/ Equipment procurement and title The Appellant did not have any Para 1.2 title or right in leased asset and “Lessor shall at all times retain title to thus cannot be said to be owner the Equipment.” of leased asset during the lease period. Page 47/ Delivery and Installation; Maintenance If the Appellant is the owner of Para 5.2 and Repair; Inspection the asset, then there should not have been any obligation on the "Lessee shall make the Equipment and Appellant to make available its related log and maintenance records these records to lessor. available to Lessor for inspection during business hours. Identification Page 47/ This clause also showcases that ownership of leased assets at all Para 5.6 times during the lease period is "Lessee shall place and maintain with the lessor. permanent markings on the Equipment evidencing Lessor's ownership, security and other interests therein, as requested by Lessor and will keep the Equipment free of any other labeling which might be interpreted as a claim of ownership Alterations and Modifications Page 47/ Ownership rights is a bundled right with all other rights such as Para 5.7 — right to modify, right to "Lessee shall not make any additions, discard, alienate etc. Restriction attachments, alterations or on the Appellant to make improvements to the equipment... modification to leased assets, Page 51/ Assignment - "Lessee shall not assign its sub-letting assets, part with rights or obligations, sublet the para 12.1 possession of assets, etc. Equipment or otherwise permit the showcases that the lessee did not Equipment to be operated or used by, or get any ownership rights in to come into the possession of, anyone leased assets. but lessee. Page 49/ para Return of equipment "Upon expiration of The obligation on the Appellant to return the lease assets on expiry of 9.1 the original lease term or any extended lease term further demonstrates that term of a Lease, Lessee shall return the payment made by the Appellant is Equipment to Lessor... for 'use of assets' and not for 'acquisition of assets'

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited Page No. of Clause / Extract Paper Contentions Book / Para No. Page 50/ Para Events of Default This clause gives lessor the 11.1,11.2 rightto terminate the lease agreement in case of default. " The occurrence of any of the following Hence, lease rent may not be owing shall constitute an "Event of equivalent to the entire value of Default" hereunder and under each lease: asset. Thus, payment is for use of (a) Lessee fails to payany Rent. asset and not for acquisition of Remedies asset. "Upon occurrence of any Event Of Default and at any time thereafter so long as such default has not been cured to Lessor's satisfaction, Lessor at its option, may exercise any one or more of the following remedies: (d)requireLesseeto return Immediately all Equipment under any or all Leases. 11. It is a settle legal position that the treatment given in books of accounts is not determinative for the purpose of Income Tax Act. Reference is made to following decisions: (a) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) (b) Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) 12. Reference is also invited to the Circular No. 2 of 2001 dated February 9, 2001, issued by CBDT wherein CBDT has also opined that the aforesaid AS -19 issued by ICAI creating distinction between operating and finance lease will have no implication under provisions of the Act. 13. The Circular No.2 of 2001 dated 09.02.2001 issued by the CBDT is enclosed on page no. 139 of the paper book. The relevant excerpt of the Circular is as under: "1. Under the Income-tax Act in all leasing transactions, the owner of the asset is entitled to the depreciation if the same is used in the business, under section 32 of the Income-tax Act. The ownership of the asset is determined by the terms of contract between the lessor and the lessee. …..

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 3. It has come to the notice of the Board that the New Accounting Standard on 'Leases' issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act" 14. The debate of determination of ownership under finance lease was put to rest by the Hon'ble Supreme Court in case of ICDS Ltd v. CIT [2013] 350 ITR 527 (SC) wherein the Hon'ble Supreme Court pointing out specific clauses in the finance lease agreement held the lessor as the owner of the leased assets. Decision of Hon'ble Supreme Courtis enclosed at page no. 140 to 167 of the paper book. 15. The below are the relevant clauses of the agreement basis which the Hon'ble Supreme Court held lessor as owner of leased assets: i. the assessee (lessor in that case) was the exclusive owner of the vehicle all points of time: ii. if the lessee committed a default, the assessee was empowered to repossess the vehicle (and not merely recover money from the customer); iii. at the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee; and iv. the assessee had the right of inspection of the vehicle at all times. 16. The Appellant strongly relies on aforesaid decision of the Hon'ble Supreme Court. Thefact in case of the Appellant (mentioned in para 10) are similar to that of ICDS Ltd.(supra). Hence, in the case of Appellant also, the lessors are the owner of leased assets. 17. A natural corollary to above legal position is that the lessee cannot be said to be owner of the leased asset and hence payments made by lessee are for use of leased asset and thus allowable as deduction under section 37(1) of the Act. Judicial precedents in favour of Appellant 18. Reliance is placed on following decisions in context of lessee pronounced post the decision of the Supreme Court in case of ICDS

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited Ltd. (supra) wherein entire lease rental paid by the lessee including the principal portion is allowed as deduction under section 37(1) of the Act. • Minda Corporation vs. DCIT [2016] 69 taxmann.com 317 (Delhi-Trib) "In said case, the assessee-company acquired vehicles on financial lease. The lease rental paid by the assessee was claimed as deduction under section 37. The Assessing Officer disallowed the aforesaid claim of deduction on the ground that since the payments made by the assessee were in the nature of a 'financial lease', the same were required to be capitalized and not allowable as deduction under section 37. Further, depreciation was also not allowed on the purported cost of the fixed asset. Held that under the provisions of the Act, depreciation is admissible undersection 32 only to the owner of the asset. Lease charges paid for the use ofthe asset, without acquiring any ownership rights in the same, are allowable as revenue expenditures under section 37. Thus, the disallowance of lease rental was not justified". • NIIT vs DCIT [2019] 112 taxmann.com 66 (Delhi-Trib) "7.1 Considering the totality of the facts and circumstances of the case and nature of infrastructure facilities provided to the assessee on lease rent, it is clear that the same have been provided through Agreement for business purpose of the assessee. Since assessee used these items wholly and exclusively for the purpose of business and was not the owner of the same, therefore, assessee rightly claimed the same as revenue expenditure and rightly claimed the deduction of the same. It is also well settled Law that the liability under the Act is governed by the provisions of the Act and not depending on the treatment also well followed for the same in the books of account. It is also well settled that whether the assessee was entitled to a particular deduction or not, would depend upon the provisions of Law relating thereto, and not on the view, which the assessee might take of his right, nor could the existence or absence of entries in the books of account by decisive or conclusive in the matter." (Emphasis supplied). • Tristar Container Services Asia v. ACIT [2022] 143 taxmann.com 324(Chennai-Trib) where facts of the case are similar to that of the Appellant.

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited "In said case the assessee was engaged in taking assets on lease and further subleasing to various customers. The assessee claimed lease rental paid by it as deduction under section 37(1). The assessing officer was of the opinion that lease was a finance lease and disallowed principal amount on the ground that the same was capital in nature. Tribunal held that AS-19 only provides for the accounting is not treatment to be given to the two types of leases. It is not determinative of the tax treatment of the lease which has to be computed in accordance with the provisions of the Act. Not only the interest/ finance charges but the entire lease payment treated as a deductible expense in the hands of the lessee under the Act. In the hands of the lessor, the entire lease rentals and not just the finance/ interest charges is taxed as income. The lessor who is the legal owner will be entitled to depreciation. Accordingly, the total lease payments made by the assessee was held to be revenue in nature". Above decisions are enclosed at page no. 174 to 199 of the paper book. • M/s EIH Ltd. (ITA No. 110/Col/2016) (Kolkata-Trib) (copy on record). The assessee in this case had claimed deduction towards principal payment oflease rental for machinery and vehicles taken on finance lease. As per AS 19,leased assets were capitalised at net present value and depreciation andinterest cost on the same had been debited to the profit and loss account. However, while computing the profits and gains from business and profession, the assessee claimed actual principal component of lease rental as deduction. As the assessee was not the legal owner it did not claim depreciation on leased assets. The assessing officer disallowed the principal amount on the contention that under finance lease, the lessee is the owner of the leased assets and principal repayment component of lease rental represents payment for purchase of leased assets and thus should be treated as capital expenditure. On the other hand, the DRP applying the ratio laid down by the Hon'ble Supreme Court in the case of ICDS Ltd v. CIT reported in 350 ITR 527 (SC) and Rajshree Roadways v. Union of India [2003]263 ITR 206/129 Taxman 663 (Rajasthan HC), allowed the issue in favour of the assessee. The Hon'ble Tribunal thereafter ruled in the favour of the assessee and the relevant extract of the same is reproduced below:

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited "In the aforesaid case, there was a clause in the lease agreement giving an option to the lessee to buy back the asset on termination of the lease agreement. In the instant case, the assessee (lessee) falls in a better footing, in as much as there is no clause in the lease agreement, enabling the lessee to buy back the assets on termination of the lease arrangement. We find that the case law relied upon by the Learned DR on the decision of Delhi Tribunal need not be discussed as the issue is squarely covered by the High Court and Supreme Court in favour of the assessee."(Emphasis supplied). • M/s Philips India Ltd. (formerly Philips Electronics India Ltd.) (ITA No.2489/Kol/2017) (Kolkata-Trib) "The assessee claimed lease rental paid for motor car taken on finance lease from Citi Corp. The same was treated as capital expenditure by the assessing officer based on the reliance placed in the assessee's own case for another assessment year. Consequently, the DRP upheld the proposed adjustment. However, the Tribunal ruled in favour of the assessee and held as under: "We have heard the rival submissions. We find that the issue under dispute iscovered by the decision of the Hon'ble Supreme Court in the case of ICDS Ltdsupra in favour of the assessee. Hence respectfully following the same, weallow the Ground No. 8 raised by the assessee." (Emphasis supplied). 19. Based on the above submission, it is humbly submitted that the appellant's claim of deduction on account of lease rental paid may kindly be allowed.”

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited Finance Lease. He submitted that assessee itself treating the Finance Lease as capital transaction in their financial statements and they cannot take a contrary view in claiming deduction under Income Tax Act. He objected that in the Finance Lease the assets belongs to the assessee and assessee can claim only interest expenditure and he heavily relied on the findings of the lower authorities.

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 12. Considered the rival submissions and material placed on record, we observe from the record that assessee has acquired certain assets through Finance Lease and paid a rental payment of ₹.6,47,09,747/-. The assessee following AS-19 has considered the above transactions as Finance Lease and recognized the same as fixed assets in its balance sheet to the extent of assets value and claimed the depreciation. With regard to financial charges it has claimed it as finance expenses in its profit and loss account. However, while claiming deduction under Income Tax Act, assessee has disallowed depreciation and interest in computation and claimed the whole payment of Finance Lease as expenditure. It is relevant to note that the assessee has taken the above lease from the lessor Cisco Systems Capital (India) Private Limited and the lessor has claimed the deduction of depreciation and interest in their computation of income, when the revenue disallowed the same in their hands Hon’ble Karnataka High Court allowed the claim of lessor (Cisco Systems Capital (India) Private Limited) by observing as under:-

“14. This Court has carefully gone through the assessment order passed by the assessing officer and the order passed by the Principal Commissioner of Income Tax. The order passed by the Principal Commissioner of Income Tax reveals that he has exercised jurisdiction under Section 263 of the Act of 1961 on the ground that although there was an enquiry by the assessing officer, the enquiry conducted by the assessing officer was inadequate and the assessing officer has ignored the vital facts

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited resulting in loss to the revenue. However, the order passed by the assessing officer reveals that he has called for necessary evidence on the issue of depreciation claimed on assets leased under finance lease transactions by issuing show cause notice. The assessee has filed all relevant documents including the copies of agreements entered with the customers and the assessee has also referred to the Circulars issued by the CBDT clarifying the legal position to claim depreciation on assets under operating lease as well as finance lease. The assessing officer being satisfied with the explanation and after conducting a thorough enquiry has allowed the depreciation claimed on assets under lease transactions, but disputed the rate of depreciation claimed by the assessee and therefore, by no stretch of imagination it can be held that the assessment order passed by the assessing officer was erroneous within the meaning of Section 263 of the Act of 1961. 15. The learned counsel for the Income Tax Department has vehemently relied upon the judgments delivered in the case of Malabar Industrial Co.Ltd., (supra) as well as in the case of Amitabh Bachchan (supra) on the issue that the order passed by the assessing officer is prejudicial to the interests of the revenue. In the considered opinion of this Court as rightly held by the Income Tax Appellate Tribunal every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interests of the revenue and in case two views are possible and the assessing officer has taken one view with which the Commissioner of Income Tax did not agree cannot be treated as an erroneous order and prejudicial to the interests of the revenue. 16. The Division Bench of this Court in similar circumstances while dealing with similar type of lease in the case of Hewlett Packard India Sales Pvt. Ltd., (supra) in paragraphs 6, 7 and 8 has held as under; “6. We have considered the submissions made by learned counsel for the parties and have perused the record. The clauses of the agreement in the case before the Supreme Court in I.C.D.S Ltd. supra and in the case of the assessee with regard to ownership, inspection, re possession of the vehicle of the equipment on default, delivery of equipment on expiration of lease and ownership at the end of the lease period are similar. From perusal of clause 8.1 of the agreement, it is evident that the lessee has to ensure the equipment showing the assessee's name as owner and in terms of clause 11 no alteration or improvements to the equipment can be made by the lessee without prior consent

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited from the assessee. Thus, the assessee alone can claim the depreciation allowance. The aforesaid clauses have been interpreted by the Supreme Court in I.C.D.S. Ltd. supra and it has been held that the assessee is entitled to benefit of depreciation on leased assets under Section 32 of the Act. Thus, the questions of law involved in the appeal are no longer res integra and are squarely covered by the decision of the Supreme Court in I.C.D.S. Ltd. supra. 7. For yet another reason the substantial questions of law have to be answered in favour of the assessee. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX’ (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. In the instant case, the revenue has accepted the claim of the assessee for depreciation under Section 32 of the Act for the Assessment Year 2002-03 and 2003-04. Therefore, the revenue cannot be allowed to take a different stand for the Assessment Year 2004-05. 8. In view of preceding analysis, the substantial questions of law are answered against the revenue and in favour of the assessee. In the result, the order of the Tribunal dated 09.1.2012 in so far as it pertains to the rejection of the claim of the assessee for depreciation in respect of leased assets under Section 32 of the Act is hereby quashed and the assessee is held entitled to depreciation in respect of leased assets under Section 32 of the Act. Accordingly, the appeal is allowed.” 17. The Division Bench of this Court has placed reliance upon a judgment delivered in the case of M/s ICDS Ltd (supra), wherein again the same issue was involved. Paragraphs 26 to 32 of the judgment delivered by the Hon’ble Supreme Court in M/s ICDS Ltd’s case are reproduced as under; “26. We do not find merit in the Revenue’s argument for more than one reason: (i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the MV Act. It defines

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited ownership for the subsequent provisions of the MV Act, not for the purpose of law in general. It serves more as a guide to what terms in the MV Act mean. Therefore, if the MV Act at any point uses the term owner in any Section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement of law on ownership may be the Sale of Goods Act; Section 2(30) of the MV Act must be read in consonance with sub-sections (4) and (5) of Section 51 of the MV Act, which were referred to by Mr. S. Ganesh, learned senior counsel for the assessee. The provisions read as follows: - “(4) No entry regarding the transfer of ownership of any motor vehicle which is held under the said agreement shall be made in the certificate of registration except with the written consent of the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement. (5) Where the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement, satisfies the registering authority that he has taken possession of the vehicle from the registered owner owing to the default of the registered owner under the provisions of the said agreement and that the registered owner refuses to deliver the certificate of registration or has absconded, such authority may, after giving the registered owner an opportunity to make such representation as he may wish to make (by sending to him a notice by registered post acknowledgment due at his address entered in the certificate of registration) and notwithstanding that the certificate of registration is not produced before it, cancel the certificate and issue a fresh certificate of registration in the name of the person with whom the registered owner has entered into the said agreement: Provided that a fresh certificate of registration shall not be issued in respect of a motor vehicle, unless such person pays the prescribed fee:

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited Provided further that a fresh certificate of registration issued in respect of a motor vehicle, other than a transport vehicle, shall be valid only for the remaining period for which the certificate cancelled under this sub-section would have been in force.” Therefore, the MV Act mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of lessor as owner. The Section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and if the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of a particular depreciable asset due to a vacuum of ownership. As afore- noted, the entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the lessee. This reaffirms the position that the assessee is in fact the owner of the vehicle, in so far as Section 32 of the Act is concerned. 27. Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement. [Commissioner of Income-Tax Vs. A.M. Constructions, reported in (1999) 238 ITR 775 (AP); Commissioner of Income- Tax Vs. Bansal Credits Ltd., reported in (2003) 259 ITR 69 (Del); COMMISSIONER of Income-Tax Vs. M.G.F. (India) Ltd. reported in (2006) 285 ITR 142 (Del); Commissioner of Income-Tax Vs. Annamalai Finance Ltd., reported in (2005) 275 ITR 451 (Mad)]. In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. We are in complete agreement with these decisions on the said point. 28. There was some controversy regarding the invoices issued by the manufacturer – whether they were issued in the name of the lessee or the lessor. For the view we have taken above, we deem it unnecessary to go into the said question as it is of no consequence to our final opinion on the main issue. From a perusal of the lease agreement and other related factors, as discussed

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited above, we are satisfied of the assessee’s ownership of the trucks in question. 29. Therefore, in the facts of the present case, we hold that the lessor i.e. the assessee is the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of Section 32 of the Act and hence, is entitled to claim depreciation in respect of additions made to the trucks, which were leased out. 30. With regard to the claim of the assessee for a higher rate of depreciation, the import of the same term “purposes of business”, used in the second proviso to Section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier, under Section 32 (1) of the Act. Therefore, the assessee fulfills even the requirements for a claim of a higher rate of depreciation, and hence is entitled to the same. 31. In this regard, we endorse the following observations of the Tribunal, which clinch the issue in favour of the assessee. “15. The CBDT vide Circular No. 652, dated 14-6-1993 has clarified that the higher rate of 40% in case of lorries etc. plying on hire shall not apply if the vehicle is used in a non- hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use is in hiring business. (Emphasis supplied) Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate. *** *** *** 39. The gist of the decision of the apex court in the case of Shaan Finance (P) Ltd. is that where the business of the assessee consists of hiring out machinery and/ or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of business. 40 In the present case, the business of the assessee consists of hiring out machinery and trucks where the income derived by the assessee from hiring of such machinery is business income. Therefore, the assessee-

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited appellant viz. ICDS should be considered as having used the trucks for the purpose of business. 41 It was further brought to our notice that the Hon’ble Karnataka High Court in its judgment in ITRC No. 789 of 1998 for the asst. year 1986- 87 in the case of the assessee- appellant itself (viz. ICDS) has already decided the issue in question in favour of the assessee, confirming the decision of the CIT (A) and the ITAT holding that the assessee company is entitled to the investment allowance and additional depreciation. In this judgment of the Karnataka High Court the decision of the Supreme Court reported in 231 ITR 308 was relied upon. Therefore we have no hesitation to hold that the appellant- company is entitled to a higher rate of depreciation at 50% on the trucks leased out by it. We therefore, reverse the orders of the CIT (Appeals) on this issue.” For the foregoing reasons, in our opinion, the High Court erred in law in reversing the decision of the Tribunal. Consequently, the appeals are allowed; the impugned judgments are set aside and the substantial questions of law framed by the High Court, extracted in para 7 (supra), are answered in favour of the assessee and against the Revenue. There will, however, be no order as to costs. “ 18. This Court has minutely scanned the entire record and the clauses of agreement in the case before the Supreme Court in M/s ICDS Ltd., (supra) as well as in the case of Hewlett Packard India Sales Pvt Ltd., (supra) and in the case of the assessee, in the present case, with regard to the ownership, inspection, repossession of the equipment on default, delivery of equipment on expiry of lease and ownership at the end of the lease period, are similar and therefore, it is the assessee alone who can claim depreciation, as rightly held by the assessing officer. The clauses relating to lease have already been interpreted by the Supreme Court in the case of M/s ICDS Ltd., (supra) and it has been held that the assessee is entitled to the benefit of depreciation on leased assets under Section 32 of the Act of 1961 and therefore, the substantial question of law involved in the present appeal is no longer res integra and is squarely covered by the decision of the Hon’ble Supreme Court in M/s ICDS Ltd., (supra) as well as the judgment delivered by the Division of this Court in Hewlett Packard India Sales Pvt. Ltd., (supra). Resultantly, the substantial question of law is answered in favour of the assessee and against the revenue.”

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 13. Respectfully following the above decision, the same set of transaction on which lessor (Cisco Systems Capital (India) Private Limited) was allowed to claim the deduction/depreciation in their computation and the resultant of the same transaction i.e., in the case of lessee (i.e. assessee), revenue cannot take a different view. Therefore, in our considered view the claim made by the assessee is on the same lease, therefore, we respectfully following decisions of the Hon’ble Karnataka High Court and Hon’ble Supreme Court in the case of ICDS Limited v. CIT (supra) we are inclined to allow the claim of the assessee to claim the lease rent as an expenditure in their computation. This case being peculiar we are inclined to allow the ground raised by the assessee. Accordingly, ground raised by the assessee is allowed.

“5.1 On perusal of the Profit and Loss Account, it was seen that the assessee company has debited sum of Rs. 15,15,49,522/- as provision, During the course of assessment proceeding the assessee was asked to give bifurcation of the amount of provision along with detail and ledger account of each of the relating expenditure. On examination of the detail furnished, it was noticed

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited that the total amount of provision of Rs. 15,15,49,522/-Included the following provisions: a) Provision for tax - 5,64,89,669/- b) Provision for gratuity 1,15,83,633/- c) Provision for lease rent equalisation 2,42,66,738/- d) Other Provisions 5,92,09,482/ 5.2 The provisions for Tax, Provisions for Gratuity and Provision for lease rent equalisation have been disallowed in the computation of income. However, other provisions of Rs. 5,92,09,482/- Include provisions such as 'Business Promotion", "Legal & Professional Fees" and under the head "Electricity Charges". During the assessment proceedings assessee was asked to provide the complete details and bills for these provisions and was asked to explain why these provisions should not be disallowed? In response, assessee has not submitted details of the bills and vouchers and has only stated that these provisions have been disallowed in the computation on account of non payment of TDS. It is seen that disallowance u/s 40(a)(ia) has been done @30% to the extent of Rs. 1,77,62,845. 5.3 The basic issue at hand is that the provisions are not allowable as expense under Income tax Act. Since these amounts were not the actual payments but only claimed as provisions, accordingly the same is not allowable. The Income- tax Act does not allow provisional expenses or provisions. Being a company entity, as per the provisions the assessee is required and it is following is Mercantile System of Accounting. As per the Mercantile System of Accounting, as per the Matching Principle one should record all expenses related to a revenue- generating transaction at the same time that one recognizes the revenue. This is the basic foundation for the use of accrual accounting. In the instant case the expenses which have been incurred in the next year after the balance sheet date have been debited in the current year though all Invoices pertain to the next year. Thus the assessee has claimed future expenses in the current and by doing so the assessee has decreased its tax liability. Further, even the assessee has not been able to substantiate with evidences of supporting as to how these are related wholly and exclusively for the purposes of the business of the assessee company since no details have been submitted. 5.4 It is also seen that while providing for these expenses in the books,assessee has not deducted TDS on the same. Considering the above, theprovisions of Rs. 5,92,09,482/-are hereby disallowed. Since assessee hasalready disallowed Rs. 1,77,62,845 under section 40(a)(ia), the disallowance comes to Rs. 4,14,46,637/-“

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 15. Aggrieved assessee preferred appeal before the Ld. CIT(A) and assessee has filed summary of expenses disallowed by the Assessing Officer and filed sample invoices as filed before Assessing Officer and he brought to our notice Page No. 87 details of various expenses disallowed by the Assessing Officer and also filed various invoices in support of the same. After considering the detailed submissions of the assessee along with sample invoices, Ld. CIT(A) hasnot given clear finding and the basis of rejections of the assessee submissions, he merely sustained the additions made by the Assessing Officer.

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 17. With regard to Ground No. 3, which is relating to Foreign Tax Credit, at the time of hearing, Ld.AR of the assessee submitted that during the year under consideration, the assessee has rendered remote infrastructure management services to NTT Communications Corporation, a Japanese Company, and has earned income in nature of fees for technical services NTT Communications Corporation while making remittances has withheld taxes at the rate of 10% in Japan. The details of taxes paid in Japan are enclosed at page no. 266 to 272 of the paper book alongwith sample withholding tax certificates.

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited 19. Article 23 "Elimination of Double Taxation of the India-Japan tax treaty reads as under: -

“2. Double taxation shall be avoided in the case of India as follows: (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction. Such deduction in either case shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable, as the case may be, to the income which may be taxed in Japan...." [Emphasis Supplied]

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited another.In light of the above, it was prayed to allow the assessee to take credit of the foreign tax credit paid by the assessee.

Order pronounced in the open court on 07th February, 2024.

Sd/- Sd/- (ABY T VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 07.02.2024 Giridhar, Sr.PS

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ITA NO. 2784/MUM/2023 (A.Y. 2015-16) NTT Global Data Centers & Cloud Infrastructure India Private Limited Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.

//True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum

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