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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI G. PAVAN KUMAR
आदेश /O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:
The assessee has filed the appeal against the order of the Assessing Officer passed under Section 143(3) read with Section
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144C(13) of the Act passed in pursuance to the directions of the
DRP, Chennai in F.No.DRP/CHE/81/2014-15 dated 15.12.2014.
The assessee has raised the grounds on CIT(Appeals),
2.1 The Ld. Assessing Officer erred is not considering the fact that
the assessee is eligible for deduction under Section 10A of the
Income Tax Act, 1961 (in short ‘the Act’) and whereas the
actual manufacturing of production commenced in the
financial year 2000-01 being the assessment year 2001-02
and not assessment year 1999-2000 as assumed by the
assessing authority.
2.2 The Ld. Assessing Officer disallowed the expenditure incurred
towards communication expenses under provisions of Section
40(a)(ia) of the Act, irrespective of the fact that the payments
were made for internet leased lines and such payment is not
in the nature of royalty.
2.3 The third ground, the Ld. Assessing Officer disallowed the
interest on advances provided to the subsidiaries/group
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companies for the business purpose under the provisions of Section 36(i)(iii) of the Act.
2.4 Last, The Ld. Assessing Officer has erred in disallowing software development expenditure paid to its subsidiary company Prodapt Corporation for non-deduction of TDS were the payments are made to the subsidiary for the services rendered outside India.
The brief facts of the case that the assessee company was incorporated under Companies Act and in existence for more than 12 years in software support services focusing on telecom segment and provides experience and innovation with state of the art processing technology and a solid reputation ensuring outstanding customized service to each clients and works with communication service providers, telecom solutions companies in providing software services and filed the Return of Income for the assessment year 2010-11 on 14.10.2010 with total income of ₹22,04,555/- under normal computation of income and income computed under provisions of Section 115JB of the Act, ₹3,20,23,696/-.
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The case was selected for scrutiny and notice under Section 143(2) and 142 (1) of the Act was issued. The Assessing Officer found that the assessee company has international transactions with Associated Enterprises (AE) for more than ₹15 crores and was referred to the Transfer Pricing Officer (TPO). The Ld. TPO vide order dated 03.01.2014 has considered the methodology adopted and determined the Arms Length Price (ALP) with the upward adjustment of ₹21,41,590/- towards interest accrued to the assessee company on advances given to its wholly owned subsidiary Prodapt Corporation Inc., USA and whereas this adjustment was rectified under the directions of the DRP to ₹20,71,590/-.
Further, the Ld. Assessing Officer found that the assessee does not satisfy the conditions stipulated under Section 10A of the Act and also no Revised return of income was filed to claim the relief, and on further verification of the Form No.56F filed by the assessee for the assessment year 2010-11, the assessee commenced manufacture or production on 29.01.1999 which relates to the assessment year 1999-2000. Therefore, the Assessing Officer is of the opinion, that the exemption under Section 10A of
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the Act, was claimed in the first year being assessment year 2001-02 is without any basis as the assessee company has commenced manufacture in the assessment year 1999-2000. The Assessing Officer dealt on the provisions of Section 10A of the Act and there was no clarification provided by the assessee and the Ld. Assessing Officer is of the opinion that the 1st year for claim of Section 10A of the Act has to be considered from assessment year 1999-2000 and the 10th year has expired in assessment year 2008- 09 and therefore assessee company is not eligible for said deduction of ₹3,11,80,617/- and disallowed. The DRP has considered these facts and confirmed the action of the Assessing Officer as the assessee could not satisfy the prescribed eligibility conditions for deduction under Section 10A of the Act.
On appeal before us, the Ld. AR submitted that the assessee is eligible for deduction under Section 10A for the relevant assessment year and also complied the provisions of Section 10A of the Act, and the present assessment year pertains to 10th year of claim, though the manufacturing or production has taken place on 21.09.1999, but the first year of claim being assessment year 2001-02. Therefore, the assessee has rightly claimed for the last
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year being the 10th year and the Revenue has accepted for the earlier years without any dispute. Further, the Ld. AR supported his arguments with the paper book with the details of Approval of
STP, Annual reports and prayed for allowing the ground of the appeal. Contra, the Ld. DR relied the order of the lower authorities.
We heard the rival submissions and perused the material available on record and the paper book filed by the assessee in support of the claim for deduction under Section 10A of the Act.
The sole crux of the issue lies on the date on which the production is actually commenced. For claiming exemption, the Ld. AR drew our attention to the paper book, where the assessee’s company
name was changed from earlier Zeetron Solutions Pvt. Ltd to present Prodapt Solutions Pvt. Ltd on 22.05.2000, and approval from Software Technology Park of India referred at page 2, explaining grant of approval on setting up unit, followed by the
green card and the copy of Approval under STP scheme by the Ministry, forwarded to the assessee on 30.03.2000 and further letter requesting the bonding between the customs authorities filed on
17.05.2000 and approval was granted by STPI on 18.03.2000. The assessee company has filed a letter to the STPI on 26.06.2000 for
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commencement of operations from 07.06.2000, to substantiate the
claim that the production has commenced in the financial year
2000-01 and also supported with invoice copies. Whereas, the
Assessing Officer relied only on the facts, based on the Form 56F,
wherein it was mentioned that the production was commenced on
21.01.1999 relating to assessment year 1999-2000, as first year.
We found the Revenue could not substantiate with any evidence
before us that the production was commenced in the assessment
year 1999-2000 but relied only on the Form 56F filed by the
assessee. Considering the apparent facts, material on record and
the paper book filed, we are of the opinion that the matter has to be
re-examined by the AO as these facts were not mentioned in the
order of the DRP and it is not clear whether the assessee has filed
these details before the DRP or before the Assessing Officer to
substantiate the claim. Therefore, in the interest of justice, we
remit this issue to the file of Assessing Officer to verify the
genuineness and the assessee shall be provided an opportunity of
hearing before passing the order.
The Assessing Officer found that the assessee has incurred
expenses towards the communication charges paid to Tata
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Communications and Reliance Communications and these charges
are paid for dedicated lease lines. Whereas, the Assessing Officer
alleged that no TDS was deducted and the same was disallowed.
The Ld.Assessing Officer assumed that the communication charges
paid for lease lines are on par with royalty and therefore disallowed
the claim under Section 40(a)(ia) of the Act. On filing objections
before the DRP, the DRP found the action of Assessing Officer is in
accordance with law and confirmed the disallowance. In appeal
before us, the Ld. AR argued that the expenditure was incurred
towards dedicated lease lines and does not qualify to be treated as
royalty, as presumed by the Assessing Officer and the DRP,
irrespective of the fact that the royalty recipient being an Indian
company i.e., Tata & Reliance Communications. These companies
would have paid tax on these amount, hence cannot be considered
for disallowance under Section 40(a)(ia) of the Act and relied on
Madras High Court judgment in Skycell Communications Ltd v
Deputy Commissioner of Income Tax 119 Taxman 496 and prayed
for allowing the appeal. Contra, the Ld. DR relied the orders of the
lower authorities.
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We heard the rival submissions, perused the material on
record and on perusal of the assessment order, we found that the
assessee has made a claim that the communication charges are
paid to Indian companies M/s. Tata Communications &
M/s. Reliance Communications, in respect of lease lines. But, there
is no reference of any agreement for entrusting works between the
assessee and said companies. The Assessing Officer assumed
that this dedicated lease charges are on par with royalty. Whereas,
we are unable to come to a conclusion on the nature of internet
communication charges paid to these companies, as neither the
assessee nor Revenue could put forth before us with evidence to
state that this amount pertains to internet charges or towards the
royalty. Hence, we are of the opinion, the matter has to be verified
by the Assessing Officer. Accordingly we set aside this issue for
limited purpose to the file of the Assessing Officer to examine the
nature of charges and verify whether this income has been offered
in the hands of the recipients and the Assessing Officer shall
provide an opportunity to the assessee before passing the order
and this ground of the assessee is allowed for statistical purpose.
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The assessee company has provided interest free advance to its group concerns without interest. The Assessing Officer found that the assessee has obtained loans and paying interest. Whereas, interest free advances were provided to its group concerns and the Ld. Assessing Officer dealt on the advances made to Prodapt Corporation Inc, USA being subsidiary of the assessee company and where day to day operations are controlled and advances made by the assessee company on commercial expediency. Whereas, the assessee has loan liability of ₹15,16,66,007/- as on 31.03.2010 and claims interest expenditure in P&L account ₹64,68,160/-. Whereas the interest has been paid by the assessee, on providing interest free loans to three subsidiaries and the Ld. AR relied on the decision of the Supreme Court in the case of SA Builders v CIT (Appeals) in 288 ITR 1, where it was held that the interest burden on funds advanced to a third party is allowable if it is for commercial expediency. The assessee company could not prove with any evidence that this amount is used for the purpose of business. Whereas, the Ld. TPO has made an Adjustment of interest on advances to Prodapt Corporation USA, therefore no action was considered by the Assessing Officer. But, in respect of other advances to two groups M/s. Prodapt
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Technology Holdings Pvt. Ltd. and M/s. Southern Group Industries, the Assessing Officer has discussed at page 4 & 5 of the order and made an addition holding that interest on these loans cannot be allowed as deduction under Section 36(1)(iii) of the Act and calculated disallowance of proportionate interest, as no commercial expediency was proved in respect of M/s. Prodapt Technology Holding Pvt. Ltd. ₹9,59,558 and M/s. Southern Group Industries Pvt. Ltd. ₹2,27,451, and aggregated disallowance ₹11,87,009/-. The assessee filed objections before the DRP. Whereas, the DRP discussed the issue based on the findings of the Assessing Officer that these advances were not granted as loans for rendering the business, whereas, the Ld. DRP found that the Assessing Officer has justified in his action as no evidence was filed by the assessee in respect of supporting the claim and confirmed the order of the Assessing Officer.
Before us, the Ld. AR argued that the Assessing Officer has disallowed the advances given by the assessee company to its subsidiary companies under Section 36(1)(iii) of the Act and were such advances are part of business considerations, and relied on the Hon’ble Supreme Court decision of SA Builders v. CIT in 288
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ITR 1. The Ld. Assessing Officer found that one of the subsidiary has debit balance referred at page 4 of the assessment order pertaining to the Amounts receivable on account of sale of computers and furnitures in the year 2006 and therefore no interest was charged and this amount pertains to outstanding balance of sales. The Assessing Officer has not considered this fact inspite of providing the adequate information in the assessment proceedings. The transactions with the subsidiary companies are due to business exigencies and commercial expediency and prayed for allowing the ground. Contra the Ld. DR relied on the orders of the lower authorities.
We heard the rival submissions, perused the material on record and judicial decision cited. The assessee company has made advances to the subsidiary companies without charging any interest. Whereas, the Assessing Officer found that the assessee has claimed interest on account of ₹64,68,160/- in the P&L account as on 31.03.2010 whereas the outstanding loan liability is ₹15,16,66,007/- irrespective of the facts, the assessee company has provided these interest free advances for the reasons best known to them. The contention of the assessee that the advance
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to M/s. Prodapt Corporation Inc, USA was on commercial expediency and the Ld. TPO has already considered these facts and made upward adjustment. In respect of other two advances of
M/s. Prodapt Corporation Inc & M/s. Prodapt Technology Holding Pvt. Ltd., it was contested as opening balance available in the books of the assessee company and same pertains to the sale of
furniture and computers in the year 2006 and during the year advance was provided and same was repaid within the financial year. Whereas, in the case of M/s. Southern Group Industries Pvt. Ltd, there is opening balance of ₹8,91,447/- and pertains to the adjustment of rental advance originally received by the Southern Group Industries. Therefore, the net amount is debited to the
Southern Group Industries. We on perusing the provisions of Section 36(1)(iii) of the Act, found any expenditure in nature of interest on borrowed capital shall be allowed as deduction provided it has been utilized for the purpose of business. We are of the
opinion that the assessee could not satisfy with the correct allocation of interest and interest advance information and the Assessing Officer order also does not satisfy with the reasons
except relying on the contention of the assessee. The Ld. TPO has also made adjustment as advance was provided to subsidiary
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company and these aspects are to be verified from the angle of commercial expediency, which the Assessing Officer has not made any enquiry or called for any documents from subsidiaries to prove
that there exist a commercial expediency. Therefore, we are of the opinion, one more opportunity to be provided to the assessee to explain the commercial expediency of this transactions with the
subsidiary company before the Assessing Officer and we remit the dispute of issue of interest disallowance made by the Assessing Officer on M/s. Prodapt Corporation Inc, USA, M/s. Prodapt
Technology Holdings Pvt Ltd and M/s. Southern Group Industries Pvt. Ltd to the file of the Assessing Officer to verify and pass orders and the assessee should be provided opportunity of being heard
before disposal of the order on merits.
The last ground, in the financial year 2009-10, the assessee has paid an amount of ₹1.57 crores to M/s. Prodapt Corporation Inc,
a subsidiary of the assessee’s company towards software development. Contention of the Ld. Assessing Officer is that the assessee has not deducted TDS, whereas the assessee company
has entered into service agreements with three clients in USA viz. Intrado, West Corporation and Pacific Crest Technology. But these
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services were rendered by the subsidiary company Prodapt Corporation Inc, USA to which the assessee company has made the payment of ₹1.57 crores and the services to the subsidiary companies are not in the nature of technical services. Hence, no TDS was deducted. The Assessing Officer examined the service agreement with Pacific Crest Technology Inc and came to a conclusion based on the scope and terms of agreement, which are highly technical in nature and therefore qualified professionals are specifically trained for this purpose. Hence, payment made towards this services come within the purview of technical services under provision to section 9(1)(vii) of the Act and TDS has to be deducted and disallowed the amount of ₹1.57 crores. On objections to the DRP, DRP relied on the evidence of the Assessing Officer and the contractual agreement of the subsidiaries and does not interfere with the decision of the Assessing Officer to treat the transaction as in the nature of technical services under Section 9(1)(vii) of the Act and confirmed.
Before us on appeal, the Ld. AR’s contention that the software transactions made by the non-resident subsidiary company in USA and the provisions of applicability of TDS doesn’t arise and
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there is no obligation to deduct TDS. The Ld. AR relied on the coordinate Bench of this Tribunal in the case of Financial Software & Systems (P) Ltd v Income Tax Officer (International Taxation) in ITA Nos.822,823 & 824/Mds/2016 dated 22.06.2016, where similar issue has been considered and the difficulty lies with the assessee company to deduct TDS on clients in USA Intrado, West Corporation and Pacific Crest Technology and prayed for allowing the appeal. Contra, the Ld. DR relied on the orders of the lower authorities.
We heard the rival submissions, perused the material on record and the judicial decisions cited. The crux of the issue lies that the assessee company has paid ₹1.57 crores to the subsidiary company towards software development services. The services to companies are actually rendered by the subsidiary company M/s. Prodapt Corporation Inc, USA. This amount of ₹1.57 crores was paid to the subsidiary company for updating the software development services. The issue arises that no TDS to be deducted in respect of purchase of software which is not in the nature of royalty and therefore no disallowance under Section 40(a)(i) of the Act is applicable. And the Ld. AR drew the attention
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to page 4 and para 5 and internal para at 58 & 59 in ITA
Nos.822,823 & 824/Mds/2016 dated 22.06.2016 on the applicability
of law for deduction of TDS.
“We find much force in the above contention advanced by the learned counsel appearing for the assessee. Here also, it is a subsequent amendment with retrospective effect. As held by ITAT, Mumbai Bench, in such cases, the assessee is constrained by impossibility of performance. The dictum impossibiliun nulla obligation est, states that there is no obligation to do impossible things. It is to be seen that the law does not compel to do the impossible as enshrined in the principle lex non cogit and impossibilia. The jurisprudence has also accepted as a basic dictum, impotentia excusat legem, that impossibility is an excuse in law.
When the assessee is constrained with the impossibility of performance, it is futile to argue that the assessee ought to have deducted tax at source in the assessment years earlier to amendment brought in sec.9(1)(vi) by Finance Act, 2012. It is not possible to do or undo or to bell or unbell the past”
Considering these facts and the payment made to subsidiary
for software development services does not come into the purview
of applicability of provisions of TDS Section 40(a)(ia) of the act and
accordingly we following the decision of this coordinate Tribunal
direct the Assessing Officer to delete the addition and allow this
ground of the assessee.
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In the result the appeal of the assessee is allowed for statistical purpose.
Order pronounced on Monday, 16th January, 2017 at Chennai.
Sd/- Sd/- (चं� पूजारी) (जी. पवन कुमार) (Chandra Poojari) (G. Pavan Kumar) लेखा सद�य/Accountant Member �याियक सद�य/Judicial Member चे�ई/Chennai, �दनांक/Dated, the 16th January, 2017.
JR. आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.