Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI ABRAHAM P. GEORGE
Per Asha Vijayaraghavan, Judicial Member
These are cross appeals by the Revenue and the assessee directed against the order dated 14.02.2014 of the CIT(Appeals)-III, Bangalore relating to assessment year 2009-10.
The assessee is an Indian company engaged in the business of manufacture of labels, stickers and panels titled as ‘decals’. Return of income for the AY 2009-10 was filed on 29.9.09. In the course of assessment proceedings, the AO made various additions to the returned income and assessed income at Rs.3,92,28,719.
ITA 660/B/14 (Assessee’s Appeal)
The first issue that is agitated before us is regarding disallowance of reimbursement of expenses amounting to Rs.2,42,921.
The AO noted that the assessee company has debited an amount of Rs52,42,921/- towards Reimbursement of Expenses. In reply to AO’S query, the assessee submitted the above amount of Rs.24,25,921 is paid by the assessee to M/s Serigraph Inc.(Associated Enterprise)[AE]. The assessee was asked to furnish proof of the above Payment including Invoices, Bills, Receipts, Bank Statements including, Cost-to-Cost Break up of Expenses including the Terms and Conditions of Agreement if any. The assessee reiterated that payments have been made on the Expenses
ITA No.680 & 660/Bang/2014 Page 3 of 26
incurred by M/s Serigraph Inc., but did not furnish any supporting document and evidence as sought. Therefore, the AO made an addition of
Rs.2,42,921.
On appeal, the CIT(Appeals) observed that by letter dated 21.09.2011 the AO had asked for information with respect to foreign
expenditure classified under professional and consultation fees. Before the CIT(A), it was submitted that this expenditure was in the nature of airfare
and hospitality charges paid to person who trained the employees in connection with the manufacturing process. The CIT(A) observed that the
nature of this training undertaken and details of person to whom it is paid
have not been furnished and therefore no nexus between the expenditure and needs of the business have been established. Hence he confirmed the
addition made by the AO of Rs.2,42,921.
Aggrieved, the assessee is in appeal before us. We have heard both the parties. The AO had called for the proof of above payment of
Rs,2,42,921 including lnvoices, Bills, Receipts, Bank Statements including, Cost-to-Cost and other details in respect of the same. The assessee
merely stated that payments have been made on the Expenses incurred by M/s Serigraph Inc. but has not furnished any supporting document and
evidence either before the AO or the CIT(A). Hence, we remand the issue
to the file of the Assessing Officer and direct the assessee to furnish the
ITA No.680 & 660/Bang/2014 Page 4 of 26
evidence as sought for by the AO. The AO shall decide the issue after affording reasonable opportunity to the assessee.
The second issue is regarding disallowance of commission paid to Sri Murali Rajagopalachari and M/s. Serigraph Inc totally amounting to Rs.1,12,47,098.
During the course of assessment proceedings, the AO noted that the assessee company has debited an amount of Rs. 4,04,72,566 towards Commission. From the details sought and furnished by the assessee, it was observed that an amount of Rs.1,13,10,580 in Foreign Exchange has been debited as follows:-
a. M/s Serigraph Inc., USA [Associated Enterprise] Rs. 8,52,589 b. Mr. Murali Rajagopalachari Rs.33,94,590 C, M/s Zirve Polymer Rs. 63,401 ------------------- Rs.1,13,10,580 ------------------ 9. The assessee was asked to furnish the details of the sales on which Sales Commission of Rs.1,12,47,098 which has been paid to M/s Serigraph Inc., USA [AE] and Mr. Murali Rajagopalachari with supporting documents and evidence including Tax Deducted at Source for the same.
The AO noted that the assessee company has not been able to furnish any details and supporting documents to evidence the services rendered by the above entities including its AE for increasing the sales for which the Commission has been paid. The assessee stated that the above
ITA No.680 & 660/Bang/2014 Page 5 of 26
entities have rendered Services outside India and Tax Deduction at Source is not applicable in the above cases as they do not have Permanent Establishment in India.
The AO observed that in the case of M/s Serigraph Inc., USA [AE], it held 26% shares in the Assesses Company which is registered in India with Permanent Account Number which establishes the Residency of the same and the AO held that M/s Serigraph Inc., USA is deemed to be having Permanent Establishment in India and hence the provisions of Tax Deduction at Source is applicable. The AO noted that the assessee had Financial Transaction with M/s Serigraph Inc. USA for A.Y 2009-10 as follows:-
a. Purchase of Fixed Assets Rs.15,23,120 b. Purchase of Raw Material Rs.22,79,859 c. Purchase of Services Rs. 2,42,921 ----------------- Rs.40,45,900 ----------------- 12. In the case of Mr. Murali Rajagopalachari giving the benefit of doubt that he does not have Permanent Establishment in India, the assessee was asked to furnish proof of Non-Resident Status with copy of Return of Income filed in his Country of Residence reflecting the above receipt of Commission of Rs.33,94,590.
Not withstanding the above, the Assessee Company was asked to furnish supporting Documents and Evidence of the Services as claimed to
ITA No.680 & 660/Bang/2014 Page 6 of 26
have been received from the above entities with Invoices, Bills, Receipts, Break-up of Expenses, Bank Statements including, Names and list of
clients from whom Sales have been made including Comparative Statement of the New Clients in AY 2009-10 vis-à-vis the Old Clients in AY
2008-09 and also New Business and Income generated to justify the
Payment of the above Commission.
In response, the assessee only reiterated that services have been
availed by the assessee company. Therefore an amount of Rs.1,12,471791 was added back to the total income of the assessee by
the AO.
On appeal, the CIT(Appeals) discussed the issue at para 2.13 of his order. The assessee stated before the CIT(A) that no opportunity was
given to the assessee by the AO before considering the issue. The CIT(A)
rejected this contention of the assessee and held that the AO had clearly stated that specific information regarding commission and supporting
evidence was sought from the assessee. The CIT(A) observed that assessee merely stated that commission was paid for procurement of
orders and basis of payment of commission and other evidence was not filed.
The further submissions of the assessee before the CIT(A) was that
that commission was paid to Mr. Murali Rajagopalachari, Canada and M/s Serigraph Inc, USA for the sales orders procured through them. The
ITA No.680 & 660/Bang/2014 Page 7 of 26
payees were non residents under the Income tax Act, 1961 and the services were rendered outside India.
It was submitted that CBDT Circular No. 23 dated 23.7.1969 and
Circular No. 786 dated 7.2.2000 had clarified that commission paid to non residents for the sales orders procured through them is not chargeable to
tax in India under sections 5 & 9 and consequently there is no requirement to deduct tax at source in respect of the said payments under section 195.
The above circulars were withdrawn by Circular No. 7 of 2009 dated
22.10.2009 with immediate effect. In other words, Circular Nos. 23 & 786 were withdrawn with effect from 22.10.2009. In the present case, the
assessment year under consideration is 2009-10 relevant to previous year 2008-09. Circular Nos. 23 & 786 were in force when commission was paid
during the financial year 2008-09 as well as on the first day of the
assessment year i.e., 1.4.2009. Thus, commission paid to Mr. Mural! Rajagopalachari, Canada and M/s Serigraph mc, USA during the previous
year 2008-09 were not liable for TDS under section 195.
It was further submitted that the withdrawal of circular nos. 23 and
786 is with effect from 22.10.2009 and withdrawal of circular does not have
retrospective operation. Thus, withdrawal of Circular Nos.23 and 786 w.e.f. 22.10.2009 has no relevance in the present case since the above Circulars
were in force when the commission was paid during the previous year 2008-09. Reliance was placed on the following decisions:-
ITA No.680 & 660/Bang/2014 Page 8 of 26
JCIT v Siemens Aktiengesellschaft 2010-TIOL-102-ITAT-MUM ACIT v Modern Insulator Ltd (2011] 11 ITR (Trib) 147 (ITAT- Jaipur) DCIT v Sanjiv Gupta (2011] 135 TTJ 641 (Lucknow) Gujarat Reclaim & Rubber Products Ltd v Ad. CIT (2013) 7 TaxCorp (A.T.) 32950 (MUMBAI) M/s Exotic Fruits P Ltd v ITO (IT) - IT(IT)A Nos. 1008 to 1013/Bang/2012 - decision dated 4.10.2013 of ITAT Bangalore Bench.
The further contention of the assessee was that commission paid to non-residents is not chargeable to tax in India and consequently there is no requirement to deduct tax at source in respect of the said payments u/s. 195 as held in the following decisions:-
• M/s Exotic Fruits P Ltd v ITO (International Taxation) — IT (IT) A Nos. 1008 to 1013/Bang/2012 - decision dated 4.10.2013 - ITAT Bangalore Bench; • ACIT v Modern Insulator Ltd (2011] 56 DTR 362 (Jaipur) • DCIT v Sanjiv Gupta (2011] 135 TTJ 641 (Lucknow) • JCIT v Siemens Aktiengesellschaft 2010-TIOL-l02-ITAT-MUM • CIT v EON Technology (P) Ltd (2011) 343 ITR 366 (Delhi) • Adidas Sourcing Ltd v ADIT - ITAT Delhi — decision dated 18.9.2012 • Brakes India Ltd v DCIT [2013] TaxCorp (Intl) 5275 (ITAT Chennai)
ITA No.680 & 660/Bang/2014 Page 9 of 26
The assessee contended before the CIT(A) that even otherwise, the commission paid to Mr. Murali Rajagopalachari, Canada and M/s Serigraph
Inc, USA are not chargeable to tax under the DTAA between India – Canada and India – USA since there was no ‘make available’ of technical
knowledge, experience, skill, know-how, or processes or development and
transfer of a technical plan or technical design as per the definition of ‘Fees for technical services’ under both these Treaties. Reliance was placed on
the judgment of the Hon’ble Karnataka High Court in CIT v De Beers India Minerals (P.) Ltd (2012) 346 ITR 467 wherein it was held that payment for
services which do not ‘make available’ of technical knowledge, experience, skill, know-how, or processes or development and transfer of a technical
plan or technical design are not chargeable to tax in India under the Treaty
and consequently such payments are not liable for TDS under section 195.
In view of the above submissions, the assessee submitted that
commission paid to Mr. Murali Rajagopalachari, Canada and M/s Serigraph
Inc. USA during the previous year 2008-09 were not liable for TDS under section 195.
The CIT(Appeals) observed that though specific details were called for in the course of appellate proceedings before him, the assessee has
failed to furnish supporting evidence regarding the nature of payment of
commission. Therefore, the CIT(A) held that there is no clarity on the nature of payment of commission and details of invoice value based on
ITA No.680 & 660/Bang/2014 Page 10 of 26
which commission paid was furnished by the assessee does not shed any light on the nature of services rendered. In the absence of any
documentary evidence that Mr. Murali Rajagopalachari, Canada and M/s Serigraph Inc. have actually contributed to the sales turnover of the
assessee company, the CIT(A) held that the assessee has not been able to
prove that payments to foreign parties are in the nature of payment of commission towards sales and therefore he upheld the addition made by
the AO.
As regards the assessee’s contention that no TDS was required to
be made and therefore no disallowance u/s. 40(a)(ia) of the Act was
required to be made, the CIT(A) held that these contentions were not relevant to the particular issue, since more than deductibility of TDS, the
root question that arose was the nature of payment and whether it was for actual services rendered. The CIT(A) therefore dismissed this issue raised
by the assessee.
Aggrieved, the assessee is in appeal before us. We have heard both the parties. We find that the ITAT Bangalore Bench in M/s Exotic
Fruits P. Ltd. v ITO (IT) in IT(IT)A Nos. 1008 to 1013/Bang/2012, decision dated 4.10.2013 [62 SOT 247], has held that withdrawal of Circular Nos.
23 and 786 does not have retrospective operation. The relevant
paragraphs of Tribunal’s decision are extracted hereunder:-
ITA No.680 & 660/Bang/2014 Page 11 of 26
“7.4 At this juncture, we would like to refer to the AO's observation in respect of the assessee's reliance on CBDT's Circular No.23 date 23.7.1969 that "5 . The Circular No.23 dated 23.7.1969 has been withdrawn resulting in Circular No.786 dated 7.2.2000 also becoming infructuous." In fact, an identical issue to that of the present one came up for consideration before the Hon'ble Mumbai Tribunal in the case of Gujarat Reclaim & Rubber Products Ltd. v. Addl CIT [2013] 35 taxmann.com 587 wherein the Hon'ble Bench had observed that "4.7. In view of the elaborate discussion made by the CIT (A) in AY 2008-09 with which we fully concur as it is correct both on facts and on law, we uphold the same and dismiss the Revenue ground on this issue in AY 2008-09 and allow assessee's grounds in AY 2007-08 ." 7.5 For appreciation of facts, we extract the CIT (A)'s observations verbatim as reproduced by the Tribunal in its order (supra) as under: "4.3. On page 7..... The next question for consideration is the effect of withdrawal of Circular No.23 of 1969 and 786 of 2000 by the CBDT vide Circular No.7 of 2009. I have considered the facts of the case. In the Circular No.23 of 1969 dtd 23.9.1969 some illustration instances of non-resident having business connection in India had been given as under: - Maintaining a branch office in India for the purchase or sale of goods or transacting other business, - Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident's goods, or for other business purposes - Erecting factory in India where the raw produce purchased locally is worked out into a form suitable for export abroad. - Forming a local subsidiary company to sell the products of the non-resident parent company - Having financial association between a resident and a non- resident company
ITA No.680 & 660/Bang/2014 Page 12 of 26
- Having financial association between a resident and a non- resident company In the said Circular, CBDT have given clarification regarding the applicability of provisions of sec. 9 in the certain specific situations as under: (1) Non-resident exporter selling goods from abroad to Indian importer (2) Non-resident company selling goods from abroad to Indian subsidiary (3) Sale of plant and machinery to an Indian importer on instalment basis (4) Foreign agents of Indian exporters a foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission. (5) Non-resident persons purchasing goods in India (6) Sale by a non-resident to Indian customer either directly or through agents. (7) Extent of the profit assessable u/s 9. In the above Circular relevant Para is No.4 dealing with the subject of foreign agents of Indian exporters. The CBDT vide Circular No.7 of 2009 dtd. 22.10.2009 has withdrawn the Circular No.23/1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to non-resident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of sections 5, 7, 9, 195 and other relevant provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non-resident commission agents taxable in India. I am of the considered view that even after the
ITA No.680 & 660/Bang/2014 Page 13 of 26
withdrawal of Circular No.23 of 1969, the position will remain the same i.e., the commission paid to non-resident agents is not liable to tax under the provisions of I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business' connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income- tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non-resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non-resident agents. The year under consideration is AY 2008-09 covering the previous year period 1.4.2007 to 31.3.2008. The CBDT issued Circular No.7 of 2009 in the year 2009. In the above mentioned case, the Bench of ITAT have held that withdrawal of such Circular is not having retrospective effect and will be applicable prospectively. In the facts and circumstances, even if it is assumed that the withdrawal of Circular No.23 of 1969 by the CBDT's Circular No.7 of 2009 is having any effect on taxability of commission paid to non-resident agents, such withdrawal of Circular will not be applicable in the year under consideration. In the facts and circumstances, the Circular No.23 of 1969 will be clearly applicable in the year under consideration making such commission payment not liable to tax in India. ……….. ………..
ITA No.680 & 660/Bang/2014 Page 14 of 26
7.9 The facts and circumstances of the issue as deliberated upon and also in conformity with the judicial views (supra), we are of the considered view that authorities below were not justified in bringing the assessee's case under the purview of s. 201 (1) of the Act. In substance, the assessee was not liable to deduct tax at source while making payments of commissions to non-resident agents. It is ordered accordingly.”
Hence, withdrawal of Circulars No.23 and 786 w.e.f. 22.9.2010 is of no relevance in the present case. The above Circulars were in force when the commission was paid during the previous year 2008-09.
In the case of in the case of M/s. Faizan Shoes Pvt. Ltd. in ITA No.2095/Mds/2012 dated 23.04.2013, the Chennai Bench of the Tribunal held as follows:-
““5. Heard both sides. Perused the orders of lower authorities. The Assessing Officer disallowed the commission payments made to non-residents holding that in view of Explanation to sub-section (2) of Section 9, these payments are deemed to accrue or arise in India and whether or not the non-resident has a residence or place of business or business connection in India. The Assessing Officer was of the view that in view of withdrawal of circular by CBDT, the payment made to non-residents towards commission is liable to be subjected to TDS. However, the Commissioner of Income Tax (Appeals) after examining the agency agreements entered into by the assessee with the non-residents held that the agency agreement was only for securing orders from various customers including retailers and traders for the export of leather shoe uppers and leather shoes by the assessee. The business will be transacted by opening letters of credit or by cash against document basis and the agent will be responsible for prompt payment in respect of all shipments effected on cash against document basis. The Commissioner of Income Tax (Appeals) observed that exporter will pay commission of 2.5% on FOB value of all orders procured by the agent. The Commissioner of Income Tax (Appeals) also observed that the withdrawal of circular No.23/1969 by the Board vide circular No.7/2009 is not applicable for the assessment year 2009-10, since the circular was withdrawn on
ITA No.680 & 660/Bang/2014 Page 15 of 26
22.10.2009, therefore, circular No.23 of 1969 is very much applicable to the facts of the assessee. It was the observation of the Commissioner of Income Tax (Appeals) that the services rendered by non-resident agents to the assessee do not fall under the provisions of section 9(1)(vii) of the Act, as no technical services have been provided by the agents. It was also the observation of the Commissioner of Income Tax (Appeals) that there was no question of payment of royalty or technical fees to the agents on contract with the assessee. He has finally concluded that all the conditions bring to a reasonable conclusion that the commission paid in the facts of the present case to the non-resident agents is not taxable in India. In coming to such conclusion, the Commissioner of Income Tax (Appeals) observed as under:- “4.3 As seen from the facts of this case, i. Agent is a non-resident. ii. Agent is operating his business activities outside India iii. The commission paid related to services provided outside India. iv. The agent does not have any permanent establishment or permanent business place in India. v. The commission was remitted to the agent directly outside India. 4.3 All the above conditions bring to a reasonable conclusion that the commission paid in the facts of the present case to the non-resident agent is not taxable in India. The ITAT Madras ‘A’ Bench in the case of Indopel Garments Pvt. Ltd., 72 TTJ 702 stated that the commission payable to foreign concern for acting as a selling agent for canvassing order outside India was not liable to tax as income arising or accruing to the foreign concern in India and therefore, no disallowance could be made u/s 40A(i) on the ground that tax was not deducted at source u/s 195. 4.5 The Hon’ble Supreme Court overruled the decision of the Karnataka High Court in Samsung Electronics Ltd., case in the case of GE India Technology Cen. (P) Ltd. Vs. CIT (2010) 327 ITR 456 (Se). The ITAT, Mumbai ‘D’ Bench in the case of DCIT Range-7(2), Mumbai Vs. Rediff.com India Ltd., in Appeal No.3061 (Mum.) of 2009 held that ‘As held by the Supreme Court
ITA No.680 & 660/Bang/2014 Page 16 of 26
in the case of GE India Technology Centre Pvt. Ltd., Vs. CIT (2010) 327 ITR 456/193 Taxman 234, tax deduction at source obligations u/s 195(1) arise only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a default in discharging his tax withholding obligations because such obligations came into existence only when recipient has a tax liability in India. The underlying principle is this tax withholding of the payer is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, he AO cannot proceed on the basis that the payer had an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. That exercise was not carried out by the AO on the fact of this case. The AO was thus clearly in error in proceeding to invoke disallowance u/s 40(a)(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance.: The ITAT ‘D’ Bench, in the case of ACIT, Company Circle-II(I) Vs. M/s Eagle Press Pvt. Ltd, on similar facts, relying on the judgment of Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. Vs CIT and another 327 ITR 456 held that the liability of TDS is not cast on the assessee, where the services were rendered outside India and such services were rendered by non-residents. Referring to the above discussion and the judgments relied by the assessee in his submissions, we direct the AO to delete the addition. This ground of appeal is allowed.” 6. On going through the order of the CIT(A), we find that the non- residents are only procuring orders for the assessee and following up payments, no other services are rendered other than procuring the orders and collecting the amounts. The non-residents are not providing any technical services to the assessee. The commission
ITA No.680 & 660/Bang/2014 Page 17 of 26
payment made to non-residents also does not fall under the category of royalty or fee of technical service, therefore the Explanation to sub- sec. (2) of sec. 9 has no application to the facts of the assessee’s case. We see that this case is squarely covered by the decision of the Supreme Court in the case of GE India Tech., Cen. Pvt. Ltd., Vs. CIT (327 ITR 456) wherein the Hon’ble Supreme Court held that the assessee is not liable to deduct TDS when non-residents provided services outside India. It was held that when the services are provided outside India, the commission payments made to non- residents cannot be treated as income deemed to accrue or arise in India, therefore, the provisions of sec. 195 has no application. In order to invoke the provisions of sec. 195 of the Act, the income should be chargeable to tax in India. Here the commission payments to non-residents are not chargeable to tax in India and, therefore, the provisions of sec. 195 are not applicable. In the circumstances, we sustain the order of the CIT(A) in deleting the disallowance made under 40(a)(i) of the Act.”
However, in the present case, the ld. CIT(Appeals) has rightly pointed out that the contention of the assessee that, no TDS was required to be made in the assessee’s case and hence no disallowance u/s. 40(a)(ia) of the Act was required to made, is not relevant to the present case since more than deductibility of TDS, the real question that arises is the nature of payment and the fact whether the payment of commission was made for actual services rendered. We therefore set aside this issue to the file of the Assessing Officer to provide one more opportunity to the assessee to bring out the basis of payment of commission, nature of services rendered and other supporting evidence to show that commission was paid for procurement of orders. The Assessing Officer shall, after satisfying himself about the genuineness of commission payments and nature of services rendered, shall decide the issue afresh in the light of
ITA No.680 & 660/Bang/2014 Page 18 of 26
decision of the coordinate Bench of this Tribunal in M/s Exotic Fruits P. Ltd. in IT(IT)A Nos. 1008 to 1013/Bang/2012, order dated 4.10.2013 [62 SOT 247]. Thus, the issue is allowed for statistical purposes.
The ground regarding levy of interest u/s. 234B and 234D is consequential in nature.
In the result, the appeal by the assessee is allowed for statistical purposes.
ITA 680/B/14 (Revenue’s Appeal)
The effective grounds of appeal raised by the Revenue are as follows:-
“2. On the facts and in the circumstances of the case the learned CIT(A) erred in law in disallowing the fees paid towards Trade Marks and Copy Right Registration as Capital Expenditure as they have enduring benefit to the assessee company over a period of time and is not limited to single financial year. 3. On the facts and in the circumstances of the case the learned CIT(A) erred in law in holding that purchase of software is revenue expenditure as they have enduring benefit to the assessee company over a period of time and is not limited to single financial year. 4. On the facts and in the circumstances of the case the learned CIT(A) erred in law in holding that “software expenses” are fees paid to operate software, Coral Draw, Windows Vista, MS Office, without appreciating the fact that the said software has only to be purchased but not operated by fee periodically. 5. On the facts and in the circumstances of the case the learned CIT(A) erred in law in holding that the assessee has
ITA No.680 & 660/Bang/2014 Page 19 of 26
surplus funds for advancing interest free loans just because the AO failed to furnish remand report.”
As far as ground No.2 is concerned, the assessee incurred an amount of Rs.18,600 towards fees paid towards trade marks and copyright registration and claimed it as revenue expenditure. The AO held it to be capital expenditure having enduring benefit to the assessee over a period of time not limited to a single financial year.
Before the CIT(Appeals), the assessee contended that expenditure has been incurred in the ordinary course of business and is wholly and exclusively for the purpose of business and there is no enduring benefit of a capital nature as there was no acquisition of an asset. Reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT v. Finlay Mills Ltd. 20 ITR 475 and CIT v. Panacea Biotech Ltd., 6 Taxcorp (DT) 50157 (Delhi).
The ld. CIT(Appeals) held that the AO has not pointed out as to how the expenditure has resulted in an enduring benefit and the decisions relied upon by the assessee is squarely applicable to assessee’s case. He therefore allowed the appeal of the assessee on this issue.
Aggrieved, the department is in appeal before us. 35.
ITA No.680 & 660/Bang/2014 Page 20 of 26
The ld. DR supported the order of the AO and relied on the decision of the Mumbai Bench of the Tribunal in the case of L&T DEMAG Plastics Machinery (P) Ltd. v. ITO, 123 ITD 391 (Mum).
The ld. counsel for the assessee, on the other hand, supported the order of CIT(Appeals) and relied on the following decisions:-
CIT v. Finlay Mills Ltd. 20 ITR 475 (SC) CIT v. Panacea Biotech Ltd., Delhi HC judgment dated 17.1.2012 in ITA No.22 & 24/2012. CIT v. Toyota Kirloskar Motor P Ltd. 349 ITR 65 (Kar) CIT v. IBM India Ltd. 357 ITR 88 (Kar)
We have heard both the parties. The Hon’ble Supreme Court in Empire Jute Co. Ltd. v. CIT, 124 ITR 1 (SC) at page 10 held as follows:-
“ …… There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically
ITA No.680 & 660/Bang/2014 Page 21 of 26
without regard to the particular facts and circumstances of a given case. ….”
Following the ratio laid down by the Hon’ble Supreme Court, the Hon’ble Delhi High Court in its judgment in the case of CIT v. Panacea Biotech Ltd., ITA No.22 & 24/2012 dated 17.01.2012, decided the issue in favour of the assessee. In the case of Finlay Mills Ltd., 20 ITR 475 (SC), it was held that expenditure incurred by the company carrying on business of manufacturing and selling textile goods in registering for the first time its trade marks which were not in use prior to 25th February, 1937, is revenue expenditure and an allowable deduction u/s. 10(2)(xv) of the Indian Income-tax Act, 1922.
The case relied upon by the ld. DR in L&T DEMAG Plastics Machinery (P) Ltd., 123 ITD 391 (Mum) is a case of deduction claimed in respect of expenses incurred for acquiring trade mark. The AO held that such expenditure to be capital in nature on the ground that the agreement with L&T was for creating a new trademark using a combined trademark of both companies which amounted to creating a new asset with independent identity, owner of new trademark being assessee company itself. To the question whether since assessee had obtained registration of new trademark using a combination of two companies and such new trademark was for exclusive use of assessee as its own, all expenses incurred in
ITA No.680 & 660/Bang/2014 Page 22 of 26
relation to acquiring such asset were to be considered as capital in nature, the Mumbai Bench of the Tribunal answered in the affirmative.
In the present case, there was no acquisition of an asset. We also
find that the trademark has not been taken as an asset in the balance sheet. The assessee for the first time registered the trademark and
copyright and expenses were incurred only towards registration and hence it was incurred in the course of and for the purpose of business and are
revenue expenditure. Hence, ground No.2 raised by the Revenue is dismissed.
With respect to ground No.3 & 4, the AO noted that an amount of
Rs.3,77,911 was incurred towards Coral Draw. Windows Vista MS Office and the software expenses has not been added back to the computation of
income. He was of the view that the above is in the nature of capital
expenditure having enduring benefit to the assessee over a period of time and not limited to a single financial year.
Before the CIT(Appeals), the assessee stated that the amounts are paid for the purpose of operating software and relied on the decision of the
Hon’ble Karnataka High Court in the case of CIT v. Toyota Kirloskar Motors
Pvt. Ltd., 349 ITR 65 (Kar). The CIT(A) held that the decision of Hon’ble jurisdictional High Court is squarely applicable to assessee’s case and
hence he directed the AO to delete the addition.
ITA No.680 & 660/Bang/2014 Page 23 of 26
Aggrieved, the Revenue is in appeal before us.
We have heard both the parties. The expenses towards operating software is allowable as revenue expenditure as held in the decision of Toyota Kirloskar Motors Pvt. Ltd. (supra). The relevant observations of the Hon’ble jurisdictional High Court is extracted below:-
“3. As rightly pointed out by the authorities, when the life of a computer or software is less than two years and as such, the right to use it is for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licenced for a particular period, for utilising the same for the subsequent years fresh licence fee is to be paid. Therefore, without renewing the licence or without paying the fee on such renewal, it is not possible to use those softwares. In those circumstances, the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure do not call for interference by this court.”
Respectfully following the aforesaid judgment, we decide the issue in favour of the assessee. Ground Nos.3 & 4 are dismissed.
The grievance of the Revenue in ground No.5 is that the CIT(Appeals) erred in holding that the assessee has surplus funds for advancing interest free loans.
The AO noted that an amount of Rs.1,35,09,949 was reflected as towards addition to assets. The assessee debited interest expenses of Rs.1,88,48,129 on loans and claimed the same as expenses. According to the AO, the interest free funds far exceeded the amount used for the
ITA No.680 & 660/Bang/2014 Page 24 of 26
purpose of addition to assets. Therefore, he made an addition of Rs.17,22,518.
Before the CIT(A), the assessee contended that Rs.1,35,09,949
represents addition to assets on which depreciation has been claimed u/s. 32 and interest paid on capital borrowed for the purpose of addition to
capital assets is allowable u/s. 36(1)(iii) of the Act.
The CIT(A) held that the AO has not given any factual finding as to
whether there is any loan advanced by the assessee to its AE or the it
represents addition to fixed assets. The issue was remanded to the AO for examination. In the absence of any report from the AO, the CIT(A) held
that there was no ground for any adverse finding by the AO. He accepted the contention of the assessee that amount of interest attributable to
investment in capital assets is to be allowed u/s. 36(1)(iii). The CIT(A)
observed that there was no evidence of any loan given to the AE out of interest bearing funds. He therefore deleted the addition made by the AO.
Aggrieved, the Revenue is in appeal before us.
We have heard both the parties. We find that during the year the assessee company’s bankers released additional terms loan totaling to
Rs.54,85,000 for acquiring new machinery to enhance productivity and manufacturing capacities. The Hon’ble Supreme Court in the Core Health
Care Ltd., 298 ITR 194 (SC) has held that section 36(1)(iii) of the Act
ITA No.680 & 660/Bang/2014 Page 25 of 26
makes no distinction between money borrowed to obtain a capital asset or a revenue asset; all that is required is that the assessee must borrow capital and the purpose of borrowing must be for business which is carried on by the assessee in the year of account. Further, the assessee has stated that the amount of Rs.1,35,09,949 represents addition to fixed assets on which depreciation has been claimed u/s. 32. No material has been brought on record by the AO to show that any loan has been given to AE out of interest bearing funds. Even when a particular opportunity was given by the CIT(A) in the remand proceedings, the AO did not file his remand report. We therefore find no infirmity in the impugned order of the CIT(Appeals) on this issue. Ground No.5 is dismissed.
In the result, the Revenue’s appeal is dismissed. 53.
Thus, the assessee’s appeal is allowed for statistical purposes and the Revenue’s appeal is dismissed.
Pronounced in the open court on this 28th day of December, 2015.
Sd/- Sd/-
( ABRAHAM P. GEORGE ) (ASHA VIJAYARAGHAVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 28th December, 2015.
/D S/
ITA No.680 & 660/Bang/2014 Page 26 of 26
Copy to:
Revenue 2. Assessee 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.