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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 three appeals filed by the Revenue are directed against different orders of the Commissioner of Income-tax (Appeals)- Large Tax Payer Unit, Chennai for the above assessment years passed u/s.143(3) and 250 of the Income Tax Act, 1961 (herein after
:- 2 -: 439 & 859/Mds/2010. referred to as ‘the Act’). Since the issue in these appeals are common in nature, these appeals are clubbed, heard together, and disposed of by this common order for the sake of convenience.
First, we take up of assessment year 2001-2002 for adjudication.
The Revenue has raised the following grounds of appeal:- 3.
‘’2.1. The learned CIT(A) erred in deleting the addition of ₹18,34,52,000/- made by the assessing officer towards 'unearned income', relying upon his own order In the assessee's case in ITA Tr.No.431/09-10/LTU(A)/Tr.18 dated 11.12.2009 for the a-y 2005-06 2.2. It is submitted that the relied upon order has not become final and appeal has been preferred before the Hon'ble Jurisdictional Tribunal. 2.3. Having regard to the Hon'ble Kerala High Court decision in the case of CIT v. Southern Cables & Engineering Works (289 ITR 167), the learned CIT(A) ought to have upheld the action of the assessing officer. 3.1. The learned CIT(A) erred in deleting the addition made u/s.40(a)(i) of RS.16,22,09,000/-, towards 'networking and communication costs', relying upon his own order in the assessee's case for the a-y 2003-04 in ITA Tr.No.4/09-10/LTU(A) dated 11.12.2009. 3.2. It is submitted appeal before the Hon'ble Chennai Tribunal has been preferred against the relied upon order. 4.1. The learned CIT(A) erred in deleting the disallowance of 'recruitment expenses' (Rs.29,38,000) and 'other expenses' to the tune of ₹1,64,53,286/- by holding that the impugned expenses were incurred by the assessee for :- 3 -: 439 & 859/Mds/2010. carrying on business in Australia and consequently do not involve any exposure to tax in India. 4.2. The learned CIT(A) failed to appreciate that Article 7 (Business Profits) of the DTAA between India and Australia reads thus: "(1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein ... " 4.3. In the absence of any finding that the assessee has a permanent establishment in Australia, the learned CIT(A) ought to have upheld the action of the assessing officer. 4.4. The learned CIT(A) ought to have seen that as a consequence of the assessee not having permanent establishment in Australia, the income corresponding to the aforesaid expenses are taxable in India, thus, warranting the assessee to make TDS on those expenses.
5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored’’.
4. The Brief facts of the case is that the assessee is in the business of networking services & development of software and filed return of income on 05.09.2002 admitting loss of �112,57,29,850/- and return was processed u/s.143(1) of the Act and assessment was completed u/s.143(3) of the Act determining loss income at �86,32,85,973/- and ld. Assessing Officer on reason to believe that income has escaped the assessment issued notice u/s.148 of the Act.
In compliance to notice, the assessee filed a letter requesting the :- 4 -: 439 & 859/Mds/2010. original return filed earlier be treated as return for this purpose and notice u/.s143(2) of the Act was issued. The assessee filed letter on 18.09.2008 requesting reasons for reopening. In the assessment proceedings the ld. Authorised Representative of assessee appeared and produced details for examination. The ld. Assessing Officer found unearned income of �18,34,52,000/- as per the schedule 10 of Balance sheet and not offered for taxation. The assessee has explained that it is deferring the income as per provisions of Sec. 145(2) of the Act and relied on the decision of Supreme Court and other High Courts. The ld. Assessing Officer relied on the assessment order of assessee applicable to assessment year 2005-06 were this issue was elaborately discussed as assessee has claimed corresponding expenditure for earning the above unearned income in the profit and loss account and the corresponding income has been deferred to subsequent years, which are not in accordance with accounting principles and made additions. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) considered the submissions, reasons, grounds argued by the assessee and relied on the assessee’s own case for the assessment year 2005-06 and deleted the addition made by the ld.
:- 5 -: 439 & 859/Mds/2010.
Assessing Officer. Aggrieved by the order of Commissioner of Income Tax (Appeals), the Revenue has assailed an appeal before Tribunal.
Before us, the ld. Departmental Representative argued that 6. he Commissioner of Income Tax (Appeals) erred in deleting the addition relying on subsequent year order and has not become final and appeal has been preferred in jurisdictional Tribunal, pending disposal and prayed for allowing the appeal.
Contra, ld. Authorised Representative relied on the orders of 7.
Commissioner of Income Tax (Appeals) and also supported the case with decision of Co-ordinate Bench in assessee’s own case for the assessment year 2002-03 and opposed the grounds.
We heard the rival submissions and perused the material on 8. record and judicial decisions cited. The ld. Authorised Representative contention that unearned income as per sec. 145(2) in respect of any class of income to be disclosed and notified in the Central Government by Official Gazette. We have considered the submissions of the ld. Authorised Representative and also findings of the Commissioner of Income Tax (Appeals) who relied on the earlier year orders. We found that similar issue was decided by the Co-ordinate Bench in favour of the assessee in assessee’s own in for the :- 6 -: 439 & 859/Mds/2010. assessment year 2002-2003, dated 20.11.2012, where the Tribunal observed in para Nos. 5 to 7 as under:-
‘’5. The DR vehemently submitted that the CIT(A) has wrongly deleted the addition which was deservingly made by the Assessing Officer. Accordingly, he prayed for restoring the same.
Opposing the submissions of the DR, the AR representing the assessee has submitted that the issue in hand has already been adjudicated by the Coordinate Bench of Chennai ITAT in assessee’s own case i.e. decided on 26.05.2009 for the assessment year 2003- 04 and also produced copy of the order. In rebuttal, the DR could not point out any distinguishing feature and only pleaded that the said order is yet to become final.
We have heard both parties and also perused the relevant findings as well as case law cited. The only bone of contention between the parties is that the assessee has treated the amount in question as unearned income, whereas; per Revenue, section 145(2) of the “Act” is applicable and he amount in question has to be treated as income of the current year. We find that the same very issue had arisen in assessment year 2003-04 in (supra), wherein the Coordinate Bench had decided it in favour of the assessee as under:
“Ground No. 4
4.1 The learned CIT(A) erred in directing the assessing officer to delete the addition of Rs.39,68,208 recorded in the assessee's books for the relevant previous year as 'unearned income'.
:- 7 -: 439 & 859/Mds/2010.
4.2 The learned CIT(A) ought to have noted that the impugned income had accrued to the assessee, as the assessee was following mercantile system of accounting.
4.3 The learned CIT(A) ought to have seen that the assessee adopted a device to postpone the income for the purpose of Income Tax only.
4.4 The learned CIT(A) failed to appreciate that the Hon'ble Supreme Court in the case of CIT v. Thanthi Trust (239 ITR 502) has approved in principle the proposition that book entries to have a legal effect and cannot be ignored merely because they are book entries.
It was noticed by the AO during assessment proceeding that in the balance sheet as on 31.03.2003 Rs. 45,67,354 was shown as 'unearned income' under the head 'current liabilities' as against Rs. 15,13,162 shown as on 31.03.2002. The details furnished by the assessee showed that Rs. 39,68,208 received during the year ending 31.03.2003 was not offered for tax and was carried forward to next year. The assessee explained as under.
"For revenue relating to development of e- learning software. The invoices are raised on the basis of payment milestones where as revenue are recognized on the basis of the modules developed and delivered. Though the payments has been received on the basis of invoices, if the products are not delivered sify e-learning needs to refund the amount in full to the customer."
The AO rejected the explanation and added Rs. 39,68,208 for the reasons given in his order as under: "4. The system of accounting followed by the assessee was mercantile. In such method of accounting the receipt on sale needs to be re recognized once an sales invoice was raised. Once a customer is billed, there can be no other treatment except to recognize the sale in the assessee's books. It is also a fact admitted by the assessee that payments were received on the basis of invoices (see para E-3).
The non recognition of a sale in these circumstances does not depend upon final approval of the customer, who has been making payments on the basis of invoices, raise assessee.
:- 8 -: 439 & 859/Mds/2010.
The argument of the assessee that it needs to refund the amounts to customer under certain circumstances does not hold ground. In case a customer returns the products sold by the assessee and the assessee is required to refund the payments received from the customer, the assessee can book the same as sales returns. Hence, the system adopted by the assessee cannot be accepted and so the unrecognized income of Rs.39,68,208 is now treated as income."
The CIT(A) deleted the addition and his order has been challenged by the department in the present appeal.
34. We have considered the rival submissions in the light of material on record. It was explained by the learned AR that the software development was the major source of income. In the written submission filed by the AR before the CIT(A) the break-up of receipts was shown as under.
Sl.No Particulars Amount (₹ In lacs) c The major service income are as under:- Income from software development 1175 (IDC) LMNK Income from software development 162 non LMNK Income from IT training 48 Income from software services -LMS 3 Income from - LL 2 Miscellaneous others 4 Total 1394
35. The CIT(A) has deleted the addition for the reasons given in paragraph 4.3 of his order. He has, interalia, observed that the revenue earned by the assessee from software and consultancy services was recognized on delivery of goods / services, that as per the existing scheme, M/s. Satyam Education Services Limited was assigned the responsibility to 'sign off’ on completion of the project in the case of all customers, that the assessee-company was following the AS 9 prescribed by the Institute which was in conformity with the provisions of section 145(2) of the Act. The assessee was regularly following the 'project completion method, which is a recognized method. The completion of each project is determined by 'sign off’. There is nothing on record to show that there was any inconsistency in this regard. The CIT(A) found that :- 9 -: 439 & 859/Mds/2010.
the deferred income amounting to Rs.39,68,208 was carried forward and was duly taken into account in the next assessment year. In the circumstances, therefore, we see no reason to interfere with the conclusions reached by the CIT(A). The ground no. 4 is, accordingly rejected.
In the result, the appeal filed by the department is dismissed’’.
Taking cue from the same and more particularly, in view of the fact that there is no difference pointed out by the Revenue, we are of the opinion that the CIT(A) has rightly deleted the addition under the head "unearned income”. The mere submission on the part of Revenue that the same has not attained finality is no ground in itself for not placing reliance upon the same. Accordingly, the findings of the CIT(A) are upheld and the ground is decided against the Revenue.
We respectfully following the above decision, upheld the order of the Commissioner of Income Tax (Appeals) and dismiss the Revenue ground.
On the second issue, the ld. Assessing Officer on perusal of the expenditure incurred on networking called for clarification as the expenses are subjected to TDS u/s.40(a)(i) of the Act and applicability of provisions of Sec. 195 of the Act. The assessee gave detailed clarification on remittance towards overseas services and explained the networking and communication cost and the category of expenditure incurred outside India and the said provisions shall not apply. The ld. Assessing Officer relied on the legal provisions of Sec.
:- 10 -: 439 & 859/Mds/2010.
40(a) (i) of the Act and double taxation u/s.90(2) of the Act considered the provisions of TDS are mandatory in respect of networking, communication were services are outside India and TDS has to be deducted and disallowed �16,22,09,000/-. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Authorised 10.
Representative explained that assessee has incurred such expenditure in foreign currency and payments to non-residents. Though the ld. Commissioner of Income Tax (Appeals) has dealt on ITAT decision, the assessee gave a exhaustive reply referred at page 4 to 8 of Commissioner of Income Tax (Appeals) order on the definition, applicability, system of working and criteria. The ld. Commissioner of Income Tax (Appeals) considered the submissions and the findings of the ld. Assessing Officer and deleted the addition observed at para 5.3 of his order as under:-
‘’’5.3 I have carefully considered the rival submissions as also the cases cited by the Assessing Officer and the appellant. The learned AO has noted in his order that the order u/s 263 in the case of Cognizant Technology Solutions P. Ltd was confirmed by the Hon'ble Tribunal vide dated 31.12.2007. However, subsequently the Hon'ble Tribunal in the M.P.No. 144/Mds12008 (in ITA No.1159 /Mds/207) dated 12.11.2008 for the same assessment year has held that there is :- 11 -: 439 & 859/Mds/2010. a mistake in the earlier order of Tribunal and it set aside the issue to file of AO by observing "Therefore, we find that there is a mistake apparent from the order of the Tribunal on this issue and we set aside the issue of application of section 40(a)(i) of the Act to the file of the Assessing Officer with direction to decide the issue afresh after providing reasonable opportunity of being heard to the assessee." Therefore, the issue in Cognizant Solutions case has not been decided by the Hon'ble ITAT. So far as the payments to non resident parties are concerned, these are towards overseas termination and peering charges and the question of any use of equipment of the service providers in India does not arise. I have held in my order for the A.Y. 2003·04 in ITA TR. No. 4/09·10/L TU(A) that such connectivity services availed would not result in accrual of any royalty or technical services in India under Sec 9 (1) (vi) and 9(i)(vii) of the Income tax Act 1961. Following the same reasons, I hold that the services are not liable to tax in India and hence the question of deduction of tax at source on the same does not arise. The disallowance u/s 40(a)(i) is therefore deleted. The appellant succeeds on this ground’’.
Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.
Before us, ld. Departmental Representative argued that expenditure incurred by the assessee towards assessee’’s overseas payment is subjected to TDS and ld. Commissioner of Income Tax (Appeals) relied on the decision which are yet to become and prayed for allowing the appeal.
:- 12 -: 439 & 859/Mds/2010.
Contra, ld. Authorised Representative relied on the orders of Commissioner of Income Tax (Appeals) and also supported the case with decision of Co-ordinate in assessee’s own case for the assessment year 2002-03 and opposed the grounds.
We heard the rival submissions and perused the material on 13. record and judicial decisions cited. Similar issue was dealt in for the assessment year 2002-2003, dated 20.11.2012, where the Tribunal observed in para No.13 as under:-
‘’13. We have heard the rival contentions and gone through the relevant findings as well as case law above said. The only issue between the parties is that per Revenue, the payment in question made by the assessee is liable to TDS provisions as comprised in Chapter XVII B of the “Act” which the assessee is disputing. We notice that the Coordinate Bench in and 1283/Mds/2008 (supra) decided on 02.02.2012 [in which one of us N.S. Saini, A.M. Member of the Bench) has held as under:
We have heard the rival submissions and perused the orders of the lower authorities as well as the cited decisions. We find that the Ld. CIT(A) has decided this issue by observing as under: “6. I have carefully considered the facts of the case and the rival submissions and also examined the issues carefully with reference to applicability of sec. 195, which has been denied by the appellant. The appellant company is engaged in the business of providing networking and e-commerce services by way of internet. In order to carry out its business of providing broadband internet connectivity the appellant company has entered into agreements with :- 13 -: 439 & 859/Mds/2010.
certain non-resident companies. The assessee therefore made certain remittances in foreign currency towards connectivity charges and bandwidth charges which are called telecommunication charges without deduction of tax at source. The Assessing Officer examined the matter and found that the equipments used by the appellant company through which connectivity was provided are used by the assessee. Therefore, it treated the payment as royalty for the use of the equipments. Consequently, the Assessing Officer held that the appellant committed default u/s 195 in so far as it had not deducted tax at source. He therefore, worked out short deduction of tax u/s. 201(1) at Rs.3,45,99,751/- and Rs.3,33,39,659/- for A.Ys. 2002-03and 2003-04 respectively. The Assessing Officer also charged interest u/s. 201(1A) amounting to Rs.1,99,6S,927/- and Rs.1,52,71,474/- for A.Ys. 2002-03 and 2003-04 respectively. The Assessing Officer has, therefore, taken the following arguments for raising the impugned demands. (1) The service provided by the Telecommunication service Provider in the case is different from that provided by the nonresident companies in the present case. (2) Telephone is fundamentally different from a bandwidth service. (3) The bandwidth service is not a specified service. (4) Equipment of the nonresident company through which connectivity is provided is used by the assessee the requisite bandwidth along with equipments is for exclusive for the assessee which cannot be used by others nor by the non-resident company; on termination of the agreement the assessee must cease to use the service and all equipment of the non- resident company. Thus the payment by the assessee can be treated as royalty for use of equipment. The ITO further argued that case has to be distinguished from the case of BSNL and Others Vs. Union of India (Supreme Court). In that case the Supreme Court dealt with the issue of using standard facility provided to an average householder or :- 14 -: 439 & 859/Mds/2010. consumer whereas in the present case it dealt with payment for use of equipment. 6:1. In the report dated 07-09-2007 the Assessing Officer has reiterated the arguments made in the impugned order .6.2 On the other hand the learned AR has vehemently argued that the learned Assessing Officer has not properly appreciated the facts of the case and submitted that the bandwidth charges are provided either by way of undersea cables or by satellite earth stations and the appellant does not have any control over the equipments as it has only leased a part of the transponder capacity and not leased the transponder. Therefore, the right of' use of the equipment is not exclusively with the appellant. Further, the right to use equipment mainly arises if there is physical equipment and since the equipments used by the appellant are not under its control. Therefore, the payments made do not have the character of royalty.
6.3 On the above facts and in the circumstances of the case, only one question arises for decision whether the remittances made by the appellant company to the foreign parties would fall within the purview of sec. 195(1) which requires deduction of tax at source. Bandwidth is bought and sold to consumers and it acts as a conduit only. In the appellant's case there are no equipments installed in its premises and the contract entered with the foreign parties is only for the services. Mere use of equipment in providing bandwidth services would not amount to transfer of right to use. As a matter of fact there are no goods involved in the transaction and the payments are made only for the use of services. The word "royalty" and its meaning was introduced vide Finance Act, 1976 and was defined under explanation 2 to sec. 9(1)(i) which was further expanded to include 'the right to use any industrial commercial or scientific equipment but not including the amounts referred to in sec,. 44B. The amendment was made by Finance Act, 2001 by incorporating c1ause (iv a) w.e.f. 01-04-2002 i.e., applicable for A.Y. 2002-03. In simple words, therefore, royalty means the payment of any kind received as a consideration for the use of' or the :- 15 -: 439 & 859/Mds/2010. right to use, any copy right of literary artistic or scientific work but, does not include the words 'use' or right to use, industrial, commercial or scientific equipment. In the appellant's case there is no "right to use equipment. Therefore, the payments made do not fall under 'royalty'. On similar facts the ITAT, Bangalore Bench in the case of ACIT Vs. Infosys Technologies Ltd. in and 969/Bang/2006 dated 17-10-2007 held that any payment made to database owners outside India for accessing such databases and the services provided by such telecom operator to the customers do not amount to technical services or royalty u/s 9(1)(vii) of the IT Act. Accordingly, it was held that no TDS is to be made. The Hon'ble Tribunal also held that payments for accessing data is like reading a book in a library which could not be passed on to anyone else. Since the copyright was not for literary, artistic or scientific work, the payment is not to be treated as royalty and it was held that no TDS was required to be made. The Hon'ble ITAT, Bangalore Bench in the case of ITO Vs. Madhura Coats Pvt. Ltd., in ITA No. 1711 and 1712/Bang/2005 for AYs. 2005-06 and 2006-07 vide order dated 28-09-2006, relying on the decision of the Apex court in the case of Bharat Sanchar Nigam Ltd., (Supra)' wherein, it was held that providing telecom services do not fall under the category of 'goods', the Hon'ble ITAT held that payments made for connectivity for transmission of data would not fall into the category 'royalty' or 'fees for technical. 6:4. In view of these facts and In the circumstances of the case and the position of law set out above, it is held that the transactions in respect of which the impugned payments were made was purely on account of services and there is no transfer of right to use the goods. In the result, it is held that the Assessing Officer was not justified in treating the payment as royalty and invoking the provisions of sec. 195 for both the assessment years. Consequently, the impugned order u/s, 195 r.w.s. 201(1) and 201(1A) dated 21-03-2006 for A.Ys. 2002-03 and - 2003-04 is cancelled.”
6. On a query from the Bench from the ld. D.R. as to whether there is any contrary decision of any other High Court, the ld. D.R. replied that the Hon’ble Delhi High Court decision is a lone decision on the issue.
:- 16 -: 439 & 859/Mds/2010.
7. On the above facts, when there is only one decision of the High Court, then the same requires to be followed by us. Our view finds support from the decision of the Hon’ble Bombay High Court in CIT Vs. Godavari Devi Saraf [Smt] [1978] 113 ITR 589 [Bom] We, therefore, confirm the order of the ld. CIT(A) and dismiss the grounds of appeal
s of the Revenue.
8. In the result, both the appeals of the Revenue are dismissed.” After going through the operative portion above said, there is no iota of doubt that the payments in question made by the assessee cannot be subjected to the applicability of TDS provisions contained in the “Act”. Therefore, in view of the same and in order to maintain consistency, we rely on the above said order of the ITAT and decide the grounds against the Revenue’’.
We respectfully following the above decision, we upheld the order of the Commissioner of Income Tax (Appeals) and dismiss the Revenue appeal.
On the third ground, the assessee has incurred certain 14. overseas expenditure on recruitment. In the assessment proceedings, the assessee was asked to produce TDS details. As per the provisions of sec. 195 of the Act payments are made in foreign currency during the financial year. The ld. Assessing Officer relied on the decisions and provisions of Sec. 195 of the Act are applicable and CBDT circular and concluded that payments towards recruitment expenditure are subjected to TDS and made disallowance u/s.40a(i) of the Act.
:- 17 -: 439 & 859/Mds/2010.
Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the assessee filed written 15. submissions observed at page 9 and 10 of his order as under:-. a) In so far recruitment expenses are concerned, the Appellant submits that the payment was for business services are liable to be taxed in India in the absence of a P.E. b) The learned AO ought to have appreciated that the AAR ruling in Steffen, Robertson And Kristen consulting Enginess and Scientists Vs CIT 230 ITR 206 relates to a case which involved rendering technical consultancy services. The Learned AD ought to have appreciated the facts of the case referred by him are entirely different from that of the Appellant. The decision he ought to have known related to a resident of a country with which India had no DTAA. c) The learned AO ought to have appreciated the services availed from overseas service providers the provisions of DTAA clearly exclude the same from the purview of tax liability in India. d) The learned AO ought to have appreciated the provisions of section 90 (2), the provision of DTAA or that Indian tax law whichever is more beneficial would apply. e) The learned Assessing Officer erred in not giving sufficient time to collect the information‘’.
The ld. Commissioner of Income Tax (Appeals) examined 16. the facts, submissions, nature and purpose of payment. The assessee has incurred expenses in relation to the business carried on in Australia which has double taxation agreement. The facts of the case are that the expenditure has been incurred in respect of overseas
:- 18 -: 439 & 859/Mds/2010. operations. Though remittances are for business activities and ld. Commissioner of Income Tax (Appeals) found that decisions relied by the ld. Assessing Officer are not applicable to the facts. The assessee has incurred recruitment cost and disputed the quantum expenses.
This expenses are incurred for putting up branches in Australia. The payments are made for obtaining services and are not liable for taxation and provisions of Sec. 195 of the Act shall not apply. The remittances represents the business expenses incurred for overseas operations in Australia for the purpose of carrying on business. The payments by non-resident for earning any income from sources outside India not be taxed in India and such expenses are exclusively incurred for recruitment and not in the nature of royalty or technical services for the business of the assessee in Australia, with these observations the ld. Commissioner of Income Tax (Appeals) has directed the Assessing Officer to delete the addition and sustained �87,714/- in his order. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.
Before us, the ld. Departmental Representative has submitted that ld. Commissioner of Income Tax (Appeals) has erred in deleting the recruitment expenses and other expenses which are incurred by the assessee in carrying on business in Australia and also :- 19 -: 439 & 859/Mds/2010.
not appreciated the Double Taxation Avoidance Agreement (DTAA) with Australia and the ld. Assessing Officer does not mention about permanent establishment in Australia and also the income is taxable in India in respect of Australia business activities and expenses are subject to TDS and prayed for allowing the appeal.
Contra, the ld. Authorised Representative relied on the 18. orders of Commissioner of Income Tax (Appeals) and also substantiated his arguments that the expenses are incurred for Australia branch and also no income has accrued or arise in India and relied on the decision of GE India Technology Centre P. Ltd vs. CIT 327 ITR 456 (SC) and also supported that there is no technical know-how, plan and designing for services rendered outside India and reimbursement of expenses are not taxable.
We heard the rival submissions, perused the material on 19. record and judicial decisions cited. The ld. Departmental Representative explained that assessee has not proved the nature of expenditure incurred outside India and also no evidence was produced. The ld. Authorised Representative explained that is expenditure in incurred for Branch Office at Australia which do not have permanent establishment in India and such payments are not in :- 20 -: 439 & 859/Mds/2010. the nature of technical services or technical knowledge. We on perusal of the assessment order, found that the ld. Assessing Officer has not discussed on the permanent establishment or the type of expenditure incurred with complete details and the findings of assessment order that the assessee has failed to provide details of TDS and summary of expenditure incurred. We are of the opinion that the matter has to be re-examined to verify to the expenditure and genuineness of permanent establishment and business connection of the assessee.
Hence, we remit entire issue to the file of Assessing Officer to verify the claim and pass the order. This ground of the Revenue is allowed for statistical purpose.
Now we adjudicate of assessment 20. years 2006-2007:- The first ground raised in this appeal is with regard to Employee Stock Option Cost (ESOP). The assessee has incurred an amount of �1,15,91,445/- for issue of ESOP stock in the current financial year. The ld. Assessing Officer issued show cause notice as it cannot be allowed being in the nature of capital expenditure. The assessee explained that ESOP expenditure is incurred for the purpose of business and relied on the decision of Chennai Tribunal in the case of SSI Ltd vs. DCIT in since the decision of the Tribunal is not accepted by the Department, second appeal is :- 21 -: 439 & 859/Mds/2010. preferred in respect of ITAT order. The ld. Assessing Officer made an addition. Aggrieved by the order the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) relying on the decision of SSI Ltd (supra) held that ‘’cost of stock option is expenditure incurred for remunerating its employees and consequently the expenditure will have to be classified under revenue expenditure in the way as other remunerations to employees are treated. Further, the issue is covered by favourable orders of the Tribunal in the case of SSI Ltd vs. DCIT in and dismissed the ground of the Revenue’’ and allowed the appeal. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.
Before us, the ld. Departmental Representative has argued 22. that the Commissioner of Income Tax (Appeals) has erred in deleting the addition relying on the ITAT order which is distinguished and considered in favour of the Department. The decision relied by Commissioner of Income Tax (Appeals) has not become final and prayed for allowing the appeal.
:- 22 -: 439 & 859/Mds/2010.
Contra, ld. Authorised Representative relied on the orders of Commissioner of Income Tax (Appeals) and opposed the grounds.
We heard the rival submissions, perused the material on 24. record and judicial decisions cited. The only contention of the Department that the expenditure is in the nature of capital in nature and the decision relied by the Commissioner of Income Tax (Appeals) has not attained finality. The ld. Authorised Representative argued on the purpose of issue of ESOP and also the types of expenditure incurred and supported his arguments relying on the Tribunal decision in the case of SSI Ltd (supra). We perused the order of Commissioner of Income Tax (Appeals) and the submissions of both counsels and found that ESOP are in the nature of business expenditure and it takes the characteristic of staff welfare and the shares are issued to the employees to work in the best interest of the assessee. These shares are allotted through SEBI guidelines and expenditure is in the nature of Revenue expenditure and claimed deduction and ld. Authorised Representative supported his arguments with decision of Jurisdictional High Court in the case of CIT vs. PVP Ventures Ltd 90 DTR 340 (Mad) wherein it held that staff welfare expenditure incurred by the assessee in respect of Employees Staff Option Plan as per SEBI guidelines is an ascertained liability and is allowable as expenditure in computation of :- 23 -: 439 & 859/Mds/2010. income. Considering the jurisdictional High Court decision, we uphold the order of Commissioner of Income Tax (Appeals) and allow the expenditure. The ground of the Revenue is dismissed.
The second ground raised by the Revenue is with regard to unearned income of �42,16,33,000/-.
We have considered the facts and submissions made by the 26. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in Revenue.
The third ground raised by the Revenue is with regard to non 27. deduction of TDS u/s.40(a)(i) of the Act expenditure on foreign currency towards networking and communication cost.
We have considered the facts and submissions made by the 28. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in Revenue.
:- 24 -: 439 & 859/Mds/2010.
The fourth ground raised by the Revenue with regard to networking cost made in India u/s.40(a)(ia) of the Act.
We have considered the facts and submissions made by the 30. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in Revenue.
The fifth ground raised by the Revenue with regard to 31. internet delivery charges and direct cost u/s.40(a)(i) of the Act.
We have considered the facts and submissions made by the 32. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in Revenue.
The last ground raised by the Revenue with regard to 33. deletion of foreign currency u/s.40(a)(i) of the Act.
We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on :- 25 -: 439 & 859/Mds/2010.
similar issue was adjudicated by us for the assessment year 2001-02 in Revenue is allowed for statistical purpose.
Now we adjudicate of assessment years 2007-2008:- The first ground raised by the Department is with regard to Employee Stock Option Cost (ESOP).
We have considered the facts and submissions made by the 36. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2006-07 in Revenue.
The second ground raised by the Department is with regard 37. to addition of unearned income of �29,37,55,000/-.
We have considered the facts and submissions made by the 38. ld. Authorised Representative and Departmental Representative, similar issue was adjudicated by us for the assessment year 2001-02 in Revenue.
The third ground raised by the Revenue with regard to 39. disallowance of depreciation on good will. The assessee has acquired
:- 26 -: 439 & 859/Mds/2010.
M/s. Globe Travel during the current year and submitted details in assessment and the acquisition cost was capitalized under the block of business assets to the extent of �11,27,14,945/- and depreciation claimed at 25%. The Assessing Officer issued notice on disallowance of depreciation as intangible asset and the assessee filed explanation on acquisition of M/s. Globe Travel and disclosed block of assets as intangible asset. The ld. Assessing Officer contended that the explanations of the assessee that the total assets were acquired at �11,62,18,448/- from M/s. Globe Travel and segregated the computers, fixture & furniture and plant & machineries separately in respective block and remaining amount of �11,27,14,945/- was allotted under the Head intangibles. The assessee claimed depreciation on the goodwill @25% under the block of assets and the same was disallowed by the ld. Assessing Officer. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings before the ld. Commissioner of 40.
Income Tax (Appeals) the assessee filed written submissions and explained the value of asset management, agreement entered with the M/s. Globe Travel and elaborately at page 4 to 6 of the order.
The ld. Commissioner of Income Tax (Appeals) based on the submissions and findings of the ld. Assessing Officer relied on the :- 27 -: 439 & 859/Mds/2010. judicial decisions and allowed the appeal of the assessee observed at 5.3 of his order as under:-
‘’5.3 I have carefully examined the facts of the case and the various submissions of the Id. AR. I have also perused the asset purchase agreement between the appellant and the previous owner, Mr. Herman Noronha. The Id. AR has argued that the occasion for submission of the break up of Intangibles had not arisen as the claim was duly supported by the Tax Audit Report. He stated that the appellant had furnished during the course of hearing the break up of the intangibles into Goodwill and other Intangibles and no further details were called for. The appellant has furnished before me explanation and the details which has been reproduced above. The decision of DCIT v. Sheth & Sura Engg Pvt. Ltd. would not be applicable to the case of the appellant since in that case, the undisclosed income admitted during the search operation included certain plant & machinery and furniture & fixtures for which no details could be furnished to the AO whereas in the appellant's case, the details have been duly given. The AO has also: relied on the decisions of ITAT, Delhi in the case of Guruji Entertainment Network! Ltd (l08 TTJ 180) and ITAT, Ahmedabad in the case of Bharatbhai J. Vyas (97 ITD 248) to deny the claim for depreciation. In my considered opinion, with due respect! these cannot be made applicable to the appellant's case. In the first case, the Hon'ble ITAT had concluded that goodwill is not an intangible asset entitled to de1reciation since ne-dispute on the issue was raised by the appellant. In the second case, the issue was whether the compensation paid to the retiring partner can be treated as goodwill. In the appellant's case, however, the Id. AR had strongly contended that goodwill is in the nature of "any other business or commercial rights of similar nature" and hence
:- 28 -: 439 & 859/Mds/2010. eligible for depreciation. It is also a fact that the appellant has acquired a new business and it is not a case of any compensation paid for retirement of partners. In the appellant's case, the amount was paid towards domain and customer relationship contracts as part of consideration for acquiring the business. As submitted by the Id. AR, the appellant has bought the business of Globe Travels which had been carrying on the business for more than 12 years. The said Globe Travels had contracts with all major airlines on account of which the business developed by them flowed to the appellant. It is also not in dispute that the appellant had acquired a valuable right for which compensation was paid. Based on these facts, I am of the considered opinion that the appellant had acquired a "business or commercial right of similar nature" as defined u/s 32(l)(ii). Further, I find that the later decision of ITAT, Mumbai and ITAT, Delhi the cases of Kotak Forex Brokerage Ltd (supra) and Hindusthan Coca cola Beverages Ltd (supra) respectively support the claim of the appellant. Based on the above discussions, I am of the considered opinion that the appellant is entitled to depreciation claimed by it. Accordingly this ground of appeal is allowed’’.
Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.
Before us, the ld. Departmental Representative argued that 41.
Commissioner of Income Tax (Appeals) has erred in deleting the depreciation on intangibles and goodwill; further intangibles assets including goodwill does not appear within the definition of Sec.32(1)
:- 29 -: 439 & 859/Mds/2010.
(ii) of the Act and relied on the judicial decisions and prayed for allowing the appeal.
On the other hand, the ld. Authorised Representative relied on the orders of Commissioner of Income Tax (Appeals) and opposed the grounds.
We heard the rival submissions, perused the material on record and judicial decisions cited. The only contention of the ld. Authorised Representative that depreciation has to be allowed on intangibles asset being goodwill. The goodwill takes the characteristic of separate block and assessee has paid the money over and above the value of the assets to the seller and such excess amount is the goodwill classified and falls within the explanation of Sec. 32(1)(ii) of the Act. The Hon’ble Apex Court in the case of CIT vs. SMIFS Securities Ltd 348 ITR 0302 has held that principle of ejusdem generis would strictly apply while interpreting said expression which finds place in Explanation 3(b). “Goodwill’’ is an asset under Explanation 3(b) to Sec. 32(1) of the Act and dismissed the appeal’’. We, respectfully following the Apex Court decision, upheld the order of Commissioner of Income Tax (Appeals) and dismiss the ground of the Revenue.
The fourth ground raised by the Revenue is that 44.
Commissioner of Income Tax (Appeals) erred in reversing the decision
:- 30 -: 439 & 859/Mds/2010. of the ld. Assessing Officer who has treated the sum of �43,64,69,634/- being profit on IP/VPN Business sold to Sify Communications Ltd (SCL) as business income but ld. Commissioner of Income Tax (Appeals) held the assessee’s contention as long term capital gains on slump sale. The ld. Commissioner of Income Tax (Appeals) ought to have appreciate that M/s. SCL, which has acquired the IP/VPN business is still utilizing the infrastructure facilities of the assessee, while the assessee is claiming that the unit has been sold.
The Brief facts of the case is that in the current year the 45. assessee has shown long term capital gains of �43,64,69,634/- and in the assessment proceedings, it was explained that IP/VPN business was sold on the basis of slump sale for a consideration of �50 crores and the networth of the business was valued at �6.6 crores and was in the nature of profit on sale of IP/VPN business as the entire business was transferred under slump sale as per the provisions of Sec.50B and the balance offered as capital gains. The assessee was issued show cause notice to explain the transfer of sale of IP/VPN licence cannot be considered as business income as it is not a sale of undertaking or a unit as a whole as per the provisions of Sec. 50B of the Act. In reply to show cause notice, the assessee made elaborate submissions explaining the nature and time frame and the provision of slump sale were the IP/VPN business were sold referred at para 5 & 6 of the ld.
:- 31 -: 439 & 859/Mds/2010.
Assessing Officer order. The ld. Assessing Officer considering the submissions, revoked the profit as capital gains and treated the difference as business income. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Commissioner of 46.
Income Tax (Appeals) observed the findings of the Assessing Officer and submissions made by the assessee before Assessing Officer and valuation report of Deloitte Haskins & Sells was filed in the appellate proceedings and observed at 6.3.1 of the order as under:-
‘’It is also seen that sec 2(19AA) covers even a unit or division of the business of an assessee. Accordingly, corporate connectivity (IP/VPN) business for which a separate licence was mandated under law was business segment on its own. The pre- requisite for a slum sale under sec.50B is a single price for the entire undertaking. The law does not mandate that undertaking should not be capable of being valued in terms of its components for a transaction to be classified as a slump sale. In fact sec. 2(42C) defining 'slump sale' specifically states that determination of value of assets for conveying / registration shall not deter the transaction being one for sale of undertaking for a slump price. The decisions relied upon by the AO are not applicable to the facts of the case, as they related to a period before introduction of Sec 50B. The appellant is also supported by the decision of Hon'ble ITAT, Mumbai in the case of Glaxo India Limited v. JCIT[2009·TlaL·69·ITAT·MUM]. Having regard to the above, I uphold the treatment of the transaction as a slump sale and the resulting capital gains as long term capital gain. This ground of appeal is accordingly allowed’’.
:- 32 -: 439 & 859/Mds/2010. and allowed the ground of the assessee. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.
Before us, the contention of the ld. Departmental 47.
Representative is that it is not a slump sale and the nature of income has to be treated as business income instead of Long Term Capital gains and he relied on the findings of the ld. Assessing Officer and prayed for allowing the appeal.
Contra, the ld. Authorised Representative supported his 48. arguments with judicial decisions and findings of the Commissioner of Income Tax (Appeals).
We heard the rival submissions, perused the material on 49. records and judicial decisions cited. The ld. Departmental Representative contention on the aspect of gain on sale to be as business income. We on perusal of order of Commissioner of Income Tax (Appeals) found that the assessee has placed more reliance on the valuation report of Deloitte Haskins & Sells and sold the units to subsidiary company M/s. Sify Communications (SCL) and it was explained that sale consideration is based on future earning capacity and earning before interest and depreciation but not on individual value of assets. Under sec. 2(42C) of the Act, the slump sale is :- 33 -: 439 & 859/Mds/2010. defined as ‘’sale for lumpsum consideration without assigning any value to he individual assets’’. At the time of hearing, the ld. Authorised Representative argued that even if some assets and liabilities are not transferred it will be a slump sale. Prime facie it is not clear whether sale is by a lock, stock and barrel or assigning the value of individual assets. Considering apparent facts, valuation report and decisions, we are of the opinion that the matter has to be re- examined. We remit the disputed issue to the file of the Assessing Officer to consider afresh the grounds of the Revenue and allow the ground for statistical purpose.
The fifth ground raised by the Revenue is with regard to disallowance of networking cost u/s.40(a)(ia) of the Act �73,78,95,119/-.
We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in Revenue.
The last ground raised by the Revenue is with regard to disallowance u/s.40(a)(i) of the Act on direct cost, content development cost and legal and professional charges
:- 34 -: 439 & 859/Mds/2010.
We have considered the facts and submissions made by the 53. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in at para 13 and we dismiss the ground of the Revenue.
In the result, the appeal of the Revenue in 439 54. & 859/Mds/2010 are partly allowed for statistical purpose.
Order pronounced on Wednesday, the 8th day of June, 2016, at Chennai.