Wifi Networks Pvt. Ltd Vs DCIT (ITAT Bangalore)
The issue under consideration is whether depreciation on ‘imported software’ will be considered as royalty and liable for disallowance under section 40(a)(ia) for want of TDS?
ITAT states that from the submissions made by ld AR, ITAT notice that there is contradiction between the facts narrated by the Ld A.R with regard to the payment of Rs.5.00 crores on which the impugned depreciation has been claimed by the assessee and the facts that were understood by Ld.CIT(A). Further, ITAT notice that the Ld CIT(A) has not taken cognizance of the order passed by the ITAT in ITA No.1624 to 1627/Bang/2012 (Supra) or possibly it has not been brought to his notice by the assessee. In the above said order of the Tribunal, it has been held that the payment of Rs.5.00 crores made to Shri Mohan Raju was not royalty. ITAT have noticed that the ld CIT(A) has held the payment as royalty and the said decision is contrary to the decision rendered by ITAT. Further, the above said amount of Rs.5.00 crores was paid during the financial year 200506 and 2006-07. The said payment had been capitalized in those years. ITAT are concerned here with AY 2012-13 and during the year under consideration, the assessee has claimed only depreciation thereon. In the earlier years, the AO had only disallowed the depreciation claimed by the assessee by invoking the provisions of sec.40(a)(ia) of the Act, i.e., the AO has not disturbed the action of the assessee in capitalizing the payment of Rs.5.00 crores. Hence the issue of capitalizing the payment has attained finality. Hence ITAT are not able to understand as to how the ld CIT(A) can direct the AO to treat the amount of depreciation as royalty payment. The foregoing discussions would show that the ld CIT(A) has rendered his decision without properly appreciating the facts surrounding the issue. In any case, the facts presented by Ld A.R also, in our view, requires verification. Hence, ITAT are of the view that this issue requires fresh examination at the end of the ld CIT(A). Accordingly ITAT set aside the order passed by ld CIT(A) on this issue and restore the same to his file for examining it afresh, after affording adequate opportunity of being heard to the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
These cross appeals are directed against the order dated 1910-2016 passed by Ld CIT(A)-7, Bengaluru and they relate to the assessment year 2012-13.
2. At the time of hearing, the ld AR submitted that the tax effect involved in the appeal filed by the Revenue is less than Rs.50.00 lakhs. Accordingly,he submitted that the Revenue is precluded from pursuing this appeal as per Circular No.17/2019 dated 8/8/2019 issued by Central Board of Direct Taxes, which has been clarified by CBDT as applicable to all pending appeals, vide its Instruction dated 20/8/2019. The Ld D.R, on the contrary, submitted that the tax effect as well as whether the issues contested in this appeal fall in any of the exception provided in the Circular are required to be checked at the end of the AO.
3. We heard the parties and perused the record. We notice that the tax effect involved in the appeal of the revenue apparently is less than Rs.50.00 lakhs. Accordingly we are of the view that the revenue is precluded for pursuing its appeal as per the CBDT circular, referred supra. However, liberty is given to the revenue to move appropriate application within the limitation period, if it is found that the tax effect involved is more than Rs.50.00 lakhs or the issues contested fall in the category of exceptions provided in the Circular. With these observations, we dismiss the appeal of the revenue.
4. Now we shall take up the appeal filed by the assessee. The first issue relates to disallowance of depreciation. The facts relating to this issue, as narrated by the AO, are that the assessee had claimed depreciation of Rs.30.99 lakhs on the WDV of “imported software”. Since the assessee did not deduct tax at source on the payment made for purchase of software, the AO took the view that depreciation claimed by the assessee is not allowable as deduction u/s 40(a)(ia) of the Act. Accordingly, he disallowed the depreciation claim of Rs.30.99 lakhs.
5. Before the ld CIT(A), the assessee submitted that it had claimed depreciation of Rs.30.99 lakhs on “intellectual property rights” purchased by it in the financial years 2005-06 and 2006-07 relevant to the asst. years 2006-07 and 2007-08 respectively. The assessee further contented, by placing reliance on the decision of Delhi ITAT in the case of SMS Demag Pvt. Ltd., 132 TTJ 42, that the disallowance prescribed u/s 40(a)(ia) is not applicable to the claim of depreciation.
6. The ld CIT(A) noticed that identical disallowance was made in asst. year 2007-08 and 2008-09 by the AO and the Tribunal, vide its order passed in ITA No.189 & 190/Bang/2012 has held that no disallowance u/s 40a(ia) of the Act can be made in respect of depreciation claimed by the assessee. The ld CIT(A), on the contrary, took the view that the IP rights can be treated either as copy right or secret formula or design etc., and since the owner of IP right (i.e., MD of the assessee company) had retained the rights and allowed the assessee only to use the rights, the same would fall under the definitionof “royalty” as defined under Explanation – 2 of sec. 9(1)(vi) of the Act. Accordingly, by following the decision rendered by Hon’ble Karnataka High Court inthe case of Samsung Electronics Co. Ltd., (2011) 203 TM 477, the ld CIT(A) took the view that the assessee is entitled to claim the payment made for IP rights as revenue expenditure. Accordingly, the Ld CIT(A) held that the assessee was not right in capitalizing the purchase value of IP rights and consequently in claiming depreciation thereon. Accordingly he directed the AO to treat the depreciation claim as the claim for deduction of royalty payment, i.e., as revenue expenditure. Since the assessee did not deduct tax thereon, the ld CIT(A) confirmed the disallowance made by the AO u/s 40(a)(ia) of the Act.
7. The ld AR submitted that both the tax authorities have not properly understood the facts relating to the present issue. He submitted that the assessee company was promoted by a person named Shri Mohan Raju. Subsequently a Bombay based company named M/s. Wide Screen Holdings Pvt. Ltd., (WHPL) acquired 51% of the shares of the assessee company. Thereafter, a tripartite agreement was entered between the assessee company, Shri Mohan Raju and WHPL. In the said agreement, a non-compete clause was incorporated, as per which, the right of first refusal was given to the assessee company and WHPL in respect of any future business initiatives that may be taken by Shri Mohan Raju in specified business areas. It was further provided that if Shri Mohan Raju undertakes any new business initiative either as promoter or as shareholder or partner inthe filed of telecommunication, digital media and convergence other than those specified in class 2(b) of the agreement, then Shri Mohan Raju should offer 74% of his economic interest in the new venture to the assessee company. In consideration of granting above said right to the assessee company, Shri Mohan Raju was paid a sum of Rs.5 crores in aggregate i.e Rs.1.00 crore was during the financial year 2005-06 and the balance of Rs.4.00 crores was paid during the financial year 2005-06 and the balance of Rs.4.00 crores was paid during the financial year 2006-07. The ld AR further submitted that the assessee had capitalized the above said amount of Rs.5.00 crores as Intellectual Property right and accordingly, the assessee has been claiming depreciation since then.
8. The ld AR further submitted that the assessee had not deducted tax from the above said payment of Rs.5.00 crores, when it was paid to Shri Mohan Raju. Hence the TDS Officer had initiated proceedings u/s 201 of the Act for non-deduction of tax at source from the above said payment. The assessee challenged the order passed by TDS Officer and when the matter reached the Tribunal, the ITAT vide its order dated 24/2/2016 passed in ITA No.1624 to 1627/Bang/2012, has held that the payment of Rs.5.00 crores made by the company to Shri Mohan Raju cannot be treated as royalty and hence the question of deducting tax at source u/s 194J of the Act does not arise. It was further held that the proceedings u/s 201 is liable to be cancelled, since the payee of above said amount has already paid the tax. Accordingly the ld AR submitted that the issue relating to the character of payment of Rs.5.00 crores has already been settled by the ITAT and hence the decision rendered by Ld CIT(A) characterizing the payment as “royalty” is contrary to the decision rendered by the Tribunal and is liable to be cancelled.
9. On the contrary the ld DR supported the order passed by the ld CIT(A) on this issue.
10. We have heard the rival contentions and perused the record. From the submissions made by ld AR, we notice that there is contradiction between the facts narrated by the Ld A.R with regard to the payment of Rs.5.00 crores on which the impugned depreciation has been claimed by the assessee and the facts that were understood by Ld.CIT(A). Further, we notice that the Ld CIT(A) has not taken cognizance of the order passed by the ITAT in ITA No.1624 to 1627/Bang/2012 (Supra) or possibly it has not been brought to his notice by the assessee. In the above said order of the Tribunal, it has been held that the payment of Rs.5.00 crores made to Shri Mohan Raju was not royalty. We have noticed that the ld CIT(A) has held the payment as royalty and the said decision is contrary to the decision rendered by ITAT. Further, the above said amount of Rs.5.00 crores was paid during the financial year 200506 and 2006-07. The said payment had been capitalized in those years. We are concerned here with AY 2012-13 and during the year under consideration, the assessee has claimed only depreciation thereon. In the earlier years, the AO had only disallowed the depreciation claimed by the assessee by invoking the provisions of sec.40(a)(ia) of the Act, i.e., the AO has not disturbed the action of the assessee in capitalizing the payment of Rs.5.00 crores. Hence the issue of capitalizing the payment has attained finality. Hence we are not able to understand as to how the ld CIT(A) can direct the AO to treat the amount of depreciation as royalty payment. The foregoing discussions would show that the ld CIT(A) has rendered his decision without properly appreciating the facts surrounding the issue. In any case, the facts presented by Ld A.R also, in our view, requires verification. Hence, we are of the view that this issue requires fresh examination at the end of the ld CIT(A). Accordingly we set aside the order passed by ld CIT(A) on this issue and restore the same to his file for examining it afresh, after affording adequate opportunity of being heard to the assessee.
11. The next issue relates to disallowance of payments made outside India by invoking provisions of sec. 40a(i) of the Act. The Ld CIT(A) had confirmed disallowance of payments made outside India to two persons. At the time of hearing the ld AR did not press the ground numbered as 3.2 relating to disallowance of Rs.5,17,951/-and in this regard, he also made necessary endorsement on the grounds of appeal. Accordingly we dismiss the said ground as not pressed.
12. The ground No.3.1 relates to disallowance of Rs.7,62,090/-for non deduction of tax at source u/s 195 of the Act.
13. The assessee has made payment of Rs.7,62,090/- to a person named Saabwe Paul Kisitu and it was paid for the purpose of handling of all operations including coordinating with Indian teams for maintaining, rectifying problems, testing, upgrading/supporting customers, contentproviders etc., in Uganda. The above said payment was made outside India for services rendered outside India i.e in Uganda. The AO held the payment as fee for technical services and accordingly disallowed the same u/s 40(a)(i) of the Act, as the assessee had not deducted tax at source. Before ld CIT(A), it was submitted that the payment made by the assessee would fall under the category of ‘independent personal services’, as per Article 14 of Agreement for avoidance of double taxation entered between India– Uganda. It was further submitted that ITAT, Bangalore has considered an identical issue in the assessee’s own case in ITA No.189 and 190/Bang/2012 relating to asst. year 2007-08 and it has held that payment made to the above said person should be regarded as ‘business profit’ and the same cannot be charged in India in the absence of permanent establishment. The ld CIT(A) however held that the DTA between India and Uganda has a clause for royalty and Fee for Technical services (Art 12) and accordingly took the view that the decision rendered by ITAT in asst. year 2007-08 is not applicable to this payment. Accordingly he confirmed the disallowance made by the AO.
14. The ld AR submitted that the assessee had made identical payments in asst. year 2011-12 which came for consideration of the coordinate bench in ITA No.943/Bang/2007. The coordinate bench noticed that the DTAA entered between India and Uganda also contains Article 14 relating to independent personal services. Accordingly, the Tribunal held that in the present case Art 14 is applicable and the same is not taxable. He submitted that there is no change in facts and accordingly submitted that the decision rendered by the Tribunal in the earlier year should be followed.
15. We heard Ld D.R and perused the record. As submitted by Ld A.R, an identical issue has been considered by the co-ordinate bench in the assessee’s own case in AY 2011-12 (referred supra). For the sake of convenience, we extract below relevant discussions made by the coordinate bench in asst. year 2011-12 on this issue:-
“5. We have considered the rival submissions. First of all, we reproduce the relevant paras 7 to 7.5 from the order of CIT(A) which are as under.
“7. The Twenty-Fourth, Twenty-Fifth, Twenty-Sixth, Twenty Seventh,Twenty-Eighth and Twenty-Ninth grounds pertain to the payment made by the appellant to the following Non-Residents amounting to Rs. 13,92,346/-, which was claimed as a deduction but disallowed by the assessing officer. As per the admitted facts of the case, during the previous year relevant to the Asst. Year 2011-12, the Appellant made the followings payments:-
