Where assessee-company reimbursed community expenses to foreign company for utilising leased lines services situated outside India, said payment not being in nature of ‘royalty’ within meaning of section 9(1)(vi), assessee was not liable to deduct tax at source while making payment in question
FULL TEXT OF THE ITAT JUDGEMENT
These three appeals are filed by the Revenue, aggrieved by the separate orders of the Learned Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai dated 16.01.2014 in
i) ITA 48/10-11/LTU(A), for the assessment year 2007-08,
ii) ITA 71/11-12/LTU(A) for the assessment year 2008-09 &
iii) ITA No.2/13-14/LTU(A) for the assessment year 2009-10 passed under section 143(3) read with section 92CA & Section 250 of the Act. Since the issues and grounds for all these three appeals are identical, they are disposed off by this consolidated order.
2. The Revenue has raised five elaborate grounds for the assessment years 2007-08 & 2008-09 and three elaborate grounds for the assessment year 2009-10,. All these grounds for all the three appeals are concised herein below for adjudication:-
(i) The Ld. CIT (A) had erred in holding that the assessee is entitled to depreciation @ 60% on UPS, treating it as part of computers for the assessment years 2007-08 & 2008-09.
(ii) The Ld. CIT (A) had erred in deleting the disallowance under section 40(a)(i) in respect of `19,86,663/- & `29,99,356/-being payment towards utilizing the leased lines, and back-up server situated outside India for the assessment years 2007-08 & 2008-09 respectively and `1,00,93,603/-, `1,34,38,888/- & Rs.1,51,72,183/- towards expenditure on managing sales affairs outside India for the assessment years 2007-08, 2008-09 & 2009-10 respectively.
3. The brief facts of the case are that the assessee is a private limited company, engaged in the business of manufacturing and trading in flavor essence, aromatic components, aromatic chemicals and food coloring agents. The assessee filed its return of income for the assessment years 2007-08, 2008-09 & 2009-10 on 31.10.2007, 30.09.2008 & 30.09.2009 declaring its income as Rs. 68.81 lakhs, Rs.57.80 lakhs and Rs. 70.99 lakhs respectively. The case was selected for scrutiny and assessments were completed on 30.11 .2010, 08.12.2011, & 26.02.2013 for the assessment years 2007-08, 2008-09 & 2009-10 respectively wherein the Ld. Assessing Officer made certain additions, which were deleted by the Ld. CIT (A) against which the Revenue is now in appeal before us.
4. Ground No.1 Depreciation @ 60% on UPS treating it as part of computers: A.Ys : 2007-08 & 2008-09
4.1. This issue relates to disallowance of excess depreciation claimed by the assessee on UPS. During the course of assessment proceedings, the Ld. Assessing Officer had observed that the assessee had included UPS under the block of assets “computer & software” and thus had claimed depreciation @ 60%. Ld. Assessing Officer opined that UPS is not a part of computer and it can be only treated as Uninterrupted Power Supply (UPS) equipment for electrical appliances. The Ld. Assessing Officer had relied on the decision of the ITAT Delhi Bench of the Tribunal in the case of Nesly India Ltd. Vs. DCIT in 111 TTJ 498 and decision of the case of CIT (A) LTU Chennai Vs. M/s.Cholamandalam General Insurance Company Ltd., in ITA No.70/2007-08/LTU(A) dated 29.08.2008 wherein UPS was treated as a part of general plant and machinery. By holding so, the Ld. Assessing Officer had disallowed the excess claim of depreciation of `11,810/- & `85,387/- for the assessment years 2007-08 & 2008-09 respectively. On appeal, the Ld. CIT deleted the addition made by the Ld. A.O(A), relying upon the decisions of the jurisdictional ITAT in the case of Sundaram Asset Management company ltd and IOB in ITA No.1774/Mds./2012 dated 19.07.2013 & ITA No.1815/Mds./2011 dated 02.04.2013 respectively.
4.2. Before us, the Ld. A.R. submitted the decision of the case Sundaram Asset Management vs. DCIT reported in 37 Taxmann.com 278 wherein the Chennai Bench of the Tribunal held as follows:-
“The fifth ground of appeal of the assessee relates to the issue of depreciation on UPS. The assessee has claimed depreciation on UPS @ 60% treating the same as part of computer. On the other hand, the Assessing Officer has considered the UPS at par with Plant & Machinery and restricted the depreciation to 15%. It has been repeatedly held in various decisions of the Tribunal that depreciation @ 60% has to be provided on UPS treating it to be part of computer. This issue has been decided by the Tribunal in the case of Harworth (India) (P) Ltd.(supra) and Macawber Engg. Systems (India) (P) Ltd.(supra) wherein it has been held that UPS is an integral part of the computer. This view has been consistently followed by the Tribunal in various other appeals. Accordingly, this ground of appeal of the assessee is allowed and the assessee is entitled to claim deprecation @ 60% on UPS.”
Ld. D.R could not successfully confront before us with any other decision in support of the order of the Ld. Assessing Officer. Therefore, following the order of the Chennai Bench of the Tribunal, we hereby hold that UPS is to be treated as part of the computer and the depreciation is to be allowed accordingly, thereby we confirm the order of the Ld. CIT (A). Thus, this issue is decided in favour of the assessee
5. Ground No.2 Applicability of Sec.40 (a)(i) of the Act with respect to reimbursement of communication expenses paid to non-residents and expenditure on managing sales affairs outside India.
A. Reimbursement of communication expenses:-
During the course of assessment proceedings, it was observed by the Ld. Assessing Officer that the assessee had paid an amount of Rs. 19,86,662/- and Rs. 29,99,356/- for the assessment years 2007-09 & 2008-09 respectively towards utilizing leased lines and back up services situated outside India. These payments were made without complying with the provisions of section 195 of the Act. On the query raised by the Ld. Assessing Officer as why these payments cannot be considered as royalty payment the assessee had replied that the payment was made for the purpose of communication expenses to the leased lines to assess the data of the company which has been maintained by the holding company in a server located in USA. Therefore, the aforesaid payment cannot be considered as payment towards as royalty for the purpose of usage of scientific equipments. The Ld. Assessing Officer rejected the contention of the assessee for the following reasons:-
(i) The above payment was made to the persons of the foreign country mainly for the purpose of utilizing (use or right to use) its equipment i.e. leased lines and backup server by the assessee. Hence, the above payment shall be considered as the payment made as per the provisions of section 9(1)(vi).
(ii) Further it has been observed from the Hon’ble Special Bench of ITAT Delhi in the case of M/s.New Sky Satellite Vs. DCIT [319 ITR (AT) 269] has held that the payment made for the use of equipments in the referred case, it is for the use of bandwidth of the satellite) shall be considered as payment within the purview of Sec.9(1)(vi) of the Act. A similar view has also been taken by the Hon’ble Chennai ITAT in the case of ITO Vs. Raj Television Network Limited [ITA No.1827 & 1828/Mds/1998].
Thereafter, the Ld. Assessing Officer came to a conclusion that the aforesaid payments made by the assessee falls under the ambit of Sec.9(1)(vi) of the Act as royalty and since the payments were made without deduction of TDS for both the assessment years invoking the provisions of section 40(a)(i) of the Act, the amount of `19,86,662/-and `29,99,356/- was disallowed for the assessment years 2007-08 & 2008-09 respectively.
B. Expenditure on managing sales affairs outside India
It was also observed by the Ld. Assessing Officer that the assessee had made payments for `1,00,93,603/-, `1,34,38,888/- & `1,51,72,183/- for the assessment years 2007-09, 2008-09 & 2009-10 respectively to various parties towards managing the sales affairs of the assessee company outside India. The Ld. Assessing Officer came to a conclusion that the assessee had not complied with the provisions of section 195 of the Act and therefore invoked the provisions of section 40(a)(i) of the Act and disallowed the amount of Rs. 1,00,93,603/-, Rs. 1,34,38,888/- & Rs. 1,51,72,183/- as deductable expenditure for the assessment years 2007-08, 2008-09 & 2009-10 respectively.
5.1. When the matter came up before the Ld. CIT (A) relying upon the decision of the Tribunal in the assessee’s own case for the assessment year 2005-06 in ITA No.250/Mds./10 dated16.12.2010 and the decision of Hon’ble Supreme Court in the case of GE India Technology center Pvt Ltd Vs. CIT reported in 327 ITR 456, deleted both the additions with respect to disallowances of communication expenses and expenditure incurred towards managing sales affairs outside India.
5.2. At the outset the Ld. A.R. relied upon the following decisions and argued that the facts and circumstances of the assessee’s case is identical to the case cited herein below and therefore the additions made by the Ld. Assessing Officer may be deleted and the order of the Ld. CIT (A) may be confirmed.
a) On the issue of reimbursement of communication expenses using leased lines and back up servers situated outside India:-
Hon’ble High Court of Bombay in the case of Director of Income-tax,(IT)-1 V. WNS Global Services (UK) Ltd. in  32 taxmann.com 54 (Bom.) held that:
“So far as Questions (4)& (5) are concerned, the Tribunal by the impugned order followed its order in the matter of WNS North America
Inc rendered on 25th November, 2011. The Tribunal while upholding the order of the CIT (A) held that the amount of Rs.2.93 Crores was received by the Respondent-Assessee as reimbursement of lease line charges and would not classify either as royalty or as income attributed to a Permanent Establishment in India. The Respondent-Assessee has obtained from an international Telecom Operator lease line on payment of charges. These lease line facility in turn is provided to WNS India on cost to cost basis so as to have international connectivity. For this purpose, the international telecommunication operator charges the Respondent-assessee and the Respondent-assessee recovers the same from WNS India. The Tribunal has come to finding of fact that the reimbursement of lease line charges received by the Respondent-assessee is the actual amount which is incurred by it on making payment to the international telecom operator. Thus, on the above finding of fact, the Tribunal concluded that there is no income earned by Respondent-assessee which is subject to tax but is only a reimbursement of lease line charges paid by it to international telecom operator. Accordingly, as the decision of the Tribunal is based on finding of fact, we see no reason to entertain Questions (4) & (5).”
b) On the issue of expenditure on managing sales affairs outside India:-
Hon’ble ITAT Chennai Bench in the case of Assistant Commissioenr of Income Tax V. Farida Shoes (P) Ltd. in  (2013) 143 ITD 400(Chennai) held that:-
“In the present case, the assessee paid certain amounts to overseas agents for procurement of export orders. The agents have not provided any managerial/technical services. The payments received by the non-resident Indian are not taxable in India. Taking into consideration of entire facts and circumstances, the issue involved in this appeal is covered in favour of the assessee and Sec.195 have no application to assessee’s case. Accordingly, the appeal of the Revenue is dismissed.”
5. 3. Ld. D.R could not successfully controvert to the submissions made by the Ld. A.R.
5.4. After hearing both sides and carefully perusing the materials on record, we find that the case cited by the assessee is identical to the facts of the case before us. Therefore, we do not find any hesitation to confirm the order of the Ld. CIT (A) on both these issues which are held in favour of the assessee. It is ordered accordingly.
6. In the result, all the three appeals of Revenue are dismissed.
Order pronounced on 2nd September, 2014 at Chennai.