Spicejet Limited Vs Addl. CIT (ITAT Delhi)
ITAT Delhi held that payment towards leasing/ hiring of the equipment will not constitute a royalty under the provisions of the India – Netherlands Double Taxation Avoidance Agreement (DTAA).
Facts-
AO noticed an amount of Rs. 1,32,00,000/- was paid to KLM Engineering and Maintenance towards leasing of rotables and repair work. Being of the view that the payment made is in the nature of royalty, on which, assessee was required to withhold tax under section 195 of the Act, AO made disallowance under section 40(a)(i) of the Act.
The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) found that the assessee had entered into a leasing agreement with M/s. KLM Engineering and Maintenance and had taken on lease rotables. He observed, as per the India – Netherlands Double Taxation Avoidance Agreement (DTAA) receipt from equipment leasing/hiring is not included within the definition of royalty, as applicable to the assessment year under dispute. He further found that even the income is not taxable as business profit at the hands of M/s. KLM Engineering and Maintenance, as, it did not have a PE in India. Thus, he held that the amount cannot be taxed under the Treaty Provisions. However, considering the fact that the Assessing Officer has not considered the issue in the aforesaid perspective, learned Commissioner (Appeals) directed the Assessing Officer to verify, whether the amount is exempt from taxation under the Tax Treaty and, if so, to delete the addition.
Further, AO noticed that the assessee debited an amount of 13,98,512/- to the profit and loss account towards expenditure incurred on implementation of software system for booking tickets. AO was of the view that the expenditure incurred by the assessee is for purchasing computer software for ticket booking. He was of the view that without the software assessee’s business cannot run. Thus, the asset provides benefit of enduring nature. Accordingly, he treated it as capital expenditure and allowed depreciation thereon at the rate of 60%.
Conclusion-
Thus, as against the definition of royalty before its amendment, wherein leasing/hiring of equipment etc. was included in the expression “royalty”, in the amended provision, amount received from leasing/hiring of equipment been specifically excluded. Therefore, as per the meaning of royalty under the Treaty applicable to the impugned assessment year, leasing/hiring of equipment will not constitute royalty.
In case of Amway India Enterprises (supra), the Special Bench of the Tribunal has held that expenditure incurred in software which gives enduring benefit is of capital nature. In fact, in the depreciation schedule under the Statute, computer software is treated as an asset, on which, depreciation is allowable at the rate of 60%. In fact, the Assessing Officer has allowed depreciation at the prescribed rate.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeals by the assessee and revenue and cross objections by the assessee and cross objection by the assessee arise out of separate orders of learned Commissioner of Income Tax (Appeals), Delhi, pertaining to assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11.
ITA No.2688/Del/2011
Assessee’s Appeal for AY: 2006-07
2. In ground no. 1, the assessee has challenged the addition of 13.50 crores made under section 68 of the Income-tax Act, 1961 (In short ‘the Act’).
3. Briefly the facts are, the assessee, a resident corporate entity, is engaged in the business of operating airlines. For the assessment year under dispute, the assessee filed its return of income on 29.11.2006 declaring loss of Rs.97,44,70,071/-. In course of assessment proceeding, while examining the materials on record, the Assessing Officer noticed that in the year under consideration, the assessee has shown to have received share capital of Rs.4.50 crores from Mr. Ajay Singh and Rs. 9 crores from Mr. Sanjay Malhotra. Noticing this, the Assessing Officer called upon the assessee to furnish requisite confirmation, bank statements and copy of Income Tax Returns of the concerned persons and to explain, why the amount should not be treated as unexplained cash credit under section 68 of the Act. As alleged by the Assessing Officer, despite availing adequate opportunity, the assessee failed to furnish the confirmations from the concerned persons. The Assessing Officer observed, when the concerned persons are directors/substantial shareholders of the company, the failure of the assessee to file confirmations from them is unacceptable. Accordingly, he treated the amount of Rs. 13.50 crores as unexplained cash credit under section 68 of the Act and added back to the income of the assessee. The assessee contested the aforesaid addition before learned Commissioner (Appeals). However, learned Commissioner (Appeals) confirmed the addition.
4. Before us, learned counsel appearing for the assessee submitted that in course of proceedings before the departmental authorities, the assessee had furnished the source form which investments in shares have come. He submitted, copy of passports of the concerned persons, bank account details were also furnished. He submitted, though, the Assessing Officer has stated that the concerned persons were in the Board of Directors of the assessee, however at the relevant point of time they were not in the Board. However, he submitted, now both of them are again on the Board of the assessee company and the assessee is ready and willing to produce them before the Assessing Officer for examination not only to prove the genuineness of the transaction but the creditworthiness of the creditors. Thus, he submitted, the issue may be restored back to the Assessing Officer for enabling the assessee to produce the Mr. Sanjay Malhotra and Mr. Ajay Singh for examination.
5. Learned Departmental Representative submitted, the assessee was unable to prove the genuineness of the amount received towards share capital from the concerned persons despite adequate opportunity being given. However, he submitted, an opportunity can be given to the assessee to substantiate its claim.
6. We have considered rival submissions and perused the materials on record. It is observed, though, before the departmental authorities the assessee furnished some documentary evidences to prove the genuineness of the share capital and the creditworthiness of the concerned persons contributing towards share capital, however, they were not to the satisfaction of the Assessing Officer and learned Commissioner (Appeals). Before us, learned counsel appearing for the assessee has submitted that both the persons, namely, Mr. Sanjay Malhotra and Mr. Ajay Singh, who have invested in share capital of the assessee are again back on the Board of the assessee company and assessee is willing to produce them before Assessing Officer not only to prove the identity and creditworthiness of the concerned persons but even the genuineness of the transaction. Considering the above submissions of the assessee, we are inclined to grant opportunity to the assessee to produce Mr. Sanjay Malhotra and Mr. Ajay Singh for examination before the Assessing Officer to prove the creditworthiness of the concerned persons and the genuineness of the transaction. It is open to the assessee to furnish any other evidence to substantiate its claim regarding the genuineness of the share capital. Accordingly, the issue is restored back to the Assessing Officer for adjudicating afresh after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
7. In ground no. 2, the assessee has challenged the decision of learned Commissioner (Appeals) in directing the Assessing Officer to examine assessee’s claim that the payment of Rs. 1,32,00,000/- to M/s. KLM Engineering and Maintenance is not in the nature of royalty under India – Netherlands Double Taxation Avoidance Agreement and allow relief accordingly.
8. Briefly the facts relating to this issue are, in course of assessment proceeding, the Assessing Officer noticed that the assessee has debited an amount of Rs.28,55,97,487/- to its profit and loss account towards aircraft maintenance cost, out of which, an amount of Rs. 1,32,00,000/- was paid to KLM Engineering and Maintenance towards leasing of rotables and repair work. Being of the view that the payment made is in the nature of royalty, on which, assessee was required to withhold tax under section 195 of the Act, the Assessing Officer made disallowance under section 40(a)(i) of the Act. The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) found that the assessee had entered into a leasing agreement with M/s. KLM Engineering and Maintenance and had taken on lease rotables. He observed, as per the India – Netherlands Double Taxation Avoidance Agreement (DTAA) receipt from equipment leasing/hiring is not included within the definition of royalty, as applicable to the assessment year under dispute. He further found that even the income is not taxable as business profit at the hands of M/s. KLM Engineering and Maintenance, as, it did not have a PE in India. Thus, he held that the amount cannot be taxed under the Treaty Provisions. However, considering the fact that the Assessing Officer has not considered the issue in the aforesaid perspective, learned Commissioner (Appeals) directed the Assessing Officer to verify, whether the amount is exempt from taxation under the Tax Treaty and, if so, to delete the addition.
9. We have considered rival submissions and perused the materials on record. Undisputedly, the Assessing Officer has disallowed the amount in dispute under section 40(a) (i) of the Act by entertaining the view that the payment made is in the nature of royalty, hence, required deduction of tax at source under section 195 of the Act. However, as per the definition of royalty under the new India – Netherlands DTAA, issued vide notification No. SO-6 93[E], dated 30.08.1999, the expression “royalty” has been amended with retrospective effect from 01.04.1998, and would mean payment of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including, cinematograph film, any patent, trademark, design or model, plan, secret formula or process or for information concerned, inter alia, commercial, scientific experience. Thus, as against the definition of royalty before its amendment, wherein leasing/hiring of equipment etc. was included in the expression “royalty”, in the amended provision, amount received from leasing/hiring of equipment been specifically excluded. Therefore, as per the meaning of royalty under the Treaty applicable to the impugned assessment year, leasing/hiring of equipment will not constitute royalty. Though, learned Commissioner (Appeals) has given a categorical finding to the effect that as per the new provision of the Treaty it is not taxable as royalty, however, since the Assessing Officer has not examined the issue in the aforesaid perspective, he has directed the Assessing Officer to examine it and allow assessee’s claim of exemption. We do not find any deficiency or irregularity in the aforesaid direction of learned Commissioner (Appeals). Accordingly, we dismiss the ground raised.
10. In ground no. 3 & 3.1, the assessee has challenged disallowance of Rs. 13,98,512/- by Treating it as capital
11. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee debited an amount of 13,98,512/- to the profit and loss account towards expenditure incurred on implementation of software system for booking tickets. After calling for necessary details and examining them, the Assessing Officer was of the view that the expenditure incurred by the assessee is for purchasing computer software for ticket booking. He was of the view that without the software assessee’s business cannot run. Thus, the asset provides benefit of enduring nature. Accordingly, he treated it as capital expenditure and allowed depreciation thereon at the rate of 60%. Following the decision of the ITAT, Special Bench, in case of Amway India Enterprises, 111 ITD 112 (Del)(SB), learned Commissioner (Appeals) upheld the disallowance.
12. We have considered rival submissions and perused the materials on record. Undisputedly, the expenditure incurred by the assessee is for purchasing a software for its ticket booking In case of Amway India Enterprises (supra), the Special Bench of the Tribunal has held that expenditure incurred in software which gives enduring benefit is of capital nature. In fact, in the depreciation schedule under the Statute, computer software is treated as an asset, on which, depreciation is allowable at the rate of 60%. In fact, the Assessing Officer has allowed depreciation at the prescribed rate. In view of the aforesaid, we do not find any reason to interfere with the decision of learned Commissioner (Appeals).
13. In ground no. 4, the assessee has challenged disallowance of 3,96, 14,684/- out of current repair and maintenance expenditure of Rs.4, 16,99,667/- by treating it as capital expenditure.
14. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee had debited an amount of Rs.4, 16,99,667/- to the profit and loss account towards repair and maintenance. After calling for and examining the necessary details, the Assessing Officer observed that the company has commenced its operation and expenses have been incurred towards creation of counters, help desk etc. at the airports, which cannot be treated as repair. He was of the view that such expenditure are in the nature of furnishing and fixtures. Accordingly, he disallowed the expenditure. The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) observed that the building premises, wherein, the assessee has incurred the expenditure were not owned by the assessee but have been taken on lease. However, referring to section 32(1A), deleted from the statute w.e.f. 01.04.1971, read with Explanation 1 to section 32 of the Act, learned Commissioner (Appeals) held that merely because the expenditure incurred related to property taken on lease, it cannot be claimed as revenue expenditure. Having so observed, he proceeded to decide whether the expenditure can be allowed as current repairs under section 30 or revenue expenditure under section 37(1) of the Act. Referring to facts on record, he observed that two office premises have been taken on lease wherein the assessee undertook renovation work in a big way to adapt to its business. Thus, the expenditure was incurred on the building so that it may yield to the assessee fresh advantage not forthcoming from the lease of premises in its original condition. He observed that only few items, such as, surface coating paint, plumbing work, can be said to be in the nature of repair work. Whereas, major items of expenditure related to furniture, machinery and plant are not repair works. Thus, after factually examining the details of expenditure, he treated the expenditure on generator rent, gen-set repair, generator fuel, cabling repair etc. as revenue in nature. Whereas, he held the other items of expenditure are capital in nature. Accordingly, he allowed 5% of the total expenditure claimed as revenue and the balance amount as capital in nature.
15. Before us, learned counsel appearing for the assessee submitted that the expenditure incurred is for making leased premises usable. Thus, he submitted, the expenditure cannot be considered to be of enduring nature. He further submitted that expenditure cannot be treated as current repairs, which learned Commissioner (Appeals) wrongly observed. He submitted, the expenditure incurred is for making the premises useful, hence, would fall within the terms of repairs. Thus, he submitted, the expenditure incurred should be allowed.
16. Learned Departmental Representative submitted, the expenditure incurred cannot be treated as current repairs under section 30. He submitted, the assessee has renovated the premises substantially; hence, it has derived enduring benefit by incurring such expenditure. However, he submitted, whether the expenditure is capital expenditure or revenue has to be examined after verifying the details of expenditure incurred. In rejoinder, learned counsel for the assessee drew our attention to the details of expenditure at page 338 of the paper-book.
17. We have considered rival submissions and perused the materials on record. The details of expenditure claimed by the assessee towards repairs and maintenance of office premises are as under:
