TMI Blog2022 (6) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision rendered in the case of Samsung Electronics Co [ 2009 (9) TMI 526 - KARNATAKA HIGH COURT] - Accordingly, we set aside the order passed by CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(i)/40(a)(ia). For capitalisation of software expenses - We are of the view that this issue also requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by CIT(A) on this issue and restore the same to the file of AO with the direction to examine this issue, follow the above cited binding decisions of the jurisdictional High Court and take appropriate decision. The assessee is also directed to furnish all the relevant information to the AO. Disallowance of claim of communication expenses - As submitted that the said payment does not quality to be royalty as per Article 12 of India-US treaty and hence it is not liable for tax deduction at source - AO, however, held that the assessee would be liable to deduct tax at source on the above said payment in terms of sec. 9(1)(vi) of the Act and accordingly disallowed the above said expenditure - HELD THAT:- In the instant case, the assessee has reimbursed the data link ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no necessity to refer to Article 15 also. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of legal and professional fees made u/s 40(a)(i). - Decided in favour of assessee. - ITA No. 2890/Bang/2018 - - - Dated:- 30-5-2022 - Shri N.V. Vasudevan, Vice President And Shri B.R. Baskaran, Accountant Member For the Appellant : Smt. Shreya Loyalaka, Advocate For the Respondent : Shri Sumer Singh Meena, CIT-DR ORDER PER: B.R. BASKARAN, A.M. The assessee has filed this appeal challenging the order dated 18-07- 2018 passed by Ld CIT(A)-3, Bengaluru and it relates to the assessment year 2011-12. The grounds urged by the assessee relate to the following issues:- (a) Disallowance of deduction claimed u/s 80JJAA of the Act (b) Disallowance of expenses on Annual maintenance contract and software expenses. (c) Disallowance of communication expenses (d) of Legal and Professional fees. (e) Deduction of education cess paid. 2. The assessee is engaged in the business of development of computer software and providing I T enabled services. The return of income was filed by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s who have worked for 300 days in a previous are eligible for the purpose of deduction under section 80JJAA in the succeeding year if he completes 300 days in such succeeding year without appreciating that person working in software industry cannot be said to be 'Workman' for the purpose of section 80JJAA of the Act and conditions prescribed for claiming said deduction are not satisfied by Assessee? 16.1. The Assessee had claimed deduction under Section 80JJ-AA of the Act on account of the payments made to the employees hired by the Assessee in the previous year even though they had not completed 300 days of service in that year since they continued on the rolls of the Assessee in the next year totalling up to more than 300 days as required under section 80JJ-AA of the Act. The issue raised by the Revenue is that the employees of the Assessee would not come within the purview of the definition of workman under Section 2(2) of the Industrial Disputes Act, 1947 (for short 'ID Act') and that since the employee has not completed 300 days of employment in the previous year, no deduction could be claimed by the Assessee. 16.2. As regards the first contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons skilled in software development and, as such, engaged by the Assessee to render services in the industry being run by the Assessee. Thus the software engineer would also come within the purview and ambit of workman under Section 2(s) of the ID Act so long as such a person does not take a supervisory role. The software engineer per se would be a workman; a software engineer rendering supervisory work would not be a workman. In the present case, it is not the case of the Revenue that the persons employed by the Assessee are rendering any supervisory work or assistance. Admittedly, the said persons have been engaged for the purpose of software development, and as such, they are to be regarded as a workman in terms of Section2 (s) of the ID Act. 16.5. The Apex Court has in the case of Devinder Singh's (supra) categorically held that when a person is employed in an industry for hire or reward for doing manual, unskilled, skilled, operational, technical or clerical work, such a person would satisfy the requirement and would fall within the definition of the 'workman'. In the present case, a software engineer is a skilled person, a technical person who is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh such employee has been employed for 300 continuous days or more. 16.10. We would disagree with the said contention. What is required is for a person to be employed for a period of 300 days continuously. There is no such criteria made out for a person to be employed in any particular year or otherwise. If such a restrictive interpretation is given, then any person employed post 5th June of a particular year would not entitle the Assessee to claim any deduction. Thus in order to claim the benefit under Section 80JJ-AA, an employer would have to hire the workmen before 5th June of that year. As a corollary, since the Assessee would not get any benefit if the workmen were engaged post 5th June, the employer/Assessee may not even employ anyone post 5th June, which would militate against the purpose and intent of Section 80JJ-AA, which is the encourage creation of new employment opportunities. 16.11. The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Limited (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect by giving a purposive construction. Thus the clarificatory amendment of the year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years. 16.15. In view thereof, the substantial question No.1 is answered by holding that the software professional/engineer is a workman within the meaning of Section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of Section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete 300 days in a particular assessment year but in the subsequent year so long as there is continuity of employment, the Assessee could continue to claim further benefit in the next two years as provided in under Section 80JJ-AA of the Act. 16.16. Accordingly, we answer Question No.1 by holding that a software engineer in a software industry is a workman within the meaning of Section 2(s) of the Industrial Disputes Act so long as the Software e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision rendered by Hon ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co Ltd (2011)(203 Taxman 477)(Kar), the Ld CIT(A) held that the payments made for purchase of software is to be treated as royalty and is liable for deduction of tax at source. (b) in respect of AMC , Ld CIT(A) held that the claim the benefit of second proviso to sec. 40(a)(ia) read with the first proviso to sec. 201(1) of the Act is not automatic, i.e., it is the responsibility of the assessee to show that the payee has complied with the conditions laid down in the said proviso. Since the assessee did not bring anything on record to show such a certificate was furnished to the AO, the Ld CIT(A) rejected the benefit of second proviso to sec.40(a)(ia) of the Act. 5.3 In respect of Software expenses of Rs.21.45 crores capitalised by the AO, the assessee submitted before the AO that it has deducted tax at source on an amount of Rs.19.85 crores and further their software licenses was valid for a period of less than two years. In respect of balance amount of Rs.1.60 crores, the assesseee admitted that their life is more than two years. Accordingly, with respect to the amount of Rs.1.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Sonata Information Technology Ltd. v. ACIT (103 ITD 324) decision rendered on 31.1.2006, it was held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no requirement of disallowance made u/s 40(a)(i)/40(a)(ia) as the payments have been made prior to the decision rendered by Hon ble Karnataka High Court in the case of Samsung Electronics Co (supra). Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(i)/40(a)(ia) of the Act. 5.6 With regard to the capitalisation of software expenses, we notice that the Hon ble Karnataka High Court has rendered following two decisions:- (a) CIT vs. Toyota Kirloskar Motors (P) Ltd (ITA No.176 of 2009), wherein the Hon ble High Court had held that the software licence fee paid for use of software for a limited duration upto two years is allowable as revenue expenditure. (b) CIT vs. IBM India Ltd (357 ITR 88), wherein the Hon ble Karnataka High Court has held that the purchase of application software is revenue expenditure. The relevant observations are extracted below:- 9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum of Rs.33,14,298/-. The Tribunal on consideration of the material on record and the rival contentions held, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue expenditure. In that view of the matter, the finding recorded by the Tribunal is in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue. Accordingly, we are of the view that this issue also requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO with the direction to examine this issue, follow the above cited binding decisions of the jurisdictional High Court and take appropriate decision. The assessee is also directed to furnish all the relevant information to the assessing officer. 6. The next issue relates to the disallowance of claim of communication expenses. The assessee had paid a sum of Rs.2,45,89,919/- to its AE M/s Honeywell International Inc (HII) and claimed the same as communication expenses. Before the AO, the assessee submitted that the above said payment is in the nature of data link charges, i.e., the HII, as part of its headquarter services, charges its affiliates for management and routine maintenance of data link facility. It was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meaning of Article 12 of India USA DTAA. Accordingly, she submitted that the data link charges cannot be treated as Royalty. The Ld A.R also submitted that the amendments in sec. 9(1)(vi) of the Act have been brought into the Act by Finance Act, 2012 only and hence, under the doctrine of impossibility of performance, the assessee cannot be fasted with liability to deduct tax at source u/s 9(1)(vi) of the Act. 6.3 We heard Ld D.R and perused the record. The assessee has explained the nature of payment before Ld CIT(A). Before us, the Ld A.R submitted that the payment has been made for providing point to point connection between two computers or local area networks. It is called data link facility and it can be used for telephone, data or internet services. Explaining further, the Ld A.R submitted that the parent company M/s HII enters into an agreement with the 3rd party vendor for providing data link services. The payment shall be made by the parent company and the proportionate cost, based on actual usage, is recovered from the affiliates. The Ld A.R submitted that the assessee does not possess any right or control over the equipment provided by the 3rd party vendor. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance of Legal and Professional fees u/s 40(a)(i) of the Act. The AO noticed that the assessee has paid legal and professional fees to the tune of Rs.4,73,18,208/- to certain foreign legal firms as detailed below:- 1. Deloitee Tax LLP - 3,35,77,224 2. Fragomen, Del Rey, Bernsen Loewy 36,910 3. Schiff Hardin LLP 61,67,154 4. Schwegaman Lundberg Woessner Kluth 75,36,920 4,73,18,208 The AO noticed that the assessee has not deducted tax at source from the above said payments. The assessee submitted that the above said payments were made to foreign legal firms, which are firm of individuals in connection with services rendered by them in USA in connection with preparation of tax return, tax reconciliation calculation, application for tax identification numbers, submission of documents etc. It was submitted that the services were provided outside India and they have been consumed outside India. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t were not attracted. However, the Ld CIT(A) held that the fees for technical services payable to a resident in India would be income deemed to arise in India except where FTS is payable in respect of any right, property or information used or services is utilised for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India. He also referred to the Explanation given under sec. 9(2) and observed that the said Explanation was inserted to undo the ratios laid down by the Hon ble Supreme court in the case of Ishikawajima Harima Heavy Industries Ltd (288 ITR 408) and Jindal Thermal Power Company Ltd (321 ITR 31)(Kar). Accordingly, the Ld CIT(A) held that (a) the non-residents have provided technical services to the assessee company and therefore, the payments are fee for technical services liable for deduction of tax at source. (b) With regard to Article 15 of India-USA DTAA, the Ld CIT(A) held that the assessee has not brought anything on record to show that the payments were made to individual or firm of individuals except for one document related to M/s Deloitte. However, it was self-certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices in USA only. Accordingly, the Ld CIT(A) has held that Article 15 is not applicable to the facts of the present case. 7.6 The Ld CIT(A) has, however, taken the view that the services rendered by these professionals fall under the category of Fee for Technical services u/s 9(1)(vii) of the Act. In view of Explanation given u/s 9(2), the Ld CIT(A) took the view that the payment is taxable in the hands of the recipients, even if they do not have residence of place of business in India. 7.7 We heard the parties on this issue and perused the record. Since the Ld CIT(A) has held that the impugned payment would be hit by sec. 9(1)(vii) of the Act, it is required to be examined as to whether the impugned payments would fall under the category of Fee for technical services in terms of sec. 9(1)(vii) of the Act or not. Section 9 of the Act lists out income which are deemed to accrue or rise in India . Section 9(1)(vii) of the Act reads as under:- 9(1)(vii) income by way of fees for technical services payable by - (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resi dent has rendered services in India. The Ld CIT(A) has expressed the following view:- 10.5 A perusal of the above provisions shows that where fees for technical services (FTS) is payable by a person who is resident of India, it would be a deemed income arising in India, within the meaning of section 9(1), irrespective of whether the recipient of such income is a resident or non-resident of India except where FTS is payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India . 10.6 In the case under consideration the non-residents have provided technical services to the appellant company. Therefore, the payment made towards these technical services is undisputedly fee for technical services as stipulated in Section 9(1)(vii) of the Income tax Act, liable for deduction of tax at source. 7.8 The contention of the Ld A.R is that the assessee has availed only legal and professional services from some professional firms and it will not fall under the category of Fee for technical s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) of Explanation to section 194J of the Act. He submitted, even section 194J has prescribed two different rates for TDS for professional services and technical services. Thus, he submitted, the payment made by the assessee not being in the nature of FTS, there is no liability to deduct tax at source. 12. Without prejudice, he submitted, even assuming that the payment made to foreign attorneys are in the nature of FTS, then also such payment are not chargeable to tax under clause (b) of section 9(1)(vii) of the Act, as, the payments were made to foreign attorneys for utilizing their services outside India and for the purpose of earning income from a source outside India. Therefore, such income cannot be deemed to accrue or arise in India. 13. Without prejudice, he submitted, in terms of DTAAs entered with certain countries, payments received by the nonresidents are in the nature of business income, hence, not liable to tax in India under the respective DTAAs in absence of a fixed place of business or PE in India. Thus, he submitted, there being no obligation on the assessee to deduct tax at source under section 195 of the Act, no disallowance under section 40(a)(i) can be made. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act for failure to deduct tax at source under section 195 of the Act. Further, it is evident, the aforesaid disallowance was made solely for the reason that assessee failed to furnish TRCs of the nonresidents to whom such payments were made. In the synopsis filed before us, learned counsel for the assessee has furnished the details of payments made, as under:- 17. In so far as the balance amount of Rs.48,52,693/- is concerned, undisputedly, they represent professional fee paid to non-resident attorneys for various professional services rendered by them in the respective foreign jurisdictions. Therefore, the foremost crucial issue requiring examination is, whether the payment made to the non-residents is chargeable under the provisions of the Act so as to attract the provisions of section 195 of the Act. On a reading of section 5 of the Act, which defines the scope of total income, it would be very much clear that the following categories of income shall be included in the total income:- (i) income received in India; (ii) income deemed to be received in India; (iii) income which accrues or arises in India; or (iv) income which is deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parate categories. 20. Therefore, payments made to non-resident attorneys cannot be regarded as FTS under section 9(1)(vii) of the Act. Further, a conjoint reading of section 40(a)(i) and 40(a)(ia) brings out a clear distinction between FTS and fees for professional services. Though, section 40(a)(ia) encompasses, both, FTS and fees for professional services, however, section 40(a)(i) is applicable only in case of failure to deduct tax on payments made for FTS. As rightly submitted by learned counsel for the assessee, this could be for the reason that payment of legal/professional fee to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India as per section 5 and section 9 of the Act. It is relevant to observe, in the case of NQA Quality Systems Registrar Ltd. Vs. DCIT (supra), the coordinate Bench has held that professional services are a category distinct from technical services. Similar view has been expressed in the following decisions as well: (i) ONGC Vs. DCIT (supra) (ii) Deloitte Haskins Sells Vs. ACIT (supra) No contrary decision has been brought to our notice by learned Departmental Representative. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegory of Fee for technical services within the meaning of sec. 9(1)(vii) of the Act. Following the same, we hold that the view taken by Ld CIT(A) cannot be sustained. 7.11 We noticed earlier that the services were rendered in USA by these non-residents and the payments have been received by them outside India. Further, their services have been used outside India. Hence these payments does not constitute income under the Indian Income tax Act, 1961 u/s 5 of the Act and we have held that it is not deemed to accrue in India u/s 9(1)(vii) of the Act. Hence this income is not taxable in India in the hands of non-residents and hence the question of deducting tax at source u/s 195 of the Act does not arise here. Accordingly, the disallowance made u/s 40(a)(i) is liable to be deleted. 7.12 Under Sec. 90(2) of the Act, the provisions of the Income tax Act are required to be applied only if they are more beneficial to the assessee. We noticed that under the Income tax Act, this receipt is not taxable in India in the hands of non-residents. Hence, the provisions of Income tax Act are more beneficial to the non-residents. In this view of the matter, there is no necessity to refer to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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