TMI Blog2014 (9) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... gn currency to M/s RPC - the tax authorities have failed to show that the payment received by M/s RPC was liable to tax in India either in terms of Indian Income tax Act or in terms of Indo-US DTAA, the assessee was not liable to deduct TDS on such payments made to a foreign resident, as decided in GE India Technology Centre Private Ltd. Versus Commissioner of Income Tax & Anr [2010 (9) TMI 7 - SUPREME COURT OF INDIA] - the assessee had paid the amount to M/s RPC before the Explanation was inserted u/s 9(2) of the Act with retrospective effect - the order of CIT(A) is set aside – Decided in favour of assessee. Architect fees disallowed – Expenses capital in nature or not – Held that:- The payment was made to the Architect in connection with an existing factory building - the architect has carried out some work to suit the Vaastu - the expenditure has been incurred in connection with an existing factory building and it is not the case of the revenue that a new asset has come into existence due to spending of the amount - There is no material on record to substantiate the view of the tax authorities that the consultation provided by the architect would have enduring benefit – the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER Per B. R. Baskaran, Accountant Member: The present appeal has been filed by the assessee against the order of the CIT(A)-13, Mumbai, dated 06.06.2011 relevant to Assessment Year 2007-08. The assessee has taken the following grounds of appeal: 1. (i) Commissioner of Income Tax (Appeals)-13, Mumbai [hereinafter referred to as CIT(A)] erred in confirming disallowance of professional fees of ₹ 41,84,737 u/s. 40(a)(i) of the I.T.Act on the ground that tax has not been deducted on the said payment made to RPC a Non-resident Your appellant submits that fees paid to RPC are not chargeable under the I.T.Act and hence provision u/s. 195 is not applicable to the said payment. (ii)The CIT(A) erred in not adjudicating the grounds in appeal relating to disallowance of legal/professional fees of ₹ 41,84,737/- paid to M/s. Rich Products Corporation (RPC), USA made by AO treating the same as capital in nature not allowable u/s 37(i) of the I.T Act. Your Appellant submits that professional fee paid to RPC is for the purpose of its business activity and same shall be allowed as deductible business expenditure. 2. The CIT(A) erred in confirming the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not allowable u/s. 40(a) (i) also. However, it was contended by the assessee that the TDS was not deductible on the said payment since the payee was a foreign resident and the same was not taxable in India. The AO did not accept the said contention of the assessee by placing reliance upon the decision of the Hon ble Karnataka High Court in the case of CIT (Intl. Taxation) v. Samsung Electronics Co. Ltd. [ITA No.2808 of 2005] (320 ITR 209). Accordingly he disallowed the said expenditure and added the same into the income of the assessee. 3. The learned CIT(A) also held that the expenditure incurred on exploring new market was capital expenditure. In this regard, he relied upon the judgment of the Hon ble Bombay High Court in the case of J K Chemicals Ltd 207 ITR 985 (Bom). He further observed from the agreement of the assessee entered with the said M/s. Rich Products Corporation that the said agreement did not state that the services would not be provided in India. He, therefore, held that the income of M/s. Rich Products Corporation was taxable in India as fees for technical services made available in India. Referring to the Explanation inserted below sec. 9(2) by Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etimes, it may have short life also. So far as the decision of Hon ble Bombay High Court rendered in the case of M/s J.K.Chemicals Ltd (supra) is concerned, we notice that the decision was rendered in respect of the expenditure incurred for setting up of new unit, which is not the case here. Hence, in our view, the said decision is not applicable to the facts of the instant case. Under these set of facts, we are unable to agree with the view taken by the tax authorities. Accordingly we hold that the said payment is a revenue expenditure in the hands of the assessee. 6. The AO held that the payment made to M/s RPC was in the nature of fee for technical services. He further held that the assessee was liable to deduct tax at source from the said payment and in this regard, he placed reliance on the decision rendered by Hon ble Karnataka High Court in the case of Samsung Electronics Ltd (supra). The Ld CIT(A) has also held that the said payment is in the nature of fee for technical services and the same is taxable in the hands of M/s RPC, even if it does not have Permanent Establishment in India. 7. Before us, the Ld A.R has submitted that the said decision in the case of Samsun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears that the Ld CIT(A) is making reference to Indo-US DTAA. There should not be any dispute that under Indo-US DTAA, the geographical areas for providing services are not relevant. What is required to be seen is that whether M/s RPC, a USA based company, could be subjected to tax in terms of Indo-US treaty or under Indian Income tax Act. Ld. CIT(A) has held that M/s RPC has made available its consultancy services to the assessee herein. We have already held that the sales promotion or marketing services will not fall in the category of Fee for technical services and hence the question of examining whether the services were made available or not does not arise. We notice that the agreement entered between the assessee and M/s RPC specifically provide that the services shall be provided from outside India and it will not have permanent establishment in India. Further we notice that the payment was made in foreign currency to M/s RPC. Since the tax authorities have failed to show that the payment received by M/s RPC was liable to tax in India either in terms of Indian Income tax Act or in terms of Indo-US DTAA, in our view, the assessee was not liable to deduct TDS on such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) also confirmed the same. 12. We have heard the parties on this issue. The undisputed fact remains that the said payment was made to the Architect in connection with an existing factory building. It appears that the architect has carried out some work to suit the Vaastu. Thus, it is seen that the expenditure has been incurred in connection with an existing factory building and it is not the case of the revenue that a new asset has come into existence due to spending of the above said amount. There is no material on record to substantiate the view of the tax authorities that the consultation provided by the architect would have enduring benefit. Hence, in our view, the above said payment cannot be considered as Capital in nature. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the above said addition. 13. Ground no.3 relates to the disallowance of software expenses of ₹ 97,968/-. The AO noticed that the assessee has claimed a sum of ₹ 2,24,202/- as Software Charges. The AO held that the purchase of Software would fall in the category of Royalty . Since the assessee did not deduct tax at source, he disallowed the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) with retrospective effect from 1.6.1976. The Ld A.R has submitted that the assessee had purchased the software much prior to the insertion of Explanation 4 and accordingly contended that the disallowance cannot be made u/s 40(a)(ia) of the Act on the basis of subsequent amendment brought into the Act with retrospective effect. In this regard, he has placed reliance on the case laws submitted by him earlier. On the contrary, the Ld D.R has placed reliance on the provisions of sec. 9(1)(vi) and sec. 194J of the Act to submit that the payment made for purchase of software would be hit by the provisions of sec. 194J and hence the assessee is liable to deduct tax at source u/s 194J of the Act from the said payment, failing which the same is liable to be disallowed u/s 40(a)(ia) of the Act. 16. We have heard the learned representatives of the parties. As submitted by Ld D.R, the transfer of all or any right for use or right to use a computer software (including granting of license) is included in the definition of royalty under Explanation 4 to sec. 9(1)(vi) of the Act. Further the provisions of sec. 194J also brings royalty under its purview. However, during the course of heari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delete this addition. 18. The next issue relates to the addition of ₹ 2,36,021/- made u/s 145A of the Act in respect of Excise duty and VAT component included in Raw materials and Work in Progress. The AO originally made addition of ₹ 2,84,973/- relating to Finished Goods also. However, the Ld CIT(A) deleted the addition relating to the finished goods, but sustained the addition relating to Raw materials and Work in Progress. Referring to the paragraph 21 and 22 of the assessment order, the Ld A.R has submitted that the addition of ₹ 2,36,021/- confirmed by Ld CIT(A) also includes a sum of ₹ 23,905/- and ₹ 22,647/- pertaining to the Excise duty and Vat component relating to finished goods. Accordingly he has submitted that both the above said amounts should be deleted, since they relate to the finished goods. We find merit in this submission and accordingly direct the AO to delete the addition of ₹ 23,905/- and ₹ 22,647/- out of the addition of ₹ 2,36,021/- sustained by Ld CIT(A). 19. We notice that the assessee has submitted a letter dated 27.11.2009 before the AO and the same is available in page 23 of the paper book. As per t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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