TMI Blog2016 (6) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusions reached by the CIT(A) There is no difference pointed out by the Revenue, we are of the opinion that the CIT(A) has rightly deleted the addition under the head unearned income . The mere submission on the part of Revenue that the same has not attained finality is no ground in itself for not placing reliance upon the same. Accordingly, the findings of the CIT(A) are upheld and the ground is decided against the Revenue. TDS u/s 195 - expenditure incurred on networking - remittance towards overseas services - assessee explained the networking and communication cost and the category of expenditure incurred outside India and the said provisions shall not apply - AO relied on the legal provisions of Sec. 40(a) (i) of the Act and double taxation u/s.90(2) of the Act considered the provisions of TDS are mandatory in respect of networking, communication were services are outside India - HELD THAT:- As decided in own case [ 2012 (11) TMI 1151 - ITAT CHENNAI] payments made for connectivity for transmission of data would not fall into the category 'royalty' or 'fees for technical - there is no iota of doubt that the payments in question made by the assessee can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision, we uphold the order of Commissioner of Income Tax (Appeals) and allow the expenditure. The ground of the Revenue is dismissed. Disallowance of depreciation on good will - assessee claimed depreciation on the goodwill @25% under the block of assets - HELD THAT:- The goodwill takes the characteristic of separate block and assessee has paid the money over and above the value of the assets to the seller and such excess amount is the goodwill classified and falls within the explanation of Sec. 32(1)(ii) of the Act. The Hon ble Apex Court in the case of CIT vs. SMIFS Securities Ltd [ 2012 (8) TMI 713 - SUPREME COURT] has held that principle of ejusdem generis would strictly apply while interpreting said expression which finds place in Explanation 3(b). Goodwill is an asset under Explanation 3(b) to Sec. 32(1) of the Act and dismissed the appeal . We, respectfully following the Apex Court decision, upheld the order of Commissioner of Income Tax (Appeals) and dismiss the ground of the Revenue. Profit on IP/VPN Business sold to Sify Communications Ltd (SCL) - business income OR long term capital gains on slump sale - HELD THAT:- We on perusal of order of Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision in the case of CIT v. Southern Cables Engineering Works (289 ITR 167), the learned CIT(A) ought to have upheld the action of the assessing officer. 3.1. The learned CIT(A) erred in deleting the addition made u/s.40(a)(i) of ₹ 16,22,09,000/-, towards 'networking and communication costs', relying upon his own order in the assessee's case for the a-y 2003-04 in ITA Tr.No.4/09-10/LTU(A) dated 11.12.2009. 3.2. It is submitted appeal before the Hon'ble Chennai Tribunal has been preferred against the relied upon order. 4.1. The learned CIT(A) erred in deleting the disallowance of 'recruitment expenses' (₹ 29,38,000) and 'other expenses' to the tune of ₹ 1,64,53,286/- by holding that the impugned expenses were incurred by the assessee for carrying on business in Australia and consequently do not involve any exposure to tax in India. 4.2. The learned CIT(A) failed to appreciate that Article 7 (Business Profits) of the DTAA between India and Australia reads thus: (1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate proceedings, the ld. Commissioner of Income Tax (Appeals) considered the submissions, reasons, grounds argued by the assessee and relied on the assessee s own case for the assessment year 2005-06 and deleted the addition made by the ld. Assessing Officer. Aggrieved by the order of Commissioner of Income Tax (Appeals), the Revenue has assailed an appeal before Tribunal. 6. Before us, the ld. Departmental Representative argued that he Commissioner of Income Tax (Appeals) erred in deleting the addition relying on subsequent year order and has not become final and appeal has been preferred in jurisdictional Tribunal, pending disposal and prayed for allowing the appeal. 7. Contra, ld. Authorised Representative relied on the orders of Commissioner of Income Tax (Appeals) and also supported the case with decision of Co-ordinate Bench in assessee s own case for the assessment year 2002-03 and opposed the grounds. 8. We heard the rival submissions and perused the material on record and judicial decisions cited. The ld. Authorised Representative contention that unearned income as per sec. 145(2) in respect of any class of income to be disclosed and notified in the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be ignored merely because they are book entries. 31. It was noticed by the AO during assessment proceeding that in the balance sheet as on 31.03.2003 ₹ 45,67,354 was shown as 'unearned income' under the head 'current liabilities' as against ₹ 15,13,162 shown as on 31.03.2002. The details furnished by the assessee showed that ₹ 39,68,208 received during the year ending 31.03.2003 was not offered for tax and was carried forward to next year. The assessee explained as under. For revenue relating to development of elearning software. The invoices are raised on the basis of payment milestones where as revenue are recognized on the basis of the modules developed and delivered. Though the payments has been received on the basis of invoices, if the products are not delivered sify e-learning needs to refund the amount in full to the customer. 32. The AO rejected the explanation and added ₹ 39,68,208 for the reasons given in his order as under: 4. The system of accounting followed by the assessee was mercantile. In such method of accounting the receipt on sale needs to be re recognized once an sales invoice was raised. Once a custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igned the responsibility to 'sign off on completion of the project in the case of all customers, that the assessee-company was following the AS 9 prescribed by the Institute which was in conformity with the provisions of section 145(2) of the Act. The assessee was regularly following the 'project completion method, which is a recognized method. The completion of each project is determined by 'sign off . There is nothing on record to show that there was any inconsistency in this regard. The CIT(A) found that the deferred income amounting to ₹ 39,68,208 was carried forward and was duly taken into account in the next assessment year. In the circumstances, therefore, we see no reason to interfere with the conclusions reached by the CIT(A). The ground no. 4 is, accordingly rejected. 36. In the result, the appeal filed by the department is dismissed . Taking cue from the same and more particularly, in view of the fact that there is no difference pointed out by the Revenue, we are of the opinion that the CIT(A) has rightly deleted the addition under the head unearned income . The mere submission on the part of Revenue that the same has not attained finalit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Therefore, we find that there is a mistake apparent from the order of the Tribunal on this issue and we set aside the issue of application of section 40(a)(i) of the Act to the file of the Assessing Officer with direction to decide the issue afresh after providing reasonable opportunity of being heard to the assessee. Therefore, the issue in Cognizant Solutions case has not been decided by the Hon'ble ITAT. So far as the payments to non resident parties are concerned, these are towards overseas termination and peering charges and the question of any use of equipment of the service providers in India does not arise. I have held in my order for the A.Y. 2003 04 in ITA TR. No. 4/09 10/L TU(A) that such connectivity services availed would not result in accrual of any royalty or technical services in India under Sec 9 (1) (vi) and 9(i)(vii) of the Income tax Act 1961. Following the same reasons, I hold that the services are not liable to tax in India and hence the question of deduction of tax at source on the same does not arise. The disallowance u/s 40(a)(i) is therefore deleted. The appellant succeeds on this ground . Aggrieved by the Commissioner of Income Tax (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. Therefore, it treated the payment as royalty for the use of the equipments. Consequently, the Assessing Officer held that the appellant committed default u/s 195 in so far as it had not deducted tax at source. He therefore, worked out short deduction of tax u/s. 201(1) at ₹ 3,45,99,751/- and ₹ 3,33,39,659/- for A.Ys. 2002-03and 2003-04 respectively. The Assessing Officer also charged interest u/s. 201(1A) amounting to ₹ 1,99,6S,927/- and ₹ 1,52,71,474/- for A.Ys. 2002-03 and 2003-04 respectively. The Assessing Officer has, therefore, taken the following arguments for raising the impugned demands. (1) The service provided by the Telecommunication service Provider in the case is different from that provided by the nonresident companies in the present case. (2) Telephone is fundamentally different from a bandwidth service. (3) The bandwidth service is not a specified service. (4) Equipment of the nonresident company through which connectivity is provided is used by the assessee the requisite bandwidth along with equipments is for exclusive for the assessee which cannot be used by others nor by the non-resident company; on te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as made by Finance Act, 2001 by incorporating c1ause (iv a) w.e.f. 01-04-2002 i.e., applicable for A.Y. 2002-03. In simple words, therefore, royalty means the payment of any kind received as a consideration for the use of' or the right to use, any copy right of literary artistic or scientific work but, does not include the words 'use' or right to use, industrial, commercial or scientific equipment. In the appellant's case there is no right to use equipment. Therefore, the payments made do not fall under 'royalty'. On similar facts the ITAT, Bangalore Bench in the case of ACIT Vs. Infosys Technologies Ltd. in ITA Nos. 653 and 969/Bang/2006 dated 17-10-2007 held that any payment made to database owners outside India for accessing such databases and the services provided by such telecom operator to the customers do not amount to technical services or royalty u/s 9(1)(vii) of the IT Act. Accordingly, it was held that no TDS is to be made. The Hon'ble Tribunal also held that payments for accessing data is like reading a book in a library which could not be passed on to anyone else. Since the copyright was not for literary, artistic or scientific work, the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 14. On the third ground, the assessee has incurred certain overseas expenditure on recruitment. In the assessment proceedings, the assessee was asked to produce TDS details. As per the provisions of sec. 195 of the Act payments are made in foreign currency during the financial year. The ld. Assessing Officer relied on the decisions and provisions of Sec. 195 of the Act are applicable and CBDT circular and concluded that payments towards recruitment expenditure are subjected to TDS and made disallowance u/s.40a(i) of the Act. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). 15. In the appellate proceedings, the assessee filed written submissions observed at page 9 and 10 of his order as under:-. a) In so far recruitment expenses are concerned, the Appellant submits that the payment was for business services are liable to be taxed in India in the absence of a P.E. b) The learned AO ought to have appreciated that the AAR ruling in Steffen, Robertson And Kristen consulting Enginess and Scientists Vs CIT 230 ITR 206 relates to a case which involved rendering technical consultancy services. The Learned AD ought to have ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not appreciated the Double Taxation Avoidance Agreement (DTAA) with Australia and the ld. Assessing Officer does not mention about permanent establishment in Australia and also the income is taxable in India in respect of Australia business activities and expenses are subject to TDS and prayed for allowing the appeal. 18. Contra, the ld. Authorised Representative relied on the orders of Commissioner of Income Tax (Appeals) and also substantiated his arguments that the expenses are incurred for Australia branch and also no income has accrued or arise in India and relied on the decision of GE India Technology Centre P. Ltd vs. CIT 327 ITR 456 (SC) and also supported that there is no technical know-how, plan and designing for services rendered outside India and reimbursement of expenses are not taxable. 19. We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Departmental Representative explained that assessee has not proved the nature of expenditure incurred outside India and also no evidence was produced. The ld. Authorised Representative explained that is expenditure in incurred for Branch Office at Australia which do not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in deleting the addition relying on the ITAT order which is distinguished and considered in favour of the Department. The decision relied by Commissioner of Income Tax (Appeals) has not become final and prayed for allowing the appeal. 23. Contra, ld. Authorised Representative relied on the orders of Commissioner of Income Tax (Appeals) and opposed the grounds. 24. We heard the rival submissions, perused the material on record and judicial decisions cited. The only contention of the Department that the expenditure is in the nature of capital in nature and the decision relied by the Commissioner of Income Tax (Appeals) has not attained finality. The ld. Authorised Representative argued on the purpose of issue of ESOP and also the types of expenditure incurred and supported his arguments relying on the Tribunal decision in the case of SSI Ltd (supra). We perused the order of Commissioner of Income Tax (Appeals) and the submissions of both counsels and found that ESOP are in the nature of business expenditure and it takes the characteristic of staff welfare and the shares are issued to the employees to work in the best interest of the assessee. These shares are allotted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 34. We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2001-02 in ITA No.435/Mds/2010 at para 19 and we dismiss the ground of the Revenue is allowed for statistical purpose. 35. Now we adjudicate ITA No.859/Mds/2010 of assessment years 2007-2008:- The first ground raised by the Department is with regard to Employee Stock Option Cost (ESOP). 36. We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2006-07 in ITA No.439/Mds/2010 at para 24 and we dismiss the ground of the Revenue. 37. The second ground raised by the Department is with regard to addition of unearned income of ?29,37,55,000/-. 38. We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, similar issue was adjudicated by us for the assessment year 2001-02 in ITA No.435/Mds/2010 at para 8 and we dismiss the ground of the Revenue. 39. The third ground raised by the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the search operation included certain plant machinery and furniture fixtures for which no details could be furnished to the AO whereas in the appellant's case, the details have been duly given. The AO has also: relied on the decisions of ITAT, Delhi in the case of Guruji Entertainment Network! Ltd (108 TTJ 180) and ITAT, Ahmedabad in the case of Bharatbhai J. Vyas (97 ITD 248) to deny the claim for depreciation. In my considered opinion, with due respect! these cannot be made applicable to the appellant's case. In the first case, the Hon'ble ITAT had concluded that goodwill is not an intangible asset entitled to de1reciation since ne-dispute on the issue was raised by the appellant. In the second case, the issue was whether the compensation paid to the retiring partner can be treated as goodwill. In the appellant's case, however, the Id. AR had strongly contended that goodwill is in the nature of any other business or commercial rights of similar nature and hence eligible for depreciation. It is also a fact that the appellant has acquired a new business and it is not a case of any compensation paid for retirement of partners. In the appellant's case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is an asset under Explanation 3(b) to Sec. 32(1) of the Act and dismissed the appeal . We, respectfully following the Apex Court decision, upheld the order of Commissioner of Income Tax (Appeals) and dismiss the ground of the Revenue. 44. The fourth ground raised by the Revenue is that Commissioner of Income Tax (Appeals) erred in reversing the decision of the ld. Assessing Officer who has treated the sum of ?43,64,69,634/- being profit on IP/VPN Business sold to Sify Communications Ltd (SCL) as business income but ld. Commissioner of Income Tax (Appeals) held the assessee s contention as long term capital gains on slump sale. The ld. Commissioner of Income Tax (Appeals) ought to have appreciate that M/s. SCL, which has acquired the IP/VPN business is still utilizing the infrastructure facilities of the assessee, while the assessee is claiming that the unit has been sold. 45. The Brief facts of the case is that in the current year the assessee has shown long term capital gains of ?43,64,69,634/- and in the assessment proceedings, it was explained that IP/VPN business was sold on the basis of slump sale for a consideration of ?50 crores and the networth of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of appeal is accordingly allowed . and allowed the ground of the assessee. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal. 47. Before us, the contention of the ld. Departmental Representative is that it is not a slump sale and the nature of income has to be treated as business income instead of Long Term Capital gains and he relied on the findings of the ld. Assessing Officer and prayed for allowing the appeal. 48. Contra, the ld. Authorised Representative supported his arguments with judicial decisions and findings of the Commissioner of Income Tax (Appeals). 49. We heard the rival submissions, perused the material on records and judicial decisions cited. The ld. Departmental Representative contention on the aspect of gain on sale to be as business income. We on perusal of order of Commissioner of Income Tax (Appeals) found that the assessee has placed more reliance on the valuation report of Deloitte Haskins Sells and sold the units to subsidiary company M/s. Sify Communications (SCL) and it was explained that sale consideration is based on future earning capacity and earning before interest ..... 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