2015 (3) TMI 1132 - AT - Income Tax

Disallowance u/s. 40(a)(i) on payment to the licensor - non tds - AO made the disallowance treating the nature of the amount to be that of royalty - Held that - Keeping in view of the decision of the Hon ble Jurisdictional High Court passed in the case of CIT vs. Dynamic Vertical Sofware India (P) Ltd 2011 (2) TMI 77 - DELHI HIGH COURT wherein held that the assessee has been purchasing the software from Microsoft and sold it further in Indian market - By no stretch of imagination it would be termed as royalty - No TDS - Decided in favour of assessee. Disallowance u/s. 40(a)(ai) on payment to Catche License Procurement & Software update - Held that - The amount was paid to M/s Intersystem India Pvt. Ltd., Gurgaon relating to payment of Catche Licenses Procurement. This has also been disallowed by the AO invoking the provision of section 40(a)(ia) for non deduction of TDS, treating the nature of payment as royalty. In view of the submissions made under Ground No. 2, as aforesaid, the disallowance is not called for - Decided in favour of assessee. Disallowance on account of expenditure made on Tour to Maldives - Held that - The total expenses incurred on foreign travel to Maldives were ₹ 4,43,893 out of which an amount of ₹ 2,96,861 only has been disallowed which shows that the AO himself does not fully think the expenses not for business purposes. We also find that similar addition was made in AY 2007-08, which was deleted by CIT(A), the department did not go in further appeal. In view of above detailed discussions, we are of the considered view that such adhoc disallowance cannot be upheld.- Decided in favour of assessee. Disallowance on account of expenditure made on client hardware - Held that - The facts are that the agreement was an going agreement and software are generally implemented on make shift servers and once it is tested and completed in all respects, it is moved to the New Server. Copies of emails from Mr. Rajiv Saxena, Sir Ganga Ram Hospital are placed which shows that the assessee has settled the claim of the client on 50% i.e. for ₹ 4,38,980. We find considerable force in the finding of the Ld. CIT(A) that the assessee has also filed a copy of the debit note dated 20.4.2007 raised by Sir Ganga Ram Hospital. In view of the facts of the case, Ld. CIT(A) was of the opinion that the liability to incur the expenditure arose during the year and the AO was not justified in holding it to be pertaining to prior period.- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) on payment to licensor
2. Disallowance under section 40(a)(ia) on payment for Catche License procurement and software update
3. Disallowance on expenditure made on tour to Maldives
4. Disallowance on expenditure made on client hardware
5. Validity of assessment under section 143(3) and service of notice under section 143(2)

Analysis:

1. Disallowance under section 40(a)(ia) on payment to licensor:
The Revenue raised concerns about the deletion of additions under section 40(a)(ia) for payments made to licensors. The Appellate Tribunal reviewed the facts, noting that the purchases were for resale of software and not royalty payments. Referring to precedents, the Tribunal upheld the order of the Ld. CIT(A) based on a similar case law where software purchases for resale were not considered as royalty. The Tribunal concluded that the dispute was in favor of the assessee, following the precedent set by the High Court, and decided against the Revenue.

2. Disallowance under section 40(a)(ia) on payment for Catche License procurement and software update:
Regarding disallowance on payments for Catche License procurement and software update, the Tribunal found that the disallowance under section 40(a)(ia) was not warranted. The payments made were for licenses procurement and not royalty, as argued by the Revenue. The Tribunal upheld the Ld. CIT(A)'s decision on this issue, dismissing the Revenue's claim.

3. Disallowance on expenditure made on tour to Maldives:
The Tribunal analyzed the disallowance of expenditure on a tour to Maldives and found that the Managing Director visited Maldives for business prospects. Despite the AO's contention of no business exploration, the Tribunal noted the business relationships with Maldives-based entities and previous software installations. Considering the details provided and past decisions, the Tribunal upheld the Ld. CIT(A)'s decision to delete the disallowance, rejecting the Revenue's appeal.

4. Disallowance on expenditure made on client hardware:
In the case of expenditure on client hardware, the AO disallowed the amount based on the date of agreement, considering it as not related to the current year. The Tribunal reviewed the ongoing agreement and the obligation to supply hardware, ultimately upholding the Ld. CIT(A)'s decision to delete the disallowance. The Tribunal found the liability for the expenditure arose during the year, contrary to the AO's assertion, and rejected the Revenue's claim on this issue.

5. Validity of assessment under section 143(3) and service of notice under section 143(2):
The Assessee's Cross Objection raised concerns about the assessment under section 143(3) and the service of notice under section 143(2). The Tribunal dismissed the Cross Objection as the decisions of the Ld. CIT(A) were upheld on all issues, and the Assessee's grounds were not contested. Consequently, the Tribunal dismissed both the Revenue's appeal and the Assessee's Cross Objection, affirming the Ld. CIT(A)'s orders.

In conclusion, the Appellate Tribunal ITAT DELHI ruled in favor of the assessee on various disallowances and upheld the decisions of the Ld. CIT(A) on all issues, resulting in the dismissal of both the Revenue's appeal and the Assessee's Cross Objection.