2016 (7) TMI 1333 - AT - Income Tax

Reopening of assessment - reason to believe - Held that - The re-assessment proceedings have rightly been initiated after forming opinion that some income chargeable to tax as escaped assessment u/s.147 of the Act, after amendment to sec.147 of the Act with effect from 01.04.1989, wide power has been given to the AO, even to reopen the cases where the assessee has fully disclosed material facts. The only condition for reassessment is that the AO should have reasoned to believe that income chargeable to tax had escapement. Such belief can be reached in any manner and is not quantified by pre-condition of full and true disclosure of material facts by the assessee as contemplated in the pre-amended section 147(a) of the Act. Reopening in this case is done on defined reasons of non dection of tds TDS u/s 195 - allowance of Bandwidth Connectivity charges for non deduction of TDS from the said payment - Held that - The payment is nothing but a royalty as defined under clause (i) of Explanation 2 to section 9(1)(vi) read with Explanation 6 to section 9(1)(vi) of the Income Tax Act. As such, the provisions of the section 195 is applicable and since the assessee has not deducted TDS and the payment is disallowed u/s.40(a)(i) of the Act is justified. See Verizon Communications Singapore Pte Ltd. 2013 (11) TMI 1058 - MADRAS HIGH COURT . This ground raised by the assessee is dismissed. Disallowance of fees for technical services made u/s.40(a)(i) - Held that - The assessee is liable to deduct TDS u/s.195 of the Act and the assessee failed to deduct the TDS and the same is disallowed u/s.40(a)(i) of the Act. Hence, this ground raised by the assessee is rejected. Disallowance of Repairs and Maintenance - revenue or capital - Held that - This issue came up for consideration before this Tribunal in the case of M/s. K.R.Bakes Pvt. Ltd. 2015 (5) TMI 1035 - ITAT CHENNAI wherein held in order to find out the nature of expenditure, it is necessary to find out the nature of construction put up, the purpose of construction/renovation and the use to which the construction put up and also if it is a case of repair, replacement, addition or improvement has to be gone into. It is only on the aforesaid material, keeping in mind the principles enunciated in the judgments by the Supreme Court and keeping in mind section 37 and section 32 of the Act, that one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. The assessee had not stated the nature of civil works constructed, the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. In the absence of that material and without proper application of mind, the assessing authority proceeded on the footing that the expenditure constituted capital expenditure. In view of the above, we remit the issue in dispute to AO to consider whether the expenditure is revenue or capital in nature and decide afresh.

Summary

Issues Involved:

1. Reopening of assessment after four years.
2. Disallowance of Bandwidth Connectivity charges for non-deduction of TDS.
3. Disallowance of fees for technical services under Section 40(a)(i).
4. Disallowance of Repairs and Maintenance expenses as capital expenditure.

Detailed Analysis:

1. Reopening of Assessment After Four Years:

The first common ground in ITA Nos. 1330, 1331 & 1333/Mds./15 pertains to the reopening of assessment after the end of four years from the relevant assessment year. The assessee had initially filed returns for the assessment years 2003-04 and 2005-06, which were subsequently scrutinized and assessed under Section 143(3). However, the AO reopened the assessments on the grounds that the assessee had not fully disclosed details of Bandwidth connectivity charges and fees for Technical Services, leading to the issuance of a notice under Section 148. The CIT(A) upheld the reopening, relying on various judgments, emphasizing that the AO's belief that income chargeable to tax had escaped assessment was sufficient for reopening under the amended Section 147. The Tribunal found no grounds to interfere with the CIT(A)'s findings, confirming that the reassessment proceedings were rightly initiated.

2. Disallowance of Bandwidth Connectivity Charges for Non-Deduction of TDS:

The next issue in ITA Nos. 1330, 1331 & 1333/Mds./15 concerns the disallowance of Bandwidth Connectivity charges due to non-deduction of TDS under Section 195. The assessee argued that the payments did not constitute income received in India and were not taxable in the hands of the recipients. However, the lower authorities disallowed the payments under Section 40(a)(i), citing that the payments were akin to 'royalty' as defined under Section 9(1)(vi) and required TDS deduction. The Tribunal upheld this view, referencing the jurisdictional High Court's decision in the case of Verizon Communications Singapore Pte Ltd., which classified similar payments as 'royalty' and taxable under Section 9(1)(vi).

3. Disallowance of Fees for Technical Services Under Section 40(a)(i):

The third issue in ITA Nos. 1330 & 1331/Mds./15 involves the disallowance of fees for technical services due to non-deduction of TDS. The assessee had made payments to Technip Italy for technical services rendered in Chennai, arguing that the income did not accrue in India and thus did not require TDS deduction. The AO, relying on precedents such as Van Oord ACZ India Pvt. Ltd. and Timken India Ltd., disallowed the expenditure. The CIT(A) upheld this disallowance, noting that the assessee was aware of the need for TDS deduction, as evidenced by previous applications for non-deduction certificates. The Tribunal found no infirmity in the CIT(A)'s order, confirming the disallowance under Section 40(a)(i).

4. Disallowance of Repairs and Maintenance Expenses as Capital Expenditure:

The final issue in ITA No. 1332/Mds./15 pertains to the disallowance of Repairs and Maintenance expenses, treating them as capital expenditure. The assessee had incurred significant expenses on a leased building, which the AO treated as capital expenditure, allowing only depreciation. The CIT(A) upheld this view, rejecting the claim that the expenses were revenue in nature. The Tribunal referred to a previous decision in the case of M/s. K.R. Bakes Pvt. Ltd., which emphasized the need to determine whether such expenses result in enduring benefits and should be treated as capital expenditure. Consequently, the issue was remitted to the AO for fresh consideration.

Conclusion:

The appeals in ITA Nos. 1330, 1331 & 1333/Mds./15 were dismissed, affirming the disallowances and reassessment proceedings. The appeal in ITA No. 1332/Mds./15 was partly allowed for statistical purposes, with the issue remitted to the AO for fresh consideration.