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2018 (11) TMI 1582 - AT - Income TaxTDS u/s 195 OR 192 - Disallowance of Project Management Expenses on ground of non deduction of Tax at Source - Reimbursement of salary - Held that - Reimbursement of salary to LOR Cyprus is not in the nature of any technical or consultancy fee and that the same falls outside the purview of Articles 12 and 13. Our view is supported from the decision of DCIT vs. Mahanagar Gas Ltd. 2016 (5) TMI 27 - ITAT MUMBAI and ADIT vs. Marks and Spencers Reliance India P. Ltd. 2017 (5) TMI 1638 - BOMBAY HIGH COURT which has been affirmed by the Hon ble Bombay High Court. Accordingly, we are of the considered view that it is only the mark up which is liable to withholding tax u/s 195 of the Act and not the reimbursement of actual cost to LOR Cyprus. At this juncture, it will also be relevant to take note of another important submission of the Ld. AR in which it has been clarified that the non-resident LOR Cyprus has deducted TDS u/s 192 of the Act while making payments to the seconded employees and as such there is no loss to the revenue. Payments have been charged to tax in India u/s 192, the assessee could not be treated as assessee in default for non-deduction of TDS - Disallowance of the project management expenses u/s 40(a)(i) r.w.s. 195 of the Act has rightly been deleted. Disallowance of interest expenses on estimated rate of 12% on the ground that same pertains to Capital Work In Progress (CWIP) - Held that - DR was not able to controvert the factual and legal findings of the Ld. CIT (Appeals) wherein the disallowance has been deleted by holding that the CWIP is towards current business needs and same could not be considered as capital in nature. The Ld. CIT (Appeals) has also held that the respondent/assessee has sufficient own funds and further that the net worth of the company is far more than the value of CWIP and as such there is no nexus between the borrowed funds and the CWIP. We also note that the assessing officer has accepted the claim of interest in AY 2011-12 wherein, on identical facts, no such disallowance was made. In these circumstances, the department cannot be allowed to agitate this issue in the year under reference. Capitalization of Software expenses - AO was of the view that Software expense incurred by the respondent/assessee is of capital nature and same is required to be clubbed with Computer and other peripherals - AO made a disallowance after allowing depreciation @ 60% - Held that -Admittedly, the expenses claimed under the head software expense include AMC, consumables and license fee. We are conscious of the fact that the expenses towards AMC, consumables and license fee are regular feature in modern business particularly big organizations like the respondent/ assessee which is obliged to incur these expenses every year. Also, the very nature of these expenses is such that the subscriber/purchaser only gets the right to use for a limited period of time and as such it could not be said these expenses provide any benefit of enduring nature. It is also relevant to take note of the fact that no new asset has comes into existence by incurring of such expenses and even the assessing officer has accepted the claim with regard to AMC expenses in AY 2011-12. The finding and reasoning of the CIT (Appeals) that software expenses are of revenue nature is well founded and in consonance with decision of the Hon ble Jurisdictional High Court in the case of CIT v. G.E. Capital Services Ltd. 2007 (7) TMI 185 - DELHI HIGH COURT which has been followed in the case of the sister-concern of the respondent/assessee DLF Home Developers Ltd.. Accordingly, we hereby confirm the order of the Ld. CIT (Appeals) and uphold the deletion of disallowance of software expenses - Revenue appeal dismissed.
Issues Involved:
1. Disallowance of Project Management Expenses due to non-deduction of Tax at Source (TDS) under Section 195 of the Income Tax Act, 1961. 2. Disallowance of interest expenses on the ground that it pertains to Capital Work In Progress (CWIP). 3. Capitalization of Software expenses. Issue-wise Detailed Analysis: 1. Disallowance of Project Management Expenses: The respondent/assessee made a payment of ?6,65,79,242 to a Cyprus-based company, LOR Cyprus, for manpower supply under a Manpower Supply Agreement. The assessing officer disallowed these expenses under Section 40(a)(i) due to non-deduction of TDS on the entire amount under Section 195. The Ld. CIT (Appeals) deleted the disallowance, noting that TDS was deducted on the 5% mark-up, and the actual cost component was merely a reimbursement of salaries, on which TDS was deducted by LOR Cyprus under Section 192. The Tribunal upheld this decision, emphasizing that the reimbursement of actual costs does not constitute income and therefore does not attract TDS under Section 195, in line with the Supreme Court ruling in GE India Technology Ltd. vs. CIT. 2. Disallowance of Interest Expenses: The assessing officer disallowed ?49,01,176 of interest expenses, estimating a 12% interest rate on CWIP, arguing that interest attributable to CWIP is not allowable as a revenue expense. The Ld. CIT (Appeals) deleted this disallowance, stating that the respondent/assessee had sufficient own funds and there was no proven nexus between borrowed funds and CWIP. The Tribunal upheld this decision, noting that the assessing officer failed to provide a basis for the estimation and did not establish any nexus between the borrowed funds and CWIP. The Tribunal also noted that in the assessment year 2011-12, no such disallowance was made on similar facts. 3. Capitalization of Software Expenses: The assessing officer categorized software expenses of ?1,03,95,322 as capital in nature and made a disallowance of ?65,70,768 after allowing depreciation. The Ld. CIT (Appeals) deleted this disallowance, observing that the expenses included Annual Maintenance Costs (AMC), consumables, and license fees, which are not of enduring nature and are incurred on a year-to-year basis. The Tribunal upheld this decision, agreeing that these expenses do not provide any enduring benefit and are thus revenue in nature. The Tribunal referenced the Delhi High Court's decision in CIT v. G.E. Capital Services Ltd., which supports treating such expenses as revenue expenditure. Conclusion: The Tribunal dismissed the revenue's appeal, upholding the Ld. CIT (Appeals)'s decisions on all three issues. The Tribunal found no justification for interfering with the deletion of disallowances related to project management expenses, interest expenses, and software expenses.
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