2016 (6) TMI 1393 - AT - Income Tax

Unearned income as per sec. 145(2) - any class of income to be disclosed and notified in the Central Government by Official Gazette - HELD THAT - Revenue earned by the assessee from software and consultancy services was recognized on delivery of goods / services, that as per the existing scheme, M/s. Satyam Education Services Limited was assigned 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) 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 cannot be subjected to the applicability of TDS provisions contained in the Act . Therefore, in view of the same and in order to maintain consistency, we rely on the above said order of the ITAT and decide the grounds against the Revenue. TDS u/s 195 - Overseas expenditure on recruitment - Departmental Representative explained that assessee has not proved the nature of expenditure incurred outside India and also no evidence was produced. AR explained that is expenditure in incurred for Branch Office at Australia which do not have permanent establishment in India and such payments are not in the nature of technical services or technical knowledge. We on perusal of the assessment order, found that the ld. Assessing Officer has not discussed on the permanent establishment or the type of expenditure incurred with complete details and the findings of assessment order that the assessee has failed to provide details of TDS and summary of expenditure incurred - matter has to be re-examined to verify to the expenditure and genuineness of permanent establishment and business connection of the assessee. Hence, we remit entire issue to the file of Assessing Officer to verify the claim and pass the order. This ground of the Revenue is allowed for statistical purpose. Allowability of Employee Stock Option Cost (ESOP) - revenue or capital expenditure - only contention of the Department that the expenditure is in the nature of capital in nature and the decision relied by the CIT (Appeals) has not attained finality - HELD THAT - We perused the order of CIT (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 through SEBI guidelines and expenditure is in the nature of Revenue expenditure and claimed deduction and ld. Authorised Representative supported his arguments with decision of Jurisdictional High Court in the case of CIT vs. PVP Ventures Ltd 2012 (7) TMI 696 - MADRAS HIGH COURT wherein it held that staff welfare expenditure incurred by the assessee in respect of Employees Staff Option Plan as per SEBI guidelines is an ascertained liability and is allowable as expenditure in computation of income. Considering the jurisdictional High Court decision, 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 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 and depreciation but not on individual value of assets. Under sec. 2(42C) of the Act, the slump sale is defined as sale for lumpsum consideration without assigning any value to he individual assets . At the time of hearing, the ld. Authorised Representative argued that even if some assets and liabilities are not transferred it will be a slump sale. Prime facie it is not clear whether sale is by a lock, stock and barrel or assigning the value of individual assets. Considering apparent facts, valuation report and decisions, we are of the opinion that the matter has to be reexamined. We remit the disputed issue to the file of the Assessing Officer to consider afresh the grounds of the Revenue and allow the ground for statistical purpose.

Summary

Issues Involved:

1. Deletion of addition towards 'unearned income'.
2. Deletion of addition under Section 40(a)(i) towards 'networking and communication costs'.
3. Deletion of disallowance of 'recruitment expenses' and other expenses.
4. Employee Stock Option Cost (ESOP) as revenue expenditure.
5. Depreciation on goodwill and intangible assets.
6. Treatment of profit on IP/VPN business sale as long-term capital gains or business income.
7. Disallowance under Section 40(a)(ia) for networking cost.
8. Disallowance under Section 40(a)(i) for direct cost, content development cost, and legal and professional charges.

Detailed Analysis:

1. Deletion of Addition Towards 'Unearned Income':

The Revenue challenged the deletion of ?18,34,52,000/- towards 'unearned income' by the CIT(A), arguing that the relied upon order was not final and was pending appeal. The Tribunal upheld the CIT(A)'s decision, referencing the assessee's consistent accounting method and previous favorable decisions, including the Coordinate Bench's ruling in ITA No.1084/Mds/2012 for AY 2002-03. The Tribunal found no reason to deviate from the established practice and dismissed the Revenue's ground.

2. Deletion of Addition Under Section 40(a)(i) Towards 'Networking and Communication Costs':

The Revenue contested the deletion of ?16,22,09,000/- under Section 40(a)(i) for networking and communication costs, arguing that these expenses should be subject to TDS. The Tribunal referred to the Coordinate Bench's decision in ITA No.1084/Mds/2012 for AY 2002-03, which held that such payments do not attract TDS provisions. The Tribunal upheld the CIT(A)'s decision, noting that the payments were for services rendered outside India and did not constitute royalty or technical services under Section 9(1)(vi) and 9(1)(vii) of the Act.

3. Deletion of Disallowance of 'Recruitment Expenses' and Other Expenses:

The Revenue argued that the CIT(A) erred in deleting the disallowance of ?29,38,000/- for recruitment expenses and ?1,64,53,286/- for other expenses, asserting that these should be taxed in India. The Tribunal found that the CIT(A) correctly held that these expenses were incurred for business operations in Australia and were not subject to Indian tax laws. However, the Tribunal remitted the issue back to the Assessing Officer for re-examination, requiring verification of the nature of expenses and the existence of a permanent establishment.

4. Employee Stock Option Cost (ESOP) as Revenue Expenditure:

The Revenue challenged the allowance of ?1,15,91,445/- for ESOP as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, which relied on the Chennai Tribunal's decision in the case of SSI Ltd vs. DCIT and the jurisdictional High Court's ruling in CIT vs. PVP Ventures Ltd. The Tribunal concluded that ESOP costs are akin to staff welfare expenses and are allowable as revenue expenditure.

5. Depreciation on Goodwill and Intangible Assets:

The Revenue contested the allowance of depreciation on goodwill and intangible assets valued at ?11,27,14,945/-. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT vs. SMIFS Securities Ltd, which classified goodwill as an asset under Explanation 3(b) to Section 32(1) of the Act. The Tribunal found that the assessee's payment for business acquisition included goodwill, which is eligible for depreciation.

6. Treatment of Profit on IP/VPN Business Sale as Long-Term Capital Gains or Business Income:

The Revenue argued that the profit of ?43,64,69,634/- from the sale of the IP/VPN business should be treated as business income, not long-term capital gains. The Tribunal noted the CIT(A)'s reliance on the valuation report and the definition of slump sale under Section 2(42C) of the Act. However, the Tribunal remitted the issue back to the Assessing Officer for re-examination, requiring a clear determination of whether the sale was a lock, stock, and barrel transaction or involved assigning individual asset values.

7. Disallowance Under Section 40(a)(ia) for Networking Cost:

The Revenue's ground regarding the disallowance of ?73,78,95,119/- under Section 40(a)(ia) for networking cost was dismissed by the Tribunal, referencing its earlier decision in ITA No.435/Mds/2010 for AY 2001-02, which upheld the CIT(A)'s deletion of such disallowances.

8. Disallowance Under Section 40(a)(i) for Direct Cost, Content Development Cost, and Legal and Professional Charges:

The Revenue's ground regarding the disallowance under Section 40(a)(i) for direct cost, content development cost, and legal and professional charges was dismissed by the Tribunal, following its earlier decision in ITA No.435/Mds/2010 for AY 2001-02, which upheld the CIT(A)'s deletion of these disallowances.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on most grounds, including the deletion of additions for unearned income, networking and communication costs, and ESOP expenses. It also confirmed the allowance of depreciation on goodwill and the treatment of certain expenses as not subject to TDS. However, the Tribunal remitted the issues of recruitment expenses and the treatment of profit on the IP/VPN business sale back to the Assessing Officer for further examination. The appeals were partly allowed for statistical purposes.