2017 (7) TMI 606 - AT - Income Tax

TDS U/S 194J - internet services, i.e. leased line benefits/broadband services - whether in the nature of technical services - TDS liability - Held that - The expenditure in question incurred by the assessee are in respect of internet charges and communication and service charge paid to three companies. There is no dispute that the payment for uses of internet of the width cannot be considered as Fees for Technical Services in view of the decision of Hon ble High Court in the case of CIT Vs. Estel Communcations Pvt. Ltd. (2008 (3) TMI 327 - DELHI HIGH COURT ), we do not find any error or illegality in the order of the impugned order of CIT (Appeals) on this issue. Addition made under Section 41(1) - Held that - The assessee has claimed that this amount was capitalized in the books of account and therefore no claim was made by the assessee as an expenditure in respect of this amount. However this fact was not pointed out before the Assessing Officer and therefore in the absence of verification of the relevant record regarding the fact that the assessee has not claimed this amount in the computation of income in any of the earlier years in our opinion the CIT (Appeals) should have asked a remand report from the Assessing Officer before giving the finding on this issue. Accordingly, in the facts and circumstances of the case and in the interest of justice we remit this issue to the record of the Assessing Officer for limited purpose of verifying the fact as to whether this amount was capitalized by the assessee and not claimed as an expenditure. Disallowance u/s 40(a)(ia) - depreciation on Intellectual Property Rights ( IPR ) - Held that - As regards the applicability of the provisions of Section 40(a)(ia) of the Act for disallowance of claim of depreciation, we find that when the assessee has capitalised this amount and not claimed as a revenue expenditure then the claim of depreciation cannot be disallowed by invoking the provisions of Section 40(a)(ia) of the Act.

Summary

Issues Involved:
1. Classification of internet services as technical services under Section 194J.
2. Addition under Section 41(1) for cessation of liability.
3. Disallowance under Section 40(a) for depreciation on Intellectual Property Rights (IPR).

Issue-wise Detailed Analysis:

1. Classification of Internet Services as Technical Services under Section 194J:
The primary issue was whether payments for leased line benefits/broadband services constituted "Fees for Technical Services" under Section 194J, necessitating Tax Deducted at Source (TDS). The Assessing Officer disallowed ?3,30,964, arguing these were technical services. However, the Commissioner of Income Tax (Appeals) (CIT(A)) reversed this decision, citing the Mumbai Tribunal's decision in Pacific 27 SOT 573 and the Delhi High Court's ruling in CIT Vs. Estel Communications Pvt. Ltd. 318 ITR 185. The Tribunal upheld the CIT(A)'s decision, stating, "there is no dispute that the payment for uses of internet of the width cannot be considered as Fees for Technical Services."

2. Addition Under Section 41(1) for Cessation of Liability:
The Assessing Officer added ?3,37,553 to the assessee's income, claiming it was a cessation of liability to M/s. Ruprah Interiors. The CIT(A) deleted this addition, accepting the assessee's argument that the amount was capitalized for interior work and not claimed as expenditure. The Tribunal noted, "if the assessee has not claimed the amount in question as expenditure at any point of time then at the time of written back of this amount has no longer payable would not be treated as income as per the provisions of Section 41(1) of the Act." However, since the relevant records were not verified, the Tribunal remanded the issue to the Assessing Officer for verification.

3. Disallowance Under Section 40(a) for Depreciation on Intellectual Property Rights (IPR):
The assessee purchased IPR from Tally Solutions FZ LLC, Dubai, for ?53,67,52,595 and claimed depreciation of ?6,70,94,074. The Assessing Officer disallowed this, treating the payment as royalty and noting no TDS was deducted, invoking Section 40(a)(ia). The CIT(A) reversed this disallowance, referencing decisions in SKOL Beverages 142 ITD 49 and SMS Demag Pvt. Ltd. Vs. DCIT. The Tribunal upheld the CIT(A)'s decision, stating, "when the assessee has capitalized this amount and not claimed as a revenue expenditure then the claim of depreciation cannot be disallowed by invoking the provisions of Section 40(a)(ia) of the Act." The Tribunal also cited the jurisdictional High Court's decision in CIT Vs. Samsung Electronics Co. Ltd. 345 ITR 494, affirming that payments for IPR in software are considered royalty.

Conclusion:
The appeal of the revenue was partly allowed. The Tribunal upheld the CIT(A)'s decisions on the classification of internet services and the disallowance under Section 40(a) for depreciation on IPR. However, the issue of addition under Section 41(1) was remanded to the Assessing Officer for further verification.