2022 (6) TMI 228 - AT - Income Tax

Deduction u/s 80JJAA - AO disallowed the claim holding that the business of software development will not fall under the category of industrial undertaking, assessee is not engaged in the business of manufacturing or production of articles or things and the employees, being software engineers, would not fall under the definition of workmen as defined u/s 80JJAA - HELD THAT - We notice that the various contentious issues with regard to the deduction allowable u/s 80JJAA of the Act has been resolved in the case of CIT vs. Texas Instruments India P Ltd 2021 (4) TMI 1049 - KARNATAKA HIGH COURT . Both the parties agreed that this issue may be restored to the file of the assessing officer for examining it afresh in the light of decision rendered by Hon ble jurisdictional High Court, referred above. Nature of expenses - disallowance of annual maintenance contract and software expenses claimed as revenue expenses - HELD THAT - We hold that there is no requirement of disallowance made u/s 40(a)(i)/40(a)(ia) as the payments have been made prior to the decision rendered in the case of Samsung Electronics Co 2009 (9) TMI 526 - KARNATAKA HIGH COURT - Accordingly, we set aside the order passed by CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(i)/40(a)(ia). For capitalisation of software expenses - We are of the view that this issue also requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by CIT(A) on this issue and restore the same to the file of AO with the direction to examine this issue, follow the above cited binding decisions of the jurisdictional High Court and take appropriate decision. The assessee is also directed to furnish all the relevant information to the AO. Disallowance of claim of communication expenses - As submitted that the said payment does not quality to be royalty as per Article 12 of India-US treaty and hence it is not liable for tax deduction at source - AO, however, held that the assessee would be liable to deduct tax at source on the above said payment in terms of sec. 9(1)(vi) of the Act and accordingly disallowed the above said expenditure - HELD THAT - In the instant case, the assessee has reimbursed the data link charges to its AE, which in turn has entered into agreement with third party vendors for providing data link facility. It can be noticed that the assessee has made the payment for using the facility provided by a third party vendor. Accordingly, following the decisions rendered in the above cited cases, we hold that this payment shall not fall under the category of royalty within the meaning of Article 12 of DTAA. Since it is not shown that the provider of the link facility had permanent establishment in India, the payment cannot be taxed in India and hence the provisions of sec.195 are not applicable. We noticed that the AO/CIT(A) relied upon the Explanations 5 6 inserted in sec. 9(1)(vi) of the Act by Finance Act, 2012. Since it is a prospective amendment, the disallowance u/s 40(a)(i) cannot be invoked for the year under consideration relying upon the above said amendment. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. Disallowance of Legal and Professional fees u/s 40(a)(i) - HELD THAT - In the instant case, the assessee has availed legal and professional services in USA. In the above said case, it has been held that the professional services would not fall under the category of Fee for technical services within the meaning of sec. 9(1)(vii) - Following the same, we hold that the view taken by Ld CIT(A) cannot be sustained. Under Sec. 90(2) of the Act, the provisions of the Income tax Act are required to be applied only if they are more beneficial to the assessee. We noticed that under the Income tax Act, this receipt is not taxable in India in the hands of non-residents. Hence, the provisions of Income tax Act are more beneficial to the non-residents. There is no necessity to refer to the provisions of India-USA DTAA. In any case, we notice that, in order to bring the impugned payments within the Article 12 of India-USA DTAA, the services should have been made available technical knowledge etc to the assessee herein. In the instant case, the assessee has only availed professional services of non-residents in connection with tax compliances and the technical knowledge has not been made available . Since the make available clause fails, the impugned payments cannot be taxed as Fee for Included services under Article 12 of the India-USA DTAA. In this view of the matter, there is no necessity to refer to Article 15 also. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of legal and professional fees made u/s 40(a)(i). - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of deduction claimed u/s 80JJAA of the Act.
2. Disallowance of expenses on Annual maintenance contract and software expenses.
3. Disallowance of communication expenses.
4. Disallowance of Legal and Professional fees.
5. Deduction of education cess paid.

Detailed Analysis:

1. Disallowance of Deduction Claimed u/s 80JJAA of the Act:
The assessee claimed a deduction of Rs.26.87 crores u/s 80JJAA, which allows for an additional deduction of 30% of the additional wages paid to 'new regular workmen' for three assessment years. The AO disallowed the claim on three grounds: the business of software development does not qualify as an industrial undertaking, the assessee is not engaged in manufacturing or production, and software engineers do not fall under the definition of "workmen" as per the Act. The CIT(A) disagreed with these views but confirmed the disallowance on other grounds. The Tribunal referred to the Karnataka High Court's decision in CIT vs. Texas Instruments India P Ltd, which clarified that software engineers qualify as workmen under Section 2(s) of the Industrial Disputes Act. The Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for fresh examination in light of the Karnataka High Court's decision.

2. Disallowance of Expenses on Annual Maintenance Contract and Software Expenses:
The assessee incurred software expenditure of Rs.32.87 crores, including Rs.17.50 crores for annual maintenance charges and Rs.15.37 crores for software purchases. The AO disallowed Rs.11.42 crores for non-deduction of tax at source and capitalized the remaining Rs.21.45 crores, allowing depreciation on it. The CIT(A) upheld the disallowance of Rs.11.42 crores, citing the Karnataka High Court's decision in CIT vs. Samsung Electronics Co Ltd, which treated software purchases as royalty requiring TDS. For the remaining amount, the CIT(A) directed the AO to examine the claim afresh. The Tribunal noted that the decision in Samsung Electronics was rendered after the relevant assessment year and cited the doctrine of "impossibility of performance" to hold that the assessee could not have anticipated the future ruling. The Tribunal also referenced the Supreme Court's reversal of the Samsung Electronics decision in Engineering Analysis Centre of Excellence P Ltd vs. CIT. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance.

3. Disallowance of Communication Expenses:
The assessee paid Rs.2,45,89,919/- to its AE for data link charges, which the AO disallowed for non-deduction of tax at source, treating it as royalty under Section 9(1)(vi). The CIT(A) upheld the disallowance, relying on the Madras High Court's decision in Verizon Communications Singapore Pte Ltd vs. ITO. The Tribunal, however, referred to decisions by the Delhi and Bombay High Courts and the Bangalore Tribunal, which held that payments for bandwidth or data link facilities are not royalty. The Tribunal also noted that the amendments to Section 9(1)(vi) by the Finance Act, 2012, are prospective and cannot be applied retrospectively. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance.

4. Disallowance of Legal and Professional Fees:
The AO disallowed Rs.4,73,18,208/- paid to foreign legal firms for non-deduction of tax at source. The assessee argued that the payments were for services rendered and consumed outside India and thus not taxable under the India-USA DTAA. The CIT(A) rejected this, holding that the payments were for technical services under Section 9(1)(vii) and taxable in India. The Tribunal referred to the Delhi Tribunal's decision in Sh. Chander Mohal Lall vs. ACIT, which held that professional services do not qualify as technical services under Section 9(1)(vii). The Tribunal concluded that the payments were not taxable in India and directed the AO to delete the disallowance.

5. Deduction of Education Cess Paid:
The assessee raised an additional ground for deduction of education cess. The Tribunal dismissed this ground in light of the Finance Act, 2022, which mandates the disallowance of such claims.

Conclusion:
The appeal was partly allowed, with the Tribunal setting aside the disallowances related to deductions u/s 80JJAA, software expenses, communication expenses, and legal and professional fees, while dismissing the claim for deduction of education cess.