2012 (6) TMI 516 - AT - Income Tax

Unexpired value of Annual Maintenance Contracts - addition - Held that - Undisputedly, said amount pertained to unexpired period of AMC falling outside the end of the relevant previous year. The clients of the assessee could at any point cancel the contract and get a refund for the unexpired period. This itself meant that the amount received by the assessee at the point of time it entered into an AMC was nothing but an advance, which on the progress of each day got converted into revenue. Therefore, following Principle of matching concept of income and expenses, assessee was justified in not recognizing revenue for the unexpired period of AMC - Decided in favor of assessee. DTAA between India and Mauritius - payment made to Mauritius company for conducting market survey for exploring Opportunities in Asia for Electronics - Revenue contended the same to be FTS and dis-allowed expenditure u/s 40(a)(ia) on account of non-deduction of tax at source - Held that - Since, such a market survey definitely involved exercise of technical knowledge and skill by the persons, therefore, by virtue of Explanation 2 to Section 9(1)(vii), the type of service received was nothing but fees for technical services. However, Chapter III of DTAA between India and Mauritius did not provide for taxing any fees paid for technical services. Only for a reason that DTAA is silent on a particular type of income, such income will not automatically become business income of the recipient. Hence, when DTAA is silent on an aspect, the provisions of the Act has to be considered and applied. Therefore, matter remitted back to A.O. for consideration afresh.

Summary

Issues:
1. Deletion of addition made on account of unexpired value of Annual Maintenance Contracts.
2. Deletion of addition made for non-deduction of tax at source under Section 40(a)(i) of the Income-tax Act, 1961.

Issue 1: Deletion of Addition on Unexpired Value of Annual Maintenance Contracts:
The case involved the appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-III, Chennai, regarding two core issues. The first issue was the deletion of an addition made by the Assessing Officer (A.O.) for the unexpired value of Annual Maintenance Contracts (AMCs) received by the assessee. The A.O. contended that income accrued to the assessee at the time of raising the invoice for the AMC and thus the full amount should be shown as income. However, the assessee argued that only the revenue pertaining to the AMCs within the relevant previous year should be recognized. The CIT (Appeals) appreciated the assessee's contention and deleted the addition. The Income Tax Appellate Tribunal (ITAT) upheld the decision of the CIT (Appeals), stating that the income accrued on a day-to-day basis and the obligation to refund the unexpired value of AMC existed if the contract was canceled by customers. The principle of matching concept of income and expenses supported the assessee's claim, justifying the recognition of income only in the subsequent year.

Issue 2: Deletion of Addition for Non-Deduction of Tax at Source:
The second issue revolved around the deletion of an addition made under Section 40(a)(i) of the Income-tax Act. The assessee had made payments to a non-resident company for a market survey, and the A.O. held that tax should have been deducted at source under Section 195 of the Act. The CIT (Appeals) ruled in favor of the assessee, stating that the income earned by the non-resident company was not taxable in India as the services were rendered outside India. The ITAT acknowledged that the market survey involved technical knowledge and skill, constituting fees for technical services. However, the ITAT noted that the argument based on the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius was not presented before the A.O. The ITAT remitted the issue back to the A.O. for fresh consideration, emphasizing that the provisions of the Act should be applied when DTAA is silent on a particular type of income. The ITAT allowed the Revenue's appeal for statistical purposes.

In conclusion, the ITAT upheld the deletion of the addition on the unexpired value of Annual Maintenance Contracts but remitted the issue of non-deduction of tax at source back to the A.O. for reconsideration in light of the DTAA provisions and the Act.