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TMI Blog2013 (11) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee can claim depreciation @ 25%. Disallowance of Unearned Income - Whether the CIT(A) erred in deleting the addition made by the assessing officer towards 'unearned income' – Following CIT vs. Dinesh Kumar Goel [2010 (10) TMI 287 - Delhi High Court] - Mercantile system of accounting – Fees for full course of package received in advance – Service to be rendered in next financial year – income not recognized unless service rendered – Income does not accrue - There was hardly any strife between the parties about the amount received qua ‘unearned income’ and payment made by the assessee without deducting tax at source - Per Revenue, the assessee’s unearned income was liable to be taxed and the payments made was royalty which requires tax deduction at source which was disputed by the assessee - decided in favor of assessee. Applicability of TDS provisions - Payment made by the assessee to foreign entities - Held that:- Following CIT Vs. Smt. Godavari Devi Saraf [1977 (9) TMI 24 - BOMBAY High Court] - After going through the operative portion, there was no iota of doubt that the payments in question made by the assessee cannot be subjected to the applicability of TDS pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease in value of investment amounting to Rs.121,97,73,000/-. In scrutiny proceedings, the Assessing Officer noticed that the assessee had debited an amount of 3,12,21,000/- in its profit and loss account as software package for its own use. In support thereof, it pleaded that the software was used for its regular operations. Further, it also acknowledged before the Assessing Officer its eligibility for claim of depreciation. Still it emphasized that the software in question had much shorter life span rendering it obsolete very quickly. As we notice from the assessment order, the Assessing Officer rejected assessee s contention for want of evidence and held that the expenditure to be capital in nature. In the assessment order dated 10.02.2004, he also restricted the depreciation @ 25% [as applicable to general plant, machinery and technical know-how]. 7. In assessee s appeal, the CIT(A) has deleted the addition made by the Assessing Officer aforesaid by placing reliance on the case law of Hon ble Jurisdictional High Court reported as [2006] 288 ITR 15 CIT vs. Southern Roadways Ltd. Therefore, the Revenue is aggrieved. 8. We have heard both parties at length, perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy been preferred. 2.3. Having regard to the Hon'ble Kerala High Court decision in the case of CIT v. Southern Cables Engineering. Works (289 ITR 167), the learned CIT(A) ought to have upheld the action of the assessing officer. 3.1. The learned CIT(A} erred in deleting the addition made u/s.40(a)(i) of Rs.21,52,68,531/- by holding that the payments to non-residents would neither be royalty nor would it be fees for technical services, relying, inter alia, on the order of the learned CIT(A)-XI in the assessee's own case In ITA No.CIT(A)-XI/CHE/17/06-07 dated 28.3.2008. 3.2. It is submitted that the order, relied upon, has not become final and appeal against the same has been preferred before the Hon'ble Chennai Tribunal. 3.3. Without prejudice to the above ground, the learned CIT(A) ought to have noted that, even if the impugned transaction between the assessee and the non-residents cannot be classified as royalty or technical services, In view of the decision of the Hon'ble Apex Court in the case of, CIT v. R.D. Agarwal and Company (56 ITR 20), there was business connection between the two entities, warranting assessment of the Income of the non-residents In I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd urged for their restoration. 17. Opposing this, the AR representing the assessee has relied on CIT(A) s order and reasons contained therein. To buttress the same, he submitted that both grounds above said are squarely covered by the decision of ITAT, Chennai for the assessment year 2003-04 in I.T.A. No. 1954/Mds/2007 decided on 26.05.2007, [2011] 331 ITR 10 (Delhi) CIT vs. Dinesh Kumar Goel, order dated 02.02.2012 passed in I.T.A. Nos. 1277 1283/Mds/2008 for the assessment year 2002-03 2003-04 and in I.T.A. No. 1084/Mds/2012 for the assessment year 2002-03 decided on 20.11.2012. 18. In rebuttal, the DR has sought to distinguish the above said case law by submitting that the facts of the case in hand are different than those involved therein. 19. We have heard rival contentions, perused the orders of Assessing Officer and CIT(A) as well as case law above said. Undisputedly, in both grounds, there is hardly any strife between the parties about the amount received qua unearned income and payment made by the assessee without deducting tax at source. Per Revenue, the assessee s unearned income is liable to be taxed and the payments made of Rs.21,52,68,531/- is royalty whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t delivered sify e-learning needs to refund the amount in full to the customer." 32. The AO rejected the explanation and added Rs. 39,68,208 for the reasons given in his order as under: "4. The system of accounting followed by the assessee was mercantile. In such method of accounting the receipt on sale needs to be re recognized once an sales invoice was raised. Once a customer is billed, there can be no other treatment except to recognize the sale in the assessee's books. It is also a fact admitted by the assessee that payments were received on the basis of invoices (see para E-3). The non recognition of a sale in these circumstances does not depend upon final approval of the customer, who has been making payments on the basis of invoices, raise by assessee. The argument of the assessee that it needs to refund the amounts to customer under certain circumstances does not hold ground. In case a customer returns the products sold by the assessee and the assessee is required to refund the payments received from the customer, the assessee can book the same as sales returns. Hence, the system adopted by the assessee cannot be accepted and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In the light thereof, we see no reason to arrive at a different conclusion here, particularly, when no distinguishing feature has been pointed out by the Revenue. Therefore, qua the ground of unearned income, we affirm the CIT(A) s findings. 20. This leaves us with other ground i.e. regarding applicability of TDS provisions qua payment made by the assessee to foreign entities. In this context also, we notice that in I.T.A. No. 1084/Mds/2012 (supra), this issue stands decided in favour of the assessee as under: 13. We have heard the rival contentions and gone through the relevant findings as well as case law above said. The only issue between the parties is that per Revenue, the payment in question made by the assessee is liable to TDS provisions as comprised in Chapter XVII B of the Act which the assessee is disputing. We notice that the Coordinate Bench in I.T.A. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the agreement the assessee must cease to use the service and all equipment of the non-resident company. Thus the payment by the assessee can be treated as royalty for use of equipment. The ITO further argued that case has to be distinguished from the case of BSNL and Others Vs. Union of India (Supreme Court). In that case the Supreme Court dealt with the issue of using standard facility provided to an average householder or consumer whereas in the present case it dealt with payment for use of equipment. 6:1. In the report dated 07-09-2007 the Assessing Officer has reiterated the arguments made in the impugned order. 6.2 On the other hand the learned AR has vehemently argued that the learned Assessing Officer has not properly appreciated the facts of the case and submitted that the bandwidth charges are provided either by way of undersea cables or by satellite earth stations and the appellant does not have any control over the equipments as it has only leased a part of the transponder capacity and not leased the transponder. Therefore, the right of' use of the equipment is not exclusively with the appellant. Further, the right to use equipment main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as royalty and it was held that no TDS was required to be made. The Hon'ble ITAT, Bangalore Bench in the case of ITO Vs. Madhura Coats Pvt. Ltd., in ITA No. 1711 and 1712jBang/2005 for AYs. 2005-06 and 2006-07 vide order dated 28-09-2006, relying on the decision of the Apex court in the case of Bharat Sanchar Nigam Ltd., (Supra)' wherein, it was held that providing telecom services do not fall under the category of 'goods', the Hon'ble ITAT held that payments made for connectivity for transmission of data would not fall into the category 'royalty' or 'fees for technical 6:4. In view of these facts and In the circumstances of the case and the position of law set out above, it is held that the transactions in respect of which the impugned payments were made was purely on account of services and there is no transfer of right to use the goods. In the result, it is held that the Assessing Officer was not justified in treating the payment as royalty and invoking the provisions of sec. 195 for both the assessment years. Consequently, the impugned order u/s, 195 r.w.s. 201(1) and 201(1A) dated 21-03-2006 for A.Ys. 2002-03 and - 2003-04 is cancelled. 6. On a que ..... X X X X Extracts X X X X X X X X Extracts X X X X
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