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TMI Blog2017 (7) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. - I.T. (I.T) A. No.1463/Bang/2014 - - - Dated:- 29-11-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Ms. Neera Malhotra, CIT(D.R) For The Respondent : Shri C. Ramesh, C.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act, 1961 (in short 'the Act'). The Assessing Officer held that the amounts were incurred on internet use and service charges and therefore it was in the nature of Fees for Technical Services which requires deduction of tax as per the provisions of Sections 194C 194J of the Act. On appeal, the CIT (Appeals) has deleted the disallowance in view of the decision of Mumbai Tribunal in the case of Pacific 27 SOT 573 as well as the decision of Hon'ble Delhi High Court in the case of CIT Vs. Estel Communications Pvt. Ltd. 318 ITR 185. 5. Before us, the learned Departmental Representative has relied upon the order of the Assessing Officer. 6. On the other hand, the learned Authorised Representative has submitted that this issue is covered by the decision of the Tribunal in the case of Pacific Internet India (supra) as well as the decision of Hon'ble Delhi High Court in the case of CIT Vs. Estel Communications Pvt.Ltd. (supra). 7. Having considered the rival submissions and relevant material on record we find that the expenditure in question incurred by the assessee are in respect of internet charges and communication and service charge paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Having considered the rival submissions as well the relevant material on record, we note that there is no quarrel on the point that in case 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are in question. It shows that there is an another instance of purchase of IPR by the assessee on 30.9.2008 which is not recorded in the agreement dt.27.1.2009. The learned Departmental Representative further submitted that the payment for purchase of copy right in the software is in the nature of royalty as per the decision of CIT Vs. Samsung Electronics Co. Ltd .(Kar) 345 ITR 494. 17. On the other hand, the learned Authorised Representative has submitted that as regards the date referred in the order of the Tribunal for the Assessment Year 2006-07 as 30.9.2009, it is only the date on which the assessee has completed the negotiations and decided the consideration for purchase of the IPR and therefore there is no separate agreement or transaction but the same transaction was finally reduced in agreement dt.27.1.2009. The learned Authorised Representative has submitted that the date 30.9.2008 is only relevant for the purpose of deciding the purchase consideration of IPR at book value on the said date. Therefore the said date is only relevant for the purpose of ascertaining the book value of the IPR being consideration agreed upon between the parties. He has pointed out that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x are entirely different as income-tax is a direct tax and sales-tax is an indirect tax and wherefore, mere finding that the computer software would be included within the term 'sales-tax' would not preclude this Court from holding that the said payment made by the respondents to the non-resident company in the present cases would amount to 'royalty' unless the respondents are able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in the absence of any PE of the nonresident supplier, there is no obligation on the part of the payer to make deduction under s. 195(1) of the Act. 28. It is well settled that in the absence of any definition of 'copyright' in the IT Act or DTAA with the respective countries, in view of cl. 3 of the DTAA, reference is to be made to the respective law regarding definition of 'copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that literary work includes computer programmes, tables and compilations including computer (databases). Sec. 16 of the Copyright Act, 1957 states that no person shall be entitled to copyright or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) in the case of a sound recording,- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation -For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation. It may also be noted that under s. 51 of the Act dealing with when copyright infringed states that copyright in a work shall be deemed to be infringed-when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under the Act does anything, the exclusive right to do which is by the Act co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no stretch of imagination, payment made by the respondents to the non-resident suppliers can be treated as 'royalty' is not helpful to the respondents in the present cases as in the said case, Delhi High Court was considering the provisions of s. 40(a)(i) of the Act and the order of the High Court reads as follows : What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold it further in Indian market. By no stretch of imagination, it would be termed as royalty. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under s. 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in posse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove under s. 14 of the Copyright Act. 30. It is also clear from the abovesaid analysis of the DTAA, IT Act, Copyright Act that the payment would constitute 'royalty' within the meaning of art. 12(3) of the DTAA and even as per the provisions of s. 9(1)(vi) of the Act as the definition of 'royalty' under s. 9(1)(vi) of the Act is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per cl. (iv) of Expln. 2 to s. 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of s. 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident companies would amount to 'royalty' within the meaning of art. 12 of the DTAA with the respective country, it is clear that the payment made by the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation is a statutory deduction as per the section 32 of the Act can be disallowed by invoking the provisions of section 40(a)(i) of the Act. At the outset, it is to mention that on the same set of facts an identical issue has been dealt by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under :- 16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)(ii); therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(a)(i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand on which tax is deductible at source under Chapter XVII -B and such tax has not been deducted or, after deduction, has not been paid, the amount of interest, royalty, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f technical knowhow was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed. 6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee. 16.4 In view of the above discussion as well as following the decision of the Hon'ble Punjab Haryana High Court, we decide this issue in favour of the assessee and against the revenue. 7. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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