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TMI Blog2022 (6) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... in a previous are eligible for the purpose of deduction under section 80JJAA in the succeeding year if he completes 300 days in such succeeding year without appreciating that person working in software industry cannot be said to be 'Workman' for the purpose of section 80JJAA of the Act and conditions prescribed for claiming said deduction are not satisfied by Assessee? 16.1. The Assessee had claimed deduction under Section 80JJ-AA of the Act on account of the payments made to the employees hired by the Assessee in the previous year even though they had not completed 300 days of service in that year since they continued on the rolls of the Assessee in the next year totalling up to more than 300 days as required under section 80JJ-AA of the Act. The issue raised by the Revenue is that the employees of the Assessee would not come within the purview of the definition of workman under Section 2(2) of the Industrial Disputes Act, 1947 (for short 'ID Act') and that since the employee has not completed 300 days of employment in the previous year, no deduction could be claimed by the Assessee. 16.2. As regards the first contention of the Revenue, the same does not requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such, engaged by the Assessee to render services in the industry being run by the Assessee. Thus the software engineer would also come within the purview and ambit of workman under Section 2(s) of the ID Act so long as such a person does not take a supervisory role. The software engineer per se would be a workman; a software engineer rendering supervisory work would not be a workman. In the present case, it is not the case of the Revenue that the persons employed by the Assessee are rendering any supervisory work or assistance. Admittedly, the said persons have been engaged for the purpose of software development, and as such, they are to be regarded as a workman in terms of Section2 (s) of the ID Act. 16.5. The Apex Court has in the case of Devinder Singh's (supra) categorically held that when a person is employed in an industry for hire or reward for doing manual, unskilled, skilled, operational, technical or clerical work, such a person would satisfy the requirement and would fall within the definition of the 'workman'. In the present case, a software engineer is a skilled person, a technical person who is engaged by the employer for hire or reward. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16.10. We would disagree with the said contention. What is required is for a person to be employed for a period of 300 days continuously. There is no such criteria made out for a person to be employed in any particular year or otherwise. If such a restrictive interpretation is given, then any person employed post 5th June of a particular year would not entitle the Assessee to claim any deduction. Thus in order to claim the benefit under Section 80JJ-AA, an employer would have to hire the workmen before 5th June of that year. As a corollary, since the Assessee would not get any benefit if the workmen were engaged post 5th June, the employer/Assessee may not even employ anyone post 5th June, which would militate against the purpose and intent of Section 80JJ-AA, which is the encourage creation of new employment opportunities. 16.11. The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Limited (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entitled to the benefit of Section 80JJ-AA in the next assessment year and so o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years. 16.15. In view thereof, the substantial question No.1 is answered by holding that the software professional/engineer is a workman within the meaning of Section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of Section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete 300 days in a particular assessment year but in the subsequent year so long as there is continuity of employment, the Assessee could continue to claim further benefit in the next two years as provided in under Section 80JJ-AA of the Act. 16.16. Accordingly, we answer Question No.1 by holding that a software engineer in a software industry is a workman within the meaning of Section 2(s) of the Industrial Disputes Act so long as the Software engineer does not discharge any supervisory role. 16.17. The period of 300 days as menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(203 Taxman 477)(Kar), the Ld CIT(A) held that the payments made for purchase of software is to be treated as 'royalty' and is liable for deduction of tax at source. (b) 'in respect of AMC', Ld CIT(A) held that the claim the benefit of second proviso to sec. 40(a)(ia) read with the first proviso to sec. 201(1) of the Act is not automatic, i.e., it is the responsibility of the assessee to show that the payee has complied with the conditions laid down in the said proviso. Since the assessee did not bring anything on record to show such a certificate was furnished to the AO, the Ld CIT(A) rejected the benefit of second proviso to sec.40(a)(ia) of the Act. 5.3 In respect of Software expenses of Rs.21.45 crores capitalised by the AO, the assessee submitted before the AO that it has deducted tax at source on an amount of Rs.19.85 crores and further their software licenses was valid for a period of less than two years. In respect of balance amount of Rs.1.60 crores, the assesseee admitted that their life is more than two years. Accordingly, with respect to the amount of Rs.1.60 crores, the Ld CIT(A) upheld its capitalisation and directed the AO allow depreciation @ 60% /30% depending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co (supra). Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(i)/40(a)(ia) of the Act. 5.6 With regard to the capitalisation of software expenses, we notice that the Hon'ble Karnataka High Court has rendered following two decisions:- (a) CIT vs. Toyota Kirloskar Motors (P) Ltd (ITA No.176 of 2009), wherein the Hon'ble High Court had held that the software licence fee paid for use of software for a limited duration upto two years is allowable as revenue expenditure. (b) CIT vs. IBM India Ltd (357 ITR 88), wherein the Hon'ble Karnataka High Court has held that the purchase of application software is revenue expenditure. The relevant observations are extracted below:- "9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum of Rs.33,14,298/-. The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue." Accordingly, 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 Ld 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 assessing officer. 6. The next issue relates to the disallowance of claim of communication expenses. The assessee had paid a sum of Rs.2,45,89,919/- to its AE M/s Honeywell International Inc (HII) and claimed the same as communication expenses. Before the AO, the assessee submitted that the above said payment is in the nature of data link charges, i.e., the HII, as part of its headquarter services, charges its affiliates for management and routine maintenance of data link facility. It was also 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 dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the amendments in sec. 9(1)(vi) of the Act have been brought into the Act by Finance Act, 2012 only and hence, under the doctrine of impossibility of performance, the assessee cannot be fasted with liability to deduct tax at source u/s 9(1)(vi) of the Act. 6.3 We heard Ld D.R and perused the record. The assessee has explained the nature of payment before Ld CIT(A). Before us, the Ld A.R submitted that the payment has been made for providing point to point connection between two computers or local area networks. It is called data link facility and it can be used for telephone, data or internet services. Explaining further, the Ld A.R submitted that the parent company M/s HII enters into an agreement with the 3rd party vendor for providing data link services. The payment shall be made by the parent company and the proportionate cost, based on actual usage, is recovered from the affiliates. The Ld A.R submitted that the assessee does not possess any right or control over the equipment provided by the 3rd party vendor. The purpose of payment is towards utilisation of data link facility and not in connection with the grant of any license/use of equipment belonging to 3r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tune of Rs.4,73,18,208/- to certain foreign legal firms as detailed below:- 1. Deloitee Tax LLP - 3,35,77,224 2. Fragomen, Del Rey, Bernsen & Loewy 36,910 3. Schiff Hardin LLP 61,67,154 4. Schwegaman Lundberg Woessner Kluth 75,36,920 4,73,18,208 The AO noticed that the assessee has not deducted tax at source from the above said payments. The assessee submitted that the above said payments were made to foreign legal firms, which are firm of individuals in connection with services rendered by them in USA in connection with preparation of tax return, tax reconciliation calculation, application for tax identification numbers, submission of documents etc. It was submitted that the services were provided outside India and they have been consumed outside India. Hence the services rendered by them do not have any nexus in India. Accordingly, it was submitted that the payments are not taxable in the hands of recipients in terms of Article 15 of the India- USA DTAA. Accordingly it was submitted that the assessee is not liable to deduct tax at source from these payments. The AO did not accept the explanations given by the assessee. He also observed that the assessee company coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Explanation given under sec. 9(2) and observed that the said Explanation was inserted to undo the ratios laid down by the Hon'ble Supreme court in the case of Ishikawajima Harima Heavy Industries Ltd (288 ITR 408) and Jindal Thermal Power Company Ltd (321 ITR 31)(Kar). Accordingly, the Ld CIT(A) held that (a) the non-residents have provided technical services to the assessee company and therefore, the payments are "fee for technical services" liable for deduction of tax at source. (b) With regard to Article 15 of India-USA DTAA, the Ld CIT(A) held that the assessee has not brought anything on record to show that the payments were made to individual or firm of individuals except for one document related to M/s Deloitte. However, it was self-certified document and hence cannot be considered as sufficient. (c) the Article 15 covers payments for performance of services in "Other contracting state" (here India). However, in the instant case, the assessee himself has admitted that the services were performed in USA. Hence Article 15 is not applicable here. Accordingly, the Ld CIT(A) confirmed the disallowance made by the AO. 7.4 We heard rival contentions on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if they do not have residence of place of business in India. 7.7 We heard the parties on this issue and perused the record. Since the Ld CIT(A) has held that the impugned payment would be hit by sec. 9(1)(vii) of the Act, it is required to be examined as to whether the impugned payments would fall under the category of "Fee for technical services" in terms of sec. 9(1)(vii) of the Act or not. Section 9 of the Act lists out income which are "deemed to accrue or rise in India". Section 9(1)(vii) of the Act reads as under:- "9(1)(vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India Provided that nothing contained in this clause shall apply in relation to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , property or information used or services utilized for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India…." 10.6 In the case under consideration the non-residents have provided technical services to the appellant company. Therefore, the payment made towards these technical services is undisputedly fee for technical services as stipulated in Section 9(1)(vii) of the Income tax Act, liable for deduction of tax at source." 7.8 The contention of the Ld A.R is that the assessee has availed only "legal and professional services" from some professional firms and it will not fall under the category of "Fee for technical services" defined in sec. 9(1)(vii) of the Act, since the professional service will not fall under the category of "managerial or technical or consultancy service" mentioned in the definition of the expression "Fee for Technical services" given in Explanation 2 to sec. 9(1)(vii). In this regard, the Ld A.R placed her reliance on the decision rendered by Delhi bench of Tribunal in the case of Sh. Chander Mohal Lall vs. ACIT (ITA No.1869/Del/2019 dated 09-12- 2021). 7.9 We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (b) of section 9(1)(vii) of the Act, as, the payments were made to foreign attorneys for utilizing their services outside India and for the purpose of earning income from a source outside India. Therefore, such income cannot be deemed to accrue or arise in India. 13. Without prejudice, he submitted, in terms of DTAAs entered with certain countries, payments received by the nonresidents are in the nature of business income, hence, not liable to tax in India under the respective DTAAs in absence of a fixed place of business or PE in India. Thus, he submitted, there being no obligation on the assessee to deduct tax at source under section 195 of the Act, no disallowance under section 40(a)(i) can be made. Further, he submitted, only because the assessee was unable to furnish the TRC in respect of some of the payees, the Assessing Officer has disallowed part of expenditure. He submitted, non-furnishing of TRCs cannot be the sole reason for disallowing assessee's claim when the genuineness of the expenditure is not doubted. He submitted, since, the assessee has no control over issuance of TRC by foreign jurisdiction, the disallowance should not have been made, when all other evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hellip;…… 17. In so far as the balance amount of Rs.48,52,693/- is concerned, undisputedly, they represent professional fee paid to non-resident attorneys for various professional services rendered by them in the respective foreign jurisdictions. Therefore, the foremost crucial issue requiring examination is, whether the payment made to the non-residents is "chargeable under the provisions of the Act" so as to attract the provisions of section 195 of the Act. On a reading of section 5 of the Act, which defines the scope of total income, it would be very much clear that the following categories of income shall be included in the total income:- (i) income received in India; (ii) income deemed to be received in India; (iii) income which accrues or arises in India; or (iv) income which is deemed to accrue or arise in India. 18. In the facts of the present appeal, undisputedly, the non-resident attorneys have rendered their professional services outside India in relation to following: (i) Filing of application for grant/registration of IPR; (ii) Filing of Form/responses/petitions in relation to activity leading to or in the process of grant/registration; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable only in case of failure to deduct tax on payments made for FTS. As rightly submitted by learned counsel for the assessee, this could be for the reason that payment of legal/professional fee to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India as per section 5 and section 9 of the Act. It is relevant to observe, in the case of NQA Quality Systems Registrar Ltd. Vs. DCIT (supra), the coordinate Bench has held that professional services are a category distinct from technical services. Similar view has been expressed in the following decisions as well: (i) ONGC Vs. DCIT (supra) (ii) Deloitte Haskins & Sells Vs. ACIT (supra) No contrary decision has been brought to our notice by learned Departmental Representative. In view of the aforesaid, we hold that the payments made to non-resident attorneys being not in the nature of FTS, there was no obligation on the assessee to deduct tax at source. 21. At this stage, we must observe, learned Departmental Representative has submitted before us that the payments made by the assessee being in the nature of FTS are taxable by applying the source rule. In our view, even assuming that paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Indian Income tax Act, 1961 u/s 5 of the Act and we have held that it is not deemed to accrue in India u/s 9(1)(vii) of the Act. Hence this income is not taxable in India in the hands of non-residents and hence the question of deducting tax at source u/s 195 of the Act does not arise here. Accordingly, the disallowance made u/s 40(a)(i) is liable to be deleted. 7.12 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. In this view of the matter, 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X
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