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TMI Blog2022 (4) TMI 1498X X X X Extracts X X X X X X X X Extracts X X X X ..... a contentious issue. Sharing of data on world wide web/Internet has become an important marketing tool for the present-day business trend. As observed herein above, there are various decisions on this aspect which are rendered based on the peculiar facts. We note that, the payees are tax residents of various countries with whom India has DTAA. Therefore, in view of Section 90(2) of the Act the provisions of the Act or the DTAA whichever is more beneficial to the assessee shall apply. The conclusions with regard to payment for right to use software will equally apply to these types of payments and these has to be analysed in the light of the agreements entered into between the assessee and vendors in respective countries, in the light of the principles laid down by Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd.[ 2021 (3) TMI 138 - SUPREME COURT] having regard to the DTAA. Various decisions relied by the Ld.AR as well as, the Ld.CIT.DR are based on the facts therein, however the basic principle enunciated by Hon able Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd.(supra), that domestic law cannot override the treaty be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision by holding that, they were uncrystallised liability. This view was sustained by the Ld. CIT(A) - HELD THAT:- In the present facts of the case, we note that, the provision was in respect of a contingent liability for which invoices had not received. Under such situation, there is no accrual of income in the hands of the payee and that assessee immediately reverses it on the 1st day of the next accounting year even before the amount accrued to the payee. Therefore, in our view the ratio laid down by Hon ble Karnataka High Court in case of Karnataka Power Transmission Corporation [ 2016 (2) TMI 412 - KARNATAKA HIGH COURT] squarely applies to the present facts of the case. Respectfully following the same, way direct the Ld.AO to delete the disallowance made in respect of the provision, that was made on the last day of the financial year relevant to assessment year under consideration, that stood reversed on the 1st day of next accounting year. Nature of expenses - Disallowance of Expenses on subsidiary - assessee incurred professional fees for establishing a subsidiary in Australia the Ld.AO disallowed the some treating it to be capital in nature, which was upheld by the Ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es cannot be considered as fees for technical services. f. The learned CIT(A) has failed to appreciate that the web hosting charges are merely standard services obtained over Internet and as such no technical inputs are provided by the service provider to the Appellant. 2. Disallowance of Provisions- Rs. 29,39,905 a. The learned CIT(A) has erred in not providing the Appellant with an opportunity of being heard on the applicability of withholding taxes on such provisions made which is against the principles of natural justice. b. The learned CIT(A) ought to have appreciated that TDS was not applicable on the year end provisions made by the Appellant. c. Notwithstanding and without prejudice to the above, if the provisions made are to be disallowed, the same is to be allowed as a deduction to the appellant on reversal/payment. 3. Disallowance of Subsidiary establishment expenses- Rs.1,59,450 a. The learned AO had erred in disallowing professional charges paid towards setting up a subsidiary in Australia. b. The learned AO has erred in concluding that the expenses incurred are capital in nature. c. The learned CIT(A) has erred in not adjudicating this ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) has erred in not following the jurisdictional Tribunal Ruling on the disallowance of depreciation. e. The learned CIT(A) has erred in alleging that the Appellant had capitalized the software costs to avoid deduction of tax at source without any basis. f. The learned CIT(A) ought to have observed that out of the total software purchase of Rs.10,59,229, invoice pertaining to Rs. 825,746 fell within the Notification No. SO 1323(E) dated 13-06-2012 issued by Central Board of Direct Taxes (`CBDT') which notifies that no deduction of tax shall be made for purchase of software from residents. 2. Disallowance of web hosting charges paid - Rs.3,24,66,717 Payment considered as Fees for Technical Services a. The learned CIT(A) has erred in confirming disallowance of web hosting charges amounting to Rs. 3,24,66,717 for non-deduction of tax at source. b. The learned CIT(A) has erred in confirming that web hosting charges paid is in the nature of fees for technical service("FTS") under the India USA and India - Australia Double Tax Avoidance Agreement treaty ("tax treaty"). c. The learned CIT(A) has erred in not adjudicating the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,265 Australia Article 12 & Article 14 of India- Australia DTAA Edvaldo Acir 37,59,010 Brazil Article 14 of India- Brazil DTAA Joao Paulo Pereira Corian 5,31,513 Brazil Article 14 of India- Brazil DTAA Patricia Lorenzino 13,29,381 Brazil Article 14 of India- Brazil DTAA Thiago De Andrade 4,22,082 Brazil Article 14 of India- Brazil DTAA Careerwin Executive Search 2,42,019 China Article 12 of India-China DTAA CIIC Financial Consulting Co. Ltd 51,12,130 China Article 12 of India-China DTAA Jack Wu (Cheng- Hsien WU) 70,01,369 China Article 12 & Article 14 of India-China DTAA Liann Gao (Lingyan Gao) 15,51,128 China Article 12 & Article 14 of India-China DTAA Sachin Kulkarni 6,37,492 China Article 12 & Article 14 of India-China DTAA Kwai Wing Egan Lau 16,26,276 Hong Kong As per section 9(1)(i) of the Act Dicky Hermawan 21,78,860 Indonesia Article 14 of India- Indonesia DTAA Ridho Putradi S'Gara 4,22,381 Indonesia Article 14 of India Indonesia DTAA Micro Ad -Inc(Consultants) 14,05,677 Japan Article 12 of India-Japan DTAA Amjad Puliyali 4,44,136 UAE Article 14 of India-UAE DTAA DLA Piper UK LLP Beijing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite, social media etc. It is submitted that, retargeting is an exercise that refers to online ad placement or display ads which targets users who have interacted with assessee's customers in a specific way. It is submitted that, once a visitor enters the customers website, clicks on a product or takes a certain action that the company wants them to take, a cookie is sent to their browser and this information is used to re-target them with the ads based on the user's interaction. The assessee submitted that, the web hosting service, is a type of Internet hosting service that allows individuals and organisation to make their website accessible via the world wide web. The vendors provide with an earmarked space on the website, and allow to save data on the servers owned by the vendors. In this entire process, the assessee uses the services of various non-resident vendors whereby, the company procures hosting services, server space for posting the ads of its customers on the designated space of the vendors cloud websites. 3.2 For assessment year 2012-13, the assessee made payments amounting to ₹ 28,14,822/- to Amazon, Softlayer, Rackspace Hosting etc., towards the space provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred appeal before the Ld. CIT(A). 4. The Ld.CIT(A) sustained the disallowance of web hosting charges on the ground that the service provider, had, made available knowledge, expertise relating to web hosting services to the assessee. The Ld.CIT(A) however allowed certain deductions of payment made by assessee to the vendors in following countries for the following reasons: Country Amount Remarks USA 26,83,359 Sustained by CIT(A) on the grounds that it makes available technical knowledge to the Appellant. India 7423 Allowed as below threshold limit Australia 124,041 Allowed as necessary taxes were deducted by the Appellant. 5. In respect of disallowance of provision, the Ld.CIT(A) upheld the addition on the ground that, the liability to deduct tax arises at the time of payment or credit of any sum to any account including suspense account. 6. In respect of disallowance of the expenses incurred to establish subsidiary in Australia, the Ld.CIT(A) upheld the addition made by the Ld.AO. 7. In respect of the consultancy fee disallowed, the Ld.CIT(A), sustained the addition by holding that, the assessee was facilitated by M/s.People Search Pte., of Singapore, in decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 214 and DIT vs Sun Microsystems India Private Ltd., reported in (2014) 48 taxman.com 93. 9.5 It is the submission of the Ld.AR that, in the present case the vendors do not "make available" any technical skill, knowledge, know-how, experience etc., or technology to assessee, while providing the web hosting services as there is no human interactions. 9.6 On the contrary, the Ld.CIT.DR, placed reliance on orders passed by authorities below. 9.7 We have perused submissions advanced by both sides in light of records placed before us. 9.8 The only payment disputed by the revenue for non-deduction of TDS for assessment year 2012-13 is in respect of the payments made to following parties: Sl.No. Name Amount (in Rs.) Country 1 Adbrite Inc 113317 USA 2 Amazon Web Services 805246 USA 4 Codesion cloud services 35874 USA 6 Jespersoft 2402 USA 7 Linkedin 38524 USA 8 Max mind 13449 USA 9 Rackspace 262472 USA 10 Softlayer 1397342 USA 11 Comodo Group Inc 14733 USA Total 2814822 10. For assessment year 2013-14, following are the payments made to non residents in various countries that are disallowed for non deduction of taxes. Name Amount (Rs.) C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, in view of Section 90(2) of the Act the provisions of the Act or the DTAA whichever is more beneficial to the assessee shall apply. 15. In our view, the conclusions with regard to payment for 'right to use' software will equally apply to these types of payments and these has to be analysed in the light of the agreements entered into between the assessee and vendors in respective countries, in the light of the principles laid down by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd., reported in (2021) 125 taxmann.com 42, having regard to the DTAA. 16. Various decisions relied by the Ld.AR as well as, the Ld.CIT.DR are based on the facts therein, however the basic principle enunciated by Hon'able Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd.(supra), that domestic law cannot override the treaty benefits, cannot be ignored. 17. We therefore remand this issue back to the Ld.AO for de novo verification, in order to correctly characterise the nature of payment made by the assessee to various vendors. It may also be noted that, treaty benefits available to assessee cannot be done away with, in case it the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound No.4 for assessment in 2012-13 and Ground No.3 for assessment year 2013-14 stands allowed for statistical purposes. 19. Disallowance of Software payment: This issue is relevant for assessment year 2013-14 only. 19.1 The assessee claimed depreciation of ₹ 3,61,107 on purchase of computer software amounting to ₹ 10,29,822/-. The Ld.AO disallowed the depreciation under section 40(a)(ia) of the Act, by holding that the computer software was purchased without making TDS on the amount paid to the supplier. The Ld.AO relied on decision of Hon'ble Mumbai Tribunal in case of V Kay Translines (P) Ltd in ITA No. 1562/Mum/2010. 19.2 The Ld. CIT(A) upheld the disallowance by observing as under: "4.8 In view of above, the purchase of software of the appellant is only revenue in nature and the payment for the same cannot be allowed for failure to deduct tax as per the provisions of the Act. The fact that every year the appellant is purchasing such software, indicates the revenue nature of such expenditure and adds to the credence of the above conclusion. Therefore, the AO is directed to disallow the payment of Rs 10,59,229 for software u/s 40(a)(ia) of the Act for non compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee regularly follows mercantile system of accounting and business income was computed accordingly. It was submitted that, there is no income attributable to the payee and the provisions are reversed at the very beginning of the next accounting year and therefore the TDS provisions are not applicable. In support, he placed reliance on the decision of Hon'ble Karnataka High Court in case of Karnataka Power Transmission Corporation Ltd reported in (2016)67 taxman.com 259 and decision of Hon'ble Mumbai Tribunal in case of Pfizer Ltd in ITA number 1667/Mum/2010. 20.3 The Ld.CIT.DR relied on orders passed by authorities below. 20.4 We have perused submissions advanced by both sides in light of records placed before us. 20.5 Admittedly, the provisions were made at the end of the year since the invoices were not received up to 31/03/2012. The said provision was reversed in the beginning of the next accounting year. We note that, Hon'ble Karnataka High Court in case of Karnataka Power Transmission Corporation Ltd (supra) had an occasion to consider identical issue. On perusal of the said decision it is noted that, the assessee therein created provision for contingent payment of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of appeal. The authorised representative also appreciated the factual position and acknowledged that the same was admitted at assessment stage In view of this, the ground number 3 of the appeal is not adjudicated and is treated as dismissed." 21.2 Before this Tribunal the Ld.AR relied on decision of coordinate bench of this Tribunal in case of On Mobile Global Ltd vs DCIT in ITA number 1163/B/2012. 21.3 We have perused the said decision relied by the Ld.AR. We note that, in that case Tribunal was considering an issue where assessee therein had made payment towards the due diligence and feasibility study conducted by a consultant before acquiring a company. Whereas, in the present facts of the case the expenditure has been incurred by assessee in order to establish a subsidiary company in Australia. This is an expenditure incurred for expanding assessee's business and has been rightly treated as capital in nature by the revenue authorities. We therefore do not find any infirmity in the view taken by the Ld.CIT(A). Accordingly this ground raised by assessee for assessment in 2012-13 stands dismissed. In the result appeal filed by assessee for assessment year 2012-13 stands pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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