Income Tax Appellate Tribunal - Chennai
Sift Communications Limited , Chennai vs Department Of Income Tax on 30 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. No. 851/Mds/2013
(Assessment Year : 2008-09)
M/s Sify Communications Limited,
The Deputy Commissioner of (now amalgamated with Sify
Income Tax, v. Technologies Limited),
Large Taxpayer Unit, 2nd floor, Tidel Park,
Chennai - 600 101. 4, Canal Bank Road, Taramani,
Chennai - 600 113.
PAN : AAECS 9191 P
(Appellant) (Respondent)
Appellant by : Shri Guru Bashyam, JCIT
Respondent by : Shri Saroj Kumar Parida,Advocate
Date of Hearing : 30.09.2013
Date of Pronouncement : 04.10.2013
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by the Revenue, it has raised four grounds in total, out of which, grounds 1 and 4 are general needing no adjudication.
2 I.T.A. No. 851/Mds/132. Vide its ground No.2, Revenue assails order dated 25.1.2013 of Commissioner of Income Tax (Appeals)-V, Chennai, deleting the addition of ` 11,10,17,000/- made by the Assessing Officer for invoices raised but not shown as income.
3. When the matter came up, Adv. Saroj Kumar Parida, appearing for assessee, pointed out that ld. CIT(Appeals) had followed the decision of this Tribunal on an identical issued in assessee's own case in I.T.A. No. 1954/Mds/2007 dated 26th May, 2009 for assessment year 2003-04.
4. Shri Guru Bashyam, learned D.R. fairly admitted that the matter was covered against the Revenue by virtue of decision of this Tribunal. Nevertheless, according to him, once invoices were raised, it constituted a sale and therefore, assessee was bound to account for it.
5. We have heard the contentions. On the issue regarding accounting of invoices on services which were still to be rendered, this Tribunal held on Revenue's appeal for assessment year 2003-04, at paras 31 to 35 of its order, as follows:-
"31. It was noticed by the A.O. during assessment proceeding that in the balance sheet as on 31.03.2003 ` 45,67,354 was shown as 'unearned income' under the head 'current liabilities' as against ` 3 I.T.A. No. 851/Mds/13 15,13,162 shown as on 31.03.2002. The details furnished by the assessee showed that ` 39,68,208 received during the year ending 31.03.2003 was not offered for tax and was carried forward to next year. The assessee explained as under:-
"For revenue relating to development of e-learning software.
The invoices are raised on the basis of payment milestones where as revenue are recognized on the basis of the modules developed and delivered. Though the payments has been received on the basis of invoices, if the products are not delivered sify e-learning needs to refund the amount in full to the customer."
32. The A.O. rejected the explanation and added ` 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 a 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 raised 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 4 I.T.A. No. 851/Mds/13 by the assessee cannot be accepted and so the unrecognized income of ` 39,68,208 is now treated as income."
33. The CIT(A) deleted the addition and his order has been challenged by the department in the present appeal.
34. We have considered the rival submissions in the light of material on record it was explained by the learned A.R. that the software development was the major source of income. In the written submission filed by the AR before the CIT(A) the break- up of receipts was shown as under:
S.No. Particulars Amount
(` in lacs)
c The major service income are as under-
Income from software development (IDC) LMNK 1175
Income from software development non LMNK 162
Income from IT training 48
Income from software services - LMS 3
Income from - LL 2
Miscellaneous others 4
Total 1394
35. The CIT(A) has deleted the addition for the reasons given in paragraph 4.3 of his order. He has, interalia, observed that the revenue earned by the assessee from software and consultancy services was recognized on delivery of goods / services, that as per the existing scheme, M/s Satyam Education Services Limited was assigned the responsibility to 'sign off' on completion of the project in the case of all customers, that the assessee-company was following the AS 9 prescribed by the Institute which was in conformity with the provisions of Section 145(2) of the Act. The assessee was regularly following the 'project completion method, which is a recognized method. The completion of each project is determined by 'sign off'. There is nothing on record to show that there was any inconsistency in this regard. The CIT(A) found that the deferred income amounting to ` 39,68,208 was carried forward and was duly taken into account in the next assessment year. In the circumstances, therefore, we see no reason to 5 I.T.A. No. 851/Mds/13 interfere with the conclusions reached by the CIT(A). The ground no. 4 is, accordingly rejected."
Since it has been conceded by both the parties that the fact situation is very similar for impugned assessment year also, we cannot fault ld.
CIT(Appeals) for deleting the addition made by the Assessing Officer.
6. Ground No.2 of the Revenue stands dismissed.
7. Vide its ground No.3, grievance of the Revenue is that the CIT(Appeals) deleted the disallowance made under Section 40(a)(ia) of Income-tax Act, 1961 (in short 'the Act') on the claim of networking costs, for want of deduction of tax at source.
8. Learned A.R. submitted that this issue was also covered in favour of assessee by the decision of this Tribunal in assessee's own case for earlier years.
9. Learned D.R. fairly agreed with the submission of the assessee.
However, according to him, networking costs warranted deduction of tax at source and assessee having not done, Assessing Officer was justified in making disallowance under Section 40(a)(ia) of the Act.
10. We have heard contentions of both the parties. On Revenue's appeal for assessment year 2002-03, this Tribunal in I.T.A. No. 6 I.T.A. No. 851/Mds/13 1084/Mds/2012 dated 20.11.2012 had held at para 13 of its order, 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. 1277 and 1283/Mds/2008 (supra) decided on 02.02.2012 [in which one of us N.S. Saini, A.M. Member of the Bench) has held as under:
4. We have heard the rival submissions and perused the orders of the lower authorities as well as the cited decisions. We find that the Ld. CIT(A) has decided this issue by observing as under:
"6. I have carefully considered the facts of the case and the rival submissions and also examined the issues carefully with reference to applicability of sec. 195, which has been denied by the appellant. The appellant company is engaged in the business of providing networking and e-commerce services by way of internet. In order to carry out its business of providing broadband internet connectivity the appellant company has entered into agreements with certain non-resident companies.
The assessee therefore made certain remittances in foreign currency towards connectivity charges and bandwidth charges which are called telecommunication charges without deduction of tax at source. The Assessing Officer examined the matter and found that the equipments used by the appellant company through which connectivity was provided are used by the assessee. Therefore, it treated the payment as royalty for the use of the equipments. Consequently, the Assessing Officer held that the appellant committed default u/s 195 in so far as it had not deducted tax at source. He therefore, worked out short deduction of tax u/s. 201(1) at Rs.3,45,99,751/- and Rs.3,33,39,659/- for A.Ys. 2002-03and 2003-04 respectively. The Assessing Officer also charged interest u/s. 201(1A) amounting to Rs.1,99,6S,927/- and Rs.1,52,71,474/- for A.Ys. 2002-03 and 2003-04 respectively. The Assessing Officer has, therefore, taken the following arguments for raising the impugned demands.
7 I.T.A. No. 851/Mds/13(1) The service provided by the Telecommunication service Provider in the case is different from that provided by the non-
resident companies in the present case.
(2) Telephone is fundamentally different from a bandwidth service.
(3) The bandwidth service is not a specified service.
(4) Equipment of the nonresident company through which connectivity is provided is used by the assessee the requisite bandwidth along with equipments is for exclusive for the assessee which cannot be used by others nor by the non- resident company; on termination 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 mainly arises if there is physical equipment and since the equipments used by the appellant are not under its control. Therefore, the payments made do not have the character of royalty.
6.3 On the above facts and in the circumstances of the case, only one question arises for decision whether the remittances made by the appellant company to the foreign parties would 8 I.T.A. No. 851/Mds/13 fall within the purview of sec. 195(1) which requires deduction of tax at source. Bandwidth is bought and sold to consumers and it acts as a conduit only. In the appellant's case there are no equipments installed in its premises and the contract entered with the foreign parties is only for the services. Mere use of equipment in providing bandwidth services would not amount to transfer of right to use. As a matter of fact there are no goods involved in the transaction and the payments are made only for the use of services. The word "royalty" and its meaning was introduced vide Finance Act, 1976 and was defined under explanation 2 to sec. 9(1)(i) which was further expanded to include 'the right to use any industrial commercial or scientific equipment but not including the amounts referred to in sec,. 44B. The amendment was made by Finance Act, 2001 by incorporating c1ause (iv a) w.e.f. 01-04- 2002 i.e., applicable for A.Y. 2002-03. In simple words, therefore, royalty means the payment of any kind received as a consideration for the use of' or the right to use, any copy right of literary artistic or scientific work but, does not include the words 'use' or right to use, industrial, commercial or scientific equipment. In the appellant's case there is no "right to use equipment. Therefore, the payments made do not fall under 'royalty'. On similar facts the ITAT, Bangalore Bench in the case of ACIT Vs. Infosys Technologies Ltd. in ITA Nos. 653 and 969/Bang/2006 dated 17-10-2007 held that any payment made to database owners outside India for accessing such databases and the services provided by such telecom operator to the customers do not amount to technical services or royalty u/s 9(1)(vii) of the IT Act. Accordingly, it was held that no TDS is to be made. The Hon'ble Tribunal also held that payments for accessing data is like reading a book in a library which could not be passed on to anyone else. Since the copyright was not for literary, artistic or scientific work, the payment is not to be treated 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 9 I.T.A. No. 851/Mds/13 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 query from the Bench from the ld. D.R. as to whether there is any contrary decision of any other High Court, the ld. D.R. replied that the Hon'ble Delhi High Court decision is a lone decision on the issue.
7. On the above facts, when there is only one decision of the High Court, then the same requires to be followed by us. Our view finds support from the decision of the Hon'ble Bombay High Court in CIT Vs. Godavari Devi Saraf [Smt] [1978] 113 ITR 589 [Bom] We, therefore, confirm the order of the ld. CIT(A) and dismiss the grounds of appeals of the Revenue.
8. In the result, both the appeals of the Revenue are dismissed."
After going through the operative portion above said, there is no iota of doubt that the payments in question made by the assessee cannot be subjected to the applicability of TDS provisions contained in the "Act". Therefore, in view of the same and in order to maintain consistency, we rely on the above said order of the ITAT and decide the grounds against the Revenue."
The fact situation being the same, we are of the opinion that that CIT(Appeals) was justified in deleting the disallowance for similar costs for impugned assessment year also. We do not find any reason to interfere with the order of CIT(Appeals).
11. Ground No.3 of the Revenue stands dismissed.
10 I.T.A. No. 851/Mds/1312. In the result, appeal filed by the Revenue is dismissed.
Order was pronounced in the Court on Friday, the 4th of October, 2013, at Chennai.
sd/- sd/-
(V.Durga Rao) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 4th October, 2013.
Kri.
Copy to: (1) Appellant
(2) Respondent
(3) CIT(A)-V, Chennai-34
(4) CIT, Chennai-III, Chennai
(5) D.R.
(6) Guard file