Income Tax Appellate Tribunal - Mumbai
Stratcap Securities (India) P. Ltd, ... vs Assessee on 10 November, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
"I" BENCH, MUMBAI
BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER. AND
SMT. ASHA VIJAY RAGHAVAN, JUDICIAL MEMBER
ITA No.7048/Mum./2008
(Assessment Years : 2005-06)
Date of Hearing:
M/s. Stratcap Securities (I) P. Ltd.
44, Mint Road, Fort
Mumbai - 400 002 ....................... Appellant
PAN - AAACS7113H
v/s
ACIT - 4(2), Mumbai ................... Respondent
Assessee by : Shri Vimal Punmiya
Revenue by : Shri Sanjeev Dutt
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.
This appeal by the assessee, is directed against the impugned order dated 10th November 2008, passed by the learned CIT-IV, Mumbai, for assessment year 2005-06. Ground no.1, reads as under:-
"1. The learned CIT(A) has erred in confirming and treating the revenue expenditure as capital expenditure and thereby treated software expenditure of Rs. 2,03,500 as capital expenditure thereby erred in confirming the addition to the block of asset and disallowed depreciation @ 60% of Rs. 1,22,100 and added Rs. 81,400 as income of the assessee."
2. Brief facts of the case are that, the assessee company, during the relevant assessment year, was engaged in the business of securities, banking, mutual funds and merchant banking services, filed return of income 2 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 for the assessment year 2005-06, declaring total income of Rs. 2,40,95,253 on 30th October 2005. The assessee, during the year under consideration, debited an amount of Rs. 2,03,500 on account of computer software. This Assessing Officer has discussed this issue at Paras-4.1 and 4.2 in his assessment order and held that the software expenditure are capital in nature. He relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT v/s Arawali Construction Co. (P) Ltd., 259 ITR 30 (Raj.).
3. The assessee, being aggrieved by the stand so taken by the Assessing Officer, carried the matter in first appeal, wherein before the learned CIT(A), the assessee filed written submissions stating that the software is purely meant for the purpose of business and the Assessing Officer's observation that the software expenditure are capital in nature is not logical in view of globalization and the extensive use of software which is taking place at present. Learned CIT(A), considering the submissions of the assessee, confirmed the Assessing Officer's action by observing as under:-
"(i) The assessee's observations that software is used purely for business related purpose hence the same cannot be treated as capital is not well found. Capital expenditures are incurred for the purpose of business also. Further the nature of expenditure does not change simply because the economic environment is changing.
(ii) The controversy regarding compute software expense being capital expenditure or not has been put to rest by insertion of computer "including computer software" at (5) iii of part A of Appendix I to the I.T. Rules, 1962. The old Appendix I was substituted by the Income-tax (Twenty Fourth Amendment) Rules, 2002 w.e.f.
01.04.2003 and the new depreciation @60% is allowable on compute software. In view of the same, the action of the Assessing Officer in treating computer software expenditure as capital expenditure is upheld. The Assessing Officer has already allowed depreciation @60% on the said software expenses. The action of the Assessing Officer is correct and valid and is confirmed."
4. Aggrieved by the order so passed by the learned CIT(A), the assessee is in further appeal before the Tribunal.
5. During the course of hearing, learned Counsel for the assessee, Shri Vimal Punmiya, Chartered Accountant, placed before us a detailed paper book which includes a list of computer expenses being incurred for the 3 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 purposes of business which is placed at Pages-89 to 96. Supporting evidence for the payments made to various consultancy services for installation of software has also been produced. Learned Departmental Representative, on the other hand, relied on the order of the learned CIT(A).
6. We have heard the rival submissions, perused the orders of the lower authorities and on perusal of the details given by the assessee and taking into consideration the nature of software, we are of the view that there is no enduring benefit since such technology needs constant up-gradation and, therefore, the same has to be allowed as revenue expenditure. Consequently, we set aside the order of the learned CIT(A) and allow the ground of appeal raised by the assessee. The assessee, thus, succeeds on this ground.
7. Ground no.2, is with regard to the confirmation of disallowance of Rs. 41,522 and addition of income to that of the assessee towards capitalisation of expenditure on leased premises.
8. The Assessing Officer has discussed this issue at Para-6 of his assessment order. The assessee has incurred total expenditure of Rs. 1.11 crore out of which the assessee capitalized Rs. 37 lakhs an claimed revenue expenses of Rs.74.61 lakhs. The Assessing Officer examined the bills pertaining to repair and maintenance and out of the revenue expense claimed for a sum of Rs.74,61,092, he found that the expenses of Rs. 44,32,997 are basically for renovation and improvement of the building and the same are covered by Explanation 1 of Section 32 of the Act. He relied on the decision of the Tribunal, in case of Arya Communication and Electronics v/s JCIT, in ITA No.5614/Mum/2001, and disallowed depreciation @ 15% and disallowed the sum of Rs. 41,00,522. The assessee, in its written submission, states that the term 'renovation' differs form repair and it has undertaken repair activity and the expenditure is basically revenue expenditure for the repair work.
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ITA No.3447/Mum./2009
9. The assessee, being aggrieved, carried the matter in first appeal, wherein the learned CIT(A) confirmed the disallowance made by the Assessing Officer while observing as under:-
"3.3 The Assessing Officer has reproduced the parties name, amount and date with respect to 13 bills and also the nature/description of work done for which those bills were raised at pages 4 and 5 of the assessment order. The description of the work done clearly indicates that the expenses are indeed for the purpose of renovation / improvement of office premises, taken on lease. The action of the Assessing Officer to apply provisions of Explanation 1 to section 32 is correct and the addition of Rs. 41,00,522 is confirmed."
10. Still aggrieved, the assessee preferred appeal before the Tribunal.
11. Learned Counsel had filed details of repairs and maintenance at Page- 97 of the paper book in detail. He argued that the expenditure is for improving / renovating the premises. Learned Counsel further pointed out that the premises has been taken on lease for five years with a clause for renewal of the same lease for another five years. The improvement on the leased premises has been spread over for a period of two years and the assessee himself has capitalized Rs. 77,00,000 and had claimed revenue expenditure of Rs. 74,61,000 out of which the Assessing Officer found that the expenditure of Rs.44,32,997 were basically for renovation and improvement of the building and, hence, the dispute is only regarding the addition of Rs.41,00,522/- confirmed by the learned CIT(A). Learned Departmental Representative, on the other hand, submitted that large chunk of expenditure is in the nature of capital expenditure and relied on the decision of the Tribunal, Delhi Bench, in ACIT v/s E.I. Dupoint India Ltd., (2007) 107 ITD 63 (Del.).
12. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. We have also gone through the details of repair and maintenance along with xerox copy of the bills produced at Pages-97 to 140 of the paper book. Thus, we are of the opinion that some of the expenditure have been laid out for providing a permanent benefit to the company also, the assessee has spent on the leased premises 5 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 which is for a period of ten years as of now and the probability of renewal of lease for a longer period cannot be ruled out. Hence, we are of the opinion that the relief given by the Assessing Officer to the extent of Rs. 44,32,997 is reasonable and, therefore, we confirm the addition of ` 41,00,522 made by the Assessing Officer and confirmed by the learned CIT(A). This ground of appeal is, thus, dismissed.
13. Ground no.3, reads as under:-
"3. The learned CIT(A) erred in confirming the disallowance of Rs.` 2,37,01,175 and confirmed the addition to the income of the assessee for non-deduction of TDS on payments made under section 40(a)(ia)."
14. The Assessing Officer has discussed this issue at Paras-7.1 to 7.5 of his order. The assessee company has made payments to the parent company Strategic Capital Corporation for Rs. 2,73,01,175. The Assessing Officer gave show cause to the assessee asking why TDS was not deducted on the payments made. The assessee reply is quoted at Page 7 & 8 or the order stating that the payments were basically reimbursement for use of personal and other infrastructure of the parent company by the assessee company. The assessee also clarified that it has deducted TDS on rent paid to the parent company. The Assessing Officer, at Para-7.3 observed that Strategic Corporation is not deducting TDS on the payments made to various parties, so the assessee's claim that deduction by the assessee would leave to double deduction is not based on facts. At Para-7.4, the Assessing Officer observed that the assessee company is doing work for the parent company and the TDS was deductible and as the assessee has not deducted TDS, the Assessing Officer made addition under section 40(a)(ia). Subsequently, by way of issuing various letters, the Assessing Officer had queried with respect to the issue of non deduction of TDS. The assessee, vide letter dated 29th September 2008, stated that the TDS was non deductible on account of the following reasons:-
"i) The Strategic Capital Corporation is the parent company and M/s. Stratcap Securities (India) P. Ltd. is 100% subsidiary of Strategic Capital Corporation P. Ltd. The Strategic Capital Corporation P. Ltd.
6 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 suspended its business of investment banking and merchant banking activities and applied for a NBFC license to the Reserve Bank of India. During the course of pendency of application before the Reserve Bank of India, the Strategic Capital Corporation P. Ltd. transferred its business of dealing in Government securities to the 100% subsidiary assessee company. This arrangement lasted for approximately two years and the personnel and infrastructure of the parent company was utilized by the assessee company for which payments were made to parent company as per Memorandum of Understanding.
ii) The income of the business of dealing in Government Securities was shown as income of the assessee, i.e. subsidiary company and the payments made to the parent company which were for the use of infrastructure and personnel being reimbursement did not attract TDS.
iii) The parent company has deducted TDS while making salary payments to the personnel and payments made by the parent company to other parties. The Assessing Officer's observation in the assessment order that parent company has not deducted TDS I not correct at all. In course of assessment proceedings, the details of 3 months were given as the Assessing Officer wanted samples to be produced before him and in course of appeal proceedings, the details with respect to deduction of TDS by parent company were furnished for the whole year, which were forwarded to the Assessing Officer and the Assessing Officer in his letter dated 25.08.2008 has not commented about non deduction of TDS by the parent company."
14. The assessee being aggrieved carried the matter in appeal before the learned CIT(A), who, after going through the reply of the assessee, decided the issue as follows:-
"I have gone through the order of the Assessing Officer and submission of the assessee, report of the Assessing Officer dated 25.08.2008 and comments of the assessee on the report of the Assessing Officer.
a) The Assessing Officer's observation that the fresh evidence produced in course of appeal proceedings is not admissible is correct as there was no sufficient cause for not furnishing the same in the course of assessment proceedings.
b) Even considering the fresh evidence, it is found that the provisions of section 194C is clearly attracted a the payment by the assessee company to M/s. Strategic Capital Corporation Pvt. Ltd. of ` 2,73,01,175/- was made for any work which included supply of labour for carrying out any work. It is immaterial whether M/s. Stratcap Securities (I) P. Ltd. deducted TDS on the payment of salary to its employees u/s.192.
c) So far as the payment made by the assessee company to M/s.
Strategic Capital Corporation P. Ltd. is concerned, the payment was 7 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 made for any work which included supply of labour to carry out work of the assessee, the TDS was deductible.
d) The assessee's argument that the business o M/s. Strategic Capital Corporation P. Ltd. regarding dealing in Government securities was transferred to the assessee during the course of application by the Strategic Capital Corporation P. Ltd. for a NBFC license to RBI is again not very material. The income from the business of dealing in government securities has been considered in the hands of the assessee company and the payment has been made by the assessee company to M/s. Strategic Capital Corporation P. Ltd. for any work including supply of labour.
e) As a matter of fact, the assessee was given an opportunity to explain that there was a need to suspend dealing in government securities by M/s. Strategic Capital Corporation P. Ltd. during the pendency of its application for NBFC license to RBI as per R.B.I. Rules, the assessee could not be clearly brought out in the appeal proceedings any provision of RBI Law, Rule or Guidelines to indicate that such suspension was mandatory. Whatever may be the reason for transfer of business from M/s. Strategic Capital Corporation to the assessee company, the fact remains that M/s. Strategic Capital Corporation did work of providing office space, office vehicles and services of the employees in accordance with a formal contractual agreement and a monthly debit note was raised by M/s. Strategic Capital Corporation (SCC), the contractual obligation for supply of labour and other services attracted provisions of section 194C.
f) i) it is pertinent to know that the assessee company has deducted TDS on rent paid to SCC but it did not deduct TDS for other services stated to be based on the opinion of M/s. Vimal Punmiya & Co. dated 02.11.2007 filed in course of appeal proceedings on 22.09.08. Shri Vimal Punmiya, C.A. attended the assessment proceeding as well as the appeal proceedings. The opinion was based on answer to Question No.30 of CBDT Circular No.08.08.95 which states as under:
"Q.No.30. Whether the deduction of tax at source u/s.194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursements for actual expenses?
Ans: Section 194C and 194J refer to any sum paid obviously:
Reimbursement cannot be deducted out of the bill amount for the purpose for tax deduction at source."
ii) On the basis of the aforesaid, an opinion was given by Mr. Punmiya, C.A. that once the DS has already been deducted on the full payment made by particular person who chooses to pay on behalf of other, no further TDS shall be deducted on the same. The opinion of Shri Vimal Punmiya derived form Answer to Question No.30 of Circular No.715 dated 08.08.1995 is not correct. The answer clearly says that section 194C and 194J refers to any sum paid, obviously reimburse-
8 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 ment cannot be deducted out of the bill amount for the purpose of tax deduction at source. The circular, therefore, is loud and clear that any sum paid whether reimbursement or anything else is subject to section 194C and 194J. "Any sum paid" simply means any sum paid and finding any other meaning out of the same is not correct and is a misinterpretation of the provisions.
g) The assessee company was required to look into the nature of payments made to SCC and it is not material whether SCC was deducting TDS or not to payment made by SCC to its employees etc.
h) In view of the above, it is held that TDS was deductible on payment made to SCC by the assessee company under section 194C and as the assessee company has not deducted TDS, the provision of section 40(a)(ia) are clearly attracted. Addition of ` 2,37,01,175 is, therefore, confirmed."
15. Still aggrieved, the assessee is in appeal before the Tribunal.
16. Learned Counsel for the assessee reiterated the submissions made before the learned CIT(A).
• There is no rendering of services by Strategic Capital Corporation Private Ltd. and there is no such agreement between us and Strategic Capital Corporation Private Limited. We have not made payments to Strategic Capital Corporation Private Limited for making available, furnishing or supplying the personnel/other facilities to it. It was agreed that Strategic Capital Corporation Private Limited and we would share the services of certain employees and other facilities on cost-to-cost basis and thus. We have reimbursed all expenses on actual basis without any mark up.
• There is not cost sharing agreement entered into between us and SCCPL.
• The debit notes raised by Strategic Capital Corporation Private Limited are accompanied by the actual statement and supporting of the expenses incurred.
• In respect of the operating expenses, the same were paid first by Strategic Capital Corporation Private Limited to third parties and then on an agreed basis were reimbursed by us, since we ultimately and directly utilized those third party services/benefited from the third party services. Strategic Capital Corporation Private Limited has had no role to play in the same.
• In respect of the personnel expenses. We and Strategic Capital Corporation Private Limited recognized that they would require certain common human resources. We agreed that instead of these individuals being duly employed, Strategic Capital Corporation Private Limited would employ them. However, the services of these 9 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 employees would be availed by both the entities on need basis and costs expenses in respect of these employees (including salary, incentives based on terms of appointment, mobile phone expenses) were initially disbursed by Strategic Capital Corporation Private Limited after deducting appropriate taxes. However, to the extent that these persons rendered services to it. We have reimbursed the costs to Strategic Capital Corporation Private Limited at actuals (cost to company basis) without any mark-up. Strategic Capital Corporation Private Limited did not make available, supply or furnish the services of these personnel to us.
• While working with us, the employees were working under the direct supervision and control for their work and the intention of Strategic Capital Corporation Private Limited was never to provide any services to us.
• All the expenses can be substantiated by supplier's bills/evidences in respect of operating expense and by salary certificates in case of personnel expenses.
• The transaction are properly reflected in the books of accounts of both the parties e.g. the amount are credited by Strategic Capital Corporation Private Limited to respective expenses accounts and not as income.
11.Your goodself has mentioned that the assessee is paying to Strategic Capital Corporation Private Limited which is a parent company. Had it been it was for a third party then it would have been a 100% violation. From this view of the officer, it is apparent that only if the party involved was a third party, it would result in cent percent violation. However, in the instant case, there is no third party involved as both Strategic Capital and Strarcap Securites are sister concerns, the former being the holding company and the latter its subsidiary. Nevertheless, separate books of accounts are duly maintained and audited; hence the assessee is in the position to bifurcate its own expenses, out of the total expenses incurred under various heads.
Just because, Strategic Capital paid the whole of the expenses, the accountability of Stratcap Securities for its own share of expenses does not shrink away or diminish. That which is its liability will sooner or later have to be discharged to the extent it is liable and which it has, the same not being disputed. Also, the quantum of expenses and the same bearing nexus to business activities is not disputed. What however is disputed is the failure to deduct tax on the reimbursed expenses. However, we shall clarify the aforesaid scenario so as to enable your goodself to understand that law for all the right reasons does not provide for deduction of TDS on reimbursed expenses.
17. Learned Departmental Representative, on the other hand, contended that the assessee was paying to his parent company certain sums which were meant for common utilisation of facilities based on mutual 10 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 understanding. The assessee cannot say that these were merely reimbursement of expenses as the assessee was paying the amount to his parent company for utilisation of services. Further, the agreement does not spell out as to the person who is to pay and whether the same is to be reimbursed. Hence, the assessee has not established to the satisfaction of the Department that it is merely a reimbursement. Learned Departmental Representative also pointed out that there is no agreement with the employer and only a debit note has been given in the absence of agreement.
18. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. We find that following aspects has been brought to our notice by the learned Counsel in respect of expenditure:-
• There is no rendering of services by Strategic Capital Corporation Private Ltd. and there is no such agreement between us and Strategic Capital Corporation Private Limited. We have not made payments to Strategic Capital Corporation Private Limited for making available, furnishing or supplying the personnel/other facilities to it. It was agreed that Strategic Capital Corporation Private Limited and we would share the services of certain employees and other facilities on cost-to-cost basis and thus. We have reimbursed all expenses on actual basis without any mark up.
• There is not cost sharing agreement entered into between us and SCCPL.
• The debit notes raised by Strategic Capital Corporation Private Limited are accompanied by the actual statement and supporting of the expenses incurred.
• In respect of the operating expenses, the same were paid first by Strategic Capital Corporation Private Limited to third parties and then on an agreed basis were reimbursed by us, since we ultimately and directly utilized those third party services/benefited from the third party services. Strategic Capital Corporation Private Limited has had no role to play in the same.
• In respect of the personnel expenses. We and Strategic Capital Corporation Private Limited recognized that they would require certain common human resources. We agreed that instead of these individuals being duly employed, Strategic Capital Corporation Private Limited would employ them. However, the services of these employees would be availed by both the entities on need basis and costs expenses in respect of these employees (including salary, incentives based on terms of appointment, mobile phone expenses) were initially disbursed by Strategic Capital Corporation Private Limited 11 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 after deducting appropriate taxes. However, to the extent that these persons rendered services to it. We have reimbursed the costs to Strategic Capital Corporation Private Limited at actuals (cost to company basis) without any mark-up. Strategic Capital Corporation Private Limited did not make available, supply or furnish the services of these personnel to us.
• While working with us, the employees were working under the direct supervision and control for their work and the intention of Strategic Capital Corporation Private Limited was never to provide any services to us.
• All the expenses can be substantiated by supplier's bills/evidences in respect of operating expense and by salary certificates in case of personnel expenses.
• The transaction are properly reflected in the books of accounts of both the parties e.g. the amount are credited by Strategic Capital Corporation Private Limited to respective expenses accounts and not as income.
12.Your goodself has mentioned that the assessee is paying to Strategic Capital Corporation Private Limited which is a parent company. Had it been it was for a third party then it would have been a 100% violation. From this view of the officer, it is apparent that only if the party involved was a third party, it would result in cent percent violation. However, in the instant case, there is no third party involved as both Strategic Capital and Strarcap Securites are sister concerns, the former being the holding company and the latter its subsidiary. Nevertheless, separate books of accounts are duly maintained and audited; hence the assessee is in the position to bifurcate its own expenses, out of the total expenses incurred under various heads.
Just because, Strategic Capital paid the whole of the expenses, the accountability of Stratcap Securities for its own share of expenses does not shrink away or diminish. That which is its liability will sooner or later have to be discharged to the extent it is liable and which it has, the same not being disputed. Also, the quantum of expenses and the same bearing nexus to business activities is not disputed. What however is disputed is the failure to deduct tax on the reimbursed expenses. However, we shall clarify the aforesaid scenario so as to enable your goodself to understand that law for all the right reasons does not provide for deduction of TDS on reimbursed expenses.
19. In this view of the matter and in lieu of the aforesaid, we now hold that when TDS has already been deducted once from the entire payment, then why the same should be taxed for the second time, resulting in Double Taxation. The tax is not to be deducted on reimbursed expenses as these expenses have already been subjected to tax deductions at source while the payment was being originally paid. The Revenue department is not 12 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009 concerned with the internal arrangement of the partners as to who paid what share as long as the due TDS has been paid within the time constraint.
20. The last ground raised by the assessee regarding levy of interest charged u/s. 234A, 234B, 234C and 234D. The Learned CIT(A) has not given any finding regarding this ground. Therefore we set aside this issue to the file of the Learned CIT(A) for fresh adjudication.
21. In the result, assessee's appeal stands partly allowed.
Order pronounced in the open Court on 7th January, 2011
-/-Sd/- Sd/-
J. SUDHAKAR REDDY ASHA VIJAY RAGHAVAN
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 7/01/2011
Copy to:
(1) The Assessee
(2) The Respondent
(3) The CIT(A), Mumbai, concerned
(4) The CIT, Mumbai City concerned
(5) The DR, "I" Bench, ITAT, Mumbai
TRUE COPY
BY ORDER
ASSISTANT REGISTRAR
ITAT, MUMBAI BENCHES, MUMBAI
Pradeep J . Chowdhu ry
Sr. Private Secretary
13 Atos Origin India P. Ltd.
ITA No.3447/Mum./2009
Date Initial
1. Draft dictated on 14.12.2010 Sr.PS
2. Draft placed before author 5.1.2011 Sr.PS
3. Draft proposed & placed JM/AM
before the second
member
4. Draft discussed/approved JM/AM
by Second Member
5. Approved Draft comes to Sr.PS/PS
the Sr.PS/PS
6. Date of pronouncement Sr.PS
7. File sent to the Bench Sr.PS
Clerk
8. Date on which file goes to
the Head Clerk
9. Date of dispatch of Order