Income Tax Appellate Tribunal - Delhi
Hcl Comnet Systems & Services Ltd.,, New ... vs Department Of Income Tax on 15 January, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'C', NEW DELHI
Before Sh. N. K. Saini, AM And Sh. C. M. Garg, JM
ITA No. 4546/Del/2013 : Asstt. Year : 2007-08
HCL Comnet Systems and Vs Asstt. Commissioner of Income
Services Ltd., 806, Siddharth, 96, Tax, Circle-12(1), Central Revenue
Nehru Place, Building, New Delhi
New Delhi-110019
(APPELLANT) (RESPONDENT)
ITA No. 5106/Del/2013 : Asstt. Year : 2007-08
DCIT, Circle 12(1), Vs HCL Comnet Systems and Services
New Delhi Ltd., 806, Siddharth, 96, Nehru Place,
New Delhi-110019
(APPELLANT) (RESPONDENT)
PAN No. AAACH3130M
Assessee by : Sh. Ajay Vohar, Sr. Adv. & Upwan Gupta, CA
Revenue by : Sh. R. S. Gill, CIT DR
Date of Hearing : 13.11.2014 Date of Pronouncement : 15.01.2015
ORDER
Per N. K. Saini, AM:
These cross appeals by the assessee and the department are directed against the order dated 10.06.2013 of ld. CIT(A)- XV, New Delhi.
2. First we will deal with appeal of the assessee in ITA No. 4546/Del/2013. Following grounds have been raised in this appeal:
2 ITA No. 4546 & 5106/Del/2013HCL Comnet Systems & Services Ltd.
"1. That Hon'ble CIT(A) grossly erred in law in exceeding his jurisdiction u/s 251(1) of the Income tax Act, 1961, in restoring the matter back to the file of the learned AO for ascertaining the correct amount of foreign currency expenses and telecommunication costs for exclusion from "Export Turnover" for working out the deduction u/s 10A.
2. That Hon'ble CIT(A) erred in law in arbitrarily concluding that adjustment for the above expenses made from "Export Turnover" is not liable to be made also from "Total Turnover" for working out the deduction u/s 10A.
3. That Hon'ble CIT(A), while concluding that the above adjustment made from "Export Turnover" is not liable to be made also from "Total Turnover" grossly erred in law in not following the decision of the jurisdictional High Court which was binding on him.
4. The appellant craves leave to add, to alter, to amend or vary from the aforesaid grounds of appeal at or before the time of hearing."
3. From the above grounds it is gathered that only grievance of the assessee relates to the action of the ld. CIT(A) in not directing the AO to exclude the amount of foreign currency expenses and telecommunication cost from the "Export Turnover" as well as the "Total Turnover".
4. Facts of the case in brief are that the AO excluded telecommunication expenses and certain other expenses incurred in 3 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
foreign currency from the "Export Turnover" while computing the deduction u/s 10A of the Income Tax Act, 1961 (hereinafter referred to as the Act), without simultaneously reducing the same from the "Total Turnover".
5. Being aggrieved the assessee carried the matter to the ld. CIT(A) who directed the AO to ascertain the correct amount of expenses in foreign currency in providing technical services outside India and compute the deduction u/s 10A of the Act accordingly. The ld. CIT(A) held as under:
"(i) The expenses incurred in foreign exchange are to be excluded from ETO only if incurred in connection with providing technical services outside India. The correct amount of such expenses alone to be considered for such exclusion from ETO.
(ii) Expenses in the nature of communication expenses may be considered for exclusion from ETO, only if incurred for delivery of computer software outside India and not for any other purpose.
(iii) If these expenses are not recovered by the appellant as consideration for exports, there is no ground for their exclusion from the "export turnover" in terms of the Explanation 2(iv) to Section 10A.
(iv) Expenses in the nature of communication expenses, or expenses incurred in foreign exchange in connection with providing technical service outside India, are not of the same genre as excise duty, sales tax, freight and insurance, which, if 4 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
embedded in the sale consideration form part of profits and are to be excluded from the "export turnover" (in view of the explicit provision of Section 10A) need not be excluded from the scope of "total turnover" (in the absence of any explicit provisions in section 10A) by relying upon the decision of Hon'ble Supreme Court in the case of Laxmi Machine Works (supra), which, in my view, is misplaced."
6. Being aggrieved the assessee is in appeal. The ld. Counsel for the assessee at the very outset stated that the action of the ld. CIT(A) in remanding the case to the AO for re-computing the quantum of expenses incurred in foreign currency was in complete contravention to the provisions of section 251(1) of the Act, wherein power of the ld. CIT(A) to set aside the assessment to the file of the Assessing Officer was omitted by the Finance Act, 2001 w.e.f 01.06.2001. It was further stated that the ld. CIT(A) was not justified in holding that the exclusions made in export turnover were not to be reduced from the total turnover. The said action was against the settled position of law. It was stated that the issue is squarely covered in favour of the assessee vide order dated 23.01.2009 in ITA No. 3199/Del/2007 for the Assessment year 2004-05 in assessee's own case. Reliance was also placed on the following case laws:
Ø CIT Vs Dell International Services India Pvt. Ltd.: 349 ITR 98 (Kar.) Ø CIT Vs Gem Plus Jewellery India Ltd.: 330 ITR 175 (Bom.) 5 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
Ø HCL Technologies Vs ACIT: ITA Nos. 1320 & 1446/Del/2008 - affirmed by Delhi High Court Ø DCIT Vs Binary Semantics Ltd.: 109 TTJ 556 (Del) Ø DSL Software Ltd. (HCL Technologies) Vs ACIT: ITA Nos. 3203 & 3204/Del/2007 Ø ITO Vs Sak Soft Ltd.: 313 ITR 353 (Chennai ITAT) (SB) Ø M/s Microchip Technology Designs (India) Pvt. Ltd.: ITA No. 1161/Bang/2007 (Bang.) Ø M/s Alternative Food Process P. Ltd. Vs ITO: ITA No. 52/Bang/2008 (Bang.) Ø M/s Goodrich Aerospace Services P. Ltd. Vs DCIT: ITA No. 58/Bang/2008 (Bang.) Ø M/s Hewlett Packard Global Soft Ltd.: ITA No. 333/Bang/2008 (Bang.) Ø ACIT Vs Infosys Technologies Ltd.: 172 Taxman 134(Mag) (Bang.) Ø ITO Vs Servion Global Solutions Ltd.: 117 TTJ 380 (Chennai) Ø I-Gate Global Solutions Ltd. Vs ACIT: 112 TTJ 1002 (Bang.) Ø Tata Elxsi Ltd.: 115 TTJ 423 (Bang.) - affirmed by Karnataka High Court in CIT Vs Tata Elxsi Ltd.: ITA No. 70/2009 decided on 30.08.2011.
Ø Nous Info Systems (P) Ltd. Vs ITO: ITA No. 1042/Bang/2007 (Bang.) Ø Mphasis Ltd. Vs ACIT: ITA No. 884/Bang/2007 (Bang.) Ø Patni Telecom (P) Ltd. Vs ITO: 22 SOT 26 (Hyd.) Ø DCIT Vs Softsol India Ltd.: 22 SOT 271 (Hyd.)
7. In her rival submissions the ld. DR strongly supported the order of the ld. CIT(A).
8. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed 6 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
that the issue under consideration is squarely covered vide order dated 19.12.2011 of the ITAT 'B' Bench, Bangalore in ITA Nos. 975 & 979/Bang/2011 for the assessment year 2002-03 in the case of Intel Technology India Pvt. Ltd. Vs DCIT, LTU, Bangalore, wherein one of us (Accountant Member) is the author. In the said case the relevant findings have been given in paras 21 and 22 which read as under:
21. We have considered the submissions of both the parties and carefully gone through the material available on record. It is noticed that an identical issue has been decided in favour of the assessee by the Special Bench of ITAT Chennai in the case of ITO v. Sak Soft Ltd. 313 ITR (AT) 353 (Chennai)(SB) wherein it has been held as under:
"To say that in the absence of any definition of "total turnover" for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance would be wrong, as there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in connection with the providing of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses cannot have an element of turnover. It is only in recognition of this position that in the definition of "export turnover" in section 10B, the aforesaid two items have been directed to be excluded. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent "consideration" in 7 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
respect of the export. Any reimbursement of the two items of expenses mentioned in the definition can under no circumstances be considered to represent "consideration"
for the export of the computer software or articles or things. Thus, the expression "total turnover" which is not defined in section 10B should also be interpreted in the same manner. Thus, the two items of expenses referred to in the definition of "export turnover" cannot form part of the total turnover since the receipts by way of recovery of such expenses cannot be said to represent consideration for the goods exported since total turnover is nothing but the aggregate of the domestic turnover and the export turnover. In the formula prescribed by section 10B(4) the figure of export turnover has to be the same both in the numerator and in the denominator of the formula. It follows that the total turnover cannot include the two items of expenses recovered by the assessee and referred to in the definition of "export turnover"."
22. The aforesaid decision had been considered and affirmed by the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. & Ors. 2011-TIOL-684-HC-KAR-II wherein it has been held that for the purpose of computation of deduction u/s. 10A of the Act, if any expenditure is excluded from the export turnover, the same has to be excluded from the total turnover also. A similar view has also been taken by the Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. 2010-TIOL-456-HC-MUM-IT. We, therefore, by considering the totality of the facts as discussed hereinabove, are of the view that the ld. CIT(Appeals) was not justified in confirming the action of the Assessing Officer. We therefore set aside the impugned order on this issue and the Assessing Officer is directed to exclude the telecommunication charges from the export turnover as well as total turnover while working out the deduction u/s. 10A.
8 ITA No. 4546 & 5106/Del/2013HCL Comnet Systems & Services Ltd.
9. It is also noticed that in assessee's own case also for the assessment year 2004-05 in ITA No. 3199/Del/2007 vide order dated 23.01.2009, ITAT Delhi Bench 'C' New Delhi vide paras 8 and 9 has held as under:
"8. With regard to the revenue's ground of appeal, he submitted that the issue is squarely covered by a number of decisions of the ITAT. He relied upon the order of the ITAT in the case of Binary Sematics (supra) and the order of the ITAT in the case of ACIT Vs Infoses Technologies reported in 172 Taxman 134. Similarly, he pointed out that an identical issue has been considered by the ITAT, Hyderabad Bench in the case of Patni Telecommunication (P) Ltd. Vs ITO reported in (2008) 22 SOT 26 (Hyd.). Learned DR was unable to controvert the contentions of the learned counsel for the assessee.
9. On due consideration of the facts and circumstances of the case, we find that this issue has been considered in detail by the ITAT in the above orders and it has been held that if such expenses are to be excluded from the export turnover then they are to be excluded from the total turnover also. Respectfully following the orders of the ITAT, we do not find any merit in the ground raised by the revenue. Learned CIT(Appeals) has rightly directed the Assessing Officer to exclude such expenses from the total turnover also while computing the deductions under sec. 10A of the Act."
10. So respectfully following the aforesaid referred to orders, we set aside the impugned order of the ld. CIT(A) on this issue and the AO is directed to reduce the expenses incurred in foreign currency and telecommunication from the export turnover as well the total turnover while working out the deduction u/s 10A of the Act.
9 ITA No. 4546 & 5106/Del/2013HCL Comnet Systems & Services Ltd.
11. Now we will deal with departmental appeal in ITA No. 5106/Del/2013. Following grounds have been raised in this appeal:
"1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 43,94,513/- made by AO by invoking provisions of section 14A read with rule 8D?
2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 15,28,71,739/- on account of licence fee paid to DOT, which was treated as capital in nature by the AO; by holding that the licence fee/transponder fee was revenue in nature and allowable u/s 37 of the Act?
3. Whether Ld. CIT(A) has erred in law by holding the licence fee/transponder fee as revenue in nature without considering that the assessee had obtained the licence with an option where instead of onetime fixed cost model of licence fee; it was arranged as revenue sharing model; but the nature of payment remained as capital expenditure?
4. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in holding that expenses in nature of communication expenses or expenses incurred in foreign exchange are to be reduced from the total turnover while computing the deduction u/s 10A despite the fact that it is not provided in the provision of Income Tax Act and has also erred in not giving any categorical decision in this regard?
5. Whether Ld. CIT(A) was correct on facts and circumstances o the case and in law in directing the Assessing Officer to calculate the deduction u/s 10A in a manner which is provided by the Ld. CIT(A) and by doing so the Ld. CIT(A) has over 10 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
exercised his jurisdiction by setting aside the matter without specifying the manner in which the deduction is to be computed?
6. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing."
12. Ground No. 6 is general in nature so it does not require any comments on our part.
13. Vide Ground No. 1 the grievance of the department relates to the deletion of addition of Rs. 43,44,513/- made by the AO by invoking the provisions of section 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962.
14. Facts of the case in brief are that the assessee company was engaged in the business of providing telecommunication services through the use of Very Small Aperture Terminal (VAST) to close user group and in the development of software for export/remote infrastructure management services, internet services and IT enabled services through units setup under the STP Scheme of the Government of India. The assessee company filed the return of income at the total income of Rs. 5,40,23,471/- after claiming deduction u/s 10A and section 80IA of the Act.
15. During the course of assessment proceedings the AO made an addition of Rs. 43,94,513/- by observing that the assessee had made investments for earning income from dividends, however, had not 11 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
disallowed any expenses relevant to earning such income u/s 14A of the Act.
16. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that neither any expenditure was actually incurred for earning dividend income nor any annual income was received during the year. It was also stated that the Rule 8D came on statute w.e.f 24.03.2008 only, so it was not applicable to the assessment year under consideration.
17. The ld. CIT(A) after considering the submissions of the assessee deleted the disallowance made by the AO by considering that the Rule 8D was applicable from assessment year 2008-09 only and held that the action of the AO in applying said rule in the present case was incorrect.
18. Now the department is in appeal. The ld. DR reiterated the observations made by the AO in the assessment order dated 30.12.2010 and strongly supported the assessment order passed by the AO, it was further stated that the provisions of section 14A of the Act were not applicable and no disallowance was called for. It was also stated that there should have been a positive income for making the disallowance u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962. The reliance was placed on the following case laws:
12 ITA No. 4546 & 5106/Del/2013HCL Comnet Systems & Services Ltd.
Ø CIT Vs M/s Lakhani Marketing Incl., in ITA No. 970/2008 (O&M) order dated 02.04.2014 Hon'ble P & H High Court Ø CIT Vs Holcim India (P) Ltd. in ITA Nos. 486/2014 and 299/2014 order dated 05.09.2014 of Hon'ble Delhi High Court
19. In his rival submissions the ld. Counsel for the assessee strongly supported the orders of the authorities below and further submitted that the earning of income is not a criteria for making the disallowance u/s 14A of the Act and even if no income has been earned the disallowance has to be made u/s 14A of the Act r.w. Rule 8D of the IT Rules. The reliance was placed on the following case laws:
Ø Cheminvest Ltd. Vs ITO (2009) 121 ITD 318 (Del) (SB) Ø Maxopp Investment Ltd. Vs CIT (2011) 15 Taxmann.com 390 (Del)
20. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case it is an admitted fact that the assessee had not earned any dividend income from the investment made in the shares of M/s Helvetica Industries Pvt. Ltd., Hyderabad and M/s Kee Gad Biogen Pvt. Ltd., Delhi. The assessee acquired the shares of those companies for its growth in the future and the investment was made keeping in view the interest of the assessee company. To resolve this controversy, 13 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
it is necessary to discuss the provisions contained in section 14A(1) of the Act which read as under:
"For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act."
21. From the above provision it is clear that before making the disallowance the following conditions are to exist:
i) There must be income taxable under the Act.
ii) The said income must not form part of the total income under the Act.
iii) There must be an expenditure incurred by the assessee and
iv) The said expenditure must have a relation to the income which does not form part of the total income under the Act.
22. From the aforesaid condition it would be clear that concerned assessment year as there is no income which does not form part of the taxable income under the Act i.e. dividend from the shares, in our opinion the provisions of section 14A of the Act cannot be invoked. In the present case it is an admitted fact that the assessee was not in receipt of any dividend income as such there was no income from the investment in question which was taxable under the I.T Act, 14 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
therefore, the AO wrongly invoked the provisions of section 14A of the Act to disallow various interest payments. On a similar issue their lordships of the Hon'ble Punjab High Court in the case of CIT Vs M/s Lakhani Marketing Incl. in ITA No. 970/2008 vide order dated 02.04.2014 observed at paras 9 to 11 as under:
"9. The CIT(A) vide order dated 24.6.2004, Annexure A.II recorded as under:-
"7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to Rs. 46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly."
10. Vide order dated 16.5.2008, Annexure A.III, the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under:-
"We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:-
a) That there must be income taxable under the Act, and
b) That this income must not form part of the total income under the Act, and
c) That there must be an expenditure incurred by the assessee, and 15 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
d) That the expenditure must have a relation to the income which does not form part of the total income under the Act.
9. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee before AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B. V. reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below:-
'Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case, the entire income is found to be taxable, no disallowance can be made under section 14A of the Act.'
10. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, 16 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
since the investments in shares are in the years 1995-96, 1998-99 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares.
11. For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking section 14A of the Act is correct and in accordance with law."
11. In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted. Further, this Court in Hero Cycles Limited's case (supra) recorded as under:-
"5. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investments in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure; where it is found that for earning exempted income no expenditure has been 17 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
incurred, disallowance under section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in IT Appeal No.504 of 2008, CIT vs. Winsome Textile Industries Limited, decided on 25th August, 2009 wherein it was observed as under:-
'6. The contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT vs. Abhishek Industries Limited, (2006) 205 CTR (P&H) 304 : (2006) 286 ITR 1 (P&H) and therefore, disallowance under section 14A was justified.
7. We do not find any merit in this submission. Judgment of this Court in Abhishek Industries (supra) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business.
Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application."
23. Similarly, their lordships of the Hon'ble Jurisdictional High Court in the case of CIT Vs Holcim India (P) Ltd. in ITA Nos. 486 & 299/2014 vide order dated 05.09.2014 dismissed the appeal of the revenue and observed in para 14 as under:
18 ITA No. 4546 & 5106/Del/2013HCL Comnet Systems & Services Ltd.
"14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (II) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:
"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been 19 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order."
24. In the aforesaid case their lordships has also considered the decisions of the Hon'ble Punjab and Haryana, Gujarat and Allahabad High Court which are in favour of the assessee. We, therefore, by keeping in view the ratio laid down by the Hon'ble Jurisdictional High Court in the case of CIT Vs Holcim India (P.) Ltd. order dated 05.09.2014 and the Hon'ble P & H High Court in the case of CIT Vs M/s Lakhani Marketing (supra) are of the considered view that no disallowance u/s 14A of the Act can be made if there is no income earned. We, therefore, considering the totality of the facts as discussed here in above do not see merit in this ground of the departmental appeal.
25. Next issue Ground Nos. 2 and 3 of the department relates to the deletion of addition of Rs. 15,28,71,739/- made by the AO on account of license fee paid to DOT, claimed by the assessee as revenue in nature which was treated as capital in nature by the AO.
26. Facts relating to this issue in brief are that the assessee provided telecom services under license granted by DOT which was initially acquired for 10 years in pursuant to the New Telecom Policy in 1999.
20 ITA No. 4546 & 5106/Del/2013HCL Comnet Systems & Services Ltd.
The period of license was extended for 20 years and operators were required to pay specified share of their Adjusted Gross Revenue on a periodic basis. The assessee paid a license fee of Rs. 4.16 crores to Department of Telecommunication (DOT) under new revenue sharing regime and transponder fee of Rs. 16.22 crores to M/s Antrix Corporation Ltd., a wholly owned subsidiary of Government of India for purchasing bandwidth capacity in transponder. The AO held that the aforesaid expenditure was incurred by the assessee for acquiring a license fee and was accordingly a capital expenditure, however, he allowed depreciation @ 25% on the same.
27. Being aggrieved the assessee carried the matter to the ld. CIT(A) who held that since license/transponder fees was linked to gross annual revenues received by the assessee, the same was a revenue expenditure and allowable u/s 37 of the Act.
28. Now the department is in appeal. The ld. CIT DR reiterated the observations made by the AO in the assessment order dated 30.12.2010 and strongly supported the order of the AO.
29. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the expenses were incurred in running the business, no enduring benefit was received by the assessee and expenditure was based on percentage of revenues so it was allowable u/s 37(1) of the Act and the 21 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
ld. CIT(A) rightly held so. The reliance was placed on the following case laws:
Ø CIT Vs Bharti Hexacom Ltd.: 221 Taxman 323 (Del) Ø Hutchison Essar Telecom Ltd. Vs JCIT: 149 TTJ 673 (Del) Ø DCIT Vs Comsat Max Ltd.: 29 SOT 436 (Del) Ø Mahanagar Telephone Nigam Ltd. Vs ACIT: 100 TTJ 1 (Del) Ø ACIT Vs Vodafone Essar Gujarat Ltd.: 131 TTJ 544 (Ahd.) Ø Bharti Airtel Ltd. Vs ACIT: 41 SOT 175 (Mum.) Ø Videsh Sanchar Nigam Ltd. Vs JCIT: 81 ITD 456 (Mum.)
30. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the issue under consideration is squarely covered by the judgment of the Hon'ble Jurisdictional High Court in the case of CIT Vs Bharti Hexacom Ltd. 221 Taxman 323 (Del) (supra), wherein it has been held as under:
"The licence fee was imposed and payable under the Indian Telegraph Act and other statutory provisions and was/is mandatory. Failure to pay the same would/will result in discontinuance or stoppage of business operations.
Under 1999 policy, the amount payable speaks of sharing of gross revenue earned by the service provider from the customers. 1994 agreement as noticed did have a provision for sharing but with minimum payment stipulation. In case of non-payment of licence fee, the licence could be revoked and licencee was not permitted to carry on and continue cellular telephone service.22 ITA No. 4546 & 5106/Del/2013
HCL Comnet Systems & Services Ltd.
Thus, the licence fee payable was/is equally with the objective and purpose to maintain and operate cellular telephone services. It was also an operating expense and non-payment can lead to cancellation as one of the consequences. Endurement requires current expenses and is subject to payment on revenue share. It will not be correct to hold or propound that entire payment during the term of licence, is deferred capital payment. This was/is not the intent under the 1994 agreement or 1999 policy. The intent is to also share the .gross earning to maintain and operate the licence.
The licence fee as such is similar to both prospecting fee, acquisition of right to lease as well as leases which enabled removal of sand/tendu leaves, etc. as nothing has to be won over, or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the 'asset' i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence.
The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset.
The payment of yearly licence fee on revenue sharing basis was for carrying on business as cellular telephone operator and, thus it was a normal business expense.23 ITA No. 4546 & 5106/Del/2013
HCL Comnet Systems & Services Ltd.
Read in this manner, the licence granted by the Government/authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on the gross revenue to continue, to be able to operate and run the business, it would also be revenue in nature.
Failure to make stipulated revenue sharing payment on yearly basis would result in forfeiting the. right to operate and in turn deny the assessee, right to do business with the aid of the capital asset. Non-payment will prevent and bar an assessee from providing services.
In aforesaid circumstances, it would be appropriate and proper to apportion the licence fee as partly revenue and partly capital.
The next obvious question is, on what basis apportionment should be done and what could be the proportion of apportionment between capital and revenue expenditure. In this regard it would be appropriate and proper to divide the licence fee into two periods i.e. before and after 31-7-1999. The licence fee paid or payable for the period up to.31-7-1999 i.e. the date set out in the 1999 policy should be treated as capital and the balance amount payable on or after the said date should be treated as revenue.
The aforesaid apportionment is necessary because licence fee was payable for establishment, maintenance and operation of cellular telephone service. Establishment and set up took place in the initial years and thereafter the payments made were/ are for operation or maintaining the cellular telephone service. Initial outlay and payment, 24 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
therefore, is capital in nature, whereas the outlays and payments made subsequently are to operate and maintain the service. 1999 policy in the form of letter dated 22-7- 1999 also refers to one time entry fee which is chargeable and had to be calculated as lic7ence fee dues payable up to 31-7-1999 and licence fee was thereafter payable on percentage share of gross revenue.
The new licences issued to others also stipulated one time entry fee and then licence fee payment on sharing basis. In view of the new 1999 policy, the earlier policy which restricted competition, underwent a change and licencees forgo their right to operate in the regime of limited number of operators.
Another reason why licence fee payable for the period on or before 31- 7 -1999 should be treated as capital and the amount payable thereafter as revenue, is justified and appropriate in view of section 3SABB. The provision provides that licence fee of capital nature shall be amortized by dividing the amount by number of remainder years of licences.
Thus, the capitalized amount of licence fee is to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee along with the brought forward amortized amount would be allowed as deduction.
After a particular point of time, deduction allowable under section 35ABB would be more than the actual payment by the assessee as licence fee for 25 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
the said year. This would normally happen after the mid- term of the licence period.
Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period."
31. The Hon'ble Jurisdictional High Court concluded as under:
(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable up to 31-
7-1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 1-8-1999 should be treated as revenue expenditure.
(ii) Capital expenditure will qualify for deduction as per section 35ABB.
32. Facts of the present case appears to be similar to the facts involved in the case of CIT Vs Bharti Hexacom Ltd. (Delhi) (supra), we, therefore, restored this issue to the file of the AO to be decided in accordance with the findings given by the Hon'ble Jurisdictional High Court in the case of Bharti Hexacom Ltd. (supra) and if any expenditure on account of licence fee was payable up to 31.07.1999, it should be treated as capital expenditure and the licence fee on revenue sharing basis after 01.08.1999 should be treated as revenue in nature.
33. As regards, Ground Nos. 4 and 5, the ld. Counsel for the assessee stated that the issue raised by the department is not maintainable because 26 ITA No. 4546 & 5106/Del/2013 HCL Comnet Systems & Services Ltd.
the ld. CIT(A) had not directed the AO to reduce the foreign exchange and communication expenses from the total turnover while computing the deduction u/s 10A of the Act rather he directed the AO to calculate the deduction by reducing both expenses from the export turnover and not from the total turnover. Therefore, these grounds are not maintainable. The ld. DR could not controvert the aforesaid contention of the ld. Counsel for the assessee. Accordingly, these grounds are dismissed.
34. In the result, the appeal of the assessee is allowed and that of the department is partly allowed for statistical purposes. (Order Pronounced in the Court on 15/01/2015) Sd/- Sd/-
(C. M. Garg) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 15/01/2015
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR