Income Tax Appellate Tribunal - Delhi
Dcit, Gurgaon vs M/S. Dlf Projects Ltd., Gurgaon on 27 November, 2018
ITA No. 5178/Del/2014
Assessment year 2009-10
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B' NEW DELHI
BEFORE
SHRI R.K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No. 5178/Del/2014
Assessment year: 2009-10
DCIT, DLF Projects Ltd.
Circle 1(1), (Formerly DT Projects Ltd.),
vs
Gurgaon. 3rd Floor, Shopping Mall,
Arjun Nagar, DLF City,
Phase-I, Gurgaon.
(PAN: AACCD3093R)
(Appellant) (Respondent)
Appellant by: Shri Surender Pal, Sr. DR
Respondent by: S/Shri R.S. Singhvi, Satyejeet, CAs
Date of Hearing : 30.08.2018
Date of Pronouncement: 27.11.2018
ORDER
PER SUDHANSHU SRIVASTAVA, J.M.
This appeal has been preferred by the revenue against the order of the Ld. Commissioner of Income Tax (Appeals), Faridabad dated 24.07.2014 pertaining to assessment year 2009-
10. 2.0 The appeal primarily involves three issues in respect of which disallowance/s made by the assessing officer have been deleted by the Ld. CIT (Appeals). The issues under dispute are - 1 ITA No. 5178/Del/2014 Assessment year 2009-10 a. Disallowance of Project Management Expenses of Rs.6,32,50,280/- on ground of non deduction of Tax at Source (TDS) u/s 195 of the Income Tax Act, 1961 (hereinafter called 'the Act') b. Disallowance of interest expenses on estimated rate of 12%amounting to Rs.49,01,176/- on the ground that same pertains to Capital Work In Progress (CWIP) c. Capitalization of Software expenses - Rs.65,70,768/- 2.1 With respect to Ground no. 1 relating to disallowance of project management expenses, the brief facts are that the respondent/assessee had made payment of Rs. 6,65,79,242/- (GBP 9,05,043) to Cyprus based company Laing O' Rourke India (Holdings) Ltd. (in short LOR Cyprus) for supply of manpower in accordance with the Manpower Supply Agreement effective from 1st April, 2008 for a period of three years. The said expenses were claimed under the head 'Project Management Expenses' and the payment was made after deducting TDS on 5% mark-up. However, on the actual cost component, which was in the nature of reimbursement of salaries, no TDS was deducted by the respondent but TDS was deducted by LOR Cyprus u/s 192 of the Act. The assessing officer made the disallowance of said expenses 2 ITA No. 5178/Del/2014 Assessment year 2009-10 u/s 40(a)(i) on the ground that the respondent/assessee had failed to deduct TDS on the entire amount u/s 195 of the Act. The Ld. first appellate authority has deleted the disallowance vide finding recorded at Para 6.9 to 6.14 of the impugned order. 2.2 Ground Nos. 2 & 3 are against deletion of disallowance of interest to the extent of Rs. 49,01,176/- by the Ld. CIT (A). The assessing officer has considered the disallowance of interest by holding that interest attributable to Capital Work in Progress (CWIP) is not allowable as revenue expense. The disallowance has been made by estimating interest @12% on the month-end balance of the CWIP which was added to the cost of CWIP. The Ld. CIT (A) deleted the disallowance.
2.3 Ground no. 4 is on the issue of capitalization of software expenses to the extent of Rs. 65,70,768/-. The assessing officer was of the view that Software expense of Rs. 1,03,95,322/- incurred by the respondent/assessee is of capital nature and same was required to be clubbed with Computer and other peripherals. Accordingly, the assessing officer made disallowance of Rs. 65,70,768/- after allowing depreciation @ 60%. The Ld. first appellate authority deleted the disallowance. 3 ITA No. 5178/Del/2014 Assessment year 2009-10 2.5 Now the Revenue is before the ITAT and has raised the following grounds of appeal:
"1. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 6,32,50,280/- on account of non-deduction of TDS, by ignoring the fact that as per 'Manpower Supply Agree4ment' filed, the Cyprus Company LOR Cyprus is the service provider and keeping in view that the services were rendered in India, the payment received by LOR Cyprus was accrued and earned in India and hence TDS u/s. 195 was to be deducted by the assesse company.
2. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 49,01,176/- made on account of disallowance of interest expenses without appreciating the fact that the statement of the assesse is contradictory to the documents produced.
3. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 49,01,176/- relating to disallowance of interest expenses without appreciating the fact that on one hand, the assesse is submitting that the plant and machinery were ready to use after 4-5 days of erection and commissioning whereas details of CWIP shows that plant and machinery were purchased and deployed from March 2008 to September 2008.4 ITA No. 5178/Del/2014
Assessment year 2009-10
4. That on the facts and circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 65,70,768/- made on account of disallowance from the software expenses without appreciating the fact that software expenses are of enduring nature and are to be taken as a part of computers and need to be capitalized.
5. That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal."
3.0 Taking up ground no. 1, Sh. Surender Pal, the Ld. Departmental Representative filed a paper-book containing case laws running into 44 pages. It was argued that respondent/assessee was liable to deduct TDS on the entire amount of manpower supply charges paid to LOR, Cyprus. Relying on the judgment of the Hon'ble Delhi High Court in the case of Centrica India Offshore P. Ltd. vs. CIT reported in [2014] 364 ITR 336 (Delhi), it was contended that the amount reimbursed to LOR, Cyprus was in the nature of Fee for Technical Services (FTS) and as such the assessee was required to deduct TDS on entire amount. Reliance was also placed on decision of the Authority for Advance Rulings (AAR) in the case of Verizon Data Services India P. Ltd. and AT & S India P. Ltd. 5 ITA No. 5178/Del/2014 Assessment year 2009-10 3.1 In response, Sh. R.S. Singhvi, the Ld. AR appearing on behalf of the respondent/company supported the order of Ld. CIT (A) and contended that the Ld. first appellate authority has passed a well reasoned order after taking into consideration the terms of the agreement and has rightly deleted the disallowance. The Ld. AR also placed on record two paper books, one containing case laws and the other consisting documents in support of claim of project management expenses. The attention of the Bench was drawn towards the copy of invoice raised by LOR, Cyprus and the Journal voucher placed at Paper Book Pages 6 & 7 wherein the mark up component had been separately mentioned. It was vehemently argued that the respondent/assessee has rightly deducted TDS @ 42.23% on the mark-up amount of GBP 43,097 being 5% of the actual cost and further that there was no need to deduct TDS on the actual cost which is merely in the nature of reimbursement. The main plank of Ld. AR's submission was that the TDS has duly been deducted on payment of salaries by LOR Cyprus and as such the reimbursement of actual cost portion was not exigible to the withholding tax in view of judgment of the Hon'ble Apex Court in 6 ITA No. 5178/Del/2014 Assessment year 2009-10 the case of GE India Technology Ltd. vs. CIT reported in [2010] 327 ITR 456 (SC).
3.1.1 The Ld. AR also submitted that the actual payment made to LOR Cyprus has further been disbursed to respective employees after deduction of TDS u/s 192 of the Act and as such there is no case of any default in complying with the withholding tax provisions. Reference was made to the specific finding of the Ld. CIT (Appeals) recorded at Pages 29 and 30 of the impugned order. In support, reliance was also placed on the decision of coordinate bench of ITAT Ahmedabad in the case of Burt Hill Design P. Ltd. vs. DDIT reported in [2017] 186 TTJ 652 and the judgment of theHon'ble Bombay High Court in the case of DIT vs. Marks and Spencer Reliance India P. Ltd. (ITA No. 893 of 2014). 3.1.2 On the issue of nature of manpower supply service vis- a-vis FTS, the Ld. AR countered the argument put forth by the Ld. DR and submitted that the agreement is merely for supply of manpower and employees so seconded are under the full control and supervision of the respondent/assessee and as such the payment is not in the nature of Fee for Technical Services. It was further argued that as per Article 12 of the Indo-Cyprus DTAA, the satisfaction of 'Make available' clause is important for 7 ITA No. 5178/Del/2014 Assessment year 2009-10 treating any service to be in the nature of technical or consultancy services. The Ld. counsel submitted that as per the Manpower Supply Agreement, LOR Cyprus has merely supplied employees on secondment for execution of the project of respondent/assessee with no responsibility of services rendered by said employees and as such the pre-requisite condition of technical services being 'made available' remained unsatisfied. The Ld. AR further placed reliance of decision of the coordinate bench of ITAT Mumbai in the case of DCIT vs. Mahanagar Gas Ltd. reported in [2016] 158 ITD 1016 and the judgment of the Hon'ble Bombay High Court in the case of Marks and Spencer (Supra) for the proposition that mere secondment of employees could not be termed as fee for technical services. 4.0 On ground nos. 2 and 3, the Ld. DR, while disputing the correctness of the impugned order, contended that interest attributable to CWIP cannot be allowed as revenue expense. It was further argued that CWIP includes plant, equipments and cranes which are of enduring nature and as such the assessing officer has correctly capitalized the interest and made the disallowance.
8 ITA No. 5178/Del/2014 Assessment year 2009-10 4.1 The Ld. AR, on the other hand, supported the order of the Ld. CIT (Appeals) and reiterated the submissions made before the Ld. first appellate authority. It was further submitted that the respondent/assessee is a real estate developer and CWIP is in fact current work in progress in the form of consumables which are used at different sites. The Ld. AR also raised a plea that the assessee company has sufficient own funds and that the assessing officer has failed to prove any nexus between the borrowed funds and CWIP. The Ld. AR also pointed out that the issue is also covered by the assessment order for AY 2011-12 wherein the assessing officer has not made any similar disallowance of interest.
5.0 On ground no. 4, the Ld. DR relied on the assessment order and stated that software expenses are incurred in connection with computer and as such same are liable to capitalized. The Ld. DR justified the action of the assessing on the ground that expenses towards Annual Maintenance Contract (AMC), License Fee etc are of enduring nature. 5.1 On the other hand, the Ld. AR submitted that the expenses towards AMC, consumables and license fee are incurred on year to year basis and cannot be considered to be of 9 ITA No. 5178/Del/2014 Assessment year 2009-10 enduring nature. The Ld. AR supported the finding of the Ld. CIT (Appeals) and submitted that in AY 2011-12, the assessing officer himself has accepted the claim of AMC as revenue expenditure. Reference was also made to the decision of the Delhi Bench of the ITAT in the case of sister concern DLF Home Developers Ltd. vs. DCIT (ITA NO. 4757/Del/12 and the judgments of the Hon'ble Delhi High Court in the cases of CIT vs. G.E. Capital Services Ltd. reported in [2008] 300 ITR 420 (Del) and CIT vs. Amway India Enterprises reported in (2012) 346 ITR 341 (Delhi). 6.0 We have considered the rival submissions and have also gone through the orders passed by lower authorities. As far as ground no 1 of the appeal is concerned, it is seen that the Ld. first appellate authority has deleted the disallowance of project management expenses on account of alleged failure to deduct tax at source after elaborately discussing the various aspects of the issue in hand. It is settled law that before thrusting liability to deduct TDS, the following pre-conditions must be satisfied:
i. There must be income element in the hands of the recipient ii. The income must be earned/derived in India iii. In case the payment is made to a non-resident, satisfaction of conditions mentioned in the relevant 10 ITA No. 5178/Del/2014 Assessment year 2009-10 Article of the Double Taxation Avoidance Agreement (DTAA), if any, is to be seen.
6.1 In the present case, it is observed that the payment of man power supply charges is being made to a non- resident company, LOR Cyprus, which is a resident of Cyprus. Further, India is having DTAA with Cyprus which was operative in the year under consideration. Moreover, undisputedly, the income (mark-up component) from the supply of man power is earned and derived in India. Now the main question to be considered is the satisfaction of the relevant Articles of the DTAA which would ultimately decide the nature of payment and liability of withholding tax.
6.2 When we examine the terms of the Manpower Supply agreement and the invoice raised by LOR Cyprus placed at Paper Book pages 1-5 and 6 respectively, it is evident that the non- resident has only supplied workforce/employees to the respondent/assessee on secondment basis and further that there is no responsibility of LOR Cyprus with regard to the services performed by seconded employees. Also, as rightly observed by the Ld. CIT (Appeals), the employees are under full management and supervision of the respondent/assessee. Further, the invoice 11 ITA No. 5178/Del/2014 Assessment year 2009-10 raised by LOR Cyprus shows a clear bifurcation of the amount of the reimbursement of actual cost and the mark up @ 5% on which TDS has been deducted by the respondent/assessee. Therefore, the payment can conveniently be divided into two parts, one towards reimbursement of the actual cost and the other towards mark-up. Further, it settled position that TDS provisions would only come into play only when there is an element of income involved. The Ld. CIT (Appeals) has discussed this very aspect in great detail vide finding recorded in Para 6.13 which is reproduced hereunder for a ready reference:
"Any payment, in order to be brought within the scope of income by way of fees for technical services u/s. 9(1)(vii), should be or have at least some element of income in it. Such payment should involve some compensation for the rendering of any services, which can be described as income in the hands of the recipient. When the expenditure incurred is reimbursed as such, without having any element of income in the hands of recipient, it cannot be assumed the character of such income is deemed to accrue or arise in India. In the case of appellant out of the total payment of 905043 GBP a sum of 861946 GBP represents, reimbursement of salary and hence as such without any element of income and 43097 GBP as a mark-up of LOR Cyprus, which is calculated as @5% of amount reimbursed i.e. 861946 GBP. On this mark up of 12 ITA No. 5178/Del/2014 Assessment year 2009-10 43097 GBP, TDS has been deducted and deposited into the Govt. Account. The AO has not disputed the payment of 43097 GBP and merely the rest of the amount i.e. 861946 GBP has been disallowed which is actually the amount of reimbursement of salary to LOR Cyprus lacking any element of "income". In view of the above said judicial pronouncements by various courts of law, I am of the considered opinion that the reimbursement made by the appellant i.e. 861946 GBP which is equivalent to Rs. 6,32,50,280/- to the Cyprus Company does not constitute income in the hands of Cyprus Company."
6.3 We find ourselves in agreement with the finding recorded by the Ld. CIT (Appeals) which is in conformity with the principle laid down by the Hon'ble Apex Court in the case of GE India Technology Cen. P. Ltd reported in [2010] 327 ITR 456 (SC). It is undisputed that the reimbursement of actual manpower expense has no element of any income in the case of the service provider LOR Cyprus in terms of section 195 of the Act. Accordingly, we are of the considered view that the respondent/assessee was not required to deduct TDS on the actual cost component which is in the nature of reimbursement of salaries. The finding of the Ld. CIT (Appeals) in this regard needs no interference.
13 ITA No. 5178/Del/2014 Assessment year 2009-10 6.4 Since, LOR Cyprus does not have any Permanent Establishment (PE) in India, applicability of Article 7 is ruled out at the very threshold. When we further analyze the various Articles of Indo-Cyprus DTAA, particularly 'Article 12 - Royalties and Fee for Included Services', we find that the transaction in dispute cannot be termed as fees for included services as defined by sub-clause 4 of Article 12 as there is an express requirement that the services must be made available to recipient. However, in the present case, the non-resident LOR Cyprus has only supplied man power to the respondent/assessee and there is no case of any technical knowledge, experience, skill, know-how or process being made available to the respondent/assessee. In these circumstances, we reach the conclusion that reimbursement of salary to LOR Cyprus is not in the nature of any technical or consultancy fee and that the same falls outside the purview of Articles 12 and 13. Our view is supported from the decision of the Mumbai bench of the ITAT in the case of DCIT vs. Mahanagar Gas Ltd. (Supra) and ADIT vs. Marks and Spencers Reliance India P. Ltd. reported in [2013] 27 ITR(T) 448 which has been affirmed by the Hon'ble Bombay High Court.
14 ITA No. 5178/Del/2014 Assessment year 2009-10 6.5 Accordingly, we are of the considered view that it is only the mark up which is liable to withholding tax u/s 195 of the Act and not the reimbursement of actual cost to LOR Cyprus. 6.6 At this juncture, it will also be relevant to take note of another important submission of the Ld. AR in which it has been clarified that the non-resident LOR Cyprus has deducted TDS u/s 192 of the Act while making payments to the seconded employees and as such there is no loss to the revenue. This fact has also been noted by the Ld. CIT (Appeals) vide the following observation in Para 6.13:
"Without prejudice to the above, LOR Cyprus has deposited tax on the salary paid by it for the services rendered by its employees in India on secondment to the appellant, for which necessary proofs were filed. Hence, there is also no loss to the revenue also under these circumstances."
6.7 We agree with the observations of the Ld. CIT (Appeals) and find merit in the arguments of the Ld. AR which is clearly supported from the decision of the coordinate bench of the ITAT Ahmedabad in the case of Burt Hill Design P. Ltd. vs. DDIT reported in [2017] 186 TTJ 652 and the judgment of the Hon'ble Bombay High Court in the case of DIT vs. Marks and Spencer Reliance India P. Ltd. (ITA No. 893 of 2014) wherein it has been 15 ITA No. 5178/Del/2014 Assessment year 2009-10 held that when the payments have been charged to tax in India u/s 192, the assessee could not be treated as assessee in default for non-deduction of TDS. We have no hesitation in subscribing to the view taken by the coordinate bench and approved by Hon'ble Bombay High Court.
6.8 We also note that the cases relied upon by the Ld DR are distinguishable on facts and do not help the cause of the Revenue.
6.9 Accordingly, in light of our observations in the preceding paragraphs, we find no justification in interfering with order of the Ld. CIT (Appeals) and hold that the disallowance of the project management expenses amounting to Rs. 6,32,50,280/- u/s 40(a)(i) r.w.s. 195 of the Act has rightly been deleted. Accordingly, ground no. 1 of the revenue's appeal stands dismissed.
7.0 Coming to ground nos. 2 and 3, it is seen that the dispute in hand is regarding disallowance of interest allegedly attributable to CWIP. At the outset, we find that the assessing officer has not given any basis for estimating the interest disallowance @12% on the monthly balance of CWIP. The 16 ITA No. 5178/Del/2014 Assessment year 2009-10 assessment order is silent with regard to the basis of such estimation and the assessing officer has failed to even prove slightest of nexus between the borrowed funds and the amount reflected under the head 'CWIP'. It is a fundamental principle that the assessment has to be made after due application of mind and any disallowance or addition must be backed by logical reasoning and supported from facts of the case. Further, while making the disallowance of interest, it is incumbent upon the assessing officer to establish as to why such claim is disallowed or capitalized. However, we find that in the present case, the capitalization and the consequential disallowance of interest has been made on an arbitrary basis without even appreciating the fact of availability of own funds and without establishing any nexus between the interest expense, which is apparently related to business activities, and the borrowed funds. 7.1 We find that the Ld. CIT (Appeals) has comprehensively dealt with this issue and his finding is reproduced hereunder:
"7.3 I have gone through the assessment order passed by the AO, submissions filed by the appellant from time to time and other discussion held. The following points emerge from them:-17 ITA No. 5178/Del/2014
Assessment year 2009-10
(a) That the appellant is engaged into the business of construction as a Contractor.
(b) The plant and machinery of the appellant business is in the shape of cranes, cement feeding plants etc. (c ) Its quiet understandable that the cranes or other machinery purchased from various suppliers cannot be put to use immediately at the time of purchase, due to time lag in transporting these items to various sites and thereafter assembling of various items as per the requirement.
(d) The time period which is the gestation period from the date of its purchase/ payment till its "use "is being shown as CWIP. In the year under consideration, appellant had 17 projects in hand from locations as far away as, Mumbai, Chennai, Gurgaon, Cochin, Kolkatta etc.
(e) Only the purchase cost that has been incurred by the appellant has been shown in CWIP and no other costs have been incurred on the items shown in CWIP.
7.4 Before proceedings further it would be proper to examine the business of the appellant company. The appellant is engaged into the business of construction as a Contractor. It has fixed assets in the share of plant and machinery, furniture and fixture etc., on 31st March 2009, to the tune of Rs. 292.62 Cr. Out of these total fixed assets of Rs. 298.24Cr. i.e. 2% of the total fixed assets appear as the closing capital work in progress. Moreover the closing CWIP at the end of the year is at Rs. 4,69,42,604/- as compare to Rs. 22,26,69,694/- at the start of the year. The appellant has a share capital and reserve worth Rs. 111,39,95,205/- there 18 ITA No. 5178/Del/2014 Assessment year 2009-10 are secured loans of Rs. 213,62,47,973/- on which interest of Rs. 26,58,49,339/- was paid.
As the company is into the business of construction as a contractor the plant and machinery is in the shape of steel shuttering, cranes, batching plant, generators etc. The appellant worked for different clients at different sites and for these purposes and the plant and machinery in the shape of cranes, batching plant etc. were deployed at several sites. The cranes, batching plants of different sizes and capacities were required to the appellant for different projects. The appellant has purchased cranes, batching plants from different suppliers and in certain cases advances were given to different suppliers against the supplies to be made. Cranes, batching plant are huge in terms of size and have to be designed in accordance to the specific requirements of the project and there is always a possibility of a time lag from the date of supplies of these items to the date of actual uses of these equipments. There is also no doubt that there is no value addition made in these items and the only question is in regard to the time gap between assembling and reassembling of these items.
It is also seen that in certain cases, advances were given to different suppliers for supplying equipment, however, the supplies were made subsequently and till the time of actual supply of these items have been received and put to use, such advances have been treated as CWIP.
As per the dictionary, meaning of capital work in progress (CWIP) is as below:-
19 ITA No. 5178/Del/2014
Assessment year 2009-10 "Capital WIP is referred to as Assets under construction and are represented by a specific asset class. IT is an asset on the balance sheet i.e. not considered to be a final product, but must still be accounted for because funds have been invested towards its purchase". Thus by its very nature CWIP is a work that has not been completed but on which capital investment has already been incurred. In the case of appellant, there is no doubt that the CWIP is basically an asset which has not reached the final product stage. The details filed by the appellant during the course of assessment proceedings as well as during the course of appellate proceedings reveal that there is a closing CWIP of Rs. 4,69,42,604/- as on 31.03.2009, which represents the following:-
S.No. Particulars Amount (Rs.)
1 Capital Work in progress-Construction plant 11,29,866
and equipment
2 Capital Work in Progress-Cranes 4,37,38,406
3 Capital Work in Progress-Batching Plant 20,44,598
4 Advance ( debit balance ) to creditors for fixed 29,734
assets
Total 4,69,42,604
The above details makes it clear that the main part of CWIP represents expenditure incurred on cranes amounting to Rs. 4,37,38,406/- out of the total CWIP of Rs. 4,69,42,604/-. Similarly, there is an opening CWIP of Rs. 22,26,69,694/- as on 01.04.2008, and Rs. 1,65,12,229/- as on 31.03.2010.20 ITA No. 5178/Del/2014
Assessment year 2009-10 The above details makes it clear that the closing CWIP of Rs. 22,26,69,694/- standing in A.Y, 2008-09 has come down to Rs. 4,69,42,604/- in A.Y. 2009-10 and Rs. 1,65,12,229/- in A.Y. 2010-11. The said details leaves no doubt that the time gap for putting CWIP into use is not more than one year in any case.
The appellant has a net worth of Rs. 325.02 Crores against which there is a closing CWIP of Rs. 4.69 Crores. The AO while making disallowance of interest presumed that the borrowed funds were actually being used for purchasing items shown under the head CWIP. However, the AO has not brought anything on record to prove that there is a time gap of more than one year in capitalization of CWIP. On the other side, the appellant has stated that CWIP is merely 1.44% of its net worth and it has sufficient funds to purchase the capital items. The appellant also stated that normally CWIP is capitalized in the books within a period of 3 to 4 months only. In support thereof copies of ledger accounts were filled by the appellant.
It's also a fact that in assessment proceedings for A.Y. 2011- 12, the same issue has been decided by the AO in the case of the appellant in which no disallowance on this account have been made by the AO. The facts of A.Y. 2011-12 as well as A.Y. 2009-10 are identical. In support of its contention a copy of assessment order for A.Y. 2011-12 was also filed by the appellant.
7.5 After pursuing the facts of the case, the observation of the AO made in the assessment order and the copy of the 21 ITA No. 5178/Del/2014 Assessment year 2009-10 assessment order for A.Y. 2011-12, there is no doubt that there is no material on record that the borrowed funds were actually being used for purchasing CWIP. In this case, CWIP is merely on account of the time lag from the date of purchase/advance to the date of actual use of the equipment. It is a fact that in the case of appellant, who is working as a contractor at 17 different sites all across the country, that plant and machinery has to be deployed at different locations and there is bound to be a time lag. The AO has himself accepted the explanation of the appellant in subsequent years therefore, there is no reason to make disallowance of interest expenditure of Rs. 46,01,176/-." 7.2 The Ld. DR was not able to controvert the factual and legal findings of the Ld. CIT (Appeals) wherein the disallowance has been deleted by holding that the CWIP is towards current business needs and same could not be considered as capital in nature. The Ld. CIT (Appeals) has also held that the respondent/assessee has sufficient own funds and further that the net worth of the company is far more than the value of CWIP and as such there is no nexus between the borrowed funds and the CWIP. We also note that the assessing officer has accepted the claim of interest in AY 2011-12 wherein, on identical facts, no such disallowance was made. In these circumstances, the 22 ITA No. 5178/Del/2014 Assessment year 2009-10 department cannot be allowed to agitate this issue in the year under reference. Accordingly, in our considered view, the order of Ld. CIT (Appeals) on this issue is well reasoned and warrants no interference and is hereby upheld. Consequently, ground nos. 2 and 3 are rejected.
8.0 Ground no. 4 is on the issue of capitalization of software expenses to the extent of Rs. 65,70,768/-. The assessing officer was of the view that Software expense of Rs. 1,03,95,322/- incurred by the respondent/assessee is of capital nature and same is required to be clubbed with 'Computer and other peripherals'. Accordingly, the assessing officer made a disallowance of Rs. 65,70,768/- after allowing depreciation @ 60%. The Ld. first appellate authority deleted the disallowance by observing as under:
"8.3 I have gone through the submission filed by the appellant form time to time, assessment order passed by the AO and the facts of the case. The company is into the business of construction as a contractor. It has around 17 sites in hand at different location and have more than 800 employees and have around 800 computers.
The details of computer software submitted by the appellant reveals that expenditure on AMC, Consumables and Licence fees were incurred during the year. The AO treated the 23 ITA No. 5178/Del/2014 Assessment year 2009-10 expenditure incurred on software as "capital" in nature and accordingly, allowed depreciation on them @ 60% as against the appellant treating the entire amount as revenue expenditure. The AO has not given any concrete reasons for treating the entire software expenses as capital in nature. The AO has simply said that as per provisions of income tax act, software has been clubbed with computers for depreciation purposes and therefore, software expenses are capital in nature. On the other side, the appellant submitted that the software expenses include expenditure incurred on AMC, Consumables and licence fees. Therese expenses were not of enduring nature and the details of the expenditure itself show that the expenditure pertains to only one year. Similarly expenditure incurred on consumables items includes purchase of small items like training expenses, auto card software, gateway checkpoint software etc and licence fees pertains to renewal of various licences for one year only. The appellant also stated that the expenditure incurred on AMC has been accepted by the AO in the assessment proceedings for the A.Y. 2011-12.
Thus the fact as evident from the various details filed by the appellant clearly reveals that the expenditure was incurred on the following three accounts.
a) Annual Maintenance Cost
b) Consumables
c) Licence Fees.
24
ITA No. 5178/Del/2014
Assessment year 2009-10
The details filed also reveals that there is no such item which is enduring in nature, rather expenses were incurred in purchase of various software items, licence fees for renewal of licences, consumables etc. with a limited shelf life. The expenditure incurred on AMC is definitely only for one year and no enduring benefit can be derived there from. Similarly licence fees are being paid only for one year and no enduring benefit is being derived there from. As far as consumable items are concerned there are various software's purchased for different purposes and the warranty for these software's were not exceeding twelve months. As these items are not for any enduring benefit the entire expenditure cannot be treated as "Capital Nature".
The Hon'ble Delhi High Court in the case of CIT Vs. Amway India Enterprises (2012) 346 ITR 341 opined that expenditure incurred on purchase of software application and payment for consideration for acquiring licence to use those application would be allowed as revenue expenditure. Similarly, in the following cases it has been held that the expenses incurred for either upgrade the system or to run the system is allowable as revenue in nature.
a) CIT Vs. Asahi India Safety Glass Ltd. (2012) 346 ITR 329 (Delhi)
b) Chief CIT Vs. O.K. Play India Ltd. (2012) 346 ITR 57 ( P & HS.37(1)
c) CIT Vs. GE Capaital Services Ltd. (2007) 164 Taxman 46 (Del.) 25 ITA No. 5178/Del/2014 Assessment year 2009-10
d) Oracle India Pvt.Ltd. Vs. CIT (Delhi High Court) ITA Nos. 25/2012, 287/2008,417/2009, 447/2009, 461/2009 and 683/2009
e) CIT Vs. Southern Roadways Ltd. (2007) 288-ITR-
15 (Mad.)
f) Naveen Projects Ltd. Vs. CIT (2005) 1 SOT 232 (Delhi)
g) CIT Vs. Citicorp. Overseas Softwares Ltd. (2004) 85 TTJ (Mumb.)87
h) CIT Vs. Jasper Investments Ltd. (2007) 109 TTJ (Mum.)530
i) Ajit Kumar C Kamadar Vs. CIT (2005) 1 SOT 183 (Mum) The above facts of the case read in light of the various judicial pronouncements make it clear that the item shown by the appellant under the head "Software Expenses" did not have any item in the nature of "Capital expenditure. Therefore, the appellant is entitled to get a relief of Rs. 65,70,768/- and ground No. 4 is allowed."
8.1 Admittedly, the expenses claimed under the head software expense include AMC, consumables and license fee. We are conscious of the fact that the expenses towards AMC, consumables and license fee are regular feature in modern business particularly big organizations like the respondent/ assessee which is obliged to incur these expenses every year. Also, the very nature of these expenses is such that the subscriber/purchaser only gets the 'right to use' for a limited 26 ITA No. 5178/Del/2014 Assessment year 2009-10 period of time and as such it could not be said these expenses provide any benefit of enduring nature. It is also relevant to take note of the fact that no new asset has comes into existence by incurring of such expenses and even the assessing officer has accepted the claim with regard to AMC expenses in AY 2011-12. 8.2 It is our considered view, the finding and reasoning of the Ld. CIT (Appeals) that software expenses are of revenue nature is well founded and in consonance with decision of the Hon'ble Jurisdictional High Court in the case of CIT v. G.E. Capital Services Ltd. reported in [2008] 300 ITR 420 (Del) which has been followed by the Delhi Tribunal in the case of the sister- concern of the respondent/assessee DLF Home Developers Ltd. (supra). Accordingly, we hereby confirm the order of the Ld. CIT (Appeals) and uphold the deletion of disallowance of software expenses. Thus ground no. 4 of the revenue's appeal stands dismissed.
9.0 Ground no. 5 is general in nature and requires no separate adjudication.
10.0 In the final result, the appeal of the revenue is dismissed.
27 ITA No. 5178/Del/2014 Assessment year 2009-10 The order is pronounced in the open court on 27th November, 2018.
Sd/- Sd/-
(R.K. PANDA) (SUDHANSHU SRIVASTAVA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 27th NOVEMBER, 2018
'GS'
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order
ASSISTANT REGISTRAR
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