2008 (6) TMI 378 - AT - Income Tax

Tribunal Upholds Disallowance of Transponder Charges as Royalty; Orders Reassessment of Software, Equipment Expenditure.

Assistant Commissioner of Income-tax 11 (1), Mumbai Versus Sanskar Info. TVP. Ltd.

The tribunal upheld the disallowance under section 40(a)(i) for transponder/uplinking charges, deeming them 'royalty' for services. It restored matters ... TDS on Payment of transponder charges/rent paid to M/s. Shim Satellite Public Co. Ltd. - royalty or fee for technical services - Disallowance of transponder fee u/s 40(a) - Non Resident - Income - Deemed to accrue or arise in India - Section 9(1) - DTAA between Government of India and Government of the kingdom of Thailand - HELD THAT:- The facts in the present case are similar to the facts in the case of Satellite Television Asia Region Ltd. v. Dy. CIT. [2006 (1) TMI 172 - ITAT BOMBAY-G]. As discussed the assessee paid the service fee to the non-resident for use of transponder and uplinking facility in the satellite and the said sum was paid without deducting tax. Since the amount paid is considered as royalty covered by the provisions of section 9(1)(vi) the assessee should have deducted withholding tax as per the provisions and failure to do so result in being denied with a deduction under the section 40(a)(i ) of the Act. Further the Hon’ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1999 (8) TMI 2 - SUPREME COURT] held that if the assessee has made no application u/s 195(2) tax must be deducted u/s 195(1) and further held that provisions of section 195 are wide enough to consider any sum payable under the Act. In view of this the amount paid by the assessee-company to the foreign company for hiring the transponder are indeed chargeable under the Act and as no tax is deducted the AO is correct in invoking the provisions of section 40(a)(i) and the CIT(A) is not correct in deleting the same. Support can also be drawn from the decision of the Hon’ble Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corpn.[2003 (3) TMI 91 - GUJARAT HIGH COURT] for the proposition that having not made any tax deduction at source disallowance of amount u/s 40(a)( i) was justified. In the above referred case the issue was payment of interest by a resident to a non-resident and the Hon’ble High Court of Gujarat considered the provisions of section 9(1)(v)(b) r/w section 5(2) and section 40(a)( i) and held that the payment of accrued interest to foreign concerns is an amount taxable and assessee was responsible for paying the amount and there is a liability to deduct tax on the part of the assessee and having failed to make the deduction of tax from the interest, disallowance of interest under section 40(a)(i) was justified on the facts of the case. In this case as well, the assessee is responsible for paying transponder charges to the foreign company and there is liability to deduct tax on the above sum as it is covered by the definition of ‘royalty’ as well as provisions of section 195.Therefore, we are not in agreement with the order of the CIT(A) and so the same was set aside. Grounds of the Revenue are upheld. In the result, appeal allowed. Issues Involved1. Deletion of addition under section 40(a)(i) related to transponder charges/uplinking charges.2. Deletion of expenditure disallowed by the Assessing Officer due to non-commencement of commercial operations.3. Allowance of depreciation on Software Development expenses under section 32.4. Allowance of depreciation on Cinemax Equipment and Computers under section 32.5. Admission of new evidence in contravention of rule 46A of the Income-tax Rules, 1961.Detailed Analysis1. Deletion of Addition under Section 40(a)(i) Related to Transponder Charges/Uplinking ChargesThe revenue contested the deletion of Rs. 43,11,694 made by the Assessing Officer under section 40(a)(i) for transponder charges/uplinking charges paid to M/s. Shim Satellite Public Co. Ltd., Thailand. The CIT(A) allowed the expenditure, stating that the provisions of section 195 of the Income-tax Act, 1961, were applicable only from 1-4-2002. The tribunal disagreed with the assessee's claim that the amendment to section 9(1)(vi) effective from 1-4-2002 excluded earlier periods from the definition of 'royalty.' The tribunal held that the digital broadcast service agreement was for providing a comprehensive service, not merely hiring transponder equipment. The tribunal cited the ITAT Delhi Bench decision in Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT, which considered similar issues and concluded that the charges paid were for services, thus falling under the definition of 'royalty.' Consequently, the tribunal upheld the disallowance under section 40(a)(i).2. Deletion of Expenditure Disallowed by the Assessing Officer Due to Non-Commencement of Commercial OperationsThe Assessing Officer disallowed Rs. 14,46,892, claiming that Sanskar TV had not started commercial operations. The CIT(A) accepted a certificate from STAR dated 10-5-2004, indicating the channel was set up on 15-11-2000, and allowed Rs. 11,53,806 of the disallowed expenditure. The tribunal noted that the certificate was not presented to the Assessing Officer, violating rule 46A. Therefore, the tribunal restored the matter to the Assessing Officer for fresh examination.3. Allowance of Depreciation on Software Development Expenses under Section 32The CIT(A) directed the Assessing Officer to allow depreciation on Software Development expenses amounting to Rs. 15,10,885 at 25 percent applicable to Plant & Machinery. The tribunal noted that the CIT(A) accepted new evidence without referring it to the Assessing Officer. Therefore, the tribunal restored the matter to the Assessing Officer, directing reconsideration in light of the ITAT Delhi Special Bench decision in Amway India Enterprises v. Dy. CIT.4. Allowance of Depreciation on Cinemax Equipment and Computers under Section 32The CIT(A) directed the Assessing Officer to allow depreciation of Rs. 5,19,956 on Cinemax Equipment and Computers. The tribunal noted that the CIT(A) accepted new evidence without referring it to the Assessing Officer. Therefore, the tribunal restored the matter to the Assessing Officer for fresh consideration.5. Admission of New Evidence in Contravention of Rule 46A of the Income-tax Rules, 1961The revenue argued that the CIT(A) admitted new evidence without referring it to the Assessing Officer, violating rule 46A. The tribunal agreed and restored the matter to the Assessing Officer for fresh examination, directing the Assessing Officer to consider the date of business setup and allow expenses accordingly.ConclusionThe tribunal allowed the appeal, restoring the matters related to the disallowance of expenditure and depreciation back to the Assessing Officer for fresh consideration. The tribunal upheld the disallowance under section 40(a)(i) for transponder charges/uplinking charges, emphasizing that the charges were for services and fell under the definition of 'royalty.'