2017 (5) TMI 708 - AT - Income Tax

Assessee's Appeal Allowed for Deferred Expenditure & Non-Resident Payments

Geo Connect Ltd. Versus Deputy Commissioner of Income-Tax (and Vice Versa)

The Tribunal allowed the assessee's appeals, permitting the deferred revenue expenditure as the business was set up in the preceding year. The ... Addition on account of deferred revenue expenditure - effective date for setup of business - whether the expenditure which were incurred before the commencement of business can be allocated to cost of fixed assets, if it was directly required for the purpose of bringing the asset to put to use situation? - Held that:- Respectfully following the decision of the Hon’ble High Court in the case of Omniglobe Information Tech India P. Ltd. (2014 (9) TMI 6 - DELHI HIGH COURT ), we are of the opinion that the business of the assessee was set up in the immediately preceding year. Further, in view of the decision of the Hon’ble High Court in the case of CIT v. Samsung India Electronics Ltd. [2013 (7) TMI 335 - DELHI HIGH COURT] the expenses incurred after set up of the business and before the actual commencement of the business are allowable. Accordingly, we hold that the expenses claimed by the assessee are revenue in nature and incurred after setting of the business and before actual commencement of the business, hence, allowable under section 37 of the Act. This ground No. 1 of the appeal of the Revenue is rejected. Capitalization of professional charges - Held that:- We find that the learned Commissioner of Income-tax (Appeals) has analysed the party-wise list of expenses of ₹ 76,43,892 treated by the Assessing Officer as capital expenditure and concluded that only ₹ 15,27,790 was claimed by the assessee as professional charges in the profit and loss account and the balance expenses out of ₹ 76,43,892 were treated by the assessee as capital expenditure and, thus, cannot be disallowed again as the same has not been claimed as revenue expenditure. In respect of the expenses of ₹ 15,27,790, the learned Commissioner of Income-tax (Appeals) has held the same are incurred for running and operation of the assessee's business and accordingly he allowed the amount of ₹ 15,27,790 as revenue expenditure. The order of the learned Commissioner of Income-tax (Appeals) on the issue in dispute is comprehensive and well reasoned and thus no interference on our part is required - Decided against revenue TDS u/s 195 - treating the payment of International Private Leased Circuit (IPLC) to M/s. Kick Communication Inc., USA and connectivity charges to M/s. IGTL Solution Inc. USA chargeable to tax in India as 'royalty' under section 9(1)(vi) and article 12 of the DTAA between the USA and India - P.E. in India - disallowance under section 40(a)(i) - Held that:- On a perusal of Explanation 2 as well as the illustrative examples of business connection given in CBDT Circular No. 23, we are of the opinion that the non-resident parties in the case of the assessee are not having any business connection as no such facts of business activity carried out through a person acting on behalf of the non-resident or through a broker or agent have been brought forward before us by the Revenue. The undersea cable for providing dedicated bandwidth to the assessee was installed beyond the territory of India and no operations were carried out by the non-resident party M/s. Kick Communication in India. It was responsible for restoring connectivity and managing faults in connectivity etc. in respect of data transmitted through undersea cable only. Similarly, the operations carried out by M/s. IGTL Solutions are also in the USA and not in India. Since the operations by both the non-resident parties are carried out beyond the territory of India, we thus hold that section 9(1)(i) of the Act is not attracted in the case of the above two non-resident parties. Payments in the hands of the recipient as income by way of royalty - Held that:- We find that the service in substance is for providing connectivity facility to the assessee to generate and cater to outbound public switch telephone network (PSTN) calls within the USA. Thus, clause (iii), (iv) or (iva) are not applicable for consideration paid to M/s. IGTL Solutions by the assessee.In view of above, we are of the opinion that the consideration paid to the non-resident parties does not fall under the term 'royalty' in terms of section 9(1)(vi) of the Act. In the case of instant assessee, the control of equipment was with the non-resident parties and they have not leased the equipment, i.e. the undersea cable etc. to the assessee. The equipment were owned and used by the non-resident parties only and therefore it cannot be said that the consideration paid was for use of equipment by the assessee. Similarly the non-resident parties have not provided use of any process to the asses see, which are of patentable nature having exclusive ownership rights. The assessee was not concerned with any of the process involved in transmission or connectivity of call data. The only concern of the assessee was transmission of call data beyond the boundaries of India to the person in the USA to whom call was made. Thus we hold that the payments made by the assessee are not in the nature of royalty either under the domestic law or relevant DTAA. No disallowance could have been made under section 40(a)(i) of the Act for non-deduction of tax on the payments to non-resident parties, namely, M/s. Kick Communication and M/s. IGTL Solutions. Accordingly, ground No. 1 of the appeal is allowed. Payments in the nature of fee for technical services (FTS) - Held that:- For service of transmission of call data from end of the Indian territory to the person in the USA to whom call is made the payment in question cannot be considered as fee for technical services (FTS) in terms of section 9(1)(vii) read with Explanation 2 of the Act. Since in the call connectivity and transmission from end of the Indian territory at Mumbai to the termination of call in the USA, no technical knowledge has been made available to the assessee, respectfully following the decision of the Tribunal in the case of Bharti Airtel Ltd v. ITO (TDS) (2016 (3) TMI 680 - ITAT DELHI ), we hold that the payment for the services of call transmission through dedicated bandwidth provided by the non-resident parties to the assessee, cannot be termed as fee for technical services under the Treaty also, in the hands of the recipients. - Decided in favour of assessee. Issues Involved:1. Deferred revenue expenditure.2. Capitalisation of professional charges.3. Non-deduction of TDS on payments to non-resident entities.4. Penalty under section 271(1)(c) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Deferred Revenue Expenditure:The Revenue challenged the deletion of Rs. 95,33,520 on account of deferred revenue expenditure by the Commissioner of Income-tax (Appeals). The Assessing Officer (AO) disallowed this expenditure, arguing it was incurred before the commencement of business and should be capitalized. However, the Commissioner of Income-tax (Appeals) allowed the expenditure, stating the business was set up in the immediately preceding year. The Tribunal upheld this view, referencing the Delhi High Court's decisions in CIT v. Samsung India Electronics Ltd. and Omniglobe Information Tech India P. Ltd. v. CIT, which held that expenses incurred after setting up but before commencement of business operations are allowable under section 37 of the Act.2. Capitalisation of Professional Charges:The AO added Rs. 76,43,892 as capital expenditure on professional charges, which was contested by the assessee. The Commissioner of Income-tax (Appeals) found that only Rs. 15,27,790 was claimed as professional charges in the profit and loss account, and the rest were already treated as capital expenditure by the assessee. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, finding that the AO's disallowance was not justified as the expenses were correctly classified by the assessee.3. Non-deduction of TDS on Payments to Non-resident Entities:The AO disallowed payments made to M/s. Kick Communication Inc. USA and M/s. IGTL Solution Inc. USA for non-deduction of TDS, treating them as royalty under section 9(1)(vi) and article 12 of the DTAA between the USA and India. The Commissioner of Income-tax (Appeals) upheld this view but also considered the payments as fees for technical services (FTS) under section 9(1)(vii). The Tribunal reversed these findings, referencing the Delhi High Court's decision in Asia Satellite Telecommunications Company Ltd. v. DIT and the Tribunal's decision in Bharti Airtel Ltd. v. ITO (TDS), concluding that the payments were neither royalty nor FTS as they did not involve the use of any process or human intervention in the technical sense.4. Penalty under Section 271(1)(c):The AO imposed a penalty under section 271(1)(c) for the assessment year 2002-03, which was canceled by the Commissioner of Income-tax (Appeals). Since the Tribunal deleted the quantum additions, the issue of penalty became infructuous, and the Tribunal dismissed the Revenue's appeal on this ground.Conclusion:- The appeals filed by the assessee were allowed, and the Tribunal found that the business was set up in the immediately preceding year, making the deferred revenue expenditure allowable.- The Tribunal upheld the proper classification of professional charges by the assessee.- Payments to non-resident entities were not considered royalty or FTS, and thus, no TDS was required.- The penalty under section 271(1)(c) was rendered infructuous due to the deletion of the quantum additions.