TaxTMI 
TaxTMI 
2023 (9) TMI 978
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....ere conjectures and surmises, without considering the submissions made during the course of proceedings and without providing any opportunity of being heard, which is in gross violation of principles of natural justice. 1.2. That the CIT(A) erred on facts and in law in not quashing/ setting aside the assessment order dated 27.12.2019 passed under section 143(3) of the Act passed in violation of principles of natural justice and the mandatory procedure of assessment. Re: Disallowance of depreciation on CISCO IP Phone 2. That the CIT(AVAO erred on facts and in law in restricting depreciation on CISCO IP Phones to Rs. 47,713 computed @15 percent as against Rs. 1,90,854 computed @60 percent claimed by the appellant. 2.1 That the CIT(AVAO failed to appreciate that on application of the functional test, since CISCO IP Phone performed functions similar to a computer, the same is eligible for depreciation at higher rate of 60 percent. Re: Disallowance under section 40(a)(1) for alleged non-deduction of tax at source 249 2525 132 0484 law.com 3. That the CIT(A) erred on facts and in law in confirming the disallowance of Rs. 1,03,45,058 under section....
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....mers. For AY 2017-18, the assessee filed its return declaring income of Rs. 15,03,98,960/-. The case of the assessee was selected for complete scrutiny through CASS. Statutory notices were issued to the assessee in response to which the assessee filed necessary details online through ITBA, which are placed on record. 4. The reply/submission of the assessee was not found tenable by the Ld. Assessing Officer ("AO"). The Ld. AO treated the CISCO IP Phones as part of plant and machinery and did not allow the depreciation rate of 60% applicable for computers claimed by the assessee, thereby restricting depreciation on CISCO IP Phones to Rs. 47,713/- computed at 15% as against Rs. 1,90,854/- computed at the rate of 60% claimed by the assessee. He also made disallowance of Rs. 1,03,45,058/- under section 40(a)(i) of the Income Tax Act, 1961 (the "Act") on account of failure to deduct tax at source under section 195 of the Act out of payments made by the assessee outside India to Symbiotics Ltd., UK holding such payments to be in the nature of royalty under the Act as well as India-UK DTAA. The Ld. AO therefore completed the assessment under section 143(3) of the Act vide his order date....
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....the AO, instead of classifying the entire equipment as plant and machinery and not computer, is required to examine each item in detail as regards its functional dependency on the computer and its independent existence. The items which are, functional dependent on computers are definitely part of computer and the items with independent existence may not be computers but wherever it is found that the device is not used independent of the computer system and the purpose of audio visual conferencing and video streaming, the same shall be treated as computers and wherever it is used independently for any other purpose it shall be treated as plant and machinery. The AO, shall, thus allow depreciation at the rate of 60% on the equipment which could be classified as computer and at the rate of 15% on the equipment which could be classified as plant and machinery. This issue is accordingly set aside to the file of the AO for re-adjudication in accordance with law and our observation above." 9. In this regard, Id. Counsel of the assessee contended that ITAT has dealt with the issue and held that if the items which are functionally dependent on computers are definitely part of compu....
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....Adapt shall remain the property of Symbiotics and the assessee company shall have no rights on it Clause 70v) of the Agreement also establishes that the software captures feedback from its users based on the final outcomes and this feedback is used by the software to learn/improve/fine-tune the results. This makes the software a result of improvements made through various other users of Symbiotic's Adapt which essentially results in a fine-tuned software which is the intellectual property of Symbiotics which is used in making custom made testing software/algorithms for its clients and is not a shrink-wrap software with hard wired instructions. 4.6 A perusal of the Appendix B of the Agreement, it is established that Symbiotic develops custom profiles which includes building new algorithms and report templates and the resulting profiles are charged on a per report basis. This clearly establishes that the payment made every time for making a customized template, profile or algorithm or generation of a personalized report from the software is a payment of the nature of Royalty towards the intellectual property like algorithms, questions and testing methodologies developed ....
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....report has an expiry date after which it is not valid." 11. When the assessee carried the matter in appeal to CIT(A), the Ld. CIT(A) upheld the order of the Ld. AO without considering the submission of the assessee observing as under: "5.2.9. In the order u/s 143(3) dated 27.12.2019, the A.O has analysed as to how the payments made by the appellant to Symbiotic, U.K. would tantamount to 'Royalty (paragraph 4.7 of A.O) and for use of licence' of Symbiotic, U.K.( paragraph 4.10 of A.O ). Further the AO has analysed the relevant provisions of DTAA between India and U,K while holding how the payments made by the appellant to Symbiotic, U,.K. would tantamount to ' Royalty' and attracts the provisions of sec. 195 and 40(a)(i)." 11.1 The CIT(A) also did not consider the judicial precedents relied upon by the assessee holding that the principles of res judicata are not applicable to income tax proceedings. 12. Before us, the Ld. AR submitted that the assessee has no access to software, equipment etc. of Symbiotics Ltd. UK; what the assessee gets is just a report via e-mail. The Ld. AR submitted that the consideration paid by the assessee for candidate rep....
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....ssary corollary and as per the understanding/ allegation levelled by the assessing officer the payment would not constitute royalty under the DTAA." (iii)Para 4.10 to 4.12 of the Ld. AO's order "The assessing officer has alleged that as per the website of Symbiotics, the client purchases a set of license codes and assigns each of the license codes: of to a candidate through which he/she can take the test. It is to be noted that these license codes are not perpetual in nature and come with an expiry date before which the tests need to be taken. The candidate takes the set of tests in each license. Once the tests are completed, the reports are available immediately on the portal. The assessing officer has, on the basis of conjectures and surmises, alleged that the client purchases a set of license codes and assigns each of the license codes to a candidate through which he/she can take the test without appreciating that no licence code is provided by Symbiotics to the appellant/candidate. The candidates merely log into the website of Symbiotics and take the test and thereafter a report is generated by Symbiotics which is shared with the appellant. I....
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....arises in the hands of the assessee and therefore prayed for the deletion of the disallowance under section 40(a)(i) of the Act. 13. The Ld. DR supported the order of the Ld. AO/CIT(A). 14. We have considered the rival submissions of the parties and considered the material placed on record. Since the assessee is a tax resident of UK it can opt to be governed by the provisions of the India-UK DTAA being more beneficial to it. Accordingly, we have considered the taxability of the impugned payment by the assessee to Symbiotics Ltd. UK under the provisions of India-UK DTAA. Briefly, the undisputed facts pertaining to this issue are that the assessee is engaged in the business of training pilots and also providing services in relation to assessment of pilot candidates for its customers. Symbiotics Ltd. UK is engaged in the business of providing services in relation to profiling and evaluating suitability of candidates and preparing requisite reports for its customers. During the AY 2017-18, for the purpose of evaluating and profiling of candidates being trained by the assessee and providing desirable report(s), the assessee entered into an agreement dated 19.04.2016 with Symbiotic....
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....e made available to incoming candidate within 3 days notification of the candidates' details from CSTPL. b. Observer Comment Sheet/Computerized Tick-sheets i. CSTPL will be provided with observer comment sheets for each phase of the assessment process (structured interview, physical assessment, debrief) after recording the observed behaviours and responses during the various phases of the test. ii. The data collected via the observer comment sheets and automatically generated telemetry data will be transmitted to Symbiotics to allow its analysis which will be conducted by Symbiotics personnel at the Symbiotics' facility. c. Expert Profile Symbiotics will deliver to CSTPL expert profiles as and when requested. These expert profiles will be used in the assessment process to help determine candidate suitability for given roles or organizations and will be built to cover specific geographical regions or a specific customer airline, as required. d. Candidate Report Upon successful collection of candidate data Symbiotics will produce the candidate written report. The candidate written report is the collective term use....
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....ed in that other State. ........... 3. For the purposes of this Article, the term "royalties" means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic." 17. In the backdrop of the above facts and the relevant clauses of the Agreement, the assessee has submitted that - i) the assessee is neither granted right to control any equipment, network, infrastructure etc. nor any right to modify the source code; ii) the source code behind any of the applications / software is accessed only by Symbiotics....
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....work / infrastructure etc. used by Symbiotics Ltd. UK. The software Adapt is being used to generate the required report after conducting evaluation on the basis of criterias provided by the assessee. In our considered view it cannot tantamount to granting of licence to the software and the right to use the IP of Symbiotics Ltd. UK. It can thus be concluded that there is no grant of licence to the assessee for any software which allows it to modify the source code. The assessee does not get any right to use the copyright in the software as it merely has access to the information / data processed by the software / application which is owned and executed by Symbiotics Ltd. UK in its server located in UK. What the appellant gets is only a copyrighted article to use the product for its internal business purpose and not any right in any copyright to exploit the same for commercial reasons so as to constitute the payment received in consideration thereof as royalty in terms of Article 13 of the India UK DTAA. Support may be drawn by the decision of the Apex Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT 125 taxmann.com 42 (SC). In sum and substance what S....