Chennai Petroleum Corporation Ltd Chennai v. Jcit Chennai

In The Income Tax Appellate Tribunal B Bench Chennai Before Shri Abraham P George Accountant Member And Shri George Mathan Judicial Member Ita No 687 Mds 2013 Assessment Year 2006 07 M S Chennai Petroleum Corporation Ltd 536 Anna Salai Teynampet Chennai 600 018 Vs The Jt Commissioner Of Income Tax Large Taxpayer Unit Chennai 600 034 Pan Aaacm 4392 C Appellant Respondent Ita No 853 Mds 2013 Assessment Year 2006 07 The Dy Commissioner Of Income Tax Large Taxpayer Unit Chennai 600 034 Vs M S Chennai Petroleum Corporation Ltd 536 Anna Salai Teynampet Chennai 600 018 Pan Aaacm 4392 C Appellant Respondent Assessee By Mr R Vijayaraghavan Adv Department By Mr Prabhu Mukunth Arun Kumar Jr Standing Counsel Date Of Hearing 06 12 2017 Date Of Pronouncement 07 12 2017 Ita Nos 687 853 Mds 2013 2 O R D E R Per George Mathan Judicial Member Ita No 687 Mds 2013 Is An Appeal Filed By The Asse Ssee Ita No 853 Mds 2013 Is An Appeal Filed By The Revenue A Gainst The Order Of The Commissioner Of Income Tax Appeals Ltu Chen Nai In Ita No 66 11 12 Ltu A Dated 08 01 2013 For The Ay 2006 07 2 Shri Prabhu Mukunth Arun Kumar Jr Standing Cou Nsel Represented On Behalf Of The Revenue And Shri R Vijayaraghavan Adv Represented On Behalf Of The Assessee Ita No 687 Mds 2013 Assessees Appeal 3 In The Assessees Appeal The Assessee Has Raise D The Following Grounds 1 The Order Of The Commissioner Of Income Tax App Eals Ltu Is Contrary To Law Facts And Circumstances Of The Case 2 The Commissioner Of Income Tax Appeals Ltu Er Red In Re Opening Of The Assessment As The Appellant Had Furnished All The Materials An D Particulars Fully And Truly While Completing The Assessment U S 143 3 2 1 The Commissioner Of Income Tax Appeals Ltu Ought To Have Appreciated That Addition Made In The Reassessment Has Arisen Only D Ue To Change Of Opinion Or Is A Case Of Review On The Same Set Of Facts And Not On Account Of Concealment Of Any Particulars By The Appellant Hence The Order Is To Be Quashed As Being Without Jurisdiction 2 2 The Appellant Relies On The Decision Of The Sup Reme Court In The Case Of Cit V Kelvinator Of India Limited Reported In 320 Itr 56 1 Sc 3 The Commissioner Of Income Tax Appeals Ltu Er Red In Confirming The Disallowance Of Rs 95 07 58 118 U S 40 A I As The Appellant Had No T Deducted Tds From The Payments Made To Hardy Exploration And Production India Inc U S 195 3 1 The Commissioner Of Income Tax Appeals Ltu O Ught To Have Appreciated That Payment Made To Hepi Was For The Purchase Of Crude Oil And Hence Payment Is Not Subject To Tax In India Ita Nos 687 853 Mds 2013 3 3 2 The Commissioner Of Income Tax Appeals Ltu O Ught To Have Appreciated That Section 195 Requires That Tax Is To Be Deducted At Source From Payment To A Non Resident Only If The Amount Is Chargeable To Tax 3 3 The Honble Supreme Court In G E Technology Ce Nter Vs Cit 327 Itr 256 Has Held That If There Is No Income Chargeable To Tax In Ind Ia Then There Is No Requirement For Deducting Tax At Source Under The Income Tax Act 1 961 3 4 The Commissioner Of Income Tax Appeals Ltu O Ught To Have Appreciated That The Disallowance U S 40 A Ia Can Be Made Only In Respect Of Amounts Outstanding And Payable As On 31 St March And Not On Amounts Which Have Been Paid Duri Ng The Previous Year Appellant Relies On The Decision Special Benc H In The Case Of Merilyn Shipping And Transports V Acit Reported 16 Itr Trib 1 Vis Sb 3 5 Without Prejudice If Any Disallowance U S 40 A Ia Is Warranted It Should At Best Be Restricted To The Profit Accruing To M S Hepi On Sal E Of Crude To The Appellant On Which Tax Liability Accrues To M Shepi And Not The Entire Paym Ent I E The Entire Revenue To M S Hepi 4 The Appellant Craves Leave To File Additional Gr Ounds At The Time Of Hearing 3 1 Ground Nos 1 4 Are General In Nature 3 2 At The Time Of Hearing The Ld Ar Did Not Wish To Press The Grounds Against The Re Opening Of The Assessment And Conseq Uently Ground Nos 2 2 1 2 2 Of The Assessees Appeal Stands Dismissed As Not Pressed 3 3 In Regard To Ground Nos 3 To 3 5 It Was Submit Ted By The Ld Ar That The Issues Were Against The Action Of The Ld C It A In Confirming The Disallowance Made By The Ao In Respect Of The Purch Ase Of Crude Oil By Invoking The Provisions Of Sec 40 A I Of The Act On Account Of The Non Deduction Of Tds In Respect Of The Payments Made To M S Hardy Exploration Production India In Short M S Hepi U S 195 It Was A Submission That In The Course Of The Assessment Th E Ao Following The Decision Of The Honble Supreme Court In The Case O F M S Transmission Corporation Of Ap Ltd Reported In 239 Itr 587 Had Held That The Ita Nos 687 853 Mds 2013 4 Assessee Was Liable To Deduct Tds U S 195 1 In Res Pect Of The Purchase Price Of Crude Oil Purchased From M S Hepi It Was A Submission That M S Hepi Was The Pe Of Foreign Company And The Asse Ssee Had Purchased The Crude Oil From M S Hepi To An Extent Of Rs Rs 95 07 58 118 The Ao Had Disallowed The Same It Was Submitted By Th E Ld Ar That M S Hepi Was Assessed To Tax In India And The Asses Sment In The Case Of M S Hepi For The Ay 2006 07 Was Completed On 30 03 2012 On Nil Income The Ld Ar Drew Our Attention To Page Nos 1 3 To 17 Of The Paper Book Which Was A Copy Of The Assessment Order In Th E Case Of M S Hepi For The Ay 2006 07 It Was A Submission That As Pe R The Decision Of The Honble Supreme Court In The Case Of M S Ge India T Echnology Cen P Ltd Reported In 327 Itr 456 Sc If The Payment Did Not Contain The Element Of Income The Payer Cannot Be Made Liable For Deduction Of Tds It Was A Submission That This Had Been Reiterated I N Circular Issued By Cbdt In Circular No 3 2015 Dated 12 02 2015 Read Wi Th Instruction No 02 2014 Dated 26 02 2014 It Was A Submission T Hat As Per The Said Circular Para No 4 Which Reads As Follows 4 As Disallowance Of Amount Under Section 40 A I O F The Act In Case Of A Deductor Is Interlinked With The Sum Chargeable Under The Act A S Mentioned In Section 195 Of The Act For The Purposes Of Tax Deduction At Source The Ce Ntral Board Of Direct Taxes In Exercise Of Powers Conferred Under Section 119 Of The Act H Ereby Clarifies That For The Purpose Of Making Disallowance Of Other Sum Chargeable Under Section 40 A I Of The Act The Appropriate Portion Of The Sum Which Is Chargeable To Tax Under The Act Shall Form The Basis Of Such Disallowance And Shall Be The Same As Deter Mined By The Assessing Officer Having Jurisdiction For The Purpose Of Sub Section 1 Of S Ection 195 Of The Act As Per Instruction No 2 2014 Dated 26 02 2014 Of Cbdt Further Where D Etermination Of Other Sum Chargeable Has Been Made Under Sub Sections 2 3 Or 7 Of Section 195 Of The Act Such A Determination Will Form The Basis For Disall Owance If Any Under Section 40 A I Of The Act Ita Nos 687 853 Mds 2013 5 3 4 No Tax Was Deductible At Source In Respect Of T He Payments Made By The Assessee For The Purchase Of The Crude Oil From M S Hepi 3 5 In Reply The Ld Dr Submitted That The Ld Cit A Has Followed The Decision Of The Honble Supreme Court In The Case O F M S Ge India Technology Cen P Ltd Referred To Supra Upheld The Disallowance It Was A Submission That In The Course Of The Assessme Nt The Assessee Had Been Completed On 30 11 2011 And On The Said Date The Copy Of The Assessment Order In The Case Of M S Hepi Was Not Av Ailable It Was Also A Submission That A Perusal Of The Assessment In The Case Of M S Hepi Clearly Shows That M S Hepi Was Assessed At A Posit Ive Income For The Relevant Assessment Year But The Same Was Set Off A Gainst The Carry Forward Business Losses He Vehemently Supported T He Order Of The Ao The Ld Cit A On This Issue It Was A Submission T Hat The Assessee Having Not Taken The Necessary Certificate U S 195 2 The Assessee Was Duty Bound To Deduct The Tds Which It Has Failed To Dedu Ct And Consequently The Disallowance Was Liable To Be Upheld 3 6 We Have Considered The Rival Submissions A Pe Rusal Of The Decision Of The Honble Supreme Court In The Case Of M S Ge India Technology Cen P Ltd Shows That It Is Only When The Remittance S Made To A Non Resident Is Chargeable Under The Act Then The Requ Irement To Deduct Tds Will Arise The Provisions Of Sec 195 2 Gets Attr Acted To Cases Only Where The Payments Made Is A Composite Payment In Which Certain Portion Of Ita Nos 687 853 Mds 2013 6 The Payment Has An Element Of Income Chargeable To Tax In India And The Payers Seeks A Determination Of The Appropriate Por Tion Of The Same A Perusal Of The Decision Of The Honble Supreme Cour T In The Case Of M S Transmission Corporation Of Ap Ltd Shows That Tds Was Liable To Be Deducted By The Payer On The Gross Amount If Such P Ayment Included In It An Amount Which Was Exigible To Tax In India By K Eeping These Two Decisions In Mind If We Look At The Assessment Ord Er In The Case Of M S Hepi It Shows That Under The Normal Provision Of It Act M S Hepi Has Admitted Profits And Gains Of Business At Rs 27 66 Crs This Has Been Set Off Against The Carry Forward Business Losses O F The Earlier Years There Is Also Computation Of The Tax Liability U S 115 Jb Of The Act Under Such Computation The Net Profit Disclosed By M S H Epi In The P L A C Is Rs 27 12 Crs And After Set Off Unabsorbed Business Losses M S Hepi Still Has A Taxable Book Profit Of Rs 16 34 Crs Against Such Tax Liability U S 115 Jb M S Hepi Has Also Claimed Set Off Tds Thus The Claim Of The Assessee That The Decision Of The Honble Supreme C Ourt In The Case Of M S Ge India Technology Cen P Ltd Would Apply And Tds Is Liable To Be Made When The Remittances Is On Sum Chargeable Unde R The Act Would Come Into Play Now M S Hepi Having Income Charge Able Under The Act In India And Having Been Assessed To Such Tax Under The Act In India And The Assessee Having Not Obtained The Necessary Cert Ificate U S 197 2 We Are Of The View That The Disallowance Made By The A O On Account Of Non Deduction Of Tds In Respect Of The Purchase Of The Crude Oil From M S Hepi Ita Nos 687 853 Mds 2013 7 By The Assessee Which Has Also Been Upheld By The Ld Cit A Is On A Right Footing And Does Not Call For Any Interference 3 7 In The Result The Appeal Filed By The Assessee Stands Dismissed Ita No 853 Mds 2013 Revenues Appeal 4 In The Revenues Appeal The Revenue Has Raised The Following Grounds 1 The Order Of The Learned Cit A Is Contrary To La W And Facts And Circumstances Of The Case 2 The Cit A Erred In Holding That The Expenditure Incurred By The Assessee Towards Purchase Of Software Is Revenue In Nature 2 1 The Cit A Ought To Have Appreciated That The As Sessee Had Obtained Enduring Benefit In Respect Of The Above Expenditure 2 2 The Cit A Erred In Not Appreciating That The Re Lied Upon Decision Of The Honble High Court Of Madras In The Case Of Southern Roadways Is Distinguishable On Facts As The Same Was Rendered In Connection With Asst Year 1996 97 To 1997 98 Which Is Prior To The Asst Year 2003 04 And Hence Not Applicable To The F Acts Of The Present Case 2 3 The Cit A Ought To Have Appreciated That With E Ffect From Asst Year 2003 04 Computer Software Was Also Made Eligible For Deprec Iation 60 Along With Computers And Ought To Have Held That The Expenditure On Software Is Capital In Nature For The Year Under Consideration 2 4 It Is Submitted That The Relied Upon Order Of T He Cit A In Ita No 543 2004 5 A Iii Dated 20 09 05 In Assessees Own Case Has Not Been A Ccepted By The Department And An Appeal To Itat Has Been Preferred Against The Same 3 For These And Other Grounds That May Be Adduced At The Time Of Hearing It Is Prayed That The Order Of The Learned Cit A May Be Set Asid E And That Of The Assessing Officer Restored 4 1 It Was Submitted By The Ld Dr That The Issues I N The Revenues Appeal Was Against The Action Of The Ld Cit A In H Olding That The Expenditure Incurred By The Assessee Towards Purcha Se Of Software Was Revenue In Nature The Ld Dr Submitted That The So Ftware Purchased Was From M S Aspen Tech For The System Which Is Used By The Refinery For Making Decision Support Solutions For Optimizing Pr Oduction It Was A Ita Nos 687 853 Mds 2013 8 Submission That Special Bench Of Delhi High Court I N The Case Of M S Amway India Enterprises Reported In 301 Itr 1 D Elhi At Sb 2008 Had Laid Down Test As Follows 59 Our Conclusions On The Issue Under Consideration Thus Can Be Summarized As Under I When The Assessee Acquires A Computer Software Or F Or That Matter The License To Use Such Software He Acquires A Tangible Asset And Becomes Owner Thereof As Held Above Relying On The Decision Of Honble Supreme Co Urt In The Case Of Tcs Supra Ii Having Regard To The Fact That Software Becomes Obs Olete With Technological Innovation And Advancement Within A Short Span Of T Ime It Can Be Said That Where The Life Of The Computer Software Is Shorter Say L Ess Than 2 Years It May Be Treated As Revenue Expenditure Any Software Having Its Utility To The Assessee For A Period Beyond Two Years Can Be Considered As Accrua L Of Benefit Of Enduring Nature However That By Itself Will Not Make The E Xpenditure Incurred On Software As Capital In Nature And The Functional Test As Dis Cussed Above Also Needs To Be Satisfied Iii Once The Tests Of Ownership And Enduring Benefit Are Satisfied The Question Whether Expenditure Incurred On Computer Software I S Capital Or Revenue Has To Be Seen From The Point Of View Of Its Utility To A Bus Inessman And How Important An Economic Or Functional Role It Plays In His Busines S In Other Words The Functional Test Becomes More Important And Relevant Because Of The Peculiar Nature Of The Computer Software And Its Possible Use In Different Areas Of Business Touching Either Capital Or Revenue Held Or Its Utility To A Businessman Which May Touch Either Capital Or Revenue Field 4 2 It Was A Submission That Applying The Said Test Clearly Shows That The Expenditure On The Software Was Capital In Natu Re 4 3 In Reply The Ld Ar Submitted That The Issue Wa S Squarely Covered By The Decision Of The Honble Jurisdictional High Court In The Case Of M S Southern Roadways Ltd Reported In 304 Itr 84 He Vehemently Supported The Order Of The Ld Cit A On This Issue 4 4 We Have Considered The Rival Submissions A Pe Rusal Of The Order Of The Ld Cit A On This Issue Clearly Shows That The Assessee Had Paid Software License Fees And Maintenance Fees To M S A Spen Tech For The Ita Nos 687 853 Mds 2013 9 Systems Which Is Used By The Refinery For Making De Cision Support Solutions For Optimizing Production These Payment S Are Made On Yearly Basis And Towards Maintenance Of The Software The Expenditure Is In Nature Of Recurring One A Perusal Of The Decision Of The Honble Jurisdictional High Court In The Case Of M S Southe Rn Roadways Ltd Referred To Supra Shows That The Honble Jurisdict Ional High Court Has Held As Follows That Expenditure Incurred On Software Packages Wa S Revenue Expenditure And That Such Software Enhances The Efficiency Of The Operation A Nd Was Not An Aid In The Manufacturing Process And Therefore There Is No Enduring Benefit Or Acquisition Of Any Capital Asset By An Assessee The Concept Of Enduring Benefit Must Resp Ond To The Changing Economic Realities Of The Business The Expenses Incurred By Installat Ion Of Software Packages In The Present Computer World Which Revolves On The Modem Communi Cation Technology Enables The Assessee To Carry On Its Business Operations Effect Ively Efficiently Smoothly And Profitably However Such Software Itself Does Not Work On A St And Alone Basis It Has To Be Fitted To A Computer System To Work Such Software Enhances The Efficiency Of The Operation It Is An Aid In The Manufacturing Process Rather Than The To Ol Itself Therefore The Payment For Such Application Software Though There Is An Endur Ing Benefit Does Not Result In Acquisition Of Any Capital Asset And It Merely Enha Nces The Productivity Or Efficiency And Hence Has To Be Treated As Revenue Expenditure 4 5 A Perusal Of The Order Of The Ld Cit A Shows T Hat The Ld Cit A Has Decided This Issue By Following The Decision Of The Honble Jurisdictional High Court Of Madras And The Facts As Have Been Rec Orded By The Ld Cit A On This Issue Has Not Been Dislodged By T He Revenue This Being So We Have No Reason To Interfere With The O Rder Of The Ld Cit A On This Issue 4 6 In The Result The Appeal Filed By The Revenue Is Dismissed Ita Nos 687 853 Mds 2013 10 4 7 In The Result The Appeal Filed By The Assessee In Ita No 687 Mds 2013 Is Dismissed And The Appeal Filed B Y The Revenue In Ita No 853 Mds 2013 Is Dismissed Order Pronounced In The Open Court On December 07 2017 At Chennai Sd Sd Abraham P George Accountant Member George Mathan Judicial Member Chennai 1 Dated December 07 2017 Tln 23 43 Copy To 1 Appellant 4 5 Cit 2 Respondent 5 3 Dr 3 5 Cit A 6 Gf