SMS Demag Pvt. Ltd. (Now Know as SMS Iron Tech. P. Ltd.), New Delhi v. DCIT, New Delhi

ITA 3636/DEL/2008 | 2000-2001
Pronouncement Date: 29-01-2010 | Result: Partly Allowed

Appeal Details

RSA Number 363620114 RSA 2008
Bench Delhi
Appeal Number ITA 3636/DEL/2008
Duration Of Justice 1 year(s) 1 month(s) 18 day(s)
Appellant SMS Demag Pvt. Ltd. (Now Know as SMS Iron Tech. P. Ltd.), New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-01-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted G
Tribunal Order Date 29-01-2010
Date Of Final Hearing 06-10-2009
Next Hearing Date 06-10-2009
Assessment Year 2000-2001
Appeal Filed On 11-12-2008
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G : NEW DELHI BEFORE SHRI A.D.JAIN AND SHRI K.D.RANJAN ITA NO.3636 /DEL/2008 ASSESSMENT YEAR : 2000-01 SMS DEMAG PVT. LTD. [NOW KNOWN AS SMS IRON TECHNOLOGY PVT. LTD.] B-402 SOMDUT CHAMBER-I 5 BHIKAJI CAMA PLACE NEW DELHI-110066. VS. DY. COMMISSIONER OF INCOME TAX 9(1) NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJAN BHATIA ADVOCATE RESPONDENT BY : MS. Y.KAKKAR SR. D.R. ORDER PER RANJAN AM: THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 200 0-01 ARISES OUT OF ORDER OF LD.CIT(A)-XII NEW DELHI. 2. THE FIRST ISSUE FOR CONSIDERATION RELATES TO ASS UMPTION OF JURISDICTION U/S 147. DURING THE COURSE OF HEARING THE ASSESSEE DID NOT PRESS THIS GROUND OF APPEAL HENCE THE SAME IS DISMISSED AS NOT PRESSED. 3. THE NEXT ISSUE FOR CONSIDERATION RELATES TO UPHO LDING THE DISALLOWANCE OF DEPRECIATION AMOUNTING TO RS.54 74 602/-. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE M/S SMS DEMAG PVT. LTD. IS A SUBSIDIARY OF M/S SMA DEMAG AG GERMANY. M/S SMS DEMAG INDIA PVT.LTD. IS ENGAGED IN THE BUSI NESS OF SUPPLY AS ASSEMBLIES/SUB- ASSEMBLIES OF METALLURGICAL EQUIPMENT PROFESSION O F CONSULTATION AND TECHNICAL SERVICE IN ITA NO.3636 /DEL/2008 2 DESIGN AND ENGINEERING TO FERROUS AND NON-FERROUS S ECTORS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT AN INFORMATION WAS RECEIVED FROM ADDITIONAL DIT INTERNATIONAL TAXATION RANGE-2 THAT ASSESSEE COMPANY HAD MADE PAYMENT OF ROYALTY. AS PER THE ORDER U/S 201/201(1A ) OF THE ACT PASSED BY THE INCOME- TAX OFFICER TDS 1(2) (INTERNATIONAL TAXATION) THE ASSESSEE MADE SAP MAINTENANCE EXPENSES OF RS. 1 82 48 673/- TO THE PARENT COMPANY M/S SMA DEMAG AG GERMANY WITHOUT DEDUCTING TAX IN INDIA DURING THE FINANCIAL YEAR 1999-2000 RELEVANT TO ASSESSMENT YEAR 2000-01. THE ASSESSING OFFICER ISSU ED SHOW CAUSE NOTICE AS TO WHY THE PAYMENT OF RS.1 82 48 673/- SHOULD NOT BE DISALLOWE D U/S 40(A)(I). IT WAS SUBMITTED BY THE ASSESSEE THAT THE AMOUNT OF RS. 1 82 48 673/- WAS NOT CHARGED TO PROFIT AND LOSS ACCOUNT RELEVANT TO ASSESSMENT YEAR. THE AMOUNT REP RESENTED THE CHARGES PAYABLE TO SAP INSTALLATION CHARGES WHICH WERE CAPITALIZED IN THE BOOKS OF ACCOUNT UNDER THE HEAD COMPUTER IN THE RELEVANT ASSESSMENT YEAR. THE AMO UNT REFERRED TO IN THE NOTICE FORMED PART OF THE TOTAL ADDITION UNDER THE HEAD COMPUTER . THE ASSESSEE FILED THE COPY OF AUDITED ACCOUNTS SHOWING THE ADDITIONS TO THE COMPU TER AMOUNTING TO RS.4 32 23 878/- WHICH INCLUDED THE AMOUNT OF RS.1 82 48 673/-. SINC E THE AMOUNT WAS NOT CHARGED TO PROFIT AND LOSS ACCOUNT THE PROVISIONS OF SEC. 40( A)(I) HAVE NO APPLICABILITY. HOWEVER THIS CONTENTION OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER RELYING ON PROVISIONS OF SEC. 40(A)(I) UNDER WHICH DEDUCTION W ILL NOT BE ALLOWABLE UNLESS TAX IS DEDUCTED AT SOURCE. THE ASSESSING OFFICER ALSO NOTE D THAT ASSESSEE COMPANY HAD CHARGED DEPRECIATION @ 60% U/S 32 OF THE ACT ON AMOUNT OF R S.1 82 48 673/- WHICH WAS PAID TO ITS PARENT COMPANY. THE ASSESSING OFFICER RESTRICTE D THE ALLOWANCE OF DEDUCTION TO THE EXTENT OF 50% ALLOWABLE ON COMPUTERS WHICH RESULTED IN ADDITION OF RS.54 74 602/-. 4. BEFORE THE LD. CIT(A) IT WAS SUBMITTED THAT THE EXPENDITURE OF RS.1 82 48 673/- WAS INCURRED ON INSTALLATION/MAINTENANCE OF SOFTWAR E AND CONSIDERING THE NATURE OF COST THE ASSESSEE HAD CHOSEN TO CAPITALIZE THE SAID AMOU NT IN THE BOOKS OF ACCOUNT. THE AMOUNT WAS CAPITALIZED IN THE RELEVANT ASSESSMENT YEAR. HOWEVER THE REMITTANCE FOR THE SAME WAS MADE ONLY IN 2006. IT WAS ALSO SUBMITT ED THAT THE PAYMENT WAS NOT IN THE NATURE OF ROYALTY FOR TECHNICAL SERVICES. IT WAS AL SO ADMITTED THAT THE SOFTWARE WAS INSTALLED AND USED AND PAYMENT FOR THE SAME WAS MAD E IN 2006 AND IT WAS NOT CHARGEABLE TO TAX IN THE YEAR UNDER CONSIDERATION. THE ASSESSE E PLACED RELIANCE ON THE DECISION OF THE ITA NO.3636 /DEL/2008 3 I.T.A.T. IN THE CASE OF HERBAL LIFE INTERNATIONAL I NDIA PVT. LTD. V. ACIT 101 ITD 450. THE LD. CIT(A) HOWEVER NOTED THAT NOTHING HAD BEE N BROUGHT ON RECORD TO ESTABLISH THAT THE SAID PAYMENT WAS NOT IN THE NATURE OF INTEREST/ ROYALTY/FEE FOR TECHNICAL SERVICES. IT HAS BEEN CLAIMED BY THE ASSESSEE THAT THE SAID AMOUNT O F RS.1 82 48 673/- WAS AN EXPENDITURE TOWARDS INSTALLATION/MAINTENANCE OF SOFTWARE NAMED SAP. LD. CIT(A) RELIED ON THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE O F COREA & BROTHERS (CR) V. CIT 49 ITR 188 WHEREIN IT HAS BEEN HELD THAT IT WAS NOT LA RGENESS OF THE PAYMENTS WHICH WERE CONSIDERED FOR CAPITALIZING. IT WAS THE ACTUAL NATU RE OF PAYMENT WHICH WAS TO BE EXAMINED. SINCE THE EXPENDITURE WAS INCURRED TOWARD S INSTALLATION OF SOFTWARE NAMELY SAP THE SAID PAYMENT WAS IN THE NATURE OF ROYALTY/ FEE FOR TECHNICAL SERVICES/INTEREST. THIS BEING SO THERE WAS NO ISSUE LEFT FOR ITS BEIN G CAPITALIZED AND SUBSEQUENT CLAIM OF DEPRECIATION ON THE SAME. SHE ACCORDINGLY HELD THAT THE PAYMENT WAS IN THE NATURE OF ROYALTY/TECHNICAL SERVICES FOR THE SAID SOFTWARE. S HE ALSO UPHELD THE DISALLOWANCE OF DEPRECIATION CLAIMED BY THE ASSESSEE. 5. BEFORE US THE LD. A.R. OF THE ASSESSEE SUBMITTE D THAT THE PAYMENT MADE IS NOT IN THE NATURE OF ROYALTY OR FEE FOR TECHNICAL SERVICES . ACCORDING TO HIM THE EXPENDITURE WAS INCURRED TOWARDS INSTALLATION OF A SOFTWARE NAMED S AP FOR WHICH PAYMENT WAS MADE BY THE ASSESSEE. IT WAS THEREFORE SUBMITTED THAT SIN CE THE PAYMENT WAS TOWARDS PURCHASE OF SOFTWARE IT COULD NOT BE TREATED AS IN THE NATURE O F ROYALTY OR FEE FOR TECHNICAL SERVICES. LD.A.R. OF THE ASSESSEE FURTHER SUBMITTED THAT AS P ER ARTICLE 24 OF DTAA ENTERED INTO BETWEEN REPUBLIC OF INDIA AND FEDERAL REPUBLIC OF G ERMANY THE NATIONALS OF CONTRACTING STATE SHALL NOT BE SUBJECT IN OTHER CONTRACTING STA TE TO ANY TAXATION OR ANY REQUIREMENT CONNECTED THEREWITH WHICH IS MORE BURDENSOME THAN T HE TAXATION AND CONNECTED REQUIREMENT TO WHICH NATIONALS OF OTHER STATE IN TH E SAME CIRCUMSTANCES AND UNDER THE SAME CONDITIONS ARE OR MAY BE SUBJECTED TO. LD. A.R. OF THE ASSESSEE ALSO CLARIFIED THAT EVEN IF IT IS ASSUMED FOR ARGUMENT SAKE THAT THE PAYMENT MADE TO PARENT COMPANY WAS IN THE NATURE OF ROYALTY OR FEE FOR TECHNICAL SERVICES THE SAME WILL NOT BE LIABLE FOR TAXATION UNDER NON-DISCRIMINATORY CLAUSE CONTAINED IN DTAA W ITH REPUBLIC OF GERMANY. ACCORDING TO HIM THE ISSUE IS COVERED BY THE DECIS ION OF I.T.A.T. DELHI BENCH IN THE CASE OF HNS INTERNATIONAL INDIA PVT. LTD. (SUPRA). IT WAS ALSO SUBMITTED THAT THE ISSUE IS ITA NO.3636 /DEL/2008 4 ALSO COVERED BY THE DECISION OF I.T.A.T. IN THE CAS E OF MILLENNIUM INFOCOM TECH. LTD. V. ACIT 117 ITD 114. 6. ON THE OTHER HAND THE LD. SR. D.R. SUBMITTED TH AT MAINTENANCE CHARGES FOR SOFTWARE SAP ARE IN THE NATURE OF ROYALTY AND THER EFORE FOR DEDUCTION U/S 40(A)(I)) THE TAX AT SOURCE HAS TO BE MADE. SHE PLACED RELIANCE O N SEVERAL DECISIONS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TR ANSMISSION CORPORATION OF A.P. LTD. V. CIT 239 ITR 589. IT WAS ALSO SUBMITTED THAT NOTH ING HAS BEEN BROUGHT ON RECORD OR SUBMITTED TO ESTABLISH THAT THE SAID PAYMENT WAS NO T IN THE NATURE OF INTEREST/ROYALTY/FEE FOR TECHNICAL SERVICES. SHE PLACED RELIANCE ON THE DECISION OF I.T.A.T. DELHI BENCH IN THE CASE OF HNS INDIA V. DCIT 95 ITD 157(DEL.) FOR THE PROPOSITION THAT WHERE ASSESSEE HAS NOT SUPPLIED RELEVANT TECHNICAL AGREEMENT BEFORE TH E LOWER AUTHORITIES TO STATE THAT THE SAID PAYMENTS TO ITS PARENT COMPANY WAS OUTSIDE THE PURVIEW OF ROYALTY OR FEE FOR TECHNICAL SERVICES. SINCE HE ASSESSEE COMPANY HAS N OT BEEN IN A POSITION TO SUBMIT THE COPY OF AGREEMENT BETWEEN SUB-CONTRACTOR AND HAS AL SO NOT GIVEN THE BASIS OF AMOUNT PAID TO THE CONTRACTOR SUCH SERVICES WERE CHARGEAB LE TO TAX IN INDIA AS THE AMOUNT HAS BEEN PAID ON GENUINE BASIS AND THE PROVISIONS OF SE C. 195 WERE CLEARLY ATTRACTED. IT HAS ALSO BEEN SUBMITTED THAT ASSESSEE HAS MADE PAYMENT IN THE YEAR UNDER CONSIDERATION TO ITS PARENT COMPANY WHICH IS AN ADMITTED FACT. SUBSEQUEN T TO ITS PAYMENT THE TREATMENT AS CAPITAL EXPENDITURE HAS NO NEXUS TO THE DEDUCTION O F TAX ON SAID PAYMENTS TO THE PAYEE AND BURDEN TO DEDUCT TDS IS NOT DETERMINED IN THE N ATURE OF OUTGO WHETHER IT WAS CAPITAL OR REVENUE. FURTHER IT WAS ALSO SUBMITTED THAT THE PAYMENT WAS ROYALTY AND THEREFORE PROVISIONS OF SEC. 40(A) (I) WERE APPLICABLE. LD. S R. D.R. RELYING ON THE DECISION OF I.T.A.T. IN THE CASE OF CREDIT LLYONNAIS V. DCIT (2 005) TIOL 102 I.T.A.T..MM SUBMITTED THAT IN APPLYING THE NON-DISCRIMINATORY CLAUSE WHAT IS REALLY TO BE SEEN IS WHETHER TWO PERSONS WERE RESIDENTS OF THE SAME STAT E AND WERE BEING TREATED DIFFERENTLY. HENCE ASSESSEE'S CASE DID NOT FALL IN THE SCOPE OF NON-DISCRIMINATORY CLAUSE. 7. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE FROM RECORD. FROM THE FACTS STATED ABOVE IT IS CLEAR TH AT THE ASSESSEE HAD MADE PAYMENT FOR THE PURCHASE OF SOFTWARE NAMED AS SAP. THE ASSESSEE HAD CAPITALIZED THE COST OF INSTALLATION ITA NO.3636 /DEL/2008 5 OF SAP IN THE BOOKS OF ACCOUNT AND HAS CLAIMED DEPR ECIATION AS APPLICABLE TO COMPUTERS. THE ASSESSEE WHILE MAKING PAYMENT IN 2006 TO THE PA RENT COMPANY HAS NOT DEDUCTED TAX AT SOURCE. THE ASSESSING OFFICER HAD DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEPRECIATION ON THE GROUND THAT TAX WAS NOT DEDUCT ED U/S 40(A) (I)). U/S 40(A)(I) ANY INTEREST (NOT BEING INTEREST ON LOAN ISSUED FOR PUB LIC BEFORE 1 ST APRIL 1938) ROYALTY FEE FOR TECHNICAL SERVICES OR SUM CHARGEABLE UNDER THIS ACT WHICH IS PAYABLE OUTSIDE INDIA OR INSIDE INDIA TO A NON-RESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMPANY ON WHICH TAX IS DEDUCTIBLE AT SOURCE AND SUCH TAX HAS NOT BEEN D EDUCTED OR AFTER DEDUCTION HAS NOT BEEN PAID DURING THE PREVIOUS YEAR OR IN THE SUBSEQ UENT BEFORE THE EXPIRY OF TIME PRESCRIBED UNDER SUB-SEC. (1) OF SEC. 200 SHALL NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PRO FITS AND GAINS OF BUSINESS OR PROFESSION'. FROM THE LANGUAGE OF SEC. 40(A)(I) IT IS CLEAR THAT PAYMENT MADE OUTSIDE INDIA SHOULD BE IN THE NATURE OF INTEREST ROYALTY FEE FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THE ACT. THE ASSESSING OFFICER HAS SIMPLY REOPENED THE ASSESSMENT ON THE BASIS OF INFORMATION RECEIVED FROM ADDITIONAL D IT (INTERNATIONAL TAXATION RANGE-2 NEW DELHI) AND DISALLOWED DEPRECIATION ON ASSETS CA PITALIZED IN THE BOOKS OF ACCOUNT. THE LD. CIT(A) HAS ALSO NOT EXAMINED THE NATURE OF THE EXPENDITURE INCURRED TOWARDS INSTALLATION OF SOFTWARE NAMED SAP. SHE HAS TREATED THE PAYMENT WITHOUT ANY DISCUSSION IN THE NATURE OF ROYALTY/FEE FOR TECHNICAL SERVICES OR INTEREST. ACCORDING TO HER THE PAYMENT MADE MAY FALL IN ANY OF THE CATEGORIES. AP PARENTLY THE PAYMENT MADE TOWARDS INSTALLATION OF SOFTWARE IS NOT IN THE NATURE OF IN TEREST. THE ASSESSEE HAD MADE PAYMENT TO PARENT COMPANY FOR THE PURPOSE OF SOFTWARE. THE PAY MENT MADE FOR PURCHASE OF SOFTWARE CANNOT BE TREATED EITHER AS ROYALTY OR EVEN FOR TEC HNICAL SERVICES. THEREFORE THE PAYMENT FOR SAP SOFTWARE CANNOT BE CHARGED TO TAX IN INDIA AS INTEREST OR ROYALTY OR FEE FOR TECHNICAL SERVICES. THE LD. A.R. OF THE ASSESSEE H AS ALSO CONTENDED THAT EVEN IF THE INCOME IS CHARGEABLE TO TAX IN INDIA BECAUSE OF NON -DISCRIMINATION CLAUSE 24(1) OF DTAA BETWEEN REPUBLIC OF INDIA AND FEDERAL REPUBLIC OF G ERMANY THE NATIONALS OF A CONTRACTING STATE SHALL NOT BE SUBJECTED IN OTHER C ONTRACTING STATE TO ANY TAXATION OR ANY REQUIREMENT CONNECTED THEREWITH WHICH IS MORE BURD ENSOME THAN THE TAXATION AND CONNECTED REQUIREMENT TO WHICH NATIONALS OF THAT OT HER STATE IN THE SAME CIRCUMSTANCES AND UNDER THE SAME CONDITIONS ARE/OR MAY BE SUBJECT ED. THIS PROVISION SHALL NOTWITHSTANDING THE PROVISIONS OF ARTICLE 1 ALSO A PPLY TO THE PERSONS WHO ARE THE ITA NO.3636 /DEL/2008 6 RESIDENTS OF ONE OR OF BOTH THE CONTRACTING STATES. IN OUR CONSIDERED OPINION THE PAYMENT MADE FOR ACQUISITION OF AN ASSET WHETHER IT IS A RE VENUE EXPENDITURE OR CAPITAL PROVISIONS OF SECTION 40(A)(I) OF THE ACT WILL NOT BE APPLICAB LE IN CASE OF RESIDENT ASSESSEE FOR ASSESSMENT YEAR 2000-01. THEREFORE AS PER DECISIO N OF ITAT IN THE CASE OF MILLENNIUM INFOCOM TECH LTD. (SUPRA) AND ALSO IN THE CASE OF H ERBAL LIFE INTERNATIONAL INDIA PVT. LTD. V. ACIT (SUPRA) BECAUSE OF NON-DISCRIMINATORY CLAUS E 24(1) OF DTAA WITH INDIA AND GERMANY THE FOREIGN NATIONAL CANNOT BE SUBJECTED TO PROVISIONS OF SECTION 40(A)(I) OF THE ACT. THEREFORE THE LD. CIT (A) WAS NOT JUSTIFIED IN HOLDING THAT THE AMOUNT PAID BY THE ASSESSEE FOR ACQUISITION OF COMPUTERS WAS CHARGEABL E TO TAX IN INDIA. ACCORDINGLY THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESS EE. 8. AS REGARDS THE CLAIM OF ASSESSEE FOR DEPRECIATIO N ON ASSETS CAPITALIZED DEPRECIATION CANNOT BE DISALLOWED ON THE GROUND THA T AT THE TIME OF REMITTANCE NO TAX WAS DEDUCTED AT SOURCE. PROVISIONS OF SECTION 40(A)(I) ARE NOT APPLICABLE FOR CLAIM FOR DEDUCTION U/S 32 OF THE ACT. ACCORDINGLY IN OUR CO NSIDERED OPINION THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING 50% OF DEPRECIATIO N ON THE GROUND THAT PROVISIONS OF SECTION 40(A)(I) WERE APPLICABLE. HOWEVER THE ASS ESSING OFFICER WILL VERIFY THE FACT WHETHER THE ASSETS IN RESPECT OF WHICH EXPENDITURE HAS BEEN CAPITALIZED HAVE BEEN USED IN BUSINESS FOR PERIOD MORE THAN 180 DAYS. IF THE ASS ETS HAVE BEEN USED FOR MORE THAN 180 DAYS THE ASSESSING OFFICER WILL ALLOW FULL DEPRECI ATION AS CLAIMED BY THE ASSESSEE. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. 9. THE NEXT ISSUE FOR CONSIDERATION RELATES TO NOT DEALING WITH GROUND NO. 6 FOR ALLOWING THE CLAIM FOR DEPRECIATION IN THE SUBSEQUE NT YEAR IN WHICH TAX WAS PAID. IN VIEW OF THE AFORESAID DISCUSSION THIS GROUND OF APPEAL BECOMES IN FRUCTUOUS AND DISMISSED AS SUCH. 10. THE NEXT ISSUE FOR CONSIDERATION RELATES TO CHA RGING OF INTEREST UNDER SECTION 234- B AND C OF THE ACT. SINCE CHARGING OF INTEREST UND ER SECTIONS 234-B AND C ARE ITA NO.3636 /DEL/2008 7 CONSEQUENTIAL TO THE ADDITIONS MADE THIS GROUND OF APPEAL BEING CONSEQUENTIAL IN NATURE REQUIRES NO DISCUSSION. 11. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON : 29TH JANUARY 2010. SD/- SD/- ( A. D. JAIN ) ( K. D. RANJAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 29TH JANUARY 2010. *MEHTA * COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT DEPUTY REGISTRAR ITA NO.3636 /DEL/2008 8