IT : Penalty under section 271(1)(c) cannot be imposed for non-payment of TDS, being a technical default
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[2013] 33 taxmann.com 156 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-IV
v.
L G Chaudhary*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 536 OF 2012†
JANUARY 15, 2013
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income [Non-payment of TDS] - Assessment year 2006-07 - Assessing Officer imposed penalty on assessee under section 271(1)(c) for not deducting and depositing TDS on time - Commissioner (Appeals) and Tribunal deleted said penalty - Whether, where there was no concealment of income or furnishing of inaccurate particulars of income by assessee, non-payment of TDS being a technical default, deletion of penalty was justified - Held, yes [Para 3] [In favour of assessee]
Ms. Paurami B Sheth for the Appellant. B.S. Soparkar for the Respondent.
ORDER
Ms. Sonia Gokani, J. - Being aggrieved by the order of the Income Tax Appellate Tribunal ('ITAT' for short) dated 16.03.2012, revenue has preferred this tax appeal under Section 260A of the Income-tax Act, 1961 (hereinafter to be referred to as 'the Act'). Substantial question of law proposed for our consideration is as follows:
"Whether the Appellate Tribunal is right in law and on facts in confirming the order of the CIT(A) deleting the penalty of Rs. 1,97,55,306/- levied by Assessing Officer u/s. 271(1)(c) of the Act?"
2. The respondent, who is engaged in the business of construction for the year under consideration 2006-07, had disclosed his total income at Rs. 14 lacs (rounded off). The case was selected for scrutiny. The respondent also filed return after the fresh notice was issued. Certain additions were made by the Assessing Officer, who imposed the penalty while disallowing various expenses for not having deducted/deposited TDS. When challenged before the CIT(Appeals), it partly allowed the said appeal upholding disallowance of expense and not confirming penalty. When further challenged before the Tribunal, it had allowed such order of the CIT(Appeals) whereby it disallowed expenses for want of timely deduction/deposit of TDS. However, on the ground of disallowance made by the Assessing Officer with respect to the TDS, they did not uphold imposition and penalty u/s. 271(1)(c) of the Act. This has aggrieved the revenue, and therefore, the present appeal.
3. We heard learned counsel, Ms. Paurami Sheth for the appellant and senior counsel, Mr. Soparkar for the respondent. Learned counsel, Ms. Sheth has argued that the Tribunal had failed to see that the assessee had failed to deduct the TDS as per law which was also deposited late and on such disallowance as has been confirmed by both CIT (Appeals) and ITAT and therefore, the imposition of penalty by Assessing Officer was just and proper. Per contra, learned senior counsel submitted that none of the elements of Section 271(1)(c) get attracted in case of the respondent assessee. On due consideration of the submissions of both sides and on examining the orders of all the authorities, we find no reason to interfere in this appeal in as much as both the authorities namely CIT(A) and ITAT have rightly deleted the penalty observing that the disallowance was due to non-payment of TDS, which was at the most a technical default. There being nothing to indicate any concealment of the income or furnishing of inaccurate particulars of income by the assessee, the Assessing Officer was rightly not justified in levying the penalty.
4. This being a correct approach adopted by both the authorities concurrently, this tax appeal poses no question of law and the same requires no interference and is consequently to be dismissed.
ESHAIT : Insurance claim for loss of raw materials/final products would be eligible for deduction under section 80-IA
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[2013] 33 taxmann.com 194 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-IV
v.
Shree Rama Multi Tech Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 505 OF 2012†
JANUARY 28, 2013
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profit and gain from infrastructure undertakings [Computation of deduction] - Assessee's profits were eligible for deduction under section 80-IA - Whether compensation received by industrial undertaking from Insurance company on account of loss of raw materials and finished goods in fire, would be eligible for deduction under section 80-IA - Held, yes [Para 7] [In favour of assessee]
FACTS
| ■ | During the year the assessee suffered loss due to fire. Its raw material/finished goods were destroyed. Assessee thereupon, lodged its claim for insurance and received certain compensation towards said insurance claim. This figure, the assessee included as its liability income for deduction under Section 80-IA. | |
| ■ | The assessee claimed deduction under section 80-IA towards the compensation received from the Insurance company for the insurance claim lodged on account of loss suffered by it due to fire. | |
| ■ | The Assessing Officer disallowed the assessee's claim. On appeals, the Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal, the Tribunal allowed the claim of assessee. | |
| ■ | On revenue's appeal: |
HELD
| ■ | If the assessee had either consumed the raw material in its industrial activity or sold the finished good but for the unfortunate fire, surely the assessee would have earned income. Such income would have been eligible for deduction under section 80-IA of the Act. If this much is undisputed, merely because of the fire and destruction of such goods before sale would hardly make any significant difference insofar as deduction under section 80-IA of the Act is concerned. What the assessee achieved through passing of the insurance claim was reduction of the loss arising out of the industrial undertaking. Such recouping or reduction of the loss cannot be kept out of consideration while computing the assessee's income eligible for reduction under section 80-IA of the Act. [Para 7] |
CASE REVIEW
CIT v. Sportking India Ltd. [2010] 324 ITR 283/183 Taxman 312 (Delhi) (para 7) followed.
CASES REFERRED TO
CIT v. Sportking India Ltd. [2010] 324 ITR 283/183 Taxman 312 (Delhi) (para 4).
Ms. Paurami B. Sheth for the Appellant. Saurabh N. Soparkar, Bandish Soparkar and Mrs. Swati Soparkar for the Respondent.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal ('the Tribunal' for short) dated 06.01.2012 raising following questions of law for our consideration :
| "1. | Whether the Appellate Tribunal is right in law and on facts in reversing the order of the CIT(A) in upholding the disallowance of claim of insurance expenses and setting aside the same to the file of the Assessing Officer. | |
| 2. | Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to allow deduction u/s. 80-IA of the Act on Insurance claim. | |
| 3. | Whether the Appellate Tribunal is right in law and on facts in setting aside the order of the CIT(A) in confirming the disallowance made on account of bogus purchases and restoring the matter to the Assessing Officer for reconsideration." |
2. Insofar as questions No. 1 and 3 are concerned, we notice that the Tribunal, in the impugned judgment, has merely remanded the question for fresh consideration by the Assessing Officer. Sufficient reasons have been accorded for such remand. The Tribunal's order does not give any direction for considering the issue in a particular manner. In other words, it is an open remand which requires the Assessing Officer to take a fresh decision in accordance with law. These questions are, therefore, not required to be considered.
3. We may now deal with second question. It pertains to the deduction claimed by the Assessee under section 80-IA of the Act towards the receipts from the insurance company for the insurance claim lodged and accepted by the assessee. It appears that the revenue authorities as well as the Tribunal considered the larger figure of Rs. 1.39 crore for common discussion for deduction under section 80-IA of the Act. Part of this figure pertained to the Assessee's claim for insurance. The remaining pertained to other disllowances made by the Assessing Officer which came to be confirmed up to the level of Tribunal. We are informed that the assessee has not preferred any appeal against this judgment of the Tribunal. The present issue, therefore, is confined to the question whether the insurance claim, made by the assessee and accepted by the insurance company, would qualify for deduction under section 80-IA of the Act.
4. Apparently, during the year relevant to the assessment year under consideration, assessee suffered loss due to fire. Its raw material/finished goods were destroyed. Assessee thereupon, lodged its claim for insurance and received certain compensation towards said insurance claim. This figure, the assessee included as its liability income for deduction under section 80-IA of the Act. The Tribunal, in the impugned order, allowed such a claim relying upon and referring to the decision of Delhi High Court in case of CIT v. Sportking India Ltd. [2010] 324 ITR 283/183 Taxman 312 (Delhi).
5. Learned counsel for the assessee stated that all industrial activities of the assessee were eligible for deduction under section 80-IA of the Act. Therefore, when the goods were destroyed in fire, the insurance claim received by the assessee should also qualify for deduction under section 80-IA of the Act .
6. Section 80-IA of the Act, as is well known, provides for deduction in respect of profit and gains from industrial undertakings or enterprise engaged in the infrastructure development. The fact that the assessee's profits are eligible for such deduction is not in dispute. Short question is, can the insurance claim in the circumstances under which the same was received, be stated to be derived from industrial undertaking. This very issue came up for consideration before Division Bench of Delhi High Court in case of Sportking India Ltd. (supra) the High Court held and observed as under:
"5. At the outset while determining the meaning to be attributed to this expression, one must keep in mind that section 80-IA is a part of fasciculus of provisions whereby benefits are granted to certain industrial undertakings, businesses etc. including those which are located in certain special locations/areas. The object is generation of new investment and employment with respect to particular industries in certain areas and in certain locations besides generation of revenue for the Government and industries from whom plant etc. will be purchased by the new industrial undertaking. The object of the provision is further made clear from sub-section (2) of section 80-IA whereby such businesses are not considered for taking advantage of the deduction under section 80-IA if either it is formed from splitting up of an existing business or by use of machinery or plant previously used and so on. The object is clearly to give fillip to the economy and to investment. This object will have to be kept in view while interpreting the provisions of section 80-IA.
6. We find that for a similar provision of section 80-IB, two decisions have been rendered by two Division Benches of this court in the judgments reported as CIT v. Eltek SGS (P) Ltd. [2008] 300 ITR 6 (Delhi), and CIT v. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353 (Delhi); [2009] 221 CTR (Del) 133. In the Eltek SGS (P) Ltd. case [2008] 300 ITR 6 (Delhi) duty drawback was held to be profits/gains derived from an industrial undertaking and hence eligible for deductions under section 80-IB. In the case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353 (Delhi) refund of excise duty was held to be profits and gains derived from an industrial undertaking within the meaning of an expression under section 80-IB."
7. We have no reason to take a different view. If the assessee had either consumed the raw material in its industrial activity or sold the finished good but for the unfortunate fire, surely the assessee would have earned income. Such income would have been eligible for deduction under section 80-IA of the Act. If this much is undisputed, merely because of the fire and destruction of such goods before sale would hardly make any significant difference insofar as deduction under section 80-IA of the Act is concerned. Looking from the other angle, what the assessee achieved through passing of the insurance claim was reduction of the loss arising out of the industrial undertaking. Such recouping or reduction of the loss cannot be kept out of consideration while computing the assessee's income eligible for reduction under section 80-IA of the Act.
8. In the result, tax appeal is dismissed.
IT/ILT : Where assessee had taken space on transponder through its non-resident subsidiary company 'E' and paid certain amount as transponder fee to 'E', lower authorities were wrong in disallowing transponder fee by applying provisions of section 40(a)(i) only on limited ground that nature of impugned fee was royalty as well as fees for technical services on which tax was required to be deducted
IT/ILT : Where assessee-company issued Foreign Currency Convertible Bonds (FCCB) on 28-4-2004 and same were convertible into shares any time on or after 8-6-2004 and before 22-4-2009 and there was also an option for redemption on or after 12-5-2006 and up to 24-2-2009, expenditure incurred towards issue of FCCB was capital in nature and it had to be amortized under section 35D
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[2013] 33 taxmann.com 413 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
Zee Telefilms Ltd.
v.
Assistant Commissioner of Income-tax, Range - 11(1)*
RAJENDRA SINGH, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NO. 2308 (MUM.) OF 2010
[ASSESSMENT YEAR 2005-06]
[ASSESSMENT YEAR 2005-06]
MARCH 15, 2013
I. Section 40(a)(i), read with section 9, of the Income-tax Act, 1961 - Business disallowance - Interest etc. paid to non-resident without deduction of tax at source [Payment of transponder fee to non-resident] - Assessment year 2005-06 - Assessee-company was engaged in business of broadcasting TV programmes under brand name, Zee TV, Zee cinema, etc - These channels were uplinked to satellite in foreign territory and through transponder on satellite uplinked programmes were transmitted over entire footprint of satellite - Assessee had taken space on transponder on asiaset through its non-resident subsidiary company 'E' to enable transmission of uplinked programmes - It paid certain amount as transponder fee to 'E' and claimed deduction of same - 'E' had made payment to asiasat for use of transponder bandwith - Assessing Officer held that nature of transponder fee was royalty as well as fees for technical services on which tax was required to be deduced, which assessee had failed to do so - He, therefore, applied provisions of section 40(a)(i) and disallowed transponder fee paid to 'E' - Commissioner (Appeals) confirmed order of Assessing Officer - Whether lower authorities had erred in applying provisions of section 40(a)(i) only on limited ground that nature of transponder fee was royalty/fees for technical services - Held, yes - Whether since dispute before Tribunal was regarding disallowability of claim under section 40(a)(i), it was well within subject matter of appeal to consider if provisions of section 40(a) were attracted on some other ground - Held, yes - Whether, therefore, matter was to be sent back to Commissioner (Appeals) for examination afresh from point of view of taxability of payment as business income in case of 'E', which had a PE in India - Held, yes [Para 4.2] [Matter remanded]
II. Section 35D of the Income-tax Act, 1961 - Preliminary expenses [Expenses incurred for issue of FCCB] - Assessment year 2005-06 - Assessee-company was engaged in business of broadcasting TV programmes - It issued Foreign Currency Convertible Bonds (FCCB) on 28-4-2004 - These bonds were convertible into shares any time on or after 8-6-2004 and before 22-4-2009 -There was an option for redemption on or after 12-5-2006 and up to 24-2-2009 - During previous year assessee incurred certain expenditure towards issue of FCCB and claimed same to be allowed as revenue expenditure - Assessing Officer concluded that assessee had incurred impugned expenditure in connection with expansion and extension of business in field of television and setting up of new channels - Whether since impugned expenditure would result in addition to existing profit earning apparatus giving advantage in capital field, it was capital in nature - Held, yes - Whether, therefore, it had to be amortized under section 35D - Held, yes [Para 5.7] [In favour of revenue]
Circulars and Notifications : CBDT Circular No. 56, dated 19-3-1971
FACTS-I
| ■ | The assessee-company was engaged in the business of broadcasting TV programmes under the brand name Zee TV, Zee cinema, etc. These channels were uplinked to the satellite in the foreign territory and through transponder on the satellite the uplinked programmes were transmitted over the entire footprint of satellite. The assessee claimed that it had taken space on transponder on asiaset through its non-resident subsidiary company 'E' to enable the transmission of the uplinked programmes. During the pervious year it paid certain amount as transponder fee to its subsidiary company 'E' and claimed deduction of the same. It had not deducted tax on the said payment. | |
| ■ | The Assessing Officer held that the nature of transponder fee was royalty as well as fees for technical services [FTS] on which tax was required to be deducted, which the assessee had failed to do so. He, therefore, applied the provisions of section 40(a) and disallowed the transponder fee paid to E. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer. | |
| ■ | On second appeal, the assessee contended that the issue involved in the instant case was covered in its favour by the judgment of the Delhi High Court in the case of Asia Satellite Telecommunications Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168. |
HELD-I
| ■ | The instant case is distinguishable from the case of Asia Satellite Telecommunications Co. Ltd. (supra). In that case the assessee as well as the payers, who were telecast operators, were all situated in the foreign territory. The assessee had no business connection in India. Therefore, the payment received by the assessee from the telecast operators could be taxed in India only if the same was held to be royalty or FTS. Since the payment was not held as royalty or FTS, no tax was found to be deductible. The case of the assessee is different. The assessee had made payment to its non-resident subsidiary company 'E' as per agreement with the said company. It is 'E', which had made payment to the asiasat for use of transponder bandwidth. Therefore, the taxability of payment made by the assessee to 'E' is required to be considered. Unlike the case of Asia Satellite Telecommunications Co. Ltd. (supra), 'E' has business connection in India and has permanent establishment (PE) through its holding company, i.e., the assessee. Obviously, therefore, the income arising in case of 'E' on account of payment made by the assessee may be taxable as business income. It was a contractual payment by the assessee in connection with the business which is chargeable to tax in India. Therefore, the provisions of section 40(a) are apparently attracted. Further in respect of such payment in case of the domestic companies also, tax is deductible under section 40(a)(ia). These aspects have not been examined by the authorities below, who applied the provisions of section 40(a)(i) only on the limited ground that the nature of transponder fee was royalty/fees for technical services. Though the assessee had filed copies of separate agreements between Zee Telefilms and 'E' as well as between 'E' and asiasat, but these have not been examined. The authorities below have disallowed the claim on the ground of non deduction of tax at source under section 40(a)(i) treating the payment as royalty. Since the dispute before the Tribunal is regarding disallowability of claim under section 40(a), it is well within the subject matter of appeal to consider if provisions of section 40(a) are attracted on some other ground. Therefore, for the purpose of deciding the issue it is appropriate that the matter may be examined from the point of view of taxability of payment as business income in case of 'E', which has a PE in India. Therefore, the order of Commissioner (Appeals) was liable to be set aside and the matter was to be sent back to him for passing a fresh order after necessary examination in the light of the observations made above. [Para 4.2] |
FACTS-II
| ■ | The assessee-company had issued Foreign Currency Convertible Bonds (FCCB) on 28-4-2004. These bonds were convertible into shares any time on or after 8-6-2004 and before 22-4-2009. There was an option for redemption on or after 12-5-2006 and up to 24-2-2009. During the previous year relevant to the assessment year 2005-06, the assessee had incurred certain expenditure towards the issue of FCCB and claimed the same to be allowed as revenue expenditure. The Assessing Officer asked the assessee to explain as to why the expenditure should not be amortized under section 35D. The assessee explained that (i) FCCB was not fully convertible as there was option for redemption, and (ii) it had issued FCCB primarily with the object to borrow money for the business with the facility of repayment by way of redemption or conversion into shares and expenditure incurred in connection with the borrowing was allowable as deduction. | |
| ■ | The Assessing Officer held that the expenditure incurred was in relation to expansion and extension of business conducted by the assessee in the field of television and setting of new regional channels. There is a clear provision in section 35D(2)(c)(iv) as per which expenses incurred in connection with issue of shares or debentures were covered for amortization. He, therefore, allowed only 1/5th of the said expenditure during the year. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. | |
| ■ | On second appeal: |
HELD-II
| ■ | Under the provisions of section 35D certain expenses as specified in sub-section (2) of section 35D incurred before commencement of business or incurred after commencement of business in connection with extension of undertaking or in connection with setting up of a new unit are required to be amortized over a period of five years. These expenses also include the expenditure incurred in connection with the issue for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus, as per section 35D(2)(iv). Thus, under the provision expenses incurred in connection with issue of debentures of a company are also required to be amortized. [Para 5.5] | |
| ■ | The CBDT vide Circular No. 56, dated 19-3-1971 has clarified that provisions of section 35D do not supersede any other provisions of the Act under which expenditure is allowable as deduction against profit. It has also been clarified that any expenditure incurred which is allowable as deduction in view of the judgment of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 will not be covered by the provisions of section 35D. The Supreme Court in the said case has held that expenditure incurred in connection with borrowing of capital for the purpose of existing business is required to be allowed as business expenditure . There are also judgments of several High Courts in which it has been held that expenditure incurred in connection with issue of debentures even if it is fully convertible is allowable as revenue expenditure and is not required to be amortized under section 35D. However, there is also a contrary judgment of the Madhya Pradesh High Court in the case of Shree Synthetics Ltd. v. CIT [2008] 303 ITR 451in which it has been held that section 35D being a special provision will prevail over general provisions of the Act and that in view of specific provision of section 35D(2)(c)(iv) expenditure incurred even on non-convertible debentures is required to be amortized. [Para 5.6] | |
| ■ | Various judgments of the High Courts which are in favour of the assessee relate to the period prior to the assessment year 2004-05 from which year there is amendment to section 36(1)(iii). As per which interest on capital borrowed in connection with extension of existing business or profession starting from the date on which the capital was borrowed till the date on which the assets in the extended business have been first put to use, is required to be capitalized. Thus from assessment year 2004-05 even the interest on capital borrowed which otherwise was allowable as revenue expenditure is required to be capitalized if the same had been borrowed in connection with extension of existing business. Therefore, expenses incurred on borrowing the capital cannot be considered as revenue expenditure. Further the expenditure has been incurred in connection with extension of business in the field of television and setting up of new channels, which will result in addition to the existing profit earning apparatus giving advantage in the capital field. Any expenditure incurred existing into any advantage in the capital field has to be considered as capital in nature as held by the Supreme Court in the case of Empire Jute Co. v. CIT [1980] 124 ITR 1/3 Taxman 69. It has also been held by the Supreme Court that expenditure incurred for efficient and profitable working of existing profit making apparatus will be revenue in nature. But the expenditure incurred in connection with addition /augmentation of profit earning apparatus has to be considered as capital in nature. In view of the above position expenses incurred for issue of debenture for the purpose of extension of business has to be considered as capital expenditure and, accordingly, has to be amortized under section 35D. [Para 5.7] |
CASE REVIEW
Shree Synthetics Ltd. v. CIT [2008] 303 ITR 451 (MP) (para 5.6) (para 5.6) and Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC)(para 5.7) - followed
Asia Satellite Telecommunications Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168 (Delhi) (para 5.7) and CIT v. Secure Meters Ltd. [2010] 321 ITR 611/[2008] 175 Taxman 567 (Raj.) (para 5.7)and CIT v. South India Corpn. (Agencies) Ltd. [2007] 290 ITR 217/164 Taxman 249 (Mad.) (para 5.7) - distinguished
CASES REFERRED TO
ISRO Satellite Center [AAR 765 of 2007, dated 22-10-2008] (para 2.1), Dell International Services (P.) Ltd. [AAR 735 of 2006] (para 2.1), CITv. Bharati Cellular Ltd. [2008] 175 Taxman 573 (Delhi) (para 2.1), Asstt. CIT v. Sanskar Info TV (P.) Ltd. [2008] 24 SOT 87(Mum.) (para 2.2),New Skies Satellites BV v. Asstt. DIT (IT) [2009] 121 ITD 1 (Delhi) (SB) (para 2.3), Asia Satellite Telecommunications Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168 (Delhi) (para 3), Channel Guide (I) Ltd. [2012] 139 ITD 49/25 taxmann.com 25 (Mum.) (para 3),B4U International Holding Ltd. v. Dy. CIT(IT) [2012] 52 SOT 545/21 taxmann.com 529 (Mum.) (para 3), Skycell Communication Ltd. v. Dy. CIT[2001] 119 Taxman 496 (Mad.) (para 3), India Cement v. CIT [1966] 60 ITR 52 (SC) (para 5), Voltas Ltd. v. CIT [1998] 61 TTJ 543(Mum.) (para 5), Ashima Syntex Ltd. v. Asstt. CIT [2006] 100 ITD 247 (AHD.) (SB) (para 5), CIT v. Havells India [2012]208 Taxmann 114/21 taxmann.com 476 (Delhi) (para 5.2), CIT v. Secure Meters Ltd. [2010] 321 ITR 611/[2008] 175 Taxman 567 (para 5.2), CIT v. South India Corpn. (Agencies) Ltd. [2007] 290 ITR 217/164 Taxman 249 (para 5.2), Shree Synthetics Ltd. v. CIT [2008] 303 ITR 451 (MP) (para 5.3), CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 5.4), CIT v. Mahindra Ugine and Steel Co. Ltd. [2002] 20 Taxman 250/[2001] 250 ITR 84 (Bom.)and Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) (para 5.7).
Sanjiv M. Shah for the Appellant. Narender Kumar for the Respondent.
ORDER
Rajendra Singh, Accountant Member - This appeal by the assessee is directed against the order dated 15.2.2010 of CIT(A) in assessment year 2005-06. The assessee in this appeal has raised disputes on two different grounds which relate to disallowance of transponder fee under section 40(a) of the Income tax Act and disallowance of expenses incurred for issue of foreign currency convertible bonds under section 35D of the IT Act.
2. We first take up the issue relating to disallowance of transponder fee. The assessee had paid a sum of Rs.15,89,74,445/- as transponder fee to its subsidiary i.e. M/s. Expand Fast Holding Ltd.(EFHL) which is a non-resident company. The assessee is in the business of broadcasting TV programmes under the brand name Zee i.e. Zee TV, Zee Cinema etc. These channels are uplinked to the satellite in the foreign territory and through transponder on the satellite, uplinked programmes are transmitted from the space taken on the transponder to the entire footprint of satellite. The assessee, it is submitted, had taken space on the transponder on Asiaset/satellite through assessee's subsidiary M/s. Expand Fast Holding Ltd. to enable the transmission of the uplinked programmes. The AO noted that that assessee had not deducted tax on the payment of transmission fees to M/s. Expand Fast Holding Ltd., the non-resident company. The assessee explained that it had leased space on the transponder and it was neither in the control nor was able to operate satellite or transponder by itself. The transponder was receiving uplinked programmes and broadcasting it to the larger footprint of the satellite and there was no processing done by the satellite nor was any operation done by the assessee. The assessee had only used facility/space and there was no use of any equipment nor were any technical services provided. The payment was therefore, neither royalty nor fee for technical services provided. Thus, no tax was required to be deducted.
2.1 The assessee placed reliance on the judgment of AAR in the case of ISRO Satellite Center (AAR 765 of 2007), dated 22-10-2008 in which it was held that the assessee was only receiving the existing space segment capacity of transponder to enable uninterrupted transmission of uplinked data over the entire footprint of satellite. The assessee had no right to use transponder. The payment had been made only for deriving the benefit of satellite using capacity and not for equipment. It was also held that mere use of service or product after receipt of technical inputs did not amount to making available technical knowledge or skills and it was thus held that payment made by the assessee to the non-resident was neither royalty nor fees for technical services. The assessee also referred to AAR ruling in the case of Dell International Services (P.) Ltd. (AAR 735 of 2006) in which it was held that the payments made for transponder were for providing facility or services through sophisticated telecom net work and assessee had not used the equipment. It was, therefore, held that the payment was not royalty. Reference was also made to the judgment of Hon'ble Delhi High Court in the case of CIT v.Bharati Cellular Ltd. [2008] 175 Taxman 573 in which it was held that inter connect/port access facility to the assessee was only a facility to use the gateway and the network of MTNL or other companies. MTNL or other companies did not provide any assistance, aid or help to the assessees in managing, operating, setting up of their infrastructure and networks. It was further held that technical services would have reference to only technical service rendered by a human. It was thus held that payment was neither for royalty nor fees for technical services. The assessee also filed copies of agreement between Zee Telefilms Ltd. and M/s. Expand Fast Holding Ltd. as well as agreement between M/s. Expand Fast Holding Ltd. and Asiaset. It was pointed out that Asiaset had not provided any services through EHFL local office nor any day to day assistance and therefore, it did not have any PE in India. No part of its income was thus assessable in India.
2.2 The AO, however did not accept the arguments advanced. It was observed by him that the payment was towards getting technical services of the transponder as an integral bunch of instruments as well as payments towards 24/7 maintenance of the said instruments by a team of highly qualified engineers. It was further observed by him that the fee was also of the nature of royalty as the instruments and engineering personnel had special knowledge obtained through years of applied research and technical up-gradation. The payment was thus a combined payment towards cumulative knowledge for operation of equipments and towards use of apparatus and the personnel manning these apparatus. Payment had thus the nature of royalty as well as fee for technical services. The AO also referred to the decision of the Tribunal in the case of Asstt. CIT v. Sanskar Info TV (P.) Ltd. [2008] 24 SOT 87 (Mum.) in which it was held that the transponder fee paid by the assessee to the foreign company was covered by the definition of royalty chargeable to tax under provisions of section 9(i)(vi). The AO therefore held that the assessee was liable to deduct tax at source which was not done and, therefore he disallowed the claim under section 40(a) of the Act.
2.3 In appeal, the CIT(A)referred to the decision of the Special Bench in case of New Skies Satellites BV v. Asstt. DIT (IT) [2009] 121 ITD 1 (Delhi) (SB) in which it was held that receipts on account of use of transponder were taxable in the hands of the foreign company. CIT(A) also noted that the assessee itself in the assessment year 1997-98 had deducted tax from the payments made on account of transponder fees. CIT(A) therefore confirmed the disallowance made by AO aggrieved by which the assessee is in appeal before the Tribunal.
3. Before us, the ld. AR for the assessee submitted that the AO in disallowing the claim had followed the decision of the Tribunal in the case of Sanskar Info TV (P.) Ltd. (supra), and CIT(A) had followed the decision of the Special Bench of the Tribunal in the case of New Skies Satellites BV (supra). It was pointed out that the said decisions of the Tribunal have been reversed by the Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunications Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168, in which it has been held that payment for transponder fee was neither royalty nor fees for technical services and therefore, no tax was required to be deducted by the assessee. The ld. AR also referred to the decision of the Tribunal in the case of Channel Guide (I) Ltd. [2012] 139 ITD 49/25 taxmann.com 25 (Mum.) in which following the said judgment of the Hon'ble High Court of Delhi (supra), it has been held that payment for transponder fee for availing facility of satellite uplink for telecasting programmes was neither royalty nor fee for technical services and therefore no tax was required to be deducted. The Tribunal had also considered the impact of Explanation (v) and Explanation (vi) to section 9(1)(vi) inserted by the finance Act 2012 with retrospective effect from 1.6.76 and held that the assessee could not be held liable to deduct tax by the said amendment as it was impossible for the assessee to deduct tax in the earlier year when the amendment was not there. The Tribunal also observed that no such amendment was made in the treaty between the two countries and under the provisions of the treaty, the payment could not be considered as royalty or FTS. Accordingly, the claim of the assessee was allowable. The ld. AR further submitted that same view had been taken by the Mumbai Bench of the Tribunal in the case of B4U International Holding Ltd. v. Dy. CIT (IT)[2012] 52 SOT 545/21 taxmann.com 529 in which following the judgment of Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunication Ltd. (supra), it was held that payment was not royalty. The Tribunal also referred to the judgment of Hon'ble High Court of Madras in the case of Skycell Communication Ltd. v. Dy. CIT [2001] 119 Taxman 496 in which it was held that mere collection of fee for use of standard facility could not be considered as fee for technical services. It was thus held that payment was neither royalty nor fees for technical services. The Tribunal had also referred to the non discrimination clause in the treaty as per which the non-resident companies could not be discriminated viz-a-viz domestic company and since there was no provision for deducting tax in case of domestic companies, it was held that the assessee could not be liable to deduct tax in relation to payment made to foreign companies. It was thus submitted that the issue was fully covered in favour of the assessee and, therefore, the claim should be allowed.
3.1 The ld. DR on the other hand submitted that the judgments cited by the ld. AR related to pre-amendment period. Since the amendment to section 91(vi) had retrospective application, it has to be considered as legal position since inception and therefore would apply in case of the assessee. As regards the incorporation of the amendment in the treaty, it was submitted that the assessee had not claimed the benefits of the treaty and it was not known whether it had any non-discrimination clause or whether similar amendment had been made in the treaty.
3.2 In reply, the ld. AR submitted it was not correct that the assessee had not claimed treaty benefits. He referred to para 2.1 of the assessment order from which it was clear that the treaty benefit had been claimed. It was further submitted that the assessee had filed copy of the agreement between the two countries. It was pointed out that there was no amendment in the treaty on the pattern of Explanation (v) and Explanation (vi) to section 9(1)(vi) inserted by the Finance Act 2012. It was further pointed out that the treaty between India and Mauritius which was applicable in this case had non-discrimination clause.
4. We have perused the records and considered the rival contentions carefully. The dispute raised is regarding disallowance of transponder fee paid by the assessee on the ground of non deduction of tax at source. The assessee is engaged in the business of broadcasting T.V. programmes under brand name Zee i.e. zee T.V., Zee cinema etc. These channels are uplinked to satellite in a foreign territory and through the transponder on the satellite, the uplinked programmes are transmitted over the entire footprint of the satellite. The assessee claimed that it had taken space on transponder on Asiasat, through its subsidiary M/s. Expand Fast Holding Ltd. (EFHL), a non resident company. The assessee had not deducted tax on payment for transponder fee. Both the AO and the CIT(A) held that the nature of transponder fee was royalty on which tax was required to be deducted under section 40(a) which the assessee had failed to do. The authorities below followed the decision of the Tribunal in the case of Sanskar Info TV Pvt. Ltd. (supra) and the decision of the Special Bench of the Tribunal in the case of New Skies Satellites BV in which it has been held that the transponder fees paid by the assessee was covered by the definition of royalty chargeable to tax under the provisions of section 9(1)(vi). Since the assessee had not deducted tax, the payment made had been disallowed by the AO under section 40(a) which has been confirmed by the CIT(A).
4.1 The case of the assessee is that the decisions of the Tribunal relied upon by the authorities below have been reversed by the Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunication Co. Ltd. (supra), in which it has been held that the transponder fee was neither royalty nor fee for technical services and, therefore, no tax was required to be deducted by the assessee. The Hon'ble High Court held that the payment was not for lease of any equipment but only for giving access to broadband width on the transponder. The assessee had no right in the property. It had only access to the transponder capacity and the transponder remained under the control of the satellite operator. The assessee had only used standard facility of the transponder on the satellite. The payment was thus held not of the nature of royalty. Before the High Court, the department had not raised any arguments that the payment was of the nature of fees for technical services though it had raised additional ground before the Tribunal who had admitted the same. The ld. AR for the assessee, therefore, argued that the issue was covered in favour of the assessee by the judgment of Hon'ble High Court of Delhi in case of Asia Satellite Telecommunication Co. Ltd. (supra). It has also been pointed out that though there has been amendment in section 9(1)(vi) by the Finance Act, 2012 with retrospective effect i.e. 1.6.1976 by inserting Explanation-(V) as per which royalty included any consideration in respect of any right, property or information irrespective of the fact whether the possession or control of such right or property or information is with the payer or not, or whether such right, property or information is used directly by payer, or whether location of such right, property or information is situated in India or not, such amendment was not available at the time of payment being made by the assessee and therefore the assessee could not be expected to deduct tax at source as held by the Tribunal in case of Channel Guide (I) Ltd. (supra). Moreover, it was also submitted that no such amendments were made in the definition of royalty in the treaty and therefore the assessee was entitled to relief under the provisions of treaty. It has also been argued that interest of the assessee was protected under non discrimination clause of the treaty as per which non-resident company could not be discriminated vis-à-vis the domestic company and since there was no provision for deduction of tax on royalty in case of domestic company in the relevant year, the non-resident companies also were not required to deduct the same.
4.2 We have carefully considered the facts and circumstances of the case and the judgments relied upon. In our view, the case of the assessee is distinguishable from the case of Asia Satellite Telecommunication Co. Ltd. (supra). In that case, the assessee as well as the payers who were telecast operators were all situated in the foreign territory. The assessee had no business connection in India and, therefore, in such a case, the payment received by the assessee from the telecast operators could be taxed in India only if the same was held to be royalty or FTS. Since the payment was not held as royalty or FTS, no tax was found to be deductible. The case of the assessee is different. In this case, the assessee had made payment to M/s. EFHL, its subsidiary which is a non-resident company as per agreement with the said company. It is M/s. EFHL which had made payment to the Asiasat for use of transponder bandwidth and, therefore, in this case, the taxability of payment made by the assessee to M/s. EFHL is required to be considered. Unlike theAsia Satellite Telecommunication Co. Ltd. (supra), M/s. EFHL has business connection in India and has permanent establishment (PE) through its holding company i.e. the assessee. Obviously, therefore, the income arising in case of M/s. EFHL on account of payment made by the assessee may be taxable as business income. It was a contractual payment by the assessee in connection with the business which is chargeable to tax in India and, therefore, the provisions of section 40(a) are apparently attracted. Further in respect of such payments in case of the domestic companies also, tax is deductible under section 40(a)(ia). Therefore assessee will not get protection of non-discrimination clause as per the treaty. These aspects have not been examined by the authorities below who applied the provisions of Section 40(a) only on the limited ground of royalty/fees for technical services. Though, the assessee, as is clear from the assessment order, had filed copies of separate agreements between Zee Telefilms and M/s. EFHL as well as between M/s. EFHL and Asiasat but these have not been examined. The authorities below have disallowed the claim on the ground of non deduction of tax at source under section 40(a) treating the payment as royalty. Since the dispute before the Tribunal is regarding disallowability of claim under section 40(a) it is well within the subject matter of appeal to consider if provisions of section 40(a) are attracted on some other ground. We, therefore, for the purpose of deciding the issue consider it appropriate that the matter may be examined from the point of view of taxability of payment as business income in case of M/s. EFHL which has a PE in India for which there is a prima facie case which has not been examined. We, therefore, set aside the order of CIT(A) and restore the matter back to him for passing a fresh order after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee.
5. The second dispute is regarding disallowance of expenditure incurred by the assessee towards the issue of Foreign Currency Convertible Bonds (FCCB). The assessee had issued FCCB of USD 100 million on 28.4.2004 with interest of .5% per annum. The bonds were convertible into shares any time on or after 8.6.2004 and before 22.4.2009 at a price of Rs.197.235 per share. There was an option for redemption on or after 12.5.2006 and up to 24.2.2009. The assessee had incurred expenditure of Rs.11,85,26,700/- for the issue of FCCB. The AO asked the assessee to explain as to why these expenses should not be amortized under section 35D of the Act. The assessee explained that FCCB was not fully convertible as there was option for redemption. It was also submitted that the assessee had issued FCCB primarily with the object to borrow money for the business with the facility of repayment by way of redemption or conversion into shares and expenditure incurred in connection with the borrowing was allowable as deduction in view of the judgment of the Hon'ble Supreme Court in the case of India Cement v. CIT [1966] 60 ITR 52. The assessee also referred to Circular No.56 dated 19.3.71 of CBDT as per which provision of amortization under section 35D was not intended to supersede any other provisions and section 35D intended to give benefit of staggered deduction for capital expenses and not to deny any revenue expenditure. The assessee also referred to the decision of the Tribunal in the case of Voltas Ltd. v. CIT [1998] 61 TTJ 543 (Mum.) and the decision in case of Core Health Care Ltd. [2001] 78 ITD 1 (Ahd.) in which similar expenses incurred for issue of debentures were allowed. The AO, however, did not accept the contention raised. It was observed by him that the expenditure incurred was in relation to expansion and extension of business conducted by the assessee in the field of television and setting of new regional channels. He also observed that there was a clear provision in section 35D(2)(c)(iv) as per which expenses incurred in connection with issue of shares or debentures were covered for amortization. The AO also referred to the decision of the Special Bench of the Tribunal at Ahmedabad in the case of Ashima Syntex Ltd. v. Asstt. CIT [2006] 100 ITD 247 in which it was held that expenses incurred in connection with the issue of debenture have been held to be covered by the provisions of section 35D. The AO, therefore, allowed only 1/5th of the said expenditure during the year.
5.1 The assessee disputed the decision of AO and submitted before CIT(A) that AO had placed reliance on the decision of the Tribunal in the case ofAshima Syntex Ltd. (supra), which related to issue of fully convertible debentures whereas in case of the assessee the debentures were optionally convertible. It was also submitted that, by the issue of FCCB the assessee had only raised unsecured loans and therefore, expenses incurred in connection with raising of loan was allowable as deduction under section 37 of the Act. CIT(A) however did not accept the contentions raised. It was observed by him that the bonds in case of the assessee were convertible into shares soon after issue of bonds i.e. after 8.6.2004 i.e. 1 ½ months from the date of issue whereas the redemption option started two years after date of issue. CIT(A) also observed that primary object for the issue of FCCB was for converting them into shares. Therefore, the same could not be considered as unsecured loans. CIT(A) also held that the issue was covered against the assessee by the decision of the Special Bench of the Tribunal in the case of Ashima Syntex Ltd. (supra), and accordingly confirmed the disallowance made by the AO, aggrieved by which the assessee is in appeal before the Tribunal.
5.2 Before us, the ld. AR for the assessee reiterated the submission made before the lower authorities that expenditure incurred for issue of debenture as allowable as revenue expenditure as debentures were nothing but loan in view of the judgment of Hon'ble Supreme Court in the case of India Cement Ltd. (supra). Ld. AR also placed reliance on the judgment of Hon'ble High Court of Delhi in the case of CIT v. Havells India [2012] 208 Taxman 114/21 taxmann.com 476 in which the Hon'ble Court after referring to the judgment of Hon'ble Supreme Court in the case of India Cements Ltd.(supra) held that the expenditure incurred in connection with the issue of debentures was allowable as revenue expenditure. He also referred to the judgment of Hon'ble High Court of Rajasthan in case of CIT v. Secure Meters Ltd. [2010] 321 ITR 611/[2008] 175 Taxman 567, it which it has been held that position has to be seen at the time of issue of debentures and that the fact that at a future point of time the debenture was convertible was not relevant for deciding the allowability of expenditure. It was pointed out that SLP filed by revenue against the said judgment has been dismissed by the Hon'ble Supreme Court. He also referred to the judgment of Hon'ble High Court of Madras in the case of CIT v. South India Corpn. (Agencies) Ltd.[2007] 290 ITR 217/164 Taxman 249 in which it was held that the issue of shares was a future event and position had to be seen at the time of issue of debenture and the Hon'ble Court accordingly upheld allowability of expenditure as revenue in nature.
5.3 The ld. DR on the other hand strongly supported the orders of authorities below. It was argued that section 35D was a special provision for amortization of certain expenses incurred in connection with the expansion and extension of business and, therefore, it will have precedence over general provisions of section 37. For the said proposition, he placed reliance on the judgment of Hon'ble High Court of Madhya Pradesh in case of Shree Synthetics Ltd. v. CIT [2008] 303 ITR 451 which related to the case of partly convertible debentures and the Hon'ble Court held that even non-convertible debentures were covered by the provision of section 35D (2)(c)(iv). The Hon'ble High Court also observed that Section 35D being special provision prevailed over the general provisions and therefore expenditure incurred for issue of debentures convertible or inconvertible had to be amortized under section 35D. It was accordingly urged that the order of CIT(A) should be upheld.
5.4 In reply, the ld. AR submitted that Circular No.56 dated 19.3.71 of CBDT had specifically clarified that the provisions of amortization were not intended to supersede any other provisions of the Act as per which expenses were allowable under the Act. Therefore, it was clear that section 35D would apply in respect of capital expenses and not to expenses of revenue in nature. It was also submitted that in case of conflicting judgments of different High Courts, the view favourable to the assessee should be adopted in view of the judgment of Hon'ble Supreme Court in case of CIT v.Vegetable Products Ltd. [1973] 88 ITR 192. He also referred to the judgment of Hon'ble High Court of Bombay in the case of CIT v. Mahindra Ugine and Steel Co. Ltd. [2002] 120 Taxman 250/[2001] 250 ITR 84 in which it has been held that Section 35D was applicable only in respect of expenses which were otherwise not allowable as deduction i.e. only to capital expenses.
5.5 We have perused the records and considered the matter carefully. The dispute is regarding applicability of provisions of section 35D for amortization of expenses incurred by the assessee in connection with the issue of foreign currency convertible bonds (FCCB). These bonds which had been issued on 28.4.2004 were convertible in shares after 8.6.2004 but before 22.4.2009 and there was also option for redemption on or after 12.5.2006 and upto 24.2.2009. The assessee had incurred total expenditure of Rs.11,85,26,700/- on issue of these bonds. The issue is whether such expenditure is covered under the provisions of section 35D or is allowable as revenue expenditure. Under the provisions of section 35D, certain expenses as specified in sub-section (2) of section 35D incurred before commencement of business or incurred after commencement of business in connection with extension of undertaking or in connection with setting up of a new unit, are required to be amortised over a period of five years. These expenses also include the expenditure incurred in connection with the issue for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus, as per section 35D(2)(c)(iv). Thus, under the provision, expenses incurred in connection with issue of debentures of a company are also required to be amortized.
5.6 However CBDT vide Circular No.56 dated 19.3.1971 has clarified that provisions of section 35D do not supersede any other provisions of Income-tax Act under which expenditure is allowable as deduction against profit. It has also been clarified that any expenditure incurred which is allowable as deduction in view of the judgment of Hon'ble Supreme Court in case of India Cements Ltd. (supra) will not be covered by the provisions of section 35D. The Hon'ble Supreme Court in the said case have held that expenditure incurred in connection with borrowing of capital for the purpose of existing business is required to be allowed as business expenditure. There are also judgments of several High Courts as mentioned in para 5.2 earlier in which it has been held that expenditure incurred in connection with issue of debentures even if it is fully convertible is allowable as revenue expenditure and is not required to be amortised under section 35D. However, there is also a contrary judgment of Hon'ble High Court of Madhya Pradesh in the case of Shree Synthetics Ltd. (supra), in which it has been held that Section 35D being a special provision will prevail over general provisions of the Act and that, in view of specific provision of section 35D(2)(c)(iv), expenditure incurred even on non convertible debentures is required to be amortised. The ld. AR has argued that there being conflicting judgments, the interpretation which is favourable to the assessee should be adopted in view of the judgment of Hon'ble Supreme Court in the case of Vegetable Products Ltd. (supra).
5.7 We are however unable to accept the arguments advanced. Various judgments of Hon'ble High Courts which are in favour of the assessee as mentioned earlier relate to the period prior to assessment year 2004-05 from which year there is amendment to section 36(1)(iii) as per which interest on capital borrowed in connection with extension of existing business or profession starting from the date on which the capital was borrowed till the date on which the assets in the extended business have been first put to use, is required to be capitalized. Thus from assessment year 2004-06 even the interest on capital borrowed which otherwise was allowable as revenue expenditure is required to be capitalized if the same had been borrowed in connection with extension of existing business. Therefore, expenses incurred on borrowing the capital cannot, in our opinion, be considered as revenue expenditure. Further, the expenditure has been incurred in connection with extension of business in the field of television and setting up of new channels, which will result in addition to the existing profit earning apparatus giving advantage in the capital field. Any expenditure incurred existing into any advantage in the capital field has to be considered as capital in nature as held by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69. It has also been held by the Hon'ble Supreme Court in the said case that expenditure incurred for efficient and profitable working of existing profit making apparatus will be revenue in nature. But the expenditure incurred in connection with addition/augmentation of profit earning apparatus has to be considered as capital in nature. In view of the above position we, hold that expenses incurred for issue of debenture for the purpose of extension of business has to be considered as capital expenditure and, accordingly has to be amortized under section 35D. We, therefore, see no infirmity in the order of the CIT(A) confirming the disallowance under section 35D and the same is thus upheld.
6. In the result, appeal of the assessee is partly allowed for statistical purposes.
SKJ--
Regards,
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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