Sunday, June 28, 2009

No TDS on Sec-195 Payments, as it is a Business Income

ITA No.69 & 70/Bang/2009
Assessment Years : 2000-1 & 2001-02




Income tax - Indo-USA DTAA - Assessee is a reputed hotel group - receives certain services from US-based hotel group and makes payment without TDS - Revenue treats it as royalty or fees for technical services u/s 9(1)(vi) or (vii) and also under Article 12(3) of the DTAA - CIT(A) goes by the Delhi HC decision in the assessee's case and treats it as business income and since the non-resident has no PE in India, the payment received is held to be non-taxable - Revenue refers to the Explanation inserted at the end of section 9 by the Finance Act, 2007 with retrospective effect from 1.6.1976 which states that TDS to be deducted under clauses (v), (vi) and (vii) of sub-section (1) of Sec 9 even if there is no PE - held, since the income of the non-resident is held to be business income, this Explanation has no applicability to this case - Revenue's appeal dismissed


Per : R V Easwar :

These are two appeals filed by the revenue for the asst.years 2000-01 & 2001-02.

2. The assessee is a public limited company engaged in the running of hotels. It made payments of Rs.2,52,93,968/- and Rs.1,11,35,305/- respectively for the two years to Sheraton International, USA, a non-resident company. The question whether the assessee was liable to deduct tax from the above payments came up before the Assessing Officer. The Assessing Officer held that the assessee was liable to deduct the tax and since it had not done so, he passed an order u/s.201(1) and section 201(1A) of the IT Act on 31.7.2001 holding the assessee to be in default and directing it to pay the taxes which it ought have deducted and also charging interest. The tax amount came to Rs.33,47,733/- and Rs.15,02,609/-. The interest charged came to Rs.10,00,935/- and Rs.2,57,918/-. This order reached the Bangalore Bench of the ITAT in ITA Nos.145 to 148/Bang/2004 and by order dt.11.11.2005, the issue was restored to the file of the Assessing Officer with the following directions :

"Since the chargeability or otherwise is yet to be decided we think it fit not to prejudge the issue so as to hamper the judicial decision to be arrived at by the Assessing Officer in view of the remand by the Tribunal at New Delhi. The Assessing Officer, after determination of the taxability or otherwise of the payee, may appropriately pass order in the case of the present assessee. The matter is therefore restored back to the file of the Assessing Officer. The Assessing Officer shall determine the nature of payment as well as the amount taxable therein."

3. The Assessing Officer appears to have contacted his counterpart in New Delhi where Sheraton International, USA was being proceeded against as recipient of the aforesaid payments made by the assessee. The latter seems to have sent to the Assessing Officer all the relevant papers including the order of the Delhi Bench of the Tribunal in the case of Sheraton International which is reported in (2007) 293 ITR (AT) 68 = (2007-TIOL-288-ITAT-DEL). In this order it was held that the payments made by the present assessee under the agreement to Sheraton International did not amount to royalty or fees for technical services or fees for included services and that the payments represented business profits in the hands of Sheraton International and since Sheraton did not have any permanent establishment in India, the profits were not taxable in India in terms of Article 7 of the DTAA between India and America. The issues have been elaborately dealt with by the Tribunal but suffice to note paragraph 87 of the said order (page 152 of the report) which is as under :

"As such, considering all the facts of the case, the relevant provisions of the income-tax Act, 1961 as well as that of the Double Taxation Avoidance Agreement between India and USA and keeping in view the legal position emanating from various judicial pronouncements discussed above, we are of the opinion that the amount received by the assessee from the Indian hotels/clients for the services rendered under the relevant agreements was not in the nature of "royalties" within the meaning given in section 9(1)(vi) read with Explanation 2 thereto of the Income tax Act, 1961 or as given in article 12(3) of the Indo-American DTAA. The same was also not "fees for technical services" or "fees for included services" as defined in section 9(1)(vii) read with Explanation 2 thereto of the Income-tax Act, 1961 or article 12(4) of the Indo-American DTAA respectively. Having regard to the integrated business arrangement between the assessee-company and the Indian hotels/clients as evident from the relevant agreements as well as the nature of the assessee's own business, the said amount clearly represented its "business profit" which was not liable to tax in terms of article 7 of the Indo-American DTAA. We, therefore, allow the relevant grounds raised in the assessee's appeals on this issue and dismiss the additional grounds raised by the Revenue in its appeals."

4. On receipt of the aforesaid order of the Tribunal the Assessing Officer in the present proceedings held that the order of the Tribunal did not have any bearing on the question of the assessee's liability to deduct tax from the payments. He, accordingly, directed the assessee to deduct tax from the payments and reiterated the earlier order passed on 31.7.2001, by order passed on 30.11.2006.

5. On appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's plea based on the order of the Tribunal cited above and held as follows :

"7.5. I have considered the submissions made by the AR on behalf of the appellant and perused the order passed by the Hon'ble ITAT, Delhi Bench in the case of Sheraton referred to above. It is an undisputed fact that the liability for TDS is a vicarious liability. The principal liability is of the recipient of income as provided u/s.191 of the Act. Since, in the instant case, the recipient i.e., Sheraton is assessed to tax in India, the interest of the revenue would be amply protected because upon conclusion of the litigation, the tax due on remittances, if any, will be liable to be paid or otherwise recovered from Sheraton direct. It is observed that proceedings u/s.201(1) were initiated against the appellant on receipt of information that the appellant had paid various amounts to Sheraton without deduction of tax as required u/s. 195. I find that the impugned order was passed by the ITO concerned at Bangalore as per direction of ITAT, Bangalore Bench after taking into account the findings contained in the order of his counterpart dated.28.11.2003 in the case of Sheraton. Since the said order of the Assessing Officer in the case of Sheraton has been set aside by the Hon'ble IT AT, Delhi Bench vide its order referred to above, there is no justification for the continuance of the impugned order. Once it has been held by the Hon'ble Tribunal that the services rendered by Sheraton to Indian hotels including the appellant are not chargeable to tax in India, there is no valid reason to hold the appellant to be an assessee in default ufs.201(1) of the Act for not deducting tax at source u/s.195 on remittances made towards availing the said services. Respectfully following the said order of the Hon'ble ITAT, Delhi Bench referred to above, I hold that as the very foundation of the impugned order has ceased to exist by virtue of the said order of the Hon'ble Tribunal, the impugned order cannot be sustained anymore. The impugned order is accordingly set aside. This ground of appeal is, therefore, decided in favour of the appellant."

As regards interest u/s.201(lA) the CIT(A) deleted the same consequential to his decision on the applicability of section 201(1).

6. The revenue is in appeal challenging the order of the CIT(A) as above. At the time of the hearing it was pointed out on behalf of the assessee that the order of the Delhi Bench of the Tribunal in the case of Sheraton International has been affirmed by the Hon'ble Delhi High Court in Director of Income tax v. Sheraton International Inc. by judgement dt.30.1.2009 reported in (2009) 221 CTR 752 (Del) = (2009-TIOL-57-HC-DEL-IT). A copy of the judgement was also filed. We find from paragraph 13 of the judgement of the High Court it has been observed as under :

"13. In view of the aforesaid findings of the Tribunal that the main service rendered by the assessee to its client-hotels was advertisement, publicity and sales promotion keeping in mind their mutual interest and, in that context, the use of trademark, trade name, or the stylized "S" or other enumerated services referred to in the agreement with the assessee were incidental to the said main service. It rightfully concluded, in our view, that the payments received were neither in the nature of royalty under s.9(1)(vi) r/w Expln. 2 or in the nature of fee for technical services under s.9(1)(vii) r/w Expln. 2 or taxable under art. 12 of the DTAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a PE under the art. 7 of the DTAA "business income" received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. The Tribunal pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trademark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal. Moreover, these are findings of fact which could be gone into only if a question was proposed impugning the findings of the Tribunal as perverse. We find that no such question has been proposed in the appeal."

Thus, after the judgement of the Hon'ble Delhi High Court, the argument of the revenue that the payments made by the assessee are to be treated either as royalty u/s.9(1)(vi) or as fees for technical services u/s.9(1)(vii) of the Income tax Act cannot be upheld. The Delhi Bench of the Tribunal has applied the Indo-US DTAA and held that the payments cannot be considered as royalty or fees for technical services as per the Act or as per the DTAA. It has further found that the payments represented business profits in the hands of Sheraton assessable as such but because of the fact that Sheraton had no permanent establishment in India, the payments cannot be taxed by the Income-tax department in India as per Article 7 of the DTAA. The Tribunal has also found that the agreement between the parties cannot be considered as a colourable device. All these findings of the Tribunal have been upheld by the Hon'ble Delhi High Court in the judgement cited supra. In this view of the matter and respectfully following the High Court's judgement, we hold that the Commissioner of Income-tax (Appeals) was right in cancelling the orders passed by the Assessing Officer on 30.11.2006 u/s.201(1) and 201(lA)of the Act.

7. The learned DR however submitted that the Explanation inserted at the end of section 9 by the Finance Act, 2007 with retrospective effect from 1.6.1976 makes a difference. The Explanation reads as under :

Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.

It may be seen that the Explanation applies only where the income is deemed to accrue or arise to the non-resident company under clauses (v), (vi) or (vii) of section 9(1). These clauses speak of interest, royalty and fees for technical services, respectively, payable to the non-resident. We have already seen that the Delhi High Court has affirmed the finding of the Delhi Bench of the Tribunal in the case of Sheraton International that the character of the payments made by the assessee to Sheraton was that of business profits and not either royalty or as fees for technical or included services. The Explanation will apply only if the payments can be characterized as interest or royalty or fees for technical services. Therefore, we are of the opinion that the Explanation has no application to the present case. The argument of the learned DR cannot be upheld.

8. In the result the appeals of the department are dismissed with no order as to costs. Order pronounced in the open court on this 1st day of May, 2009.

Friday, June 26, 2009

Non-compete fees constitute depreciable intangible assets--Chennai Tribunal

The Chennai Income Tax Appellate Tribunal (ITAT) has issued three rulings addressing the contentious issue of whether noncompete fees paid by the acquirer of a business constitute a tax deductible expenditure, and concluding that such fees are tax-depreciable intangible assets (Radaan Mediaworks India Ltd (2007), Real Image Technologies (Pvt.) Ltd (2008) and
Medicorp Technologies India Ltd (2009)).


Taxpayers historically have taken the position that non-compete fees paid are revenue expenditure that are deductible for tax purposes, whereas the tax authorities have treated such fees as capital expenditure. These divergent views have led to the matter being referred to the Special Bench of the Tribunal. While the decision of the Special Bench has not yet been issued, the Chennai ITAT has added another dimension to the debate with its holdings in the three rulings treating the fees as intangible assets.

Section 32 of the Indian Income Tax Act, 1961 (ITA) allows depreciation on both tangible and intangible assets. Intangible assets for this purpose include know-how, patents, copyrights, trademarks, licenses, franchises and any other business or commercial rights of a similar nature, acquired on or after 1 April 1998. Depreciation on such intangible assets is allowed at
a rate of 25% per annum.

The issue before the Chennai Tribunal was whether non-compete fees fall within the scope of “any other business or commercial rights of a similar nature.” The Tribunal unanimously concluded that non-compete fees are a business or commercial right within the meaning of Indian income tax law and, therefore, may be depreciated for tax purposes.

The facts of the three cases were very similar:

• In acquiring a “business” (e.g. line, unit or entity, among others) from the seller, the taxpayer also paid a noncompete fee that restrained the seller from competing with the taxpayer.
• Separate non-compete agreements were entered into in two cases and, in the third, the agreement for the transfer of the business included a separate clause containing the non-compete obligation.
• The taxpayer claimed that the non-compete fee was an intangible asset entitled to depreciation (this was made as an alternative claim in two of the three cases).
• The tax authorities rejected the claim on the ground that a non-compete fee is not an “asset” and so no depreciation is allowed.

In all three cases, the first appellate authority (i.e. the Commissioner of Income-tax (Appeals)) found merit in the taxpayers’ arguments and held that the non-compete fee is tax depreciable. The tax authorities then appealed to the second appellate authority, the ITAT.

Real Image Technologies (Pvt.) Ltd – In arriving at its conclusion that a non-compete fee is tax depreciable, the Tribunal provided an informative explanation of its rationale in Real Image Technologies (Pvt.) Ltd, separating the issues before it into the following questions:

1. Whether the payment of a non-compete fee can be construed as a commercial right; and
2. If so, whether a non-compete fee is a business or commercial right similar to other rights that may be depreciated.

On the first issue, the Chennai ITAT held that the payment made by the acquirer to the seller was for restraining the seller from competing with the acquirer and, thus, gave the acquirer the right to operate the business without concern over competition. A non-compete fee is generally paid for a limited period of time (usually five years), during which the business
becomes more stable and better equipped to withstand competition. As a result, the ITAT held that the non-compete fee is a commercial right.

Having concluded in the affirmative on the first question, the ITAT then examined whether a non-compete fee is a right similar to know-how, patents, copyrights, trademarks, licenses and franchises. The Tribunal applied the ejusdem generis principle for the definition of intangible assets, which requires that words of a general nature following specific and particular words be construed as limited to things that are of the same nature as those specified. The ITAT consequently ruled that, if the business or commercial right of a patent, trademark, license, franchisee, etc., fulfilled the condition of being intangible assets, then a business or commercial right acquired by payment of INR 18.79 million also fulfilled the
condition by way of a logical corollary. The non-compete right was therefore held to be eligible for depreciation under ITA section 32(1)(ii).

Medicorp Technologies India Ltd – The Chennai ITAT’s views in Medicorp Technologies were along similar lines. However, responding to the tax authorities’ contention that a non-compete fee was not an “asset” at all because it lacks a market value and it cannot be transferred, sold or licensed, the Tribunal also examined the concept of depreciation in the ITA.

The ITAT considered the difference between the concept of depreciation under the ITA and under normal accounting principles. Under the ITA, depreciation is a statutory allowance, which is not confined to the diminution in value of an asset by wear and tear but also contains an “incentive” element and is governed by fiscal policies and considerations. The ITAT
observed that depreciation under the ITA does not reflect purely economic criteria. The ITAT gave as an example items for which the rate of depreciation provided under the ITA is 100% and observed that this does not mean that the effective life of the items is only one year. According to the ITAT, the logic for such differences in treatment could be that the Indian
government wanted to encourage the use of certain types of assets.

As another example, the ITAT referred to the fact that depreciation is allowed on computer software, which, once loaded, cannot be resold, loses its assignability and transferability, and has practically no market value. The ITAT noted that the depreciation provisions do not necessarily follow the traditional concept of an “asset” and an accountant’s approach to
“depreciation,” reiterating that the tax law sometimes implements the government’s economic and/or fiscal policies.


Through its analyses in the rulings, the ITAT concluded that a non-compete fee is an intangible “asset” that may be depreciated. The rulings should provide a boost to merger and acquisition activities in India, allowing taxpayers and their advisors to better plan for the tax consequences of non-compete fee arrangements in drafting takeover contracts


Thursday, June 11, 2009

Maintenance of software is not capital expenditure

Maintenance of software is not capital expenditure




The assessee is in appeal before us against the order of the learned CIT(A) dated 17-11-2004 for assessment year 2001-02. First four grounds in the appeal relate to the disallowance of 60% the unshared expenses.

2. The assessee company is engaged in the business of trading in raw materials, distribution of liquid petroleum gas (LPG), establishment of LPG terminals, blending and bottling plants, manufacturing of cylinders and developing LPG network. It has wholly owned subsidiaries as well as joint ventures for the aforesaid purpose. For the year under consideration it declared a business loss of Rs.2,11,35,329 and long-term capital loss of Rs.17,57,95,625. The assessee has entered into agreement with each of its subsidiaries known as ‘Shared Service Agreement', as per which the services rendered by the assessee company to the subsidiaries are to be charged to the respective subsidiaries. In this connection, the assessee showed a recovery of Rs.3,00,34,000 from the subsidiaries. The details revealed that the total cost of shared services is Rs.5,93,42,541. Thus, it was seen that the subsidiaries had shared about 51% of the total cost. The Assessing Officer scrutinised in detail the structure of the conglomerate and their activities. He found that the control of the companies was in the hands of the assessee company with common management, common public relations, common purchases, common sharing of services and data processing. Therefore, the question the Assessing Officer posed to himself was as to what was the basis of allocation of costs incurred by the assessee amongst the subsidiaries. The details on record revealed that the assessee had recovered the aforesaid sum of Rs.3,00,34,000 only from four of its subsidiaries and that too at a fixed rate of 20 or 30%. It was further noted that there was no correlation between capital employed in each of these four subsidiaries and the capital expenditure recovered from them. According to the Assessing Officer, allocating the expenditure on the basis of turnover would have been more scientific but that too was not done by the assessee. The next question the Assessing Officer posed to himself was as to why the total expenditure was not allocated to all the subsidiaries. He noted that whereas six subsidiaries did not have any activity, three were in the business of maintenance of storage terminals which involved lot of expenditure. The Assessing Officer compared the total capital employed in the four subsidiaries from whom recoveries were made with the capital employed in the three companies maintaining storage terminals and was of the view that on proportionate basis a sum of Rs.86,13,278 should have been recovered from these three companies. However, it was submitted by the assessee that the three companies were not its subsidiaries but were joint ventures and had little control over them. The Assessing Officer having noted the absence of a proper method of allocation of expenditure, fell back upon assessment year 1997-98 in which year 60% of the expenditure was disallowed and which was also confirmed by the CIT(A) by his order dated 20-3-2002 . Accordingly, for the year under consideration, the Assessing Officer followed the same pattern and disallowed Rs.1,75,85,124 out of the total expenditure.

3. The CIT(A), by and large agreed with the action of the Assessing Officer except to the extent that he directed to disallow 60% of the total expenditure after reducing the salary paid to the Managing Director and the expenditure incurred on software as these expenses were considered separately for disallowance.

4. At the outset, the learned counsel drew our attention to the basic fact and the quantum of disallowance. The assessee incurred total staff costs of Rs.2,98,70,096 and establishment costs of Rs.2,94,72,445 aggregating to Rs.5,93,42,541. The above two amounts appear debited in the profit and loss account. Out of the aggregate, the assessee distributed Rs.3,00,34,000 to the subsidiaries and the credit for which is found in the profit & loss account. Thus, the balance amount of Rs.2,93,08,541 (5,93,42,541-3,00,34,000) was claimed by the assessee as its own expenditure. However, the Assessing Officer disallowed 60% of Rs.2,93,08,541 on the ground of not having recovered any expenditure from the three storage companies and against which the assessee is aggrieved. Since the Assessing Officer made the disallowance in the light of the finding in assessment year 1997-98, the learned counsel drew our attention to the order of the Tribunal for that year in ITA No.670/Hyd/2002 dated 28-2-2007. In this connection, it was pointed out that according to the finding of the Tribunal, except Government of India's letter dated 12-10-1995 , there was no other material to suggest that the assessee provided any service to the other companies where investments were said to have been made. In a miscellaneous application filed by the assessee against the said order of the Tribunal, the amended approval of the Government of India in the form of its letter dated 19-2-1996 was placed on record to show that the formation of the new company was to implement the project. However, since this evidence was filed for the first time, the Tribunal vide its order dated 25-5-2007 in M.A.No.27/Hyd/2007 held that there was no mistake apparent on record. Thus, for the present appeal the emphasis of the learned counsel was on the letter dated 19-2-1996 to which our attention was drawn to impress that the assessee company was established to implement the project. In view of this, it was submitted that the order of the Tribunal in assessment year 1997-98 should not be followed and that the matter requires a fresh look. It was also argued that there was absolutely no basis to make a disallowance of 60%. It could well have been 6% or even 80%. It was also submitted that no disallowance could be made unless the expenditure was of a personal nature or capital nature and it was not the case of the revenue claiming to be either of this. It was also not unconnected with the business, it was submitted. The learned counsel relied on the following judgments:
(a) CIT v. Walchand And Co. Pvt. Ltd. – 65 ITR 381 (SC)
(b) J.K. Woollen Manufacturers v. CIT – 72 ITR 613 (SC)
(c) Aluminium Corporation of India Ltd. v. CIT – 86 ITR (SC)

5. At the outset, the learned Departmental Representative did not dispute about the new fact being brought on record in the form of Government's letter dated 19-2-1996 . However, according to her this did not make any material difference. Referring to paragraph 4 in the letter dated 12-10-1995 , it was contended that the legal mandate to the parent foreign company was to set up a company for the main object to carry on the business of trade in LPG, setting up and operation of LPG terminals and so on. Setting up of subsidiaries was not the business of the assessee and hence all activities other than the business in LPG were incidental only. The learned Departmental Representative likened the case of the assessee with that of a kirana dealer whose business is to trade in kirana but setting up of shops cannot be said to be his business. The submission was that the expenditure incurred by the assessee for the subsidiaries had no nexus with its own business and that the business of the subsidiaries was independent of the assessee. It was not the business of the assessee to run the business of the subsidiaries and she also raised a question as to why the recovery was from four companies only and not from all fourteen subsidiaries. The learned Departmental Representative also questioned the basis of allocation adopted by the assessee and submitted that though the allocation was stated to have been made on the basis of a careful study, no details of such study were placed on record. She further questioned the responsibility of the assessee's own assessment of time spent and resources utilised on behalf of the subsidiaries for allocating the expenditure in different propositions. Referring to the Shared Services Agreement (SSA), it was submitted that there was no payment of fees as stipulated in clause 2 of the agreement and hence it could not be said that the SSA was sacrosanct. Further, if some companies had not begun operations, it means they did not have employees and it further means that their activities were undertaken by the assessee. If that were so, the assessee should have been reimbursed for the same. According to the learned Departmental Representative, the subsidiaries were the fiefdom of the assessee and hence recoveries were effected only from them leaving out the Joint Ventures (JVs). It was submitted that the assessee did have some stake in the JVs and it was irrelevant that because they were JVs, no recoveries could be made from them. Finally, the learned Departmental Representative summed up her arguments by reiterating that the only difference from assessment year 1997-98 was the amended approval of FIPB, but the basic mandate to carry on the business of LPG did not undergo any change and hence the disallowance made this year on the basis of assessment year 1997-98 was justified and should be upheld.

6. We have duly considered the rival contentions and the material on record. First let us ascertain the raison d'etre of the assessee company. It is supposed to have been set up as a wholly owned subsidiary of SHV energy NV, Netherlands for operation of LPG terminals, blending and bottling plants, and manufacture of gas cylinders, regulators, valves and ancillary equipment and development of a LPG dealer network throughout the country. This is as per the approval letter dated 12-10-1995 . Clause 4 of this letter is also relevant. It reads as follows:
“It is noted that the proposed holding company would route the investments in downstream joint ventures, would coordinate them and provide managerial and technical assistance wherever required.”
The question is as to which is the holding company which is to route its investments in downstream joint ventures and also provide managerial and technical assistance. Well, we need not venture to interpret the clause as the Tribunal has already done so in its order for assessment year 1997-98 cited supra. As per paragraph 6 of the said order, the assessee appears to be a wholly owned subsidiary company of SHV Energy Mauritius Pvt. Ltd. which in turn is a subsidiary of SHV Energy NV, Netherlands . The Tribunal, therefore, held that the holding company was SHV Energy NV, Netherlands , and not the assessee company. The Tribunal further observed that the assessee company has nothing to do with the approval granted by the Government of India for setting up of another wholly owned subsidiary company by SHV Energy NV, Netherlands . Therefore, it may not be correct to say that the assessee company was providing any managerial and technical assistance. In the light of these findings, the Tribunal held that unless and until it is shown that the assessee is making investment in an organized and systematic manner, it cannot be said that the assessee was in the business of investment. Admittedly, it was also not in the business of money lending. In the light of these findings, the Tribunal held that the interest income is not the business income of the assessee but income from other sources. Further, in the light of these findings the Tribunal also upheld the disallowance of expenses by observing that there was no material available on record to suggest that the assessee had provided managerial or technical services to the subsidiaries. This is the factual position so far as assessment year 1997-98 is concerned. Now let us come to the present year.

7. The dispute in the present year is, by and large the same. Facts also, by and large are the same except the new evidence placed on record in the form of Government of India's letter dated 19-2-1996 . In the light of the new evidence on record, we shall try to approach the problem by posing to ourselves the following questions:
(a) are the expenses of Rs.5,93,42,541 incurred by the assessee for the purpose of its business ? if the answer to this question is in the affirmative, then obviously, the expenses would be allowable. However, if the expenses are held to be not for the purpose of the business, then the next question that arises is,
(b) whether the said expenses are incurred on behalf of the subsidiaries/JVs, and if so, was the assessee under an obligation to recover the same from them?
Let us consider the first question in the light of the new evidence placed on record. The crucial content of the letter after referring to the earlier approval is that “a new company in the name and style of M/s. SHV Energy India Private Limited has been formed to implement the project.” The implication of this letter is that the Netherland company is not to set up other subsidiaries or joint ventures but it is the assessee company which will set up subsidiaries and joint ventures in future. This is strengthened by two aspects in the original approval dated 12-10-1995 . Clause 4 uses the expression “proposed holding company”. The word ‘proposed' itself is indicative of the fact that it refers to the company which is to be established and not to the one which is already in existence. However, in absence of proper clarification in the form of the letter dated 19-2-1996, the tribunal was constrained to hold in assessment year 1997-98 that the assessee is not the holding company but only a subsidiary company. Second aspect which strengthens our view is clause 5 of the letter. It says that “for setting up further joint ventures/subsidiaries in India for downstream activities, you shall require prior approval of the Govt. of India.” Now it is common sense that if the proposed company is going to be the holding company as mentioned above, and if it has to implement the project as envisaged in the letter dated 19-2-1996 , obviously that company only will have to obtain the approval of the Government before setting up joint ventures/subsidiaries. Therefore, we are of the firm view that with the clarification coming in, in the form of the letter dated 19-2-1996, it is the assessee company which is to be the holding company which would route the investments in downstream joint ventures, would coordinate them and provide managerial and technical assistance wherever required. This fact is tacitly accepted by the Tribunal in its order in the Miscellaneous Application also when it is observed that the learned counsel very fairly conceded that the letter dated 19-2-1996 was not on record at the time of hearing the appeal, and the Tribunal could not take cognizance of the said letter in the proceedings u/s 254(2) of the Act.

8. What transpires from the foregoing discussion is that one vital additional fact has changed the status of the assessee company and hence, the complexion of the matter. It was in the case of Padmasundara Rao (decd.) v. State of Tamil Nadu (255 ITR 147) at page 153 of the report, the Supreme Court observed that circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. The same is the case here. Thus, to fulfill its objects, mandated both by the memorandum of association as well as the FIPB, the assessee company set up certain wholly owned subsidiaries and invested in some joint ventures. It entered into agreements with these companies for sharing of services and charges therefor. It was also to provide managerial and technical assistance to these companies. Therefore, the assessee incurred business development costs, stewardship costs and service related costs. The first two types were not charged to the subsidiaries but were born by the assessee company itself. So far as service related costs re concerned, the assessee incurred staff costs and establishment costs. As regards staff costs, the assessee has given details of the employees and the description of the services rendered by them. Referring to these details, it was pointed out by the learned Departmental Representative that some employees were shown to have worked for all the companies. The question raised by her was as to why there were no recoveries from the JVs and according to her there was hardly any difference between the JVs and the subsidiaries. Well, undoubtedly these are insignificant trivialities which have no bearing on the actual matter of fact. De hors that, firstly, it cannot be disputed that all the companies, whether JVs or subsidiaries are distinct legal entities. The assessee has stake in both. However, the difference is that in JVs there is another party who maybe equally interested but in subsidiaries no one except the assessee company is interested. In that sence, if the subsidiaries are the fiefdom of the assessee as the learned Departmental Representative has described it, it may not be wrong but the assessee company certainly has control over it and it has an agreement for sharing services amongst themselves. The objects of subsidiaries and JVs would obviously be different. Generally speaking, in the context of the assessee's business, subsidiaries would act in furtherance of the object of the holding company whereas the JV would be undertaking a distinct business by itself. As it appears from the overall business spectrum of the assessee, the JVs are to be kept independent and the subsidiaries are to be subservient to the holding company. In short, how the assessee has to run its business, how it has to be structured and how it has to be organized, it is all assessee's own lookout and the revenue officers need not take upon themselves the role of a business consultant. Even if there is a deviation from the SSA, it makes no difference and does not prejudice the interests of the revenue unless it is specifically shown to be so. There is no allegation or even a doubt that the expenses are fictitious or that they are of capital nature or having personal element. All the expenses incurred by the assessee are for the purpose of business and shared by some of the subsidiaries which are nothing but special purpose vehicles to smoothen the business operations of the assessee. We may also clarify that there cannot be a business of floating and winding up of subsidiaries as the learned Departmental Representative had argued. Even if the kirana dealer opens several shops, it cannot be said that he is in the business of opening shops. His business remains that of kirana only. Therefore, we do not find the comparison with the kirana dealer to be apt. In the ultimate analysis, we hold that all the expenses incurred by the assessee are wholly and exclusively for the purpose of business and no disallowance is called for. Therefore, the disallowance of 60% of Rs.2,93,08,451 is deleted.

9. Second ground in the appeal is against the disallowance of royalty of Rs.4,71,317. The impugned amount was paid to the parent company towards maintenance of Kernel Software. Since TDS was not deducted from the said payment, the Assessing Officer disallowed the same u/s 40(a)(i) of the Act. The CIT(A) confirmed the same.

10. The contention of the learned counsel is that the said amount represents credit and not actual payment. It is pointed out that as per rule 30(1)(b)(i)(1) of the Income tax Rules, if the amount is credited on 31 st March, then the tax in respect of the said amount should be deducted and paid before 31 st May. It is also submitted that the payment of tax was in fact made on 31-5-2001 . In view of the said rule, we delete the disallowance subject to the verification of the payment by the Assessing Officer.

11. Third ground in the appeal is against restricting the remuneration allowable to Rs.51 lacs paid to the managing director. The assessee paid a salary of Rs.75,50,264 to its managing director. The Assessing Officer observed that though the remuneration paid to the managing director was approved by the shareholders, the same was subject to the approval of the Central Government, which was awaited. Therefore, he disallowed the entire salary paid to him. In the course of appellate proceedings, the assessee produced the approval of the Central Government, as per which salary of Rs.4,25,000 per month was approved. Therefore, the Assessing Officer was directed to allow deduction to the extent of Rs.51 lacs and the disallowance of the balance amount of Rs.24,50,264 was confirmed.

12. The contention of the learned counsel is that the expenditure is for the purpose of business and hence is allowable. The learned Departmental Representative relied on the orders of the lower authorities.

13. On due consideration of the matter, we allow the claim of the assessee. It is not disputed that the expenditure is incurred wholly and exclusively for the purpose of business. It is also not a capital expenditure nor an expenditure of a personal nature. Therefore, all the conditions required under the Income tax Act for the allowance of the expenditure are fulfilled. The Act does not lay down any condition that remuneration to the managing director will be allowed only to the extent approved by the Central Government. Thus, the disallowance sustained by the CIT (A) is not in accordance with law and hence we delete the same.

14. Last ground in the appeal is against treating the expenses of acquiring computer software as capital expenditure. The assessee incurred expenditure of Rs.14,21,002 for purchase of software, MS Technet and Norton licences. According to the Assessing Officer it was an enduring benefit acquired by the assessee and hence proposed to treat it as capital expenditure. It was explained by the assessee that major portion of the expenses i.e. Rs.14,06,402 was towards maintenance charges/licence fees of the MS Office Enterprise and anti-virus software. However, the Assessing Officer was not convinced with the explanation and hence disallowed Rs.14,06,402. The CIT(A) confirmed the action of the Assessing Officer and also directed him to grant depreciation thereon. We do not detain ourselves for long on this issue as in several cases the Tribunal has taken the stand to hold that in the rapidly changing technological environment, nothing is of enduring nature and more so in the field of software. Moreover, in the present case, the expenses are mainly for the maintenance of the software and hence it is of revenue nature. Accordingly we delete the disallowance.

15. In the result, the appeal of the assessee is allowed.
The order was pronounced in the court on 4-12-2008 .

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