Sum paid for availing the standard service of bandwidth network is NOT liable to TDS u/s 194J/194C

DEPUTY COMMISSIONER OF INCOME TAX CIRLCE-2(32), HYDERABAD

Vs

M/s EXCEL MEDIA (P) LTD HYDERABAD

Income tax – Sections 194C, 194J – Whether the sum paid for availing the standard service of bandwidth network is liable to TDS u/s 194J.

Assessee Company entered into agreement with VSNL and Airtel and connected its equipments/network with that of VSNL/Airtel to enable their customers to have the access to the data or information over the internet. AO considered that the payment for the same falls under the provisions of section 194J and disallowed the expenditure for the same. Alternatively, if these are not considered as covered u/s 194J, the same are covered u/s 194C. CIT (A) allowed the appeal of the assessee and deleted the disallowance.

In appeal, the ITAT held that,

++ following the decision of the Tribunal dated 7.8.2009 in ITA No.440/Hyd/2009 in the case of M/s Beam Cable Systems (P) Ltd. in which decision of the Mumbai Bench in the case of Pacific Internet (India) Pvt. Ltd. was followed and observed that “for providing the sales service, the assessee needs bandwidth network operating infrastructure. As per provisions of S.194J of the Act (ii) there should be payment in the nature of fees and (ii) said should be for availing the technical services. Again expression ‘technical service’ has not been defined in S.194J but meaning given to the said expression has been adopted from Expln. 2 to cl. (vii) of S.9(1). The assessee has availed the bandwidth services and other infrastructure for providing the internet access to its customers. These are standard facilities availed by the assessee. The payment made by the assessee company to VSNL, MTNL and other concerns for availing the services of the bandwidth network infrastructure cannot be said to be technical services within the meaning of S.194J r/w Expln. 2 to cl (vii) of S.9(1).” Therefore, the payments for bandwith services do not fall u/s 194J;

++ further, the tax is required to be deducted u/s 194C where a contract was entered into for carrying out any work in pursuance of the contract. It was held by the Karnataka High Court in the case of V.M. Salgaocar & Bros. that The word ‘work’ refers and comprehends the activities of the workmen and not the operation in the factory or on machines. It is the physical force which has been comprehend in the word ‘work’. In the present case, there was no contract between the assessee and VSNL/Airtel to carry our any work as envisaged in section 194C. There was only a commercial/technical arrangement under which the assessee connected its equipments/network with that of VSNL/Airtel to enable their customers to have the access to the data or information over the internet. Hence section 194C is also not applicable.

Revenue’s appeal dismissed

ORDER

2. The Revenue raised the following grounds in its appeal:

1. The CIT(A) ought to have noticed that the amount paid to Bandwidth services falls under the provisions of section 194J, consequently hit by provision of section 40(ai) of the Act.

2. Alternatively even if it was held that the provisions of section 194J are not applicable, the CIT(A) ought to have held that the provisions of section 194C are attracted to this case.

3. After hearing both the parties, we are of the opinion that the first above ground is squarely covered in favour of the assessee by the order of this Tribunal dated 7.8.2009 in ITA No.440/Hyd/2009 in the case of M/s Beam Cable Systems (P) Ltd., Hyderabad for the assessment year 2006-07 wherein the Tribunal held as follows:

“7. We have heard both the parties and perused the material on record. In our opinion, the issue in dispute is squarely covered by the order of the Mumbai ‘D’ Bench in the case of Pacific Internet (India) Pvt. Ltd. Vs. = ITO 27 SOT 523(Mumbai) wherein it is held as follows :

“There is no dispute that the assessee company is engaged in the business of providing internet excess services to its corporate clients and consumers. For providing the sales service, the assessee needs bandwidth network operating infrastructure. The controversy is whether the services are facilities availed by the assessee from VSNL/MTNL and other concerns towards bandwidth and network operating infrastructure can be said to be ‘technical services’ within the meaning of S.194J r/w Expln. 2 cl.(vii) of S.9(1). As per provisions of S.194J of the Act (ii) there should be payment in the nature of fees and (ii) said should be for availing the technical services. Again expression ‘technical service’ has not been defined in S.194J but meaning given to the said expression has been adopted from Expln. 2 to cl. (vii) of S.9(1). The assessee has availed the bandwidth services and other infrastructure for providing the internet access to its customers. These are standard facilities availed by the assessee. The payment made by the assessee company to VSNL, MTNL and other concerns for availing the services of the bandwidth net work infrastructure cannot be said to be technical services within the meaning of S.194J r/w Expln. 2 to cl (vii) of S.9(1). The order passed by the assessing officer under S.201(1).and 201(1A) is cancelled – CIT Vs. Estel Communications (P) Ltd.) = (2008) 217 CTR (Del) 102 relied on”.

8. Further order of the Tribunal in the case of Pacific Internet (India) (Pvt.) Ltd Vs. ITO 27SOT 523 which support the case of assessee where they considered the judgement of the Delhi High Court in the case of M/s. Estel Communications (P) Ltd. cited supra wherein their Lordship has held as follows :

“The term ‘technical service’ has come for the consideration before the Hon’ble Delhi High Court in the case of Estel Communications (P) Ltd. (supra). In the said case, the assessee was providing internet bandwidth for providing access to its subscribers. The main server, based on which the internet services were provided were located in USA. In that case, the assessing officer was of the opinion that the assessee should have deducted the tax at source as the payment was made for availing the technical services. Negativing the contention of the Department , the Hon’ble High Court has held as under:

“In so far as this is concerned, the Tribunal considered the agreement that had been entered into the assessee with Teleglobe and came to the conclusion that there was no privity of contract between the customers of the assessee and Teleglobe. In fact, the assessee was merely paying for an internet bandwidth to Teleglobe and then selling it to its customers. The use of internet facility may require sophisticated equipment but but that does not mean that technical services were rendered by Teleglobe to the assessee. It was a simple case of purchase of internet bandwidth by the assessee from Teleglobe.”

9. In view of the above decision, in our opinion, the service availed by the assessee from M/s. Bharati Info Airtel Ltd. And M/s Hathway Cable and Datacom Pvt. Ltd are not to be considered as technical services within the meaning of Section 9(i)(vii) read with explanation 2 and S.194J of the IT Act. The Tribunal while adjudicating the issue before them, they have carefully gone through similar issues which came for consideration in the following cases and came to the conclusion that the impugned services do not fall under the purview of the S.194J of the IT Act

(a) HFCL Infotel Ltd. Vs. ITO - = (2006) 99 TTJ(Chd) 440

(b) Skycell Communications Ltd. Vs. Dy.CIT - = (2001) 170 CTR (Mad) 238: 2001 251 ITR 53(Mad.)

(c) Wipro Ltd. Vs. ITO (2004) 84 TTJ (Bang.) 685: (2003 86 ITD 407 (Bang)

Hence, the distinction made by the departmental representative regarding the nature of services got rendered by the assessee is devoid of merit, since the services availed by the assessee is a standard services, and as per above judgements this services does not fall under purview of S.194J of the IT Act as it is not a technical services as enumerated in S.9(1) (vii) of the IT Act.

10. The above view also supported by order of the Chandigarh Bench of the Tribunal wherein held HFCL Infotel Ltd. Vs. Income Tax Officer = (99 TTJ (Chandigarh), 440) wherein held that interconnect charges paid by assessee, a telecommunication service provider, to BSNL in respect of calls which are routed through the latter’s network cannot be treated as payment for technical services and, therefore, provisions of S.194J are not applicable.

11. Further in the case of Commissioner of Income Tax Vs. Bharati Cellular = 220 CTR 258:

"The issue before the Tribunal was whether the payment made to foreign companies are covered with the scope of S.9(1) of cl.(vii) of the Act. It was held that the amount paid by the assessee in the said case cannot be considered as fee for technical services within the meaning of cl.(vii) if S.9(1) of the Act.”

Further the same view was expressed by Hyderabad Bench in the case of M/s. Bharati Cellular Ltd. by order dated 23.3.07 ITA.1233 to 1235/Hyd./04

12. In view of the above discussion, we are of the opinion that the payment made by the assessee for getting the services of internet access is not technical services, within the meaning of Expln.2 S. (9(1) (vii) of the IT Act read with read with 194J of the IT Act. Accordingly the grounds raised by the Revenue are dismissed.”

4. Respectfully following the same ratio laid down in the above order of this Tribunal, we dismiss Ground No.1 taken by the Revenue.

5. Regarding ground No.2, that the assessing officer to invoke the provisions of Sec.194C when provisions of section 194J are not applicable, in our opinion, the tax is required to be deducted where a contract was entered into for carrying out any work in pursuance of the contract. The expression ‘any work’ in section 194C has been subject to lot of litigations. It was held by the Delhi High Court in the case of SRF Finance Ltd. (211 ITR 861) that the term ‘any work’ in section 194C is aimed at the type of work resulting in tangible material and by virtue of the special inclusion, supply of labour to carry out any work is also brought into the net of tax deduction at source. It was further held by the Hon’ble Karnataka High Court in the case of V.M. Salgaocar & Bros. (237 ITR 630) that the work ‘work’ refers and comprehends the activities of the workmen and not the operation in the factory or on machines. It is the physical force which has been comprehend in the word ‘work’. Similar views were also held in the case of Moradabad Chartered Accountants Association Vs. CBDT (264 ITR 374) (all), Madras Bar Associations Vs. CBDT (216 ITR 240) (Mds.)

5. In the present case of the assessee also, there was no contract between the assessee and VSNL/Airtel to carry our any work as envisaged in section 194C. There was only a commercial/technical arrangement under which the assessee connected its equipments/network with that of VSNL/Airtel to enable their customers to have the access to the data or information over the internet. Hence, the case of the assessee is also not covered by the provisions of section 194C of the Act.

6. Accordingly, we dismiss the ground No.2 taken by the Revenue.

7. In the result, the Revenue appeal stands dismissed.

(Order pronounced in the Court 3.12.2010)

Maintenace or Repair of Software--Taxable only from 16.05.2008--SAP India Ltd

Maintenance and Repair of Software – taxable only from 16.05.2008, when IT Software Service was introduced – The maintenance charges collected by the appellant from their customers during the period from 09.07.2004 to 31.01.2006 are not liable to be subjected to levy of Service Tax under the head 'maintenance or repair service' under Section 65 (105) (zzg) read with Section 65 (64) of the Finance Act, 1994. The services rendered by the appellant to their customers are in the nature of information technology software service, which was made taxable w.e.f. 16.05.2008 only. Such service is not to be subjected to levy of Service Tax under any other entry. Therefore, the demand of Service Tax and the connected penalties are only liable to be set aside.




M/s SAP INDIA PRIVATE LIMITED Vs THE COMMISSIONER OF CENTRAL EXCISE BANGALORE-III COMMISSIONERATE




Settled law that a new taxable service will not attract levy of Service Tax under any pre-existing entry: it is settled law today that a new taxable service covered by specific entry under Section 65 of the Finance Act, 1994 will not attract levy of Service Tax under any pre-existing entry. In this connection, the Karnataka High Court's judgment in Commissioner Vs. Turbotech Precision Engineering Pvt. Ltd- 2010-TIOL-498-HC-KAR-ST is relevant. The High Court has held that the case of the assessee fell under the definition of 'works contract' and hence it could not be classified as 'consulting engineer's service'. It may be noted that 'works contract' came to be introduced as a taxable service w.e.f. 01.06.2007 only. The service rendered by the above company was for a period prior to the said date. The Revenue wanted to levy Service Tax under the pre-existent head "consulting engineer service", which was negatived by the High Court.
Case Law Referred:

Tata Consultancy Service Vs. State of Andhra Pradesh - 2004-TIOL-87-SC-CT-LB - refererred
Bharat Sanchar Nigam Limited Vs. Union of India - 2006-TIOL-15-SC-CT-LB - refererred
Infosys Technologies Ltd. Vs. Special Commissioner and Commissioner of Commercial Taxes and another - 2008-TIOL-509-HC-MAD-CT- refererred
Dr. Lal Path Lab Pvt. Ltd. Vs. CCE, Ludhiana - 2006-TIOL-1175-CESTAT-DEL (upheld by the High Court of Punjab & Haryana vide - 2007-TIOL-533-HC-P&H-ST - refererred
Federal Bank Ltd. Vs. Commissioner - 2009-TIOL-1597-CESTAT-BANG
IBM India Pvt. Ltd. Vs. CST, Bangalore - 2010-TIOL-167-CESTAT-BANG - refererred
Karnataka High Court's judgment in Commissioner Vs. Turbotech Precision Engineering Pvt. Ltd. - 2010-TIOL-498-HC-KAR-ST - followed


This appeal filed by the assessee is directed against the Commissioner's order confirming demands of Service Tax of Rs.20,89,72,647/- against them in adjudication of show-cause notice dated 26.10.2006 for the period from July, 2004 to January, 2006, appropriating earlier payment of Rs.6,29,80,109/- of the assessee towards such demand, demanding interest on tax under Section 75 of the Finance Act, 1994 and imposing penalties on the assessee under Sections 76 to 78 of the Act. We have examined the records. In the aforesaid show-cause notice, it was alleged that the assessee had rendered "maintenance or repair" services, taxable under Section 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994, to different clients under agreements during the aforesaid period. It was also alleged that the assessee had not cared to get registered with the Department in respect of the said service or to file Service Tax returns or to pay Service Tax, all with intent to evade payment of the tax. On this basis, it was further alleged that Service Tax was leviable on the maintenance charges collected from the clients under the aforesaid agreements by invoking the extended period of limitation under Section 73(1) of the Finance Act, 1994. For the same reasons, penalties were proposed on the assessee. The demand of Service Tax and other proposals in the show-cause notice were contested in a detailed reply filed by the assessee. It was in adjudication of this dispute that the Commissioner passed the impugned order.


2.0 We have heard both sides and considered their submissions. The levy of Service Tax on 'maintenance or repair' service was introduced w.e.f. 01.07.2003. At the outset, we shall reproduce the definition of "maintenance or repair" given under Section 65(64) of the Finance Act. Prior to 16.06.2005, this definition stood as follows:-


"Section 65(64) "maintenance or repair" means any service provided by –
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorized by him,

in relation to maintenance or repair or servicing of any goods or equipment, excluding motor vehicle."

There was an amendment to the definition, which took effect on 16.06.2005. The amended definition read as under:-


"(64) "maintenance or repair" means any service provided by –
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorized by him,
in relation to

(a) maintenance or repair including reconditioning or restoration, or servicing of any goods or equipment, excluding motor vehicle; or
(b) maintenance or management of immovable property."

'Management' was also brought within the net of Service Tax w.e.f. 01.05.2006 and, consequently, the service came to be known as "management, maintenance or repair" service. There were some amendments to this service also from time to time, but we are not concerned with the same.

3.0 As per Section 65(105)(zzg) of the Finance Act, "taxable service" means any service provided to any person by any person in relation to maintenance or repair, in so far as the period of dispute in this case is concerned. Referring to the above definitions and the changes made thereto from time to time, both sides have advanced their respective viewpoints on the interpretation of the provisions as applicable to "maintenance or repair of computer software". The learned Counsel for the appellant has pointed out that Business Auxiliary Service (BAS for short) was also introduced as a taxable service on 01.07.2003 and, significantly, its definition under Section 65(19) of the Act excluded maintenance of information technology software. It has been argued that a service specifically excluded from the definition of a taxable service (BAS), should ipso facto remain outside the purview of levy of Service Tax. The learned Counsel means to say that, as long as information technology software maintenance stood excluded from the purview of BAS, it would not be chargeable to Service Tax. The learned Counsel has contextually relied on the Board's Circular No. 70/19/2003-ST dated 17.12.2003 wherein it was clarified that "maintenance of Software is not chargeable to Service Tax". In this connection, it has been submitted by the learned Special consultant for the Revenue that the Circular dated 17.12.2003 was superseded by Circular No. 81/2/2005-S.T., dated 07.10.2005 wherein maintenance or repair or servicing of software was held to be exigible to Service Tax under Section 65(105) (zzg) read with Section 65(64) of the Finance Act, 1994. In this connection, the learned Consultant has also referred to the Hon'ble Supreme Court's decision in Tata Consultancy Service Vs. State of Andhra Pradesh wherein their lordships held that software (whether canned/branded), in any medium, should be "goods". In this connection, he has also pointed out that one of the members of the Constitution Bench had gone to the extent of holding that even customized software would satisfy the attributes of "goods". It is further submitted that this view was followed with approval in the case of Bharat Sanchar Nigam Limited Vs. Union of India  , which, in turn, was followed by the Madras High Court in the case of Infosys Technologies Ltd. Vs. Special Commissioner and Commissioner of Commercial Taxes and another . He has also contextually referred to two Notifications, No. 20/2003-ST dated 21.08.2003 and No. 7/2004-ST dated 09.07.2004. The first Notification exempted from levy of service tax the taxable service provided to a customer by any person in relation to maintenance or repair of computers, computer systems or computer peripherals. The second Notification rescinded the first thereby rendering the said service chargeable to Service Tax. Contextually, we note that the impugned demand of Service Tax is for a period from 09.07.2004. According to the learned Special Consultant, maintenance or repair of computers and computer systems would include maintenance or repair of software also as clarified by the Board in its Circular dated 17.12.2003. The learned counsel has opposed this view. According to him, computers or computer systems would not per se include software. According to him, Notification No. 20/2003-ST ibid purported to exempt maintenance or repair of only computer hardware from payment of Service Tax. In this view, according to the counsel, neither of the two Notifications will have any bearing on the taxability of maintenance or repair of software.

3.1 The learned Counsel for the appellant has also relied on the following decisions in support of his plea that what is specifically kept out of the levy by the Legislature cannot be subjected to tax:-


(i) Dr. Lal Path Lab Pvt. Ltd. Vs. CCE, Ludhiana - 2006 (4) STR 527(Tri.-Del.) = 2006-TIOL-1175-CESTAT-DEL (upheld by the High Court of Punjab & Haryana vide [2007 (8) STR 337(P&H)] = 2007-TIOL-533-HC-P&H-ST
(ii) Federal Bank Ltd. Vs. Commissioner - 2009 (15) STR 279 (Tri.-Bang.) = 2009-TIOL-1597-CESTAT-BANG (upheld by the Kerala High Court vide (2010) 34 VST 27 (Ker).

3.2. The learned Counsel has further submitted that maintenance or repair of software became taxable only w.e.f. 16.05.2008 when Information Technology Software service was introduced under Section 65 of the Finance Act, 1994. It has been argued that, prior to the said date, such service was not taxable. In this connection, the learned Counsel has claimed support from IBM India Pvt. Ltd. Vs. CST, Bangalore - 2010 (17) STR 317(Tri.-Bang.), = 2010-TIOL-167-CESTAT-BANG wherein it was held that Enterprise Resource Planning (ERP), advice, implementation services were not subject to Service Tax under the head 'Management Consultant' service and the same were taxable under the new category of 'Information Technology Software' service, introduced w.e.f. 16.05.2008.

3.3 In the face of the above arguments of the counsel, the learned Special Consultant for the Revenue has referred to a technical literature on the subject. He has quoted from "SOFTWARE ENGINEERING - A PRACTITIONER's APPROACH" (Fourth Edition) by Roger S. Pressman. It has been submitted that maintenance of computer software can be categorized as corrective, adaptive, perfective and preventive depending on the nature of the activity. These categories of software maintenance are covered by the so-called "ERP maintenance and upgradation activities". It is submitted that these services are normally rendered after release or installation of the software in the customer's computer system. The learned Consultant has submitted in response to queries from the Bench that, in the ERP regime, maintenance of software would consequentially follow planning and implementation. It is submitted that ERP implementation may require some maintenance. Broadly speaking, according to the learned Consultant, the aforesaid categories of maintenance are done once the installed/implemented software goes "live”, The gist of submissions of the learned Consultant is that whatever the technocrat does for maintenance of computer software is what the law-maker intended to bring within the ambit of "maintenance or repair" service in relation to computer software. It is this view which is sought to be supported by the Board's Circular dated 17.12.2003 and the decisions of the Hon'ble Supreme Court in Tata Consultancy Services (supra) and BSNL (supra) cases.

4. The learned Counsel has also raised the plea of limitation against the impugned demand of Service Tax. In this connection, it has been pointed out that certain ongoing proceedings of the department, which are presently at various stages, would indicate that the Department is yet to take a definite view with regard to levy of Service Tax on computer software maintenance. In this connection, he has referred to show-cause notice No. 2923/2007 dated 13.04.2007 which sought to levy Service Tax under the head "management consultant's service" from the assessee in respect of software licencing, maintenance, consulting and training for the period from 01.04.2004 to 30.09.2004 and March, 2006. This show-cause notice is said to be pending adjudication.



4.1. The learned Counsel has also pointed out that, in respect of the same activities (software licensing, maintenance, consulting and training), the Department demanded Service Tax under the head "management consultant's service" for the period 01.04.2001 to 31.03.2004 by show-cause notice dated 06.05.2005, which was adjudicated upon against the assessee in order-in-original No. 58/2006 dated 26.09.2006. The order of adjudication was set aside by this Tribunal by Final Order No. 261/2007 dated 23.02.2007, against which the Department's appeal No. 133/2007 is pending before the High Court of Karnataka. The learned Counsel has further pointed out that a similar issue for the period 01.04.2000 to 31.03.2001 arising out of show-cause notice No. 2970/2005 dated 06.05.2005, is also pending before the Hon'ble High Court. It has also been pointed out that, like show-cause notice No. 2923/2007 dated 13.04.2007, a subsequent show-cause notice No. 177/2008 dated 21.10.2008 involving the period 01.04.2007 to 31.03.2008 and involving the same issue is also pending adjudication. The gist of all these submissions is that the Department issued show-cause notices not only for certain periods prior to and after the period of dispute involved in the case, but also for a part of the period of dispute demanding Service Tax from the assessee under the head "management consultancy service", in respect of the same activities viz. software licensing, maintenance, consulting and training. It has been pointed out that software maintenance was also sought to be taxed under the head "management consultancy service" for different periods when "maintenance or repair service" was also a taxable service under Section 65 of the Finance Act, 1994. In this scenario, according to the learned counsel, it cannot be said that anything was suppressed by the assessee with intent to evade payment of Service Tax under the head "maintenance or repair service" during the period of dispute (July, 2004 to January, 2006). Therefore, according to the learned counsel, the extended period of limitation is not invocable in this case.

4.2. The learned Special Consultant for the Revenue has submitted that, though it would appear from show-cause notice No. 2923/2007 dated 13.04.2007 that it covers a small portion of the period of dispute involved in the instant case, there is nothing on record to show that any part of the subject-matter of show-cause notice dated 26.10.2006 is a part of the subject-matter of the above show-cause notice. Therefore, according to him, it is not open to the assessee to resist invocation of the extended period of limitation in the present case on the strength of any of the ongoing proceedings arising out of other show-cause notices.

4.3. Shri Ramanan has further referred to the statements of Shri Venkatesh Bhat (Assistant Finance Manager of the appellant company) in this context. Shri Venkatesh Bhat, in his statements, had not referred to any of the show-cause notices issued prior to 26.10.2006 and also had not indicated that the company was not liable to pay Service Tax under the head "maintenance or repair service" in respect of the services rendered by them to various licensees to whom software packages were granted by the company. Shri Venkatesh Bhat also stated that they had estimated the amount of Service Tax payable under the head "maintenance or repair service" for the period from October, 2005. He also stated that the company had started paying Service Tax from October, 2005 and also that they had obtained registration in respect of the said service. In one of his statements, Shri Venkatesh Bhat had also agreed that, with the rescission of Notification No. 20/2003-ST, they were liable to pay Service Tax on "maintenance or repair service" in relation to computer software. According to the learned Consultant, where the liability was accepted atleast for the period from October, 2005, the appellant is not entitled to resist the demand of Service Tax on the ground of limitation. It is also submitted that the material fact was not disclosed by the assessee at any stage during the period of dispute. They did not file any return during the said period covering the maintenance charges collected by them from their customers in respect of the software maintenance. Moreover, they had not taken steps to obtain registration with the Department in respect of the service. Necessary steps were taken only after the investigations by DGCEI commenced. In the circumstances, there can be no valid objection to invocation of the extended period of limitation.

5.0. We have given careful consideration to the submissions. A profile of the activity undertaken by the appellant was given by the learned Special Consultant for the Revenue. Accordingly, what was done by the appellant in terms of the relevant agreements (end-user licence agreements) was rendering of various services in relation to the software already installed in computer systems and made operational. According to a literature filed by the learned Special Consultant, ERP maintenance is defined as post-implementation activities undertaken from the time the system goes live until it is retired from production. Another piece of literature produced by him is Chapter 27.2.1 (Software Maintenance) from "Software Engineering - A Practitioner's Approach" ibid. We shall usefully reproduce a part of the said para herein:

"Software maintenance is, of course, far more than "fixing mistakes". We may define maintenance by describing four activities [SWA76] that are undertaken after a program is released for use:

• corrective maintenance

• adaptive maintenance


• perfective maintenance or enhancement


• preventive maintenance or reengineering


Only about 20 percent of all maintenance work is spent "fixing mistakes". The remaining 80 percent is spent adapting existing systems to changes in their external environment, making enhancements requested by users, and reengineering an application for future use. When maintenance is considered to encompass all of these activities, it is relatively easy to see why it absorbs so much effort. "

It would appear from the above literature that, after the release and implementation of software package, under the ERP regime, the appellant used to provide a variety of maintenance services to their licensees. These services used to be provided mostly to upgrade the software or enhance its efficiency so as to meet the requirements of the customer. Obviously, the evolving technological environment would require perfective measures to upgrade the software. As we understand, these measures are covered by the terms "adaptive maintenance" and "perfective maintenance" mentioned in the above literature. "Corrective maintenance" and "preventive maintenance" are two other categories of maintenance of software. It would appear from the literature that, in so far as computer software is concerned, "maintenance" is an expression of wider connotation unlike maintenance of tangible goods (for instance, maintenance of a vehicle), maintenance of a factual situation (for instance, maintenance of status quo ordered by a court) etc. The wider implications of "software maintenance" are easily decipherable from the literature supplied by the learned Special Consultant.

5.1. The question now arises as to whether maintenance or repair service as it was introduced on 01.07.2003 as a taxable service under section 65 (64) read with Section 65 (105) (zzg) can be held to have covered maintenance or repair of software. In the case of Tata Consultancy Services (supra), BSNL (supra) and Infosys Technologies (supra), the view taken was that software in any media would also be "goods". The question whether maintenance or repair of software was a taxable service within the ambit of Section 65 (64) of the Finance Act, 1994 was not apparently considered in any of those cases. That software (branded or customised) has the attributes of "goods" is just a postulate for us and we shall proceed accordingly. Maintenance or repairs of goods will not normally result in upgradation of its value or functional capacity or efficacy to higher levels than what originally existed. But maintenance of software, as per technical literature, can improve its applicability to new functional areas to benefit the customer thereby enhancing its functional capacity/efficacy and value. Perhaps, the only category of maintenance referred to by the learned Special Consultant, which may compare with maintenance of tangible goods, is corrective maintenance. Other categories like adaptive maintenance and perfective maintenance (enhancement) cannot be limited to the scope of maintenance of goods. Therefore, in our considered view, the expression "maintenance or repair", when used in connection with computer software, has a wider import than when used in connection with tangible goods. In this view of the matter, we would now have a look at the new levy introduced on 16.05.2008.

5.2. "Information technology software" is seen defined under Section 65 (53a) of the Finance Act, 1994 as follows:-
65(53a) "information technology software" means any representation of instructions, U data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment;

5.3. As per Section 65 (105)(zzzze) "taxable service" means any service provided or to be provided to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including-
(i)………………..
(ii)………………..
(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software;
(iv) providing advice, consultancy and assistance on matters related to information technology software , including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a data base, advice on proprietary information technology software ;
(v) ……………….
(vi) …………….. (underlinings added).

5.4 The above new taxable service pertains to information technology software. The debate before us was, by and large, in relation to computer software. The Circulars and case-law cited before us were also in the context of discussion on computer software. The new levy w.e.f. 16.05.2008 is in relation to information technology software. The question is whether the computer software and information technology software were treated differently or as same by the legislature. At this juncture, our mind travels to an explanation added to Section 65(64) of the Finance Act, 1994. This explanation which was added w.e.f. 01.06.2007 reads as follows:-

"For the removal of doubts, it is hereby declared that, for the purposes of this clause. "goods" includes "computer software". .

This explanation was amended w.e.f. 16.05.2008 as follows:-
"For the removal of doubts, it is hereby declared that for the purposes of this clause -
(a) "goods" includes "computer software”
(b) "properties" includes” information technology software". (underlining added)

In this context, we think, we must also reproduce the full text of Section 65(64) as it stands post-16.05.2008.
"Section 65(64) "maintenance or repair" means any service provided by-


(i) any person under a maintenance contract or agreement; or
(ii) a manufacturer or any person authorized by him,
in relation to, --
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties , whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods , excluding a motor vehicle." (underlining added)

5.5. Going by the explanation (supra), we find from the above text of Section 65(64) that maintenance or repair of information technology software is specifically covered under sub-clause (b) whereas maintenance or repair of computer software is specifically covered under sub-clause (c). It is obvious that the legislature has understood information technology software to be distinct and different from computer software. The Circulars and decisions cited before us, all, discuss computer software. No material has been placed before us, other than the literature supplied by the learned Special Consultant for the Revenue, to show that activities of the kind undertaken by the appellant during the material period would be encompassed in the ERP regime. To our mind, these are activities very much within the coverage of sub-clause (zzzze)(iii) of Clause 105 of Section 65 of the Finance Act, 1994. Any incidental advice, consultancy or assistance given by the service provider will be squarely covered by sub-clause (zzzze)(iv). It is pertinent to note that adaptation, upgradation, enhancement, implementation, etc. of information technology software are expressly covered by the definition of 'information technology software' service and that these very operations have also been specified as different categories on software maintenance in the literature supplied to us. Thus there is almost total convergence between the technical literature on software and the definition of information technology software service given under Section 65(1 05) (zzzze) of the Finance Act, 1994.

5.6 It is settled law today that a new taxable service covered by specific entry under Section 65 of the Finance Act, 1994 will not attract levy of Service Tax under any pre-existing entry. In this connection, the Karnataka High Court's judgment in Commissioner Vs. Turbotech Precision Engineering Pvt. Ltd. (dated 15.04.2010) in CEA No. 4/2007 = 2010-TIOL-498-HC-KAR-ST is relevant. The Hon'ble High Court has held that the case of the assessee fell under the definition of 'works contract' and hence it could not be classified as 'consulting engineer's service'. It may be noted that 'works contract' came to be introduced as a taxable service w.e.f. 01.06.2007 only. The service rendered by the above company was for a period prior to the said date. The Revenue wanted to levy Service Tax under the pre-existent head "consulting engineer service", which was negatived by the Hon'ble High Court.

6. For the reasons already noted, we hold that the maintenance charges collected by the appellant from their customers during the period from 09.07.2004 to 31.01.2006 are not liable to be subjected to levy of Service Tax under the head 'maintenance or repair service' under Section 65 (105) (zzg) read with Section 65 (64) of the Finance Act, 1994. The services rendered by the appellant to their customers are in the nature of information technology software service which was made taxable w.e.f. 16.05.2008 only. Such service is not to be subjected to levy of Service Tax under any other entry. Therefore, the demand of Service Tax and the connected penalties are only liable to be set aside.

7. Before concluding this order, we have also to state that the Circulars of the Board or the decisions of the Hon'ble Supreme Court in the cases of Tata Consultancy Services (supra) and Bharat Sanchar Nigam Limited (supra) have no bearing on the services rendered by the appellant to their customers during the period of dispute. Also, having held in favour of the appellant on the substantive issue on merits, we have not found it necessary to deal with the limitation issue.

8. The impugned order is set aside and this appeal is allowed.

Payment of ‘off-the shelf software’ held not to be royalty

Mumbai Tribunal Ruling: Once the payment of ‘off-the shelf software’ held not to be chargeable to tax as a royalty on the basis of the certificate obtained from a chartered accountant, no penalty and interest can be levied on the grounds that the assessee did not take prior approval of the assessing officer under section 195(2) of the Act

[ADIT v. Tata Communications Ltd. (2010-TII-157-ITAT-MUM-INTL)]

Facts:

Tata Communications Ltd. (‘the assessee’) had made payment for ‘off-the shelf software’ to a company resident in USA without deducting tax at source on the basis of a certificate obtained from a Chartered Accountant under an alternate procedure laid down by the Central Board of Direct Taxes (CBDT). The assessee had not applied to the assessing officer (‘the AO’) under section 195(2) of the Income-Tax Act (‘the Act’) for determining whether or not, the tax was liable to be deducted at source. The AO issued a show-cause notice for raising the demand under section 201 read with section 195 of the Act.

In response to the show-cause notice, the assessee contented that it had purchased ‘off-the shelf software’ and it did not have any tax implications in India as the assessee had not purchased any copyrights in the software; but had purchased only a copyright software. The assessee further submitted that since the USA based company from whom, software was purchased, did not have a Permanent Establishment (PE) in India, the question of income could have arisen only in the event of the payment for purchase of software being treated as royalty, but given the facts of the case and given the fact that purchase was made only of the copyright software and not copyright per se, the amount had not therefore been treated as royalty in the hands of the USA based company.

However, the AO held that it is not open to the assessee to take any unilateral decisions on whether the amounts paid by the assessee are chargeable to income tax or not, and, therefore, the assessee could not have made the payments without deduction of tax at source, without the concurrence of the AO under section 195(2) of the Act. The AO further noted that “provisions of section 195(2) are not provisions of convenience, which the assessee may use or may not use”.

The AO held that since the assessee had not made any payment for purchase of software but only for licence to use the software, the amount was paid by the assessee is clearly in the nature of ‘Royalty’. Accordingly, the AO held that the amount paid to USA based company for the purchase of software was taxable under section 9(1)(vi) r.w. Explanation 2(iva) of the Act as also under the India – USA Double Taxation Avoidance Agreement (tax treaty). Since, the assessee failed to discharge the obligation of deducting the tax at source under section .195(1), the assessee was liable to pay the amount of tax along with interest under section 201(1A) of the Act.

On appeal, the Commissioner of Income Tax (Appeals) [‘CIT(A)’], held that the purchase of

‘off-the shelf software’ was only a copyright software and that the amount paid for the purchaseof software is not liable to be taxed in India in terms of the provisions of the Act as also applicable tax treaty. Accordingly, the CIT(A) relying on various decisions reversed the order of the AO.

Aggrieved by the order of the CIT(A), the Revenue filed an appeal before the Income Tax Appellate Tribunal (‘the Tribunal’).

Observation and decision of the Tribunal:

• In the landmark case of Motorola Inc v. DCIT (95 ITD 269), the Special Bench of theTribunal took a note of the fact that copyright article is distinct from copyright per se and payment for copyright article, therefore, cannot be treated as payment of copyright, which could be brought to tax. While payment for use of copyright in indeed covered by the definition of ‘royalty’, the payment for use of copyright article would not be covered by the definition of ‘royalty’. It is, thus, clear that so far as the merit of the issue is concerned, there is unanimous view of various benches of the Tribunal that payment for use of copyright article cannot be brought to tax as royalty.

• As regards the question that it is not open to the assessee to decide whether or not tax is required to be deducted at source from payment, it is only an elementary that tax deduction liability at source is a vicarious liability and it can be invoked only when primary liability survives. As the Tribunal has held that the USA company itself did not have any tax liability in respect of the payments, the vicarious tax liability does not survive either.

• In accordance with the procedure stipulated by the CBDT, the assessee had duly obtained the Chartered Accountant’s certification regarding applicability tax withholding right and based on the certification, made the remittance for deduction at source. The Tribunal found no infirmity in this approach of the assessee and in such a situation, and particularly when no tax is indeed payable by the recipients of the income, a demand under section 201(1A) cannot be raised on the assessee merely because he had not obtained prior approval of the AO under section 195(2) of the Act.

• Section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context, the Supreme Court in case of India GE Technology Centre Pvt Ltd v. CIT, 327 ITR 456 (SC) stated that, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. The above observations of Supreme Court in Transmission Corporation case [239 ITR 587 (SC)] with respect, has been misunderstood by the Karnataka High Court in the case of Samsung Electronics Company Limited (320 ITR 209) to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TDS is required to be deducted from such payment.

This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the Act, i.e., chargeable under Sections 4, 5 and 9 of the Act.

• Thus, unless the amount remitted by the assessee constitutes tax liability in India in the hands of recipients, the withholding tax liability under section 195 cannot arise.

Sales-Tax "Remission" is a Capital Receipt: ITAT Spl Bench

Sulzer India Ltd vs. JCIT (ITAT Mumbai Special Bench)



If NPV of future sales-tax liability is paid, there is no “remission” for s. 41(1)

The assessee availed of the sales-tax deferral schemes of 1983 & 1988 offered by the Maharashtra State Govt under which the sales-tax collected by the assessee could be paid after 12 years. The total sales-tax collected by the assessee was Rs. 7,52,01,378 which was deemed to have been paid and deduction was allowed u/s 43B. In 2002, the State issued a circular permitting premature repayment of the deferred sales-tax liability at its Net Present Value (NPV). The NPV of the deferred sales-tax liability was computed at Rs. 3,37,13,393, which the assessee paid and was discharged of the liability to pay Rs. 7,52,01,378. The difference between the deferred sales-tax and its NPV amounting to Rs. 4,14,87,795 was treated by the assessee as a capital receipt. The AO took the view that as a deduction for the sales-tax liability had been allowed u/s 43B, the “remission” from that liability was taxable u/s 41(1). This was upheld by the CIT (A). On appeal by the assessee, the issue was referred to the Special Bench in view of conflicting judgements. HELD by the Special Bench deciding in favour of the assessee:

(i) For s. 41(1) to apply, two conditions have to be satisfied. First, the assessee should have obtained an allowance or deduction in respect of any loss, expenditure or trading liability and second, the assessee should have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof;


(ii) The first requirement of s. 41(1) that the assessee should have obtained an allowance or deduction in respect of loss, expenditure or trading liability is not satisfied because all that CBDT Circular No. 496 dated 25.9.1987 provides is that “…the statutory liability shall be treated to have been discharged for the purposes of s. 43 B”. Accordingly, the benefit of deduction was allowed for the purpose of s. 43 B only and not under any other provisions of the Act. The AO applied the aforesaid Board Circular while giving the benefit of deduction u/s. 43B. Circulars are binding on the department;

(iii) The second requirement of s. 41(1) is also not satisfied because in paying the NPV, the assessee has paid the equivalent of the Future Value of the sum. As the sum of Rs. 3,37,13,393 is the NPV of the future sum of Rs.7,52,01,378 and its payment discharges the full liability, there is no remission or cessation of liability by the State Govt. It is a simple case of collecting the amount at net present value which is due later on (principles of s. 63 of the Contract Act applied);

(iv) The fact that the assessee has not obtained the modified Eligibility Certificate or that it used the expression ‘remission’ of loan liability in its books are irrelevant because the making or absence of an entry cannot determine rights and liabilities of parties.

Expenditure on ESOP’s allotted to the employees is not allowed as a “Business Expenditure”

Income Tax - Section 37 - Business Expenditure – Expenditure on ESOP’s allotted to the employees is not allowed as a “Business Expenditure”


IN THE INCOME TAX APPELLATE TRIBUNAL BENCHES 'F', MUMBAI


ITA No.7242/Mum/08 Assessment Year 2005-06
ITA No.1004/Mum/08 Assessment Year : 2006-07



M/s VIP INDUSTRIES LTD Vs DCIT, CC 32, AAYAKAR BHAWAN,GR FLR, M K ROAD, MUMBAI - 20


11. Ground No. 6 relates to the disallowance of Rs.66,24,877/- made by the A.O. and confirmed by the ld. CIT(A) on account of expenses claimed to be incurred by the assessee company on account of Employees Stock Option Scheme (ESOP).


12. During the year under consideration, the assessee company had allotted shares to its employees under the Employees Stock Option Scheme (ESOP). The said ESOP was granted on 22.11.2004 in respect of 8 lacs shares of the assessee company at Rs.30/- per share as against the market price of Rs.53.80/- per share. There was thus a price difference of Rs.23.80 per share which came a total of Rs.190.40 lacs in respect of 8 lacs shares given under ESOP. Out of this total amount, the assessee company had charged ` 66.25 lacs to its P&L account for the year under consideration and the balance amount of Rs.124.15 lacs claimed in the immediately succeeding year i.e. A.Y. 2006-07. In support of the claim made on this issue, reliance was placed on behalf of the assessee company before the A.O. on relevant SEBI Rules which specified that the difference between the market price and the price at which the option is exercised by the employees has to be debited in the P&L account as expenditure. It was contended that since there was no specific provisions contained in the Income Tax Act dealing with this issue, accounting practice suggested by the SEBI is required to be applied and adopted for tax purposes also.


13. The submissions made on behalf of the assessee on this issue were not found acceptable by the A.O. for the following reasons given in the assessment order:-


“ (i) The market price of the shares of the assesee company was Rs.53.80 and the assessee company allotted the shares at ` 30.00/-. Thus, there was a price difference of Rs.23.80.


(ii) During the year under consideration the assessee company allotted the shares of Rs. 66,24,877/- to its employees and debited this amount in the profit and loss account.


(iii) The shares were the capital of the assessee company and any loss to the capital can be considered as capital loss and not the revenue expenditure.


(iv) By allotting the shares the assessee has reduced the tax liability by an amount of Rs. 66,24,877/- .


(v) The employees also did not disclose the gain as taxable in their hands.”


13. For the reasons given above, the A.O. held that the loss suffered by the assessee as a result of allotment of shares to its employees under ESOP below the market price was on capital account and the same was not allowable as deduction.


14. The matter was carried before the ld. CIT(A) and reliance was placed on behalf of the assessee on the decision of Chennai Bench of ITAT in the case of SSI vs. DCIT reported in 85 TTJ 104 wherein it was held that ESOP will not be taxable either in the hands of the employees or in the hands of the employers. A reference again was made to the relevant SEBI Rules specifying the accounting treatment to be given to the difference between the market price and the price at which shares were allotted to the employees under ESOP. It was contented that the accounting treatment so prescribed is required to be adopted even for Income Tax purpose and the difference amount debited as expenditure in the P&L account has to be allowed as deduction being expenditure incurred wholly and exclusively for the purpose of business. It was contended that ESOP was one of the ways to compensate the top management employees of the assessee company in order to stay with it and do hard work so that the company could earn more profit.


15. The submissions made on behalf of the assessee on this issue did not find favour with the ld. CIT(A) who confirmed the disallowance made by the A.O. on account of assesse's claim for deduction on account of ESOP expenditure for the following reasons given in para 6.3 and 6.4 of his impugned order:


“ I have carefully considered the submission of the appellant and perused the order of the Assessing Officer. The appellant has formulated employees stock option scheme and granted 800000 shares @ 30 per share on 22.11.2004. At the time of granting option, the market price of the share was 53.80. Thus there was a price difference 23.80 per share on the total shares allotted of 800000 which comes to ` 190.40 lakhs. Out of the said amount the assessee company has charged to the Profit & Loss account a sum of ` 66.25 lakhs in this year and the balance in A.Y. 06-07. The Assessing Officer has not allowed this expenditure being a capital expenditure on the ground that by allotting the shares the assessee has reduced tax liability by an amount of Rs.66,24,877/-. The appellant has relied on the decision of Hon'ble Chennai ITAT in the case of SSI v. DCIT 85 TTJ 1049 in which the Tribunal has held that ESOPS received by the employees was not taxable as perquisites by virtue of proviso to section 17(2)(3c) of the I.T. Act which is omitted with effect from 1.4.2008 by Finance Act 2007. Since the amount of ESOPS was not perquisited in the hands of the employees, the same was not allowable as expenditure in the hands of the company also. This fact has not properly represented before the ITAT Chennai by the Department. Moreover, the decision of ITAT is with reference to appeal against the revision order passed by CIT u/s 263 and not on the basis of regular appeal. In view of this fact, I respectfully dis-agree with the observation of the Hon'ble ITAT that ESOPS expenditure is allowable as revenue expenditure to the assessee.


The appellant's contention that whatever is correct under accounting practices is also correct for tax purpose cannot be accepted. There is no provision under the income tax Act to allow distribution of capital by way of share or difference in market price of shares as allowable expenditure u/s 37 of the IT Act. When the company received any premium on allotment of shares over and above the issue price the same is credited to the premium reserve account and it never offered as taxable income or revenue receipt. In the same logic any capital distribution over and above on account of difference of the cost of shares and its market price of the share under ESOP scheme is going to reduce the reserve and allowable as business expenditure u/s. 37(1) of the I.T. Act. The appellant has not explained that in allotting shares to the employees, it incur any revenue loss on account of the price difference. In view of the above, the Assessing Officer is justified in not allowing an amount of ` 66,24,877/- as business expenditure to the appellant. The disallowance made by the Assessing Officer is confirmed. This ground of appeal is not allowed.”


16. The ld. Counsel for the assessee submitted that ESOP 2004 framed by the assessee company was approved by its Board of Directors as well as in its Annual General Meeting held on 24.9.04. He submitted that as specified in the relevant SEBI Rules, the difference between the market value of shares and value at which they were allotted under the scheme was debited by the assessee company in its P&L account and note to this effect was also given in the notes forming part of the final accounts of the assessee company. He submitted that the option under the scheme was granted by the assesasee company to its employees on 22.11.04 and since the same was vested with them on 30.11.05, the total expenses of Rs. 190.40 lacs were written off during the year under consideration as well as in the subsequent year on pro rata basis taking the vesting period as 22.11.04 to 30.11.05. He contended that the expenditure incurred by the assessee on ESOP being the difference between the market price of shares and the price at which the said shares were allotted to the employees was taxable as perquisite in the hands of the employees as per the provisions of section 17(2)(iii)(c) upto 31.3.01 and the same has now been treated as fringe benefit w.e.f. 1.4.08 whereby the benefit given to the employees is treated as fringe benefit and the company has to pay fringe benefit tax. He contended that this treatment given by the statute to ESOP itself shows that the expenditure incurred on ESOP is of revenue nature and there was no justification for the authorities below to treat the same as capital expenditure. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Infosys Technologies Ltd. 297 ITR 16. He also relied on the decision of Chennai Bench of ITAT in the case of SSI vs. DCIT (supra) to contend that once the ESOP is granted and exercised by the employees, the liability of the company in this behalf is an ascertained liability which is admissible an expenditure in accordance with the SEBI guidelines. He contended that the assessee company had an option to pay even directly to its employees certain sum as compensation for the services rendered without taking ESOP rout and the employees could have used the said amount for acquiring the shares in the assessee company. He contended that the payment made to employees in such scenario would have been considered as allowable business expenditure. He also contended that the ESOP was framed by the assessee company to give incentive to its top management employees in order to encourage them to continue to stay with the assessee company and also to do hard work so that the company can earn more profit. He contended that the ESOP expenditure thus was incurred by the assessee wholly and exclusively for the purpose of its business and the same being revenue in nature should be allowed as deduction.


17. The ld. D.R., on the other hand, submitted that this issue is squarely covered in favour of the Revenue and against the assessee by the decision of the Delhi Bench of ITAT in the case of Ranbaxy laboratories Ltd. vs. Addl. CIT 124 TTJ (Del) 771. He submitted that in the said case involving in similar facts and circumstances, the co-ordinate Bench of this tribunal has held that the issue of shares under ESOP at less than market price only results in short receipt of share premium and not in incurring of any expenditure within the meaning of section 37. It was held that such notional loss therefore cannot be allowed as deduction.


18. In the rejoinder, the ld. Counsel for the assessee submitted that the Tribunal while deciding a similar issue against the assessee in the case of Ranbaxy Laboratories Ltd. (supra) cited by the ld. D.R. has not taken into consideration several material aspects. He contended that the Tribunal has not considered the vital aspect that ESOP was taxable as perquisite in the hands of employees upto A.Y. 2000-01 and the same has subsequently been made liable to FBT as perquisite from A.Y. 2008-09. He contended that even the important aspect of business consideration involved in allotment of shares to the permanent employees under ESOP was not considered by the Tribunal. He pointed out that even the decision of Chennai Bench of ITAT in the case of SSI (supra) was cited on behalf of the assessee before the Tribunal but the same has not been followed on the ground that the issue in the said case was involved in the context of order passed by the CIT u/s 263. He contended that even the SEBI guidelines specifying the accounting treatment for the difference in the market value of shares and the value at which the same were allotted to the employees under ESOP were not properly appreciated by the Tribunal in the case of Ranbaxy Laboratories Ltd. (supra). According to him, even the cases relied upon by the Tribunal to decide the similar issue against the assessee in the case of Ranbaxy Laboratories Ltd. (supra) involved different issue and the same were also distinguishable on facts.


19 We have heard the arguments of both sides and also perused the relevant material on record. We have also carefully perused the case laws cited by the ld. Representatives of both the sides. In our opinion, the decision of Delhi Bench of ITAT in the case of Ranbaxy Laboratories Ltd. (supra) cited by the ld. D.R. is directly applicable in the present case and the same squarely covers the issue under consideration against the assessee and in favour of the Revenue. In the said case, the decision of Chennai Bench of ITAT in the case of SSI Ltd. (supra) heavily relied upon by the learned counsel for the assessee in the present case was also cited on behalf of the assessee. The same, however, was found by the Tribunal to be distinguishable on facts for the following reasons given in para 7.16 of its order:


“ The decision of Tribunal, Chennai in the case of S.S.I. Ltd. (supra) relied upon by the learned counsel for the assessee is also distinguishable on facts. In the case the assessee claimed similar expenditure which was allowed by the Assessing Officer. The learned CIT in his revision jurisdiction under s. 263 held such expenditure as notional and contingent in nature. The Tribunal held that in view of SEBI guidelines which the assessee was required to follow, such expenditure are in the nature of ascertained liability and not contingent liability upon happening of certain events. Hence, it was held that the order was not erroneous so as to be validly revised under s. 263 of the Act. However, the Tribunal in the said case has not answered the issue whether the loss is notional in nature or not. The Tribunal has also not considered the decision of Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. (supra) and that of Delhi High Court in the case of Reinz Talbros (P) Ltd. (supra) which is a jurisdictional High Court for us. For all the reasons stated above we, therefore, hold that the expenses as claimed by the assessee are not allowable as such.”


20. In the case of Ranbaxy Laboratories Ltd. (supra), shares were allotted by the assessee company to its employees under ESOP at price less than the market price and the resultant difference was claimed as expenditure relying, inter alia, on SEBI guidelines. The Tribunal, however, confirmed the disallowance made by the authorities below on account of the said expenditure after examining all the relevant aspects and after giving elaborate reasons as can be seen from the relevant portion of its order which is extracted from the held portion:


“ The assessee was to issue shares of face value of Rs.10 /- by receiving a sum of Rs.595/- per share from its employees. Thus the assessee was entitled to receive Rs.585/- towards premium on issue of shares. The market price at Rs. 738.95 per share would have resulted in realization of higher share premium. The assessee has not accounted for the difference between Rs.738.95 and Rs.10/- as its income during the year. Thus there is no loss of income held to be taxable. What is loss to the assessee is by way of short receipt of share premium amount and not by way of any expenditure or incurring any liability for such expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure. By issuing shares at below market price, the same does not result into incurring any expenditure rather it results into short receipt of share premium which the assessee was otherwise entitled to. Though the guidelines of SEBI requires the assessee to account for short receipt of share premium as employees compensation expense, for claiming such expense as allowable, the assessee has to qualify that expenses are incurred and the same are wholly and exclusively for the purpose of business. By issuing shares at lesser that market price, the assessee cannot be said to have incurred any expenditure rather it amounts to short receipt of share premium. The receipt of share premium is not taxable and hence any short receipt of such premium will only be a notional loss and not actual loss for which no liability is incurred. SEBI guidelines are relevant for the purpose of accounting but are not conclusive for the purpose of allowing the same as expenditure. Therefore, such notional losses are not allowable under the Act. The assessee is not to defray or pay any liability under the claim. Therefore, such notional loss cannot be held to be allowable under the scheme of the Act.


What is allowable under s. 37 is any expenditure not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee. Such expenditure should be wholly and exclusively for the purpose of business. Thus, the prerequisite is that the assessee should have incurred an expenditure. ‘Expenditure' is what is ‘paid out or away' and is something which has gone irretrievably. A benefit or income foregone cannot be considered as in expenditure. Since the assessee had not incurred any expenditure but has merely received lesser amount of share premium, the same does not amount to expenditure within the meaning os s. 37. Therefore, the claim of assessee is not allowable. – Eimco K.C.P. Ltd. Vs. CIT (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC) and CIT vs. Reinz Talbros (P) Ltd. (2001) 252 ITR 637 (Del) followed.


It is now settled law that entry or absence thereof in books of account is not conclusive either for treating the amount as income or allowability or otherwise of the expenditure. Thus, only on the basis of entry in the books of account the claim of expenditure is not allowable. The entry is made on the basis of recommendation of SEBI which is said to be mandatory for a listed company. The same may be relevant for the purpose of accounting but for allowability of expenditure under IT Act the direction of SEBI does not determine the alowability of expenditure. For the purpose of allowability of expenditure under IT Act the same has to be in consonance with the scheme of the Act. In the instant case the entry made in books of accounts as per direction of SEBI cannot be held to be conclusive for the purpose of allowing expenditure under s. 37. Unless the provision of s. 37 is complied with, the deduction is not permissible.- New India industries Ltd. Vs. asstt. CIT (2007) 112 TTJ (Del)(SB) 917 : (2008) 1 DTR (Del) (SB) (Trib) 247 and TVS Finance & services Ltd. Vs. jt. CIT (2009) 23 DTR (Mad) 33”


21. At the time of hearing before us, the ld. Counsel for the assessee has made an attempt to point out that certain aspects have not been considered by the tribunal while rendering its decision in the case of Ranbaxy Laboratories Ltd. (supra) on the similar issue. In our opinion, the said aspects pointed out by the ld. Counsel for the assessee, however, are not material enough to have any direct bearing on the well considered and well reasoned decision rendered by the Tribunal. As held by the Tribunal, any short receipt of share premium would only be a notional loss to the assessee and not an actual loss. As further held by the Tribunal, any benefit or income foregone by the assessee cannot be considered as an expenditure and since the assessee had not incurred any expenditure but had merely received lesser amount of premium, the same could not amount to expenditure within the meaning of section 37. In our opinion, the issue involved in the present case as well as all the material facts relevant thereto are thus similar to the case of Ranbaxy laboratories Ltd. (supra) and the decision rendered in the said case by the co-ordinate Bench of this Tribunal is squarely applicable in the present case. Even the decision of Hon'ble Supreme Court in the case of CIT vs. Infosys Technologies Ltd. (supra) cited by the ld. Counsel for the assessee was rendered in altogether different context and the same cannot be of any help to the assessee on the issue involved in the present case. Respectfully following the decision of the co-ordinate Bench of this Tribunal in the case of Ranbaxy Laboratories Ltd. (supra), we uphold the impugned order of the ld. CIT(A) confirming the disallowance made by the A.O. on account of ESOP expenses claimed by the assessee and dismiss ground No. 6 of the assessee's appeal.