Payment for Software--Cannot be Royalty or FTS

Important outcome of the ITAT Judgement in case of SMS DEMAG PVT LTD Vs Dy COMMISSIONER OF INCOME TAX, New Delhi(ITA No.3636 /Del/2008) is:

Payment made for purchase of software cannot be treated either as royalty or even for technical services. Therefore, the payment for software cannot be charged to tax in India as interest or royalty or fee for technical services.

Depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction u/s 32 of the Act.

Considering the fact that the decision in Samsung Case is still pending at SC, this is a welcome judgement. Hope same view prevails at SC as well. Hope the best!!


Cases relied upon:

Herbal Life International India Pvt. Ltd. v. ACIT

Millennium Infocom Tech. Ltd. v. ACIT

Transmission Corporation of A.P. Ltd. v. CIT

HNS India v. DCIT

Credit Llyonnais v. DCIT

ORDER

Per: K D Ranjan:

This appeal by the assessee for Assessment Year 2000-01 arises out of order of ld.CIT(A)-XII, New Delhi.

2. The first issue for consideration relates to assumption of jurisdiction u/s 147. During the course of hearing, the assessee did not press this ground of appeal, hence, the same is dismissed as not pressed.

3. The next issue for consideration relates to upholding the disallowance of depreciation amounting to Rs.54,74,602/-. The facts of the case stated in brief are that the assessee M/s SMS Demag Pvt. Ltd. is a subsidiary of M/s SMA, Demag AG Germany. M/s SMS Demag India Pvt.Ltd. is engaged in the business of supply as assemblies/subassemblies of metallurgical equipment, profession of consultation and technical service in design and engineering to ferrous and non-ferrous sectors. During the course of assessment proceedings, the Assessing Officer noted that an information was received from Additional DIT International Taxation Range-2 that assessee company had made payment of royalty. As per the order u/s 201/201(1A) of the Act passed by the Incometax Officer TDS 1(2) (International Taxation), the assessee made SAP maintenance expenses of Rs. 1,82,48,673/- to the parent company M/s SMA Demag AG Germany without deducting tax in India during the financial year 1999-2000 relevant to Assessment Year 2000-01. The Assessing Officer issued show cause notice as to why the payment of Rs.1,82,48,673/- should not be disallowed u/s 40(a)(i). It was submitted by the assessee that the amount of Rs. 1,82,48,673/- was not charged to profit and loss account relevant to Assessment Year. The amount represented the charges payable to SAP installation charges which were capitalized in the books of account under the head “computer” in the relevant Assessment Year. The amount referred to in the notice formed part of the total addition under the head “computer”. The assessee filed the copy of audited accounts showing the additions to the computer amounting to Rs.4,32,23,878/- which included the amount of Rs.1,82,48,673/-. Since the amount was not charged to profit and loss account, the provisions of sec. 40(a)(i) have no applicability. However, this contention of the assessee was rejected by the Assessing Officer relying on provisions of sec. 40(a)(i) under which deduction will not be allowable unless tax is deducted at source. The Assessing Officer also noted that assessee company had charged depreciation @ 60% u/s 32 of the Act on amount of Rs.1,82,48,673/- which was paid to its parent company. The Assessing Officer restricted the allowance of deduction to the extent of 50% allowable on computers which resulted in addition of Rs.54,74,602/-.

4. Before the ld. CIT(A) it was submitted that the expenditure of Rs.1,82,48,673/- was incurred on installation/maintenance of software and considering the nature of cost, the assessee had chosen to capitalize the said amount in the books of account. The amount was capitalized in the relevant Assessment Year. However, the remittance for the same was made only in 2006. It was also submitted that the payment was not in the nature of royalty for technical services. It was also admitted that the software was installed and used and payment for the same was made in 2006 and it was not chargeable to tax in the year under consideration. The assessee placed reliance on the decision of the I.T.A.T. in the case of Herbal Life International India Pvt. Ltd. v. ACIT 101 ITD 450. The ld. CIT(A), however, noted that nothing had been brought on record to establish that the said payment was not in the nature of interest/royalty/fee for technical services. It has been claimed by the assessee that the said amount of Rs.1,82,48,673/- was an expenditure towards installation/maintenance of software named SAP. Ld. CIT(A) relied on the decision of Hon’ble Madras High Court in the case of Corea & Brothers (CR) v. CIT 49 ITR 188 wherein it has been held that it was not largeness of the payments which were considered for capitalizing. It was the actual nature of payment which was to be examined. Since the expenditure was incurred towards installation of software, namely, SAP, the said payment was in the nature of royalty/fee for technical services/interest. This being so, there was no issue left for its being capitalized and subsequent claim of depreciation on the same. She accordingly held that the payment was in the nature of royalty/technical services for the said software. She also upheld the disallowance of depreciation claimed by the assessee.

5. Before us, the ld. A.R. of the assessee submitted that the payment made is not in the nature of royalty or fee for technical services. According to him, the expenditure was incurred towards installation of a software named SAP for which payment was made by the assessee. It was, therefore, submitted that since the payment was towards purchase of software it could not be treated as in the nature of royalty or fee for technical services. Ld.A.R. of the assessee further submitted that as per Article 24 of DTAA entered into between Republic of India and Federal Republic of Germany, the nationals of contracting state shall not be subject in other contracting state to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirement to which nationals of other state in the same circumstances and under the same conditions are or may be subjected to. Ld. A.R. of the assessee also clarified that even if it is assumed for argument sake that the payment made to parent company was in the nature of royalty or fee for technical services, the same will not be liable for taxation under non-discriminatory clause contained in DTAA with Republic of Germany. According to him, the issue is covered by the decision of I.T.A.T. Delhi Bench in the case of HNS International India Pvt. Ltd. (supra). It was also submitted that the issue is also covered by the decision of I.T.A.T. in the case of Millennium Infocom Tech. Ltd. v. ACIT 117 ITD 114.

6. On the other hand, the ld. Sr. D.R. submitted that maintenance charges for software SAP are in the nature of royalty and, therefore, for deduction u/s 40(a)(i)) the tax at source has to be made. She placed reliance on several decisions including the decision of Hon’ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT 239 ITR 589. It was also submitted that nothing has been brought on record or submitted to establish that the said payment was not in the nature of interest/royalty/fee for technical services. She placed reliance on the decision of I.T.A.T. Delhi Bench in the case of HNS India v. DCIT 95 ITD 157(Del.) for the proposition that where assessee has not supplied relevant technical agreement before the lower authorities to state that the said payments to its parent company was outside the purview of royalty or fee for technical services. Since he assessee company has not been in a position to submit the copy of agreement between sub-contractor and has also not given the basis of amount paid to the contractor, such services were chargeable to tax in India as the amount has been paid on genuine basis and the provisions of sec. 195 were clearly attracted. It has also been submitted that assessee has made payment in the year under consideration to its parent company which is an admitted fact. Subsequent to its payment the treatment as capital expenditure has no nexus to the deduction of tax on said payments to the payee and burden to deduct TDS is not determined in the nature of outgo whether it was capital or revenue. Further, it was also submitted that the payment was royalty and, therefore, provisions of sec. 40(a) (i) were applicable. Ld. Sr. D.R. relying on the decision of I.T.A.T. in the case of Credit Llyonnais v. DCIT 2005-TIOL-102-ITAT-MUM submitted that in applying the non-discriminatory clause what is really to be seen is whether two persons were residents of the same state and were being treated differently. Hence assessee's case did not fall in the scope of non-discriminatory clause.

7. We have heard both the parties and gone through the material available from record. From the facts stated above, it is clear that the assessee had made payment for the purchase of software named as SAP. The assessee had capitalized the cost of installation of SAP in the books of account and has claimed depreciation as applicable to computers. The assessee while making payment in 2006 to the parent company has not deducted tax at source. The Assessing Officer had disallowed the claim of the assessee for depreciation on the ground that tax was not deducted u/s 40(a) (i)). U/s 40(a)(i) any interest (not being interest on loan issued for public before 1st April, 1938), royalty fee for technical services or sum chargeable under this Act, which is payable outside India or inside India to a non-resident not being a company or to a foreign company on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year or in the subsequent before the expiry of time prescribed under sub-sec. (1) of sec. 200 shall not be allowed as deduction while computing the income chargeable under the head "profits and gains of business or profession". From the language of sec. 40(a)(i), it is clear that payment made outside India should be in the nature of interest, royalty, fee for technical services or other sum chargeable under the Act. The Assessing Officer has simply reopened the assessment on the basis of information received from Additional DIT (International Taxation Range-2, New Delhi) and disallowed depreciation on assets capitalized in the books of account. The ld. CIT(A) has also not examined the nature of the expenditure incurred towards installation of software named SAP. She has treated the payment without any discussion in the nature of royalty/fee for technical services or interest. According to her, the payment made may fall in any of the categories. Apparently, the payment made towards installation of software is not in the nature of interest. The assessee had made payment to parent company for the purpose of software. The payment made for purchase of software cannot be treated either as royalty or even for technical services. Therefore, the payment for SAP software cannot be charged to tax in India as interest or royalty or fee for technical services. The ld. A.R. of the assessee has also contended that even if the income is chargeable to tax in India because of non-discrimination clause 24(1) of DTAA between Republic of India and Federal Republic of Germany, the nationals of a contracting state shall not be subjected in other contracting state to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirement to which nationals of that other state in the same circumstances and under the same conditions are/or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to the persons who are the residents of one or of both the contracting states. In our considered opinion the payment made for acquisition of an asset whether it is a revenue expenditure or capital, provisions of section 40(a)(i) of the Act will not be applicable in case of resident assessee for assessment year 2000-01. Therefore, as per decision of ITAT in the case of Millennium Infocom Tech Ltd. (supra) and also in the case of Herbal Life International India Pvt. Ltd. v. ACIT (supra) because of non-discriminatory clause 24(1) of DTAA with India and Germany the foreign national cannot be subjected to provisions of section 40(a)(i) of the Act. Therefore, the ld. CIT (A) was not justified in holding that the amount paid by the assessee for acquisition of computers was chargeable to tax in India. Accordingly, this ground of appeal is decided in favour of the assessee.

8. As regards the claim of assessee for depreciation on assets capitalized, depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction u/s 32 of the Act. Accordingly, in our considered opinion, the assessing officer was not justified in disallowing 50% of depreciation on the ground that provisions of section 40(a)(i) were applicable. However, the assessing officer will verify the fact whether the assets in respect of which expenditure has been capitalized have been used in business for period more than 180 days. If the assets have been used for more than 180 days, the assessing officer will allow full depreciation, as claimed by the assessee. The assessing officer is directed accordingly.

9. The next issue for consideration relates to not dealing with ground No. 6 for allowing the claim for depreciation in the subsequent year in which tax was paid. In view of the aforesaid discussion, this ground of appeal becomes in fructuous and dismissed as such.

10. The next issue for consideration relates to charging of interest under section 234- B and C of the Act. Since charging of interest under sections 234-B and C are consequential to the additions made, this ground of appeal being consequential in nature, requires no discussion.

11. In the result, the appeal filed by the assessee is partly allowed.