Referred Sections:
Section 143(3) of the Act.
Section 72A of the Income tax Act, 1961.
Section -40(a)(1) of the Act.
Section 9(1 )(vi) of the Act.
Section 40(a)(i) of the Act
Section 234B and 234C of the Act.
Sections 391
Section 394
Referred Cases / Judgments:
Asia Satellite Telecommunications Co. Ltd. vs. DIT 332 ITR 340
ITO vs. People Interactive(I) P Ltd. ITA No. 2180/Mum/2009
PCIT vs. M. Tech India P. Ltd. 381 ITR 31 (Del HC)
CIT vs. Vinzas Solutions India P. Ltd. 292 CTR 332 (Mad HC)
Bharti Airtel Ltd. vs. ITO 178 TTJ 708 (Del Tri.)
American Chemical Society vs. DCIT ITA No. 6811/Mum/2017
Rackspace, US Inc. vs. DCIT (ITA No. 1634/Del/2016
DCIT vs. Magnon Solutions Pvt. Ltd. ITA No. 5878/Del/2014
EPRSS Prepaid Recharge Services India (P.) Ltd. vs. ITO (2018) 100 taxmann.com 52 (Pune – Trib.)
DDIT vs. Savvis Communication Corporation ITA No. 7340/Mum/2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `F', NEW DELHI
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
AND
MS. SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.4389/Del/2015 (A.Y. 2010-11)
ITA No.4658/Del/2019 (A.Y. 2011-12)
ITA No.487/Del/2019 (A.Y. 2013-14)
Value First Digital Media Pvt. Ltd. Vs. Deputy Commissioner
Earlier known as "Value First of Income Tax
Messaging Private Limited" Circle 17(1)
Plot No. 40, Okhla Industrial New Delhi
Estate, Phase-III, New Delhi,
South Delhi,
Delhi-110002
PAN : AABCV8400B
(Appellant) (Respondent)
Appellant by Sh. Ajay Vohra, Sr. Adv., Sh.
Divyani Mittal, CA
Respondent by Shri Surender Pal, Sr. DR
Date of hearing 31.10.2019
Date of pronouncement 21.11.2019
ORDER
PER SUCHITRA KAMBLE, JM:
These three appeals are filed by the assessee against the order dated
24.03.2015, 22.03.2019 and 12.10.2018 passed by the CIT(A)-IX, New Delhi
for Assessment Years 2010-11, 2011-12 & 2013-14 respectively.
2. The grounds of appeal are as under:
ITA No. 4389/Del/2015, A.Y. 2010-11
1.0 That on the facts and in the circumstances of the case and in
law, the order passed by the Learned Commissioner of Income-tax
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(Appeals) ("Learned CIT(A)") is erroneous and bad in law.
2.0 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in confirming the assessed income of
Rs.5,16,94,850 determined by the Learned Assessing Officer ("Learned
AO") vide his order passed under section 143(3) of the Act.
3.0 Denial of set off and carry forward of losses and
unabsorbed depreciation of demerged business undertakings of
Cellnext
3.1 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding that the business loss and
unabsorbed depreciation amounting to Rs.9,95,67,606 and
Rs.2,24,16,480 respectively did not pertain to the demerged business
undertakings and are consequently not eligible for set-off and carry-
forward in the hands of the appellant.
3.2 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the denial of the set off of
brought forward loss amounting to Rs.1,92,18,032 of the demerged
business undertakings under section 72A of the Act during the captioned
assessment year.
3.3 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the denial of the set off of
unabsorbed depreciation of the demerged business undertakings
amounting to Rs. 1,48,81,461 under section 72A of the Act during the
captioned assessment year.
3.4 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in holding that the appellant has failed to
controvert the findings of the Learned AO and has failed to show that the
conditions stipulated in Section 72A are fulfilled in this case.
3.5 Without prejudice to the above, on the facts and circumstances of
the case the Learned CIT(A) erred in not directing the Learned AO to allow
the set-off of business losses and unabsorbed depreciation amounting to
Rs.9,95,67,606 and Rs.2,24,16,480 respectively of the demerged business
undertakings in proportion to the assets taken over by the Appellant.
4.0 Disallowance of SMS and server hosting charges
4.1 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the disallowance of server
hosting charges and SMS purchase charges amounting to Rs. 1,66,90,240
under section -40(a)(1) of the Act.
4.2 That on the facts and in the circumstances of the case and in
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law, the Learned CIT(A) erred in upholding that the expenses incurred on
account of sewer hosting charges and SMS purchase charges were royalty
in nature as per Section 9(1 )(vi) of the Act.
4.3 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the disallowance of server
hosting charges and SMS purchase charges under section 40(a)(i) of the
Act even though the Learned AO failed to elucidate how these charges are
tenable in India as royalty under Section 9(1)(vi) of the Income Tax Act,
1961 and the Double Taxation Avoidance Agreements between India and
country of residence of the service providers.
4.4 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the disallowance of server
hosting charges and SMS purchase charges under section 40(a)(i) of the
Act by applying retrospective amendments introduced by the Finance Act,
2012 to a transaction which took place in Financial year 2009-10 i.e. prior
to the introduction of amendments by Finance Act 2012.
Other Grounds
5.0 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the disallowance of
Rs.3,28,300 on account of rental charges paid holding the same was not
incurred wholly and exclusively for the purpose of business under section
37 of the Act.
6.0 That on the facts and in the circumstances of the case and in
law, the Learned CIT(A) erred in upholding the denial of credit of taxes
deducted at source amounting to Rs.5,76,814."
ITA No. 4658/Del/2019, A.Y. 2011-12
1.0 That on the facts and in circumstances of the case and in law, the
order passed by the Learned Commissioner of Income Tax (Appeals)
["Ld. CIT(A)"] is erroneous and bad in law.
2.0 Denial of set off and carry forward of losses and
unabsorbed depreciation of demerged business undertakings of
Cellnext Solution Limited.
2.1 That on the facts and circumstances of the case and in law,
the Ld. CIT(A) erred in dismissing the Appellant's ground of appeal on
setoff of business loss and unabsorbed depreciation amounting to INR
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3,44,47,508 and INR 75,35,019 respectively.
2.2 That on the facts and circumstances of the case and in law
the Ld. CIT(A) was not justified in enhancing the income of the
Appellant by INR 34,677,567 by holding that business loss and
unabsorbed depreciation was disallowed by the AO and confirmed by
the CIT(A) in AY 2010-11.
2.3 The Ld. CIT(A) grossly erred in relying on earlier year's i.e. AY
2010-11 of the then Ld. CIT(A) without appreciating the fact that the
order was not a reasoned order and did not address the flaws of the
Learned Assessing officer's (Ld. AO) order.
2.4 That on the facts and circumstances of the case and in law,
the Learned CIT(A) erred in not directing the AO to dispose the
rectification application filed for AY 2010-11 considering the fact that it
was a mistake apparent from record wherein the Ld. AO contradicted
his own observation.
2.5 Without prejudice to above, on the facts and circumstances of
the case and in law, the Ld. CIT(A) erred in not directing the Ld. AO to
allow the set-off of business losses and unabsorbed depreciation
amounting to INR 3,44,47,508 and INR 37,15,251 respectively of the
demerged business undertakings in proportion to the assets taken over
by the Appellant.
3.0 Disallowance of Server Hosting Charges paid to non-
residents of INR 22,992,319
3.1 That on the facts and circumstances of the case and in law,
the Ld. CIT(A) erred in disallowing Server Hosting Charges (i.e. charges
for access to an overseas database) of INR 27,741,633 (including INR
47,49,344 paid to residents in India) under section 40(a)(i) of the Act
treating it as royalty under section 9(1 )(vi) of the Act.
3.2 That on the facts and circumstances of the case and in law,
the Ld. CIT(A) erred in upholding the disallowance of server hosting
charges under section 40(a)(i) of the Act by applying retrospective
amendments introduced by the Finance Act, 2012 to a transaction
which took place in Financial year 2009-10 i.e. prior to the introduction
of amendments by Finance Act 2012.
3.3 Without prejudice to above, on facts and circumstances of
case and in law, the Ld. CIT(A) failed to appreciate the fact that the
Appellant could not have withheld tax on payments of server hosting
charges due to impossibility of performance of task since the definition
of `Royalty' as defined under section 9(1 )(vi) of the Act was amended
by Finance Act, 2012.
3.4 That on the facts and circumstances of the case and in law,
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the Ld. CIT(A) failed to appreciate that payment made to non-resident
vendor towards server hosting charges were for the purpose of earning
income from a source outside India, specifically covered by the
exception under section 9(1 )(vi)(b) of the Act.
3.5 That on the facts and circumstances of the case and in law,
the Ld. CIT(A) erred in not appreciating the fact that payments were
made to non-resident vendors who were eligible to claim benefit of the
Double Taxation Avoidance Agreement (DTAA) signed between India
and the country of their residence since the said payments are not
taxable as per the definitions contained in the applicable DTAA.
4.0 Disallowance of amounts paid to residents of INR
47,49,344
4.1 That on facts and circumstances of case and in law, the Ld.
CIT(A) erred in disallowing the payment made to resident payees,
amounting to INR 47,49,344 under section 40(a)(i) of the Act as the
said section only covers payments to non-residents
4.2 That on facts and circumstances of case and in law, the Ld.
CIT(A) erred in disallowing the payment made to resident payees
without appreciating the nature of transaction and applicability of
withholding taxes on it.
5.0 Disallowance of rent due to non-deduction of tax at
source
5.1 That on the facts and circumstances of the case and in law,
the Ld. CIT(A) erred in upholding the disallowance of INR 29,28,609 on
account of payment of rental charges for non-deduction of taxes under
the provision of section 194-I of the Act.
5.2 That on facts and circumstances of the case and in law, the
Ld. CIT(A) erred in not appreciating the fact that the said payments
were actually reimbursements made to a group company and did not
represent actual payment of rent.
5.3 That on facts and circumstances of the case and in law, the
Ld. CIT(A) erred in not appreciating the fact that no tax is to be
deducted at source on cost-to-cost reimbursement made by the
Appellant.
5.4 That on the facts and circumstances of the case and in law,
the Ld. CIT(A) grossly erred in appreciating the fact that requisite tax
was appropriately withheld by Group company while making rent
payment to the vendor.
Other grounds
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6.0 The on facts and in the circumstances of case and in law, the
Ld. CIT(A) erred in not giving proper credit of prepaid taxes.
7.0 The on facts and in the circumstances of case and in law, the
Ld. CIT(A) erred in not disposing the grounds of appeal on levy of
interest under section 234B and 234C of the Act.
8.0 That the above grounds of appeal are mutually exclusive and
without prejudice to each other.
ITA No. 487/Del/2019, A.Y. 2013-14
1.0 That on the facts and in circumstances of the case and in law,
the order passed by the Learned Commissioner of Income Tax (Appeals)
["Ld. CIT(A)"] is erroneous and bad in law.
2.0 Disallowance of SMS Purchase Charges and Server Hosting
Charges paid to non-residents
2.1 That on the facts and in the circumstances of the case and in
law, the Ld. CIT(A) erred in disallowing SMS Purchase Charges of INR
56,277,820 (i.e. international connectivity charges) and Server Hosting
Charges of INR 24,701,338 (i.e. charges for access to an overseas
database) under section 40(a)(i) of the Act treating it as royalty under
section 9(1 )(vi) of the Act.
2.2 That on the facts and in the circumstances of the case and in
law, the Ld. CIT(A) failed to appreciate that payment made towards SMS
purchase charges were for the purpose of earning income from a source
outside India, specifically covered by the exception under section 9(1 )(vi)(b)
of the Act.
2.3 That on the facts and in circumstances of the case and in law,
the Ld. CIT(A) was not justified in denying the fact that server hosting
charges paid to Rackspace has already been allowed by Hon'ble Mumbai
Tribunal in the case of ITO vs People Interactive (I) P Ltd [ITA No 2179 to
2182 of 2009] relying upon the decision of Delhi High Court judgment in
the case of Asia Satellite Telecommunications Co ltd [323 ITR 340],
2.4 That on the facts and circumstances of the case and in law, Ld.
AO erred on ignoring the fact that Rackspace is one of the party to whom
the appellant has paid server hosting charges.
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2.5 That on the facts and in the circumstances of the case and in
law, the Ld. CIT(A) erred in not appreciating the fact that payments were
made to non-resident vendors who were eligible to claim benefit of the
Double Taxation Avoidance Agreement (DTAA) signed between India and
the country of their residence.
2.6 That on facts and in the circumstances of the case and in law, the
Ld. CIT(A) erred in concluding that Tax Residency Certificate is a pre-
requisite to claim benefit under DTAA.
3.0 That the above grounds of appeal are mutually exclusive and
without prejudice to each other.
4.0 That the Appellant craves leave to add, alter, amend and/or
rescind any of the above grounds of appeal and to submit such
statements, documents and papers as may be considered necessary either
at the time of or before the hearing of this appeal as per the law.
3. We are taking up the brief facts of Assessment Year 2010-11 bearing
ITA No. 4389/Del./2015.
4. The assessee company is a Private Limited Company incorporated
under the Companies Act, 1956 on 17.10.2003. Its main Business is to
provide messaging product, services and value added services for various
communication media and to provide services enabling Mobile messaging
via software development & Sales for managing inbound & outbound SMS,
MMS, and EMS. During the year the assessee company has taken over two
undertakings of Cellnext Solutions Limited, namely Cellpush Business
Undertaking and Mobile Value Added Services Business Undertaking in a
scheme of arrangement. The Merger took place in accordance with the
provisions under Sections 391 to section 394 of the Companies Act, 1956.
The schemes of arrangement envisaging the merger was approved by the
Hon'ble Delhi High Court vide order dated 27/03/2012. As a result of this
merger assessee was entitled to claim set off of all the brought forward
business losses and unabsorbed depreciation pertaining to the two
demerged undertakings of Cellnext Solutions Limited in accordance with the
provisions of section 72A of the Income tax Act, 1961. During the year the
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brought forward business losses and unabsorbed depreciation of Cellnext
Solutions Limited (Demerged Company) has been adjusted against `Income
under the head Business and Profession' and `Income under the head Other
Sources' of appellant Company (Resulting Company) to the extent of Rs
1,92,18,031 and Rs 1,48,81,461 respectively. The Assessing Officer
disallowed the entire claim of set off of brought forward business losses and
unabsorbed depreciation. During the year assessee had paid a sum of Rs.
1,66,90,240/- to a foreign parties as server hosting charges and towards
charges for purchase of SMS, the Assessing Officer treated the said payment
as royalty and disallowed the entire amount paid for non deduction of TDS.
Assessee's Gurgaon business premises are on rent. During the year it had
paid a sum of Rs. 57,91,192/-as rent to the landlord for the use of the
same. The Assessing Officer held that rent payable was Rs 54,62,892/-.
Consequently added a sum of Rs. 3,28,300/- in the assessable income of
the assessee.
5. Being aggrieved by the Assessment Order, the assessee preferred
appeal before the CIT(A). The CIT(A) partly allowed the appeal of the
assessee.
6. The Ld. AR submitted that Ground No. 1 and 2 general in nature
and therefore the same is not adjudicated above.
7. As regards Ground No. 3 to 3.5 regarding denial of set off and carry
forward of losses and unabsorbed depreciation of demerged business
undertakings of Cellnext. The Ld. AR submitted that the CIT(A) erred in
upholding the finance of the Assessing Officer that the business loss and
unabsorbed depreciation amounting to Rs. 9,95,67,606/- and Rs.
2,24,16,480/- respectively did not pertain to the demerged business
undertakings and are consequently not eligible for set off and carry forward
in the hands of the assessee. The Ld. AR further submitted that CIT(A) erred
in upholding the denial of the set off of unabsorbed depreciation of the
demerged business undertakings amounting to Rs. 1,48,81,461/- u/s 72A
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of the Act during the present assessment year the denial of set off of brought
forward loss amounting to Rs. 1,92,18,032/- of the demerged business
undertakings u/s 72A of the Act during the assessment year. The Ld. AR
further submitted that the CIT(A) was incorrect in giving the finding that the
assessee has not fulfilled the condition set out u/s 72A. In fact, the CIT(A)
should have directed the Assessing Officer to allow the set-off of business
losses and unabsorbed depreciation amounting to Rs. 9,95,67,606/- and Rs.
2,24,16,480/- respectively of the demerged business undertakings in
proportion to the asset taken over by the assessee. The Ld. AR submitted
that the assessee company is the resulting company and the demerged
company has not claimed any losses or carried forward any setoff. The Ld.
AR submitted the definition of merge u/s 2(19AA) of the Act as well as
Section 78(2) along with 72A(4) and (5). The Ld. AR also quoted Rule 9 of the
Income Tax Rules, wherein no conditions has been given as regard merger of
the companies. Under 72A(4), the assessee company should not have to give
the books of accounts in respect of demerger of subsequent assessee. The
Ld. AR further pointed out that the Assessing Officer in fact by calculating
this addition in respect of set off of carry forward loss mentioned that to the
extent of Rs.2,82,88,938.56/- should be allowed and only Rs.
58,10,553.44/- should be made as addition. The Ld. AR submitted that
neither the Assessing Officer as well as the CIT(A) has given any finding as to
why the addition has been made to the effect of 3,40,99,493/- when the
demerge company has not claimed depreciation on the same.
8. The Ld. DR as regards Ground No. 3 to 3.5 submitted that CIT(A) has
given its finding in page 5 of the order and requested the Bench that the
matter may be restored back to the file of the CIT(A). In alternative
submissions, the Ld. DR submitted that the Assessing Officer has given
computation in the order and the same should be upheld.
9. We have heard both the parties and perused all the relevant material
available on record. From the perusal of the Assessment Order, it can be
seen that while calculating set off of carry forward loss, the Assessing Officer
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has not allowed the set-off of business losses and unabsorbed depreciation
of the demerged business undertakings in proportion to the asset taken over
by the assessee, though the Assessing Officer mentioned that to the extent of
Rs. 2,82,88,938.56 should be allowed. The fact also remains that the
demerged company has not claimed depreciation on the same. Thus, the CIT
(A) as well as the Assessing Officer failed to appreciate the proper
implementation of provisions related to set off of business losses and
unabsorbed depreciation in respect of resulting company. Therefore, it will
be appropriate to remand back this issue to the file of the Assessing Officer
for calculating the correct amount of set off of carry forward loss as per
Section 72A after taking into account the unabsorbed depreciation.
Needless to say the assessee be given opportunity of hearing by following
principals of natural justice. Ground No. 3 to 3.5 are partly allowed for
statistical purpose.
10. As regards Ground No. 4 to 4.4 relating to disallowance of SMS and
server hosting charges amounting to Rs. 1,66,90,240/- u/s 40(a)(i) of the
Act. Ld. AR submitted that the CIT(A) erred in upholding that the expenses
incurred on account of server hosting charges and SMS purchase charges
were royalty in nature as per Section 9(1)(vi) of the Act. The Ld. AR further
submitted that the CIT(A) erred in upholding the disallowance of server
hosting charges and SMS purchase charges u/s 40(a)(i) of the Act even
though the Assessing Officer failed to give the proper reasoning as to how
these charges are taxable in India as royalty u/s 9(1)(vi) of the Act. The Ld.
AR submitted that the Assessing Officer totally ignored that the Double
Taxation Avoidance Agreements between India and country of residence of
the service providers is applicable in the present case and the server hosting
charges & SMS purchase charges cannot be termed as royalty. The Ld. AR
further submitted that applying retrospective amendments introduced by the
Finance Act, 2012 to a transaction which took place in financial year 2009-
10 i.e. prior to the introduction of amendments is also not permissible under
the Act. The Ld. AR submitted that this is only server hosting charges &
SMS purchase charges and does not have any element of income, therefore,
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this is not a royalty. To demonstrate this, the Ld. AR pointed out
Explanation 2 with respect to royalty as well as Explanation 5 of Section
9(1)(vi) of the Income Tax Act, 1961 and further elaborated that Explanation
6 not come in the present case. The Ld. AR also pointed out Article 12 of the
DTAA and submitted that the Treaty will over-ride the provisions of the
Income Tax Act. The Ld. AR relied upon the following decisions:
i) Asia Satellite Telecommunications Co. Ltd. vs. DIT 332 ITR 340
ii) ITO vs. People Interactive(I) P Ltd. ITA No. 2180/Mum/2009
iii) PCIT vs. M. Tech India P. Ltd. 381 ITR 31 (Del HC)
iv) CIT vs. Vinzas Solutions India P. Ltd. 292 CTR 332 (Mad HC)
v) Bharti Airtel Ltd. vs. ITO 178 TTJ 708 (Del Tri.)
vi) American Chemical Society vs. DCIT ITA No. 6811/Mum/2017
vii) Rackspace, US Inc. vs. DCIT (ITA No. 1634/Del/2016
viii) DCIT vs. Magnon Solutions Pvt. Ltd. ITA No. 5878/Del/2014
ix) EPRSS Prepaid Recharge Services India (P.) Ltd. vs. ITO (2018) 100
taxmann.com 52 (Pune Trib.)
x) DDIT vs. Savvis Communication Corporation ITA No.
7340/Mum/2012
The Ld. AR also relied upon following decisions on the preposition that
unilateral amendment cannot have a binding effect on a Tax Treaty and
retrospective amendment in the Act cannot create any liability on the
assessee:
i) CIT vs. Siemens Aktiongesellschaft 310 ITR 320 (Bom HC)
ii) DIT vs. Nokia Network OY 358 ITR 259 (Del HC)
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iii) DIT vs. Infrasoft Ltd. 220 Taxman 274 (Del HC)
iv) Ashok Piramal Management Corpn. Ltd. vs. ACIT (2016) 161 ITD 234
v) Holcim Services South Asia Ltd. vs. DCIT 157 ITD 892 (Mum Tri.)
The Ld. AR has also given an alternate submission that the services and the
expenses have incurred outside India and the assessee being non-resident,
there should not be any assessment in India and there is no obligation to
deduct tax at source on the assessee.
11. As regards Ground Nos. 4 to 4.4, the Ld. DR submitted that the
Explanation 6 of royalty has retrospective effect. The Ld. DR further
submitted that the server hosting and SMS charges all these activities comes
under the provisions of process and thus rightly added as royalty. In fact
Article 12(3) of the DTAA, the word "process" is also used and its meaning
should be taken from Income Tax Act itself. The Ld. DR relied upon the
decision of the various High Courts and Tribunals. The Ld. DR also relied
upon the decision of Verizon Communications Singapore Pte. Ltd. Vs. ITO,
Int. Tax. 361 ITR 575 (Mad HC), CIT Int. Tax. vs. Infosys Technologies
Ltd. 204 Taxman 311 (Karn. HC) and CIT- Int. Tax. vs. Samsung Electronics
Co. Ltd. 345 ITR 494 (Kar. HC).
12. We have heard both the parties and perused all the relevant material
available on record. From the perusal of the facts it can be seen that the
assessee purchases international SMS for its international business, which
broadly comprises of trading in SMS i.e. it purchases SMS from a foreign
customer and sells to another foreign customer. It has no other role in the
delivery of services. Thus, even assuming that payment to foreign vendors
for international SMS is in the nature of Royalty under Section 9(1)(vi) of the
Act, such royalty payment should not be taxed in India as it pertains to
property utilized for the purpose of earning income from a source outside
India. In the present case, International SMS are being purchased from
foreign vendors for onwards sale to foreign customers. The assessee does not
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have any other role in the delivery of services. Thus, no part of the service is
being delivered in India. Therefore, the payment of SMS charges to Foreign
Service providers is not taxable in India as the SMS facility received is in
connection with earning of income from non-residents. Also, the payment for
SMS charges is not taxable as royalty both under the provisions of the
Income Tax Act and DTAA. The case laws cited by the Revenue does not
apply in the present case as the ratio laid down in those matter depends
upon the fact that there was a royalty element in each of those case laws.
But in present case there is no element of royalty and besides that no service
has been performed or delivered in India. Thus, this factual aspect is ignored
by the CIT(A) as well as the Assessing Officer. Ground Nos. 4 to 4.4 are
allowed.
13. As regards Ground No. 5 relating to disallowance of Rs. 3,28,300/- on
account of rental charges paid, the Ld. AR submitted that the Assessing
Officer quoted a wrong section i.e. Section 69C of the Act. The CIT(A) also
made modification and applied Section 37(1), whereas both these sections
are not at all applicable when there is a rent agreement between the third
party. While computing the rent payable the Assessing Officer failed to
consider the increase in the rent which is payable. The Ld. AR submitted
that the Assessing Officer ought not to have disallowed such amount on
presumption basis.
14. The Ld. DR relied upon the Assessment Order and the order of the
CIT(A).
15. We have heard both the parties and perused all the relevant material
available on record. It is pertinent to note that there is a rent agreement
between the assessee and the third party and as per the escalation clause of
the said agreement the rent was increased. The Assessing Officer ignored
this aspect and relying on the old agreement, quoted Section 69C which is
not at all applicable as the assessee explained the increased rent with the
documentary evidences. The CIT(A) also while modifying the order of the
Assessing Officer applied Section 37(1), which is not at all applicable when
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there is a rent agreement between the third party. While computing the rent
payable the Assessing Officer failed to consider the increased in rent which
is payable. Thus, Assessing Officer as well as the CIT(A) were not right in
making this addition. Ground No. 5 is allowed.
16. As regards Ground no. 6 relating to denial of credit of taxes deducted
at source amounting to Rs. 5,76,814/-, the Ld. AR requested that the same
should be set aside to the file of the Assessing Officer in respect of
reconciliation as per the records available.
17. As regard Ground No. 6, the Ld. DR submitted that the TDS is
applicable as the income derived is royalty in nature and there is no
application made by the assessee under section 195(2) of the Act .
18. We have heard both the parties and perused all the relevant material
available on record. Since the issue herein is decides as there is no royalty
involved in the transaction, the issue of TDS whether arise or not has to be
looked into by the Assessing Officer on the other aspects and be reconciled
as per the submissions of the Ld. AR. Therefore, it will be appropriate to
remand back this issue to the file of the Assessing Officer and decide this
issue after taking into account the findings given by us. Needless to say, the
assessee be given opportunity of hearing by following principles of natural
justice. Ground No. 6 is partly allowed for statistical purpose.
19. In result, appeal being ITA No. 4389/DEL/2015 for A.Y. 2010-11 is
partly allowed for statistical purpose.
20. Now we are taking up ITA No. 4658/Del/2019 (A.Y. 2011-12)
21. During the year the brought forward business losses and unabsorbed
depreciation of M/s Cellnext Solutions Limited (Demerged Company) has
been adjusted against 'Income under the head Business and Profession' and
`Income under the head Other Sources' of assessee Company (Resulting
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Company) to the extent of Rs 3,44,47,508/-.The Assessing Officer disallowed
the set off of brought forward business losses and unabsorbed depreciation
on the plea that no entry of losses has made in the assessee's books. The
total brought forward business losses of the demerged undertakings of M/s
Cellnext Solutions limited were of Rs.8,03,49,575/-.The assessee has set off
of Rs,3,44,47,508/- only to the extent of current year business income. The
Assessing Officer while computing the income has allowed set off 82.96% of
Rs.3,44,47,508/-. During the year assessee paid a sum of Rs.2,77,41,633/-
to foreign parties as server hosting charges, the Assessing Officer treated the
said payment as royalty and disallowed the entire amount paid for non
deduction of TDS. During the year Cellnext Solutions Limited had charged
the proportionate rent of Rs. 29,28,609/- to the assessee for space occupied
and used by the appellant. Cellnext Solution Limited is wholly owned
subsidiary of appellant of which two undertakings are merged with the
assessee. Cellnext had paid total rent of Rs. 45,05,550/- to Dais Overseas
Pvt. Ltd. and TDS of Rs. 4,50,555/- was duly deducted and deposited as per
the provisions of section 194I. During the year assessee had Income from
Other Sources of Rs. 1,46,96,961/- and unabsorbed depreciation of
Rs.75,35,019/-. Thus, the Assessing Officer made addition of Rs.
73,04,959/- on account of inappropriate set off claimed by the assessee,
additions of Rs. 2,77,41,633 on account of non deduction of TDS u/s 195,
addition of Rs. 29,28,609/- on account of non deduction of TDS u/s 195I
and additions of Rs. 46,31,736/- on account of unearned revenue.
22. Being aggrieved by the Assessment Order, the assessee filed appeal
before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
23. As regards Ground no. 1, the same is general in nature, therefore is
dismissed.
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24. As regards Ground No. 2 to 2.5 setoff loss of demerged company same
argument has been made by the Ld. AR only with the modification that
CIT(A) has enhanced the addition without justifying the same.
25. The Ld. DR also submitted the same.
26. We have given the detailed findings on this issue hereinabove. The CIT
(A) as well as the Assessing Officer failed to appreciate the proper
implementation of provisions related to set off of business losses and
unabsorbed depreciation in respect of resulting company. Therefore, it will
be appropriate to remand back this issue to the file of the Assessing Officer
for calculating the correct amount of set off of carry forward loss as per
Section 72A after taking into account the unabsorbed depreciation.
Needless to say the assessee be given opportunity of hearing by following
principals of natural justice. Thus, Ground Nos. 2 to 2.5 are partly allowed
for statistical purpose.
27. As regards Ground No. 3 to 3.5 the same argument has been taken by
the Ld. AR as given under Ground no. 4 to 4.4 in Assessment Year 2010-11
as the issue is identical.
28. The Ld. DR also submitted that the issue is identical.
29. We have heard both the parties and perused all the relevant material
available on record. Since the issue is identical, therefore, we follow the same
reasoning given by us in A.Y. 2010-11 for this issue hereinabove and the
same will apply in the present assessment year as well. Thus, Ground Nos. 3
to 3.5 are allowed.
30. As regards Ground No. 4 to 4.2, the Ld. AR submitted that the
payment made to resident payees, amounting to Rs. 47,49,344 does not
come under the purview of Section 40(a)(i) of the Act as the said section only
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ITA No. 4658, 487/Del/2019
covers payments to non-residents. Therefore, the Assessing Officer was not
right in making this addition.
31. The Ld. DR relied upon the Assessment Order and the order of the
CIT(A).
32. We have heard both the parties and perused all the relevant material
available on record. It is pertinent to note that in relation to payments made
to resident vendors, the applicability of withholding tax on these pay-outs
has not been discussed by the Assessing Officer and the Assessing Officer
has not given any opportunity to the assessee to clarify the position on
withholding taxes on resident pay-outs. Therefore, it will be appropriate to
remand back this issue to the file of the Assessing Officer for fresh
adjudication. Needless to say, the assessee be given opportunity of hearing
by following principles of natural justice. Ground Nos. 4 to 4.2 are partly
allowed for statistical purpose.
33. As regards Ground Nos. 5 to 5.4 relating to rent due to non-deduction
of taxes at source, the Ld. AR submitted that the assessee made rental
payments amounting to Rs. 1,29,01,020 and party wise details of the rent
paid and deduction of tax thereon along with the agreement was submitted
to the Assessing Officer on 05.02.2014. Out of the total rent amount, the
assessee deducted tax on rent of Rs. 87,21,214 and an amount of Rs.
16,09,941 was paid to Cellnext. Cellnext had deducted tax on this amount
under Section 194I of the Act. Further, on the remaining amount of Rs.
25,69,365, no tax has been deducted since the rent paid each of the parties
was below the exemption threshold of Rs. 1,80,000/- as prescribed under
Section 194I of the Act. The said payment was a cost-to-cost reimbursement
of rental expenditure incurred by Cellnext on behalf of the assessee. During
the year, the Cellnext has proportionately appropriated the rent of Rs.
29,28,609 to the assessee for the space occupied and used by the assessee.
The Ld. AR further submitted that Cellnext has made total payment of Rs.
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ITA No. 4658, 487/Del/2019
45,05,550 to Dals Overseas Private Limited and accordingly deducted tax at
source of Rs. 4,50,555 under Section 194I of the Act. Thus, deduction of tax
at source by the assessee would result in double taxation of tax on aforesaid
income.
34. The Ld. DR submitted that it is not disputed that the payment made
by the assessee is in the nature of rent and that the same was paid to the
group concern without any proper rent agreement. Further, there is no
evidence given by the assessee to demonstrate that the rent payment was a
temporary affair on cost to cost basis. The assessee therefore, could not
prove the payment was in the nature of rent and therefore the assessee was
in default on account of non deduction of TDS as required u/s 194I of the
Act which leads to disallowance of the said payment u/s 40(a)(ia) of the Act.
The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
35. We have heard both the parties and perused all the relevant material
available on record. It is pertinent to note that the assessee made rental
payments amounting to Rs. 1,29,01,020 and party wise details of the rent
paid and deduction of tax thereon along with the agreement was submitted
to the Assessing Officer on 05.02.2014. Out of the total rent amount, the
assessee deducted tax on rent of Rs. 87,21,214 and an amount of Rs.
16,09,941 was paid to Cellnext. Cellnext had deducted tax on this amount
under Section 194I of the Act. Further, on the remaining amount of Rs.
25,69,365, no tax has been deducted since the rent paid each of the parties
was below the exemption threshold of Rs. 1,80,000/- as prescribed under
Section 194I of the Act. The said payment was a cost-to-cost reimbursement
of rental expenditure incurred by Cellnext on behalf of the assessee. These
contentions of the assessee appears to correct from the submissions and the
documents produced before the Revenue authorities. But these documents
were totally ignored by the Assessing Officer as well as by the CIT(A). During
the year, the Cellnext has proportionately appropriated the rent of Rs.
29,28,609 to the assessee for the space occupied and used by the assessee.
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ITA No. 4658, 487/Del/2019
From the perusal of the records it can be seen that Cellnext has made total
payment of Rs. 45,05,550 to Dals Overseas Private Limited and accordingly
deducted tax at source of Rs. 4,50,555 under Section 194I of the Act. Thus,
deduction of tax at source by the assessee would result in double taxation of
tax on aforesaid income. Therefore, the CIT(A) as well as Assessing Officer
was not right in disallowing the rent due to non-deduction of tax at source.
Ground Nos. 5 to 5.4 is allowed.
36. As regards Ground No. 6 relating to non giving of proper credit of
prepaid taxes, the Ld. AR submitted that direction may be given.
37. The Ld. DR relied upon the Assessment Order and the order of the
CIT(A).
38. We have heard both the parties and perused all the relevant material
available on record. Since the prepaid taxes has not been considered by the
Assessing Officer while determined the total income. It will be appropriate to
remand back this issue to the file of the Assessing Officer for considering the
aspect of prepaid taxes and giving proper credit to that effect. Needless to
say, the assessee be given opportunity of hearing by following principles of
natural justice. Ground No. 6 is partly allowed for statistical purpose.
39. As regards Ground no. 7, the Ld. AR submitted that interest under
Section 234C should be re-computed and be given proper effect.
40. The Ld. DR submitted that interest under Section 234C has not been
adjudicated by the CIT(A) and relied upon the Assessment Order.
41. We have heard both the parties and perused all the relevant material
available on record. It is pertinent to note that interest under Section 234B
and Section 234C were not adjudicated upon by the CIT(A), therefore, it will
be appropriate to remand back this issue to the file of the Assessing Officer
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ITA No. 4658, 487/Del/2019
to decide it after verifying all the aspect of the income of the assessee
relating to interest under Section 234B and 234C of the Act. Needless to say,
the assessee be given opportunity of hearing by following principles of
natural justice. Ground No. 7 is partly allowed for statistical purpose.
42. In result, appeal being ITA No. 4658/Del/2019 for A.Y. 2011-12 is
partly allowed for statistical purpose.
43. Now we are taking up ITA No. 487/Del/2019 (AY 2013-14)
44. The assessee filed its original return of income under section 1391 of
the Act on 29.11.2013 declaring an income of Rs. 54,65,300/- and revised
return showing income of Rs. 54,65,300 was electronically filed on
19.12.2014. The return of Income was revised to claim the additional
amount of credit of TDS which the appellant was eligible to claim after
merger of undertakings of Cellnext Solutions Limited. The assessee's return
was selected for scrutiny assessment and notice was issued by the Assessing
Officer. The Assessing Officer assessed the total income at Rs. 8,90,37,553/-
by making following additions:
i) Disallowance of payment amounting to Rs.8,09,79,158/- made by the
assessee to foreign services providers on account of server hosting
charges and SMS charges under Section 40(a)(i)/37(1) of the Act.
ii) Disallowance of expenses amounting to Rs. 14,38,554 under Section
14A of the Act.
iii) Disallowance of interest expenses amounting to Rs. 11,54,541 under
Section 40(a)(ia) of the Act.
45. Being aggrieved by the Assessment Order, the assessee filed appeal
before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
46. As regards Ground No. 1, the same is general in nature, hence
dismissed.
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ITA No. 4658, 487/Del/2019
47. As regards to Ground Nos. 2 to 2.6, the Ld. AR submitted that the
same is identical to the Ground Nos. 4 to 4.2 for Assessment Year 2010-11.
48. The Ld. DR also submitted that the issue is identical.
49. We have heard both the parties and perused all the relevant material
available on record. Since the issue is identical, therefore, we follow the same
reasoning given by us in A.Y. 2010-11 for this issue hereinabove and the
same will apply in the present assessment year as well. Thus, Ground Nos. 2
to 2.6 are allowed. Hence, appeal being ITA No. 487/Del/2019 (AY 2013-14)
is allowed.
50. In result, two appeals being ITA No. 4389/DEL/2015 for A.Y. 2010-11
and ITA No. 4658/Del/2019 for A.Y. 2011-12 are partly allowed for
statistical purpose and appeal being ITA No. 487/Del/2019 for AY 2013-14
is allowed.
Order is pronounced in the open court on 21st November, 2019.
Sd/- Sd/-
(N.K. BILLAIYA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 21st November, 2019.
*BR*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi
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ITA No. 4658, 487/Del/2019
Sl. Particulars Date
No.
1. Date of dictation: 24/10/2019
2. Date on which the draft of order is placed 25/10/2019
before the Dictating Member:
3. Date on which the draft of order is placed 21/11/2019
before the other Member:
4. Date on which the approved draft of order 21/11/2019
comes to the Sr. PS/PS:
5. Date of which the fair order is placed before 21/11/2019
the Dictating Member for pronouncement:
6. Date on which the final order received after 21/11/2019
having been singed/pronounced by the
Members:
7. Date on which the final order is uploaded on 21/11/2019
the website of ITAT:
8. Date on which the file goes to the Bench 21/11/2019
Clerk
9. Date on which files goes to the Head Clerk:
10. Date on which file goes to the Assistant
Registrar for signature on the order:
11. Date of dispatch of order:
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