The order of the Bench was delivered by
B. Ramakotaiah, Accountant Member. - These 5 appeals are by Assessee and Revenue for A.Ys. 2005-06, 2006-07 and 2007-08. In all the years, the issue is with reference to levy of tax as short deduction of tax under section 201 and interest under section 201(1A) of the I.T. Act, 1961.
2. We have heard the Ld. Counsel and Ld. D.R. and perused the documents placed on record.
3. Briefly stated, assessee company is engaged in on-site and off-site as offshore software development/process outsourcing. A survey u/s. 133A was conducted in the case of assessee on 21.09.2006 and its details of expenditure under different heads were called for to verify the TDS liability of assessee. After verification of the details filed by assessee AO noticed that assessee has been deducting tax at source on salaries, rent, contract and professional charges but on the expenditure booked towards software development, TDS was done u/s. 194C but not u/s. 194J as required. After verifying the invoices/bills and agreements for the expenditure booked towards software development charges, A.O. noticed that the software development charges in India in fact were the payments towards technical services/fees and liable for TDS u/s. 194J. After examining the agreement copies with the companies with which assessee entered into agreement for the A.Y. 2004-05 for software development services, A.O. concluded that expenditure was fees for professional services and technical services and covered by section 194J of the Act and accordingly calculated the tax and interest of Rs.18,06,000/- u/s. 201(1) r.w.s. 194J and Rs.14,17,170/-u/s.201(1A) of the Act and reduced the amount of Rs.7,22,4090/- of TDS made u/s. 194C by assessee and raised the total demand of Rs.25,01,310/-.
3.1 Likewise, in Financial Year 2006-07 the demands are raised as under :
(i) TDS u/s. 194J |
Rs.10,96,452/- |
(ii) Interest u/s.201(1A) |
Rs. 7,28,674/- |
|
Rs.18,25,026/- |
3.2 Likewise, in Financial Year 2007-08 the demands are raised as under :
| (i) TDS u/s. 194J |
Rs.1,68,89,432/- |
(ii) Interest u/s.201(1A) |
Rs. 92,04,396/- |
|
Rs.2,60,93,828/- |
3.3 It was the contention of assessee that it has entered into agreements with various companies for undertaking the work for development of software and I.T. enabled services and various modules for effective management information system of exchange of information between Head Office in India and its employees working at various client's sites. It was the contention that this is a contract for establishing the management information system and not provision of technical services and therefore, assessee has deducted tax under the provision of 194C of the Act. A.O. was of the opinion that these payments are not contract payments but payments for provision of software services which come under the provisions of section 194J of the Act. Accordingly, A.O. raised the demands.
4. Assessee contended before the Ld. CIT(A) about the nature of working and the fact that various payments were covered by provisions of section 194C and made detailed submissions which was sent to the A.O. for offering the comments on remand. After considering the same, Ld. CIT(A) upheld the A.O's contention by stating as under :
"5. The remand report and the reply of the appellant have been considered and I am in agreement with the argument of the Addl. CIT and it is the content of the contract which determines the nature of service rendered and not the contract per se. A contract may be entered into for completing a civil work or for rendering legal consultancy or for rendering any technical services but the nature of services being rendered in all these three instances is different and mere existence of contract is not decisive in itself for categorizing the activity. The vendor companies have provided the technical services for an effective management information system for exchange of information between the head office in India and its employees working at various client sites in respect of diversified sectors such as health care, telecom, banking and financial etc., Since the need for such software is for reviewing the progress of work executed by the employees of the appellant company at client's sites which requires technical expertise in all these diverse fields and therefore, the nature of services rendered can only be categorised as technical services/professional services. Accordingly, the A.O. is justified in applying the provisions of section 194J of the I.T. Act and therefore, the ground raised by the appellant is dismissed."
5. While confirming the action of the A.O., Ld. CIT(A) however, gave direction to the A.O. that the taxes cannot be collected again once the taxes have been paid by the deductees in view of the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 and the A.O. was directed to verify if the vendor-deductees have paid the taxes on the income received from assessee and if he was satisfied, to delete the demand raised under section 201(1) of the I.T. Act and to re-calculate the interest under section 201(1A) of the I.T. Act, as per law.
6. Even though Ld. CIT(A) confirmed the action of the A.O. to the extent of application of provisions of section 194J, surprisingly Revenue has raised the grounds as under in its appeals in ITA.No.991/Hyd/2013 & ITA.No.992/Hyd/2013 :
A.Y. 2005-06 :
| "1. |
|
The order of the CIT(A)-II is erroneous and prejudicial to the interest of the revenue. |
2. |
|
The CIT(A)-II, Hyderabad has erred in not deciding the core issue of the provisions of the Act with regard to applicability of section 194C or 194J which covers such payments impugned in appeal. |
3. |
|
Any other matter that may be urged during the course of appellate proceedings." |
6.1 As can be seen from the order of the Ld. CIT(A), Ld. CIT(A) upheld the contention of the A.O. that the amounts are covered by the provisions of section 194J. In fact, assessee also preferred the appeal on the same issue. We are surprised that Revenue is contesting on an issue which was decided in its favour, which indicates the non-application of mind not only by the A.O. but also by the Ld. CIT-(TDS), who approved the filing of appeal. This sort of mindless action by the Revenue does attract levy of cost. However, we refrain from doing so. We advise the Revenue authorities to apply their mind before preferring appeals to ITAT. Revenue appeals, therefore, are infructuous and accordingly dismissed.
7. In the result, appeals ITA.No.990 & 991/Hyd/2013 of the Revenue are dismissed.
ITA.No.1038, 1039/Hyd/2013 AY 2005-06, AY 2006-07
8. Coming to assessee's appeals for the A.Ys. 2005- 06 and 2006-07 assessee has raised common grounds and for the sake of record, grounds in A.Y. 2005-06 are extracted :
A.Y. 2005-06 :
| 1. |
|
"The Ld. CIT(A)-II, Hyderabad erred both in law and on facts while partly allowing the appeal. |
2. |
|
The Ld. CIT(A)-II, Hyderabad erred in confirming the action of the A.O. in computing short deduction of tax and interest of Rs.10,83,600/- & Rs.14,17,710/- u/s. 201(1) and 201(1A) respectively. |
3. |
|
The Ld. CIT(A)-II, Hyderabad erred in justifying the action of the A.O. in applying the provisions of sec. 194J instead of the provisions of Section 194C of the I.T. Act, 1961. |
4. |
|
The Ld. CIT(A)-II, Hyderabad ought to have appreciated that the contract payments made are covered under the provisions of section 194C and accordingly TDS has to be made. |
5. |
|
The Ld. CIT(A)-II, Hyderabad ought to have appreciated that the appellant has entered into contract agreements for performing the services with various parties. |
6. |
|
Assessee may add, alter or modify any other point to the grounds of appeal at any time before or at the time of hearing of the appeal." |
9. As briefly stated, assessee has entered into agreements with M/s. CAM Soft India P. Ltd. Integra Telecommunications & Software Ltd., Zuda Information Technology P. Ltd., Hightec Computech P. Ltd., M/s. Global Infosystems Ltd., vendors who are located in India for undertaking certain works in information systems. Assessee deducted tax at source under section 194C and remitted the same to the Government account. It was the contention that the works undertaken were not of contract to fall under section 194C, but fees for technical services. Assessee-company submitted that it did not pay any fees towards professional/technical services as considered by the A.O. The Ld. CIT(A) remanded matter to the A.O. and obtained the remand report. A.O. analysed the provisions of 194J read with Explanation-2 to section 9(1)(vii) to come to the decision that fees for technical services means any consideration for rendering any managerial technical or consultancy services. He has given a detailed note to the Ld. CIT(A) which was also extracted in the impugned order. The contentions as extracted by Ld. CIT(A) in para 4.1 of the A.O. are as under :
"4.1 The Addl.CIT, in his forwarding note has submitted as under:
2.2 The Assessing Officer has submitted the comments for all the three years. During the remand proceedings, assessee was requested to file copies of agreements etc., entered into by assessee with these Jour companies. Copies of agreements filed by assessee are enclosed to this report. The correspondence with M/s. Global Infosystems Limited is dated 15.10.2005, with M/s. Hitec Computech. Pvt. Ltd. is dated 01.09.2005, with MI s. Integra Telecommunications & Software Limited is dated 01.10.2005 and with CAM Soft (India) Pvt. Ltd. is dated 01.09.2005. The content of the correspondence with all these service providers is the same. As can be seen from the contract terms, assessee has requested these companies for development of software & IT enabled services with various modules. Assessee has explicitly mentioned that it has a strong presence with over 800 employees working at several of its client's sites. Assessee's clientele are operating in various sectors like healthcare, telecom, retailing, insurance and banking & financial services. Assessee put on record its need for an "effective management information systems" for exchange of information between the head office in India and its employees working at various clients sites. The need Jar such software is for reviewing the progress of work execution by the employees of assessee company at client's sites. Assessee had paid huge amounts to these companies for being provided with the software services.
2.3. A perusal of the documents makes it evident that assessee is in the business of information. technology and I.T. enabled services. Assessee has diversified clients ranging from healthcare to telecom, banking and financial services. The requirement for each sector is distinct as they are into specialized activities like insurance, healthcare etc. The software solutions I services required by assessee company are highly specialized in nature and they are made to order as per the requirements of assessee company. It is worth mentioning here that assessee himself has laid down the clause that the required software/services should be provided within the period of 90 days by these companies and that if the solutions offered by these companies is not found acceptable, then such companies would modify and provide with new solutions. Therefore, it is evidently a case of assessee company procuring "professional services" from' various companies for developing its own MIS Software which inturn would help assessee, monitor the progress of work at various client's sites who are engaged in highly specialized and diversified activities having no commanolity in the nature of business. Therefore, the services obtained by assessee is not a case of mere "execution of any contract". On the other hand, the professional services procured by assessee are highly specialized calling for techniques of applied engineering. The field of electronics is nothing but applied engineering and the field of information technology is nothing but applied electronics. In other words, it is a super specialty within the field of engineering and any services rendered in such sphere of activity cannot be anything other than 'Professional Services'. Therefore, the Assessing Officer had rightly concluded that the nature of activities are covered under sec. 194J of the I. T. Act. It may not be out of place to mention here that any agreement between two parties is in the nature of contract. However, the nature of a contract differs from activity to activity. A contract may be entered into for completing a civil work or for rendering legal consultancy or for rendering any technical services. But, the nature of services being rendered in all these three instances is different. Therefore, mere existence of contract is not decisive in itself for categorizing the activity under sec. 194C of the Act. What is required to be seen is the nature and content of contract and the nature of services being rendered as per the contract. The comments of AO are duly recommended on this issue."
4.2 The remand report was forwarded to the appellant for its comments/objections and the appellant vide its letter dated 07.03.2013 has reiterated what was stated during the assessment proceedings and the remand proceedings and made an alternate plea that since the vendor/deductees must have paid the taxes on the income received from the appellant no demand u/s.201(1) can be raised again on the, deductor appellant in view of the decision of Hon'ble Supreme Court in the case ofHindustan Coca Cola Beverages Pvt. Ltd. v. CIT [2007] 293 ITR 226)".
Based on the above detailed note of the A.O. Ld. CIT(A) confirmed that the services rendered can only be categorised as technical services or professional services.
10. It was the contention of the Ld. Counsel that those companies have not rendered any technical or professional or managerial services so as to come under the definition of sec. 9(1)(vii). Assessee even though is in the business of software services, has not undertaken any software services from them but asked them to build a system for information management between Head Office and its on-site employees. They may be using their competence in software systems but as far as assessee is concerned, it has got a product in the form of software package and this is nothing but works contract. It was further submitted that assessee has already deducted tax under section 194C and so the opinion of the A.O. that these services should be considered as technical does not hold good. He then referred to the definition of fees for technical services as per Explanation-2 to section 9(1)(vii) referred to under 194J. It was the submission that services are not technical services so as to consider under section 9(1)(vii) but ordinary contractual services which come under 194C.
11. Ld. D.R. however, supported the orders of the A.O. and Ld. CIT(A) who have considered the issue.
12. Issue as can be seen from the above is whether the payments for work undertaken by assessee can be categorised under section 194C or 194J. As seen from the contracts assessee is not asking the other company to render any personal services in the field of computers but assigned the contract for development of information systems so as to manage the on-site employee work for which various amounts were paid. There is no dispute with reference to the fact that those packages are to be developed by vendors. In fact, A.O. as well as the Ld. CIT(A) accepts that the relationship is vendee-vendor, as referred in order. Considering that nature of agreement and the work undertaken on behalf of assessee, we are of the opinion that payments made to the vendor companies do fall under 194C. Even though assessee is in the software business and services rendered/work undertaken are also on the field of software services, these cannot be considered as per professional services as they have not rendered any personal services to the company. It is a contract between a company and company. Even though the nature of contract differs from activity to activity, assessee's nature of work do indicate that those companies have not rendered any technical / professional services so as to come within the definition of section 9(1)(vii). We are of the opinion that categorization of works contract as agreement for services cannot be accepted. In view of this, assessee's contentions are to be upheld.
13. The Coordinate Bench in the case of Glaxosmithkline Pharmaceuticals Ltd. v. ITO [2011] 48 SOT 643/15 taxmannn.com 163 (Pune) considered similar services and held that payment made for services of security guard provided by contractor cannot be kept in the nature of managerial, technical or consultancy services so as to attract clause 7 to section 9(1) read with section 194J. It was held that for treating the payment for technical services to be covered under section 194J, there should be consideration for acquiring or using technical knowhow simplicitor provided, or made available by human element and there should be direct or live link between payment and receipt/use of technical services information. The contentions of assessee that payment is covered under section 194C was accepted. Similar are the facts in the present case where even though services of other company in the field of computers are availed, what assessee obtained is not a technical service but a technical product in the form of computer package. Therefore, we are of the opinion that the payments made are rightly covered under section 194C and assessee has deducted tax accordingly. The action of the A.O. to bring it under section 194J cannot be sustained on the facts of the case. Therefore, the demands to the extent of 201(1) cannot be sustained. Consequently, the interest levied under section 201(1A) also cannot be sustained.
14. Even though, Ld. CIT(A), considering the Hon'ble Supreme Court Judgment in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra), directed the A.O. to exclude amount which are offered to tax by the vendors that may become academic now as we have held that payments are not covered under the provisions of section 194J. To that extent orders of CIT(A) are reversed and A.O. is directed to delete the amounts raised. Assessee's grounds are allowed.
ITA.No.1040/Hyd/2013 - A Y 2007-2008
15. In this appeal similar issue is involved. However, as seen from the Order of the A.O. there are two sorts of payments involved. One sort of payment was similar to payments made in A.Ys. 2005-06 and 2006-07 to Indian Resident Companies. This issue on payments made to domestic companies which was brought under section 194J as against 194C is similar to the issue decided in earlier years. For the reasons stated in above appeals, we are of the opinion that assessee has correctly deducted tax under section 194C from these amounts. Therefore, grounds raised in this year are allowed accordingly.
16. The other issue which was raised in A.Y. 2007-08 is with reference to payments made abroad by assessee's on-site unit in USA. On verifying the schedule-M of the annual report and noticing that assessee has paid software development, salary and benefits and expenses abroad, A.O. was of the opinion that since these expenses were claimed to have been incurred for software expenses overseas and took entire expenditure as a claim in India, the amounts are to be covered under section 194J. He accordingly raised the demands. As seen from the order, it is not clear whether the entire amount considered by the A.O. is for payments made to the domestic companies or made abroad for overseas services. However assessee has raised two issues and Ld. CIT(A) also decided the two issues with out stating the amounts involved. Accordingly, we were also considering the issues only but the amounts involved are not clear from the orders of authorities.
17. Coming to the issue of payments abroad, the facts as stated and extracted in the order of Ld. CIT(A) are that assessee has incurred expenditure overseas for providing on-site services to the clients abroad by engaging man power. Assessee explained that company is providing on-site services to clients abroad by engaging man power from M/s. Plutus Solutions Inc USA for execution of works at customer's work place in USA and an amount of Rs.30.16 crores was paid out of the sale proceeds received from customers and the net of income over expenditure was remitted to India. It was further explained that on-site expenses are incurred abroad and the vendors are not assessed/ assessable in India. Therefore, provisions of TDS are not applicable on such expenditure being incurred abroad. Assessee placed the necessary ledger extracts and details of expenditure and submitted that as per provisions of section 195, assessee is not liable for deduction. However, A.O. was of the opinion that Explanation (2) to section 195 inserted by Finance Act, 2012 w.e.f. 01.04.1962 makes it clear that payments made to non-resident is subject to TDS whether or not, the non-resident person is a residence or place of business or business connection in India. Considering the report of the A.O. Ld. CIT(A) agreed with the A.O. by stating as under :
"5. The remand report and the reply of the appellant have been considered and I am in agreement with the argument of the Addl.CIT and it is the content of the contract which determines the nature of service rendered and not the contract per se. A contract may be entered into for completing a civil work or for rendering legal consultancy or for rendering any technical services but the nature of services being rendered in all these three instances is different and mere existence of contract is not decisive in itself for categorizing the activity. The vendor companies have provided the technical services for an effective management information system for exchange of information between the head office in India and its employees working at various client sites in respect of diversified sectors such as health care, telecom, banking and financial etc. Since the need for such software is for reviewing tile progress of work executed by the employees of the appellant company at client's sites which requires technical expertise in all these diverse fields and therefore, the nature of services rendered can only be categorized as technical services/professional services. Accordingly, the A.O. is justified in applying the provisions of section 194J of the I.T. Act and therefore, the ground raised by the appellant is dismissed.
5.1. However, the appellant's alternate plea that since the deductees must have paid the taxes on the income received from the appellant and no demand u/s.201(1) can be raised again is considered and there appears merit in the contention. In view of the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT (supra), the Assessing Officer is directed to verify if the vendor deductees have paid the taxes on the income received from the appellant and if he is satisfied, to delete the demand raised u/s. 201(1) of I.T. Act and recalculate the mandatory interest u/s. 201(1A) of the I.T. Act as per law".
18. Ld. Counsel submitted that both A.O. and Ld. CIT(A) are not correct in invoking the Explanation 2 without establishing that the same is chargeable under the provisions of the Act as held by the Hon'ble Supreme Court. He relied on the decision of Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 and also decision of ITAT, Hyderabad in the case of Asstt. CIT v. IIC System (P.) Ltd. [2010] 127 TTJ (Hyd.) 435.
19. Ld. D.R. however, relied on the orders of the A.O. and Ld. CIT(A).
20. We have considered the rival contentions, examined the details on record. There is no dispute with reference to the fact that assessee has undertaken on-site work in USA and the receipts and payments are in USA. Since assessee is an Indian company, the net of the amounts after considering the expenditure was remitted to India and was incorporated in the books of accounts. Just because the expenditure was debited to the P & L account in the books of accounts in India, the amounts cannot be considered as payments made from India. It is a fact that amounts are paid abroad and the services are rendered abroad. Those companies who received the amounts have no permanent establishment in India or even the business connection in India. Therefore, the payments made to them abroad can not be brought to tax in India as the jurisdiction of IT Act extends only to territory of India where the payments have been made from India (sic), then it can be verified whether amounts can be brought to tax as per the provisions of I.T. Act or whether Double Taxation Avoidance Agreement (DTAA) can be invoked so as to claim benefit. However, since the amounts are paid outside India to persons outside Indian territory, who does not have any tax liability as far as I.T. Act, 1961 is concerned, the amounts paid abroad cannot be considered as 'sums chargeable' under the provisions of this Act. Even though Explanation-2 clarifies the position that whether or not a non-resident person has a residence or place of business or business connection in India or any other persons in any other manner whatsoever in India, the Explanation cannot override the main provision of section 195 about 'sum chargeable' under the provisions of the Act. Moreover, as defined in section-5, scope of total income no income accrues or arise or deemed to accrue or arise in India on the payments made in USA by branch there. Therefore, the payments made abroad cannot be considered as income chargeable under the provisions of the Act. Extraterritorial jurisdiction cannot be assigned to section 195 by invoking Explanation (2) on the facts of the case. Therefore, we are of the opinion that the action of the A.O. as confirmed by the Ld. CIT(A) is not justified and cannot be supported by provisions of the Act. Therefore, assessee's contentions including additional grounds raised on this issue are allowed.
21. In the result, Assessee's appeals are allowed and Revenue appeals are dismissed.
The order pronounced in the open court on June 27, 2014.