ACIT Vs Sony India Software Centre Pvt. Ltd. (ITAT Bangalore)

ITAT Bangalore held that addition under section 28(iv) of the Income Tax Act for receiving fixed assets from sister concern on free of cost basis unjustified as no benefit is derived from the same. Accordingly, order of CIT(A) upheld and appeal of revenue dismissed.

Facts- The assessee company is engaged in the business of providing software development services. During the course of assessment proceedings, it was found that assessee has received certain assets free of cost from various sister groups located outside India. These AEs are clients of assessee and assessee is providing services to them. The assessee was asked to explain the nature and purposes of the goods received free of cost and why the same should not be considered as benefits arising to assessee and chargeable to tax u/s 28 (iv) of the Act.

AO did not accept the explanation of assessee, according to the AO, assessee has derived immense benefit on receiving such assets free of cost and by not having purchased the intellectual property related items, assessee has avoided payment of TDS on the same and therefore income is required to be taxed in the hands of assessee u/s. 28(iv) of the Act. CIT(A) deleted the addition.

The second issue involved was disallowance of professional fees of Rs.9,59,334 paid to M/s. J L Services & Consultancy for conducting workshop for its employees on which tax has not been deducted and therefore same was disallowed u/s. 40(a)(i) of the Act. The disallowance was deleted by CIT(A).

Conclusion- Held that provisions of section 28 (iv) taxes value of any benefit or perquisites arising from exercise of business or profession. In this case the assets are provided by the AE to assesse for carrying out of the work of the assesse and assesse is remunerated by considering the depreciation in the cost basis as per APA. Even otherwise what is the benefit to the assesse when a prototype is provided by the principal recipient of the services to the assesse being provider of the services for carrying on the work of service recipient according to that proto type. Thus, we confirm the order of the ld. CIT(A) in deleting the addition of Rs.1.44 crores in the hands of assessee.

Held that on a careful consideration of the rival contentions, we find that the issue involved in this appeal is with respect to applicability of provisions of DTAA of India-Singapore concerning Article 14 is one of the matter before the ld. CIT(A). Therefore, the issue was not with respect to TDS/TCS, but applicability and interpretation of provisions of DTAA. Therefore, we dismiss the argument of the ld. AR that it is low tax effect appeal. Nonetheless, the appeal filed by the revenue is dismissed and consequently the CO filed by the assessee is allowed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal is filed by ACIT, Circle 6(1)(1), Bangalore (the ld. AO) and CO No.43/Bang/2024 is filed by M/s. Sony India Software Centre Pvt. Ltd. (the assessee/appellant) for the assessment year 2017-18 against the appellate order passed by the ld. CIT(Appeals), Bengaluru-12, Bengaluru [ The ld. CIT (A)] dated 12.6.2024 wherein the appeal filed by the assessee against the assessment order dated 19.5.2021 passed by the National e-assessment Centre, Delhi [ld. AO] was partly allowed. Therefore, the revenue is in appeal raising the following grounds:-

“1) Whether in the facts and circumstances of the case, the Ld. CIT(A) is right in law in holding that the treatment of free of cost of assets u/s. 28(iv) benefits derived from the business and considering depreciation costs on these free of cost of assets as operating expenses while computing operating profit margin under TP, amounts to double taxation?

2) Whether in the facts and circumstances of the case, the Ld. CIT(A) is right in law to hold that reimbursement made by the assessee to seconded employees is not liable for deduction of TDS under Section 195?

3) Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance made u/ 40(a)(i) of the Act in regards to reimbursement payment made by the assessee to seconded employees?

4) Whether in the facts and circumstances of the case, the ld. CIT(A) failed to appreciate that amounts reimbursed by assessee to overseas companies and employees in terms of secondment agreement amounted to fee for technical services liable to tax in India and, thus, assessee was required to deduct tax at source under section 195 of Income Tax Act?”

2. The CO is filed by the assessee on the following grounds:-

“1. The order of the learned CIT(A)-12, Bangalore to the extent prejudicial to the Respondent is bad in law.

GROUNDS RELATING TO ASSETS RECEIVED ON RETURNABLE BASIS

2. The learned CIT(A) has erred in not appreciating that:

a. Addition of 1,44,73,422/- u/s 28(iv) of the Act for fixed asset received on returnable basis from various sister concerns located outside India for testing purposes is bad in law on the ground that no benefit is received by the Respondent.

b. Not appreciating that ownership of the Assets has not been transferred to the Respondent and assets received on returnable basis being capital in nature cannot be taxed u/s 28(iv) of the Act and the Respondent has also re-exported assets back to sister concerns.

GROUND RELATED TO PAYMENT OF TRAINING EXPENSES

3. The learned CIT(A) has erred in not appreciating that the payment to M/s JL Services & Consultancy (proprietor Mr. Toh Tiong Yau) is in the nature of independent personal services and M/s JL Services & Consultancy neither has fixed base in India nor was in India for more than 90 days. Thus, training fees paid to M/s JL Services & Consultancy is not chargeable to tax in India as per Article 14 of India-Singapore DTAA.”

3. The brief facts of the case show that the assessee company is engaged in the business of providing software development services, filed its return of income on 30.11.2017 at Rs.40,11,80,350 comprising of income under the head profits & gains of business and income from other sources. Return of income was picked up for scrutiny which resulted into an assessment order passed u/s. 143(3) of the Income-tax Act, 1961 (the Act) determining the total income of assessee at Rs.44,81,52,116 wherein the following two additions were made.

a) Addition of Rs. 1,44,73,422/- on account goods received free of cost from its Associated Enterprises

b) Disallowance of Rs. 9,59,334/- being payments of training charges paid to a Non Resident individual on which tax at sources is not deducted by assesse therefore disallowance u/s 40a (i) of The Act

4. During the course of assessment proceedings, it was found that assessee has received certain assets free of cost from various sister groups located outside India. These AEs are clients of assessee and assessee is providing services to them. The assessee was asked to explain the nature and purposes of the goods received free of cost and why the same should not be considered as benefits arising to assessee and chargeable to tax u/s 28 (iv) of the Act.

5. The assessee submitted that there is no benefit derived by the assessee as these assets are prototypes developed by the AEs and are provided to assessee in order to ensure that services provided by assessee on software development for the said product is meeting the said parameters. Therefore, these are testing equipments or assets and upon completion of the testing, these are re-exported to the AEs or are discarded. These assets are not retained by assessee and therefore there is no benefit derived by the assessee, so no income is chargeable on this count. The assessee also submitted a chart stating the details of assets received on returnable basis and their correct status. The assessee also submitted that assessee has entered into Advance Pricing Agreement and already considered the depreciation on such fixed assets for determination of agreed transfer pricing value of the services. Therefore, if further addition is made, it will amount to double addition.

6. The ld. AO did not accept the explanation of assessee, according to the AO, assessee has derived immense benefit on receiving such assets free of cost and by not having purchased the intellectual property related items, assessee has avoided payment of TDS on the same and therefore income is required to be taxed in the hands of assessee u/s. 28(iv) of the Act. Bases on this, a show cause notice was issued on 12.4.2021 which was replied by assessee on 14.4.2021, but the ld. AO did not accept the justification and therefore he made an addition of Rs.1,44,73,422 on the goods received free of cost u/s. 28(iv) of the Act. He also rejected the argument of the assessee that the cost of depreciation has already been considered as cost while determining the margin of arm’s length price (ALP) of services provided to the AEs who provided the assets as per APA for the same year. He rejected this stating that it is an exercise of determination of ALP. Accordingly, addition of Rs.1,44,73,422 was made.

7. This issue was challenged before the ld. CIT(A), wherein following the decision of the coordinate Bench in the case of Tesco Bengaluru Pvt. Ltd. in ITA No.2387/Bang/2019 for AY 2015-16 dated 04.8.2022 wherein identical issue was decided in favour of assessee, the ld. CIT(A) deleted the

8. The second issue involved was disallowance of professional fees of Rs.9,59,334 paid to M/s. J L Services & Consultancy for conducting workshop for its employees on which tax has not been deducted and therefore same was disallowed u/s. 40(a)(i) of the Act. The facts are shown that J L Services & Consultancy is a proprietary concern of one individual, who holds a Master of Science degree and providing training & HRM services. He is an expert in training, consulting and implementing HRD and performance management plans and solutions. The assessee engaged him to conduct workshop for its employees and above sum was paid. On this sum, no tax was deducted as same was not taxable in India because of Article 14 ‘Independent Personal Services’ of India Singapore DTAA. It was further stated that the service provider does not have any fixed base in India. The ld. AO categorically held that above sum is income chargeable to tax in India as income is sourced in India. It was further stated that Article 14 of the treaty did not fall under the category of professional services. The services provided by J L Services & Consultancy is fees for technical services and therefore tax should have been deducted on the same. In response to show cause notice, the assessee reiterated the same facts and further claimed that the services provided are not fees for technical services and no tax is required to be deducted as per DTAA.

9. The ld. AO rejected the contentions of the assessee. He held that the above services are technical in nature and therefore tax should have been deducted. Failure to do so resulted into disallowance u/s. 40(a)(i) of Rs.9,59,334.

10. When the matter reached the ld. CIT(A), disallowance was deleted by following the decision of the coordinate Bench in the case of Tesco Bengaluru Pvt. Ltd. (supra) wherein it was held that training services charges cannot be considered as technical, managerial or consultancy in nature and therefore treating the same as fees or technical services by the ld. AO is not acceptable. According to the ld. CIT(A), no tax was required to be deducted u/s. 195 of the Act and consequent disallowance was deleted.

11. So the revenue is aggrieved by the deletion of the above two additions/disallowance.

12. Ground no.1 of the appeal of the revenue is with respect to addition u/s 28(iv) of the Act of Rs.1,44,73,422 deleted by the ld. CIT (A).

13. The ld. DR explained the shareholding of the company and further that assessee has been provided with fixed assets which have been considered as income of assessee and the ld. CIT(A) has wrongly deleted the addition.

14. The ld. AR submitted a detailed chart and stated that list of items received by the assessee from its AE are provided to the AO. He further gave complete details that out of the above assets, 115 items have been re-exported to its associated concern and 27 items have been destroyed on completion of the project. He gave complete details of these expenses and reiterated his submission made before the ld. AO. He further referred to the Advance Pricing Agreement entered into by the assessee wherein the assets have been taken up and depreciation thereon is considered as cost while working out the ALP of the assessee. On this cost, the assessee is remunerated. Therefore, if the depreciation has been included in the cost base, naturally assessee has recovered higher sum in India because of above transaction. He further relied on the decision of the ld. CIT(A) and the decision of the coordinate Bench in ITA No.2387/Bang/2019 dated 4.8.2022 wherein identical addition was considered.

15. We have carefully considered the rival contentions and perused the orders of ld. lower authorities. During the course of assessment proceedings, the assessee explained the details related to assets received from its AE on returnable basis along with supporting evidences. It was submitted that these assets have been given by the AEs to whom assessee is providing services. These assets are on returnable basis. As soon as job is over, these assets are returned back to the AE or are destroyed. Therefore, it was submitted that receipt of such assets by the assessee from its AE on returnable basis cannot be an income. The ld. AO has taxed the same u/s. 28(iv) of the Act. These assets are used by the assessee for providing services to its AEs. The assessee is remunerated on cost plus basis. The depreciation value of these assets are also considered in the cost base of the assessee on which after mark-up, remuneration of the assessee is decided. The assessee has entered into Advance Pricing Agreement, depreciation of the same are considered in cost base and accordingly the assessee has received remuneration from its AE which is already offered for taxation. Further, identical issue is decided by the coordinate Bench in the case of ITA No.2387/Bang/ 2019 for AY 2015-16 wherein addition made u/s. 28(iv) on assets received from AEs charged to tax by the revenue authorities was deleted. The ld. CIT(A) has also followed the same decision.

16. The DR could not show us any reason to deviate from the same.

17. Looking to that decision of coordinate bench where the ground before the bench was

“The Ld. AO erred in concluding that the assets worth INR 1,64,92,752, received from Tesco Stores Limited on a Free of Cost basis is ‘benefit arising from the businesses of the Appellant and chargeable to tax under Section 28(iv) of the Income-tax Act, 1961 [‘the Act’]”

18. Coordinate bench has held as under: –

‘11.4 We have heard the rival submissions and perused the materials available on record. We find force in the arguments of the assessee’s counsel. If the depreciation on assets is considered as part of operating profit margin arising from the transaction, and the income from which it is offered to tax, no addition u/s 28(iv) of the Act is warranted, which is already subject to tax pursuant to APA and no further addition is necessary, otherwise it amounts to double taxation. Accordingly, we allow this ground taken by the assessee.’

19. Decision of Honorable Supreme court in case of CIT V Mahindra & Mahindra Limited [2018] 93 com 32 (SC)/ [2018] 255 Taxman 305 (SC) was on issue of waiver of loan whether taxable u/s 41 (1) of the Act or U/s 28 (iv) of The Act. The issue before us is not related to waiver of loan but, assets received by the assesse on returnable basis for the purposes of carrying out the work of assessee’s AE.

20. Provisions of section 28 (iv) taxes value of any benefit or perquisites arising from exercise of business or profession. In this case the assets are provided by the AE to assesse for carrying out of the work of the assesse and assesse is remunerated by considering the depreciation in the cost basis as per APA. Even otherwise what is the benefit to the assesse when a prototype is provided by the principal recipient of the services to the assesse being provider of the services for carrying on the work of service recipient according to that proto type.

21. In view of this, we confirm the order of the ld. CIT(A) in deleting the addition of Rs.1.44 crores in the hands of assessee and accordingly ground no.1 of the appeal of revenue is dismissed.

22. Ground nos. 2-4 are with respect to reimbursement made by the assessee to seconded employees. We do not find any such addition made in the assessment order or in the order of the ld. CIT(A). The only ground relating to non-deduction of tax at source is with respect to disallowance of workshop expenses amounting to Rs.9,59,334 paid to J L Services & Consultancy for training expenses. As this issue is not arising out of the order of the AO, ground nos. 2 to 4 are dismissed.

23. Accordingly, the appeal filed by the revenue in ITA No.1550/Bang/2024 is dismissed.

24. Coming to the Cross Objection filed by the assessee wherein ground no.2 is in relation to assets received on returnable basis and ground 3 is related to disallowance of training expenses, Both these grounds are also connected to the grounds of appeal filed by the revenue wherein the appeal filed by the revenue is dismissed, the CO filed by the assessee is allowed.

25. The assessee has also raised an issue that appeal filed by the revenue is a low tax effect appeal and therefore the same should be dismissed. The ld. Counsel submitted a detailed chart stating that total tax effect in the above appeal is only Rs.53,40,968 and therefore the above appeal should be dismissed as low tax effect. He filed a detailed paperbook on this issue wherein he referred to Circular No.5 and Notifications issued by the CBDT along with the decision of the Hon’ble Bombay High Court in the case of CIT v. Perfetti Van Melle ICT BV in ITA No.40/2023 dated 14.10.2024. It was submitted that though the issue is non-deduction of tax at source, but same is not an exception and therefore low tax effect appeal of the revenue must be dismissed on that ground.

26. The ld. DR submitted that the appeal is not covered by the Circular No.3/2018 and Circular No.5/2024 for the reason that the litigation is arising on TDS/TCS in International Taxation on interpretation of Double Taxation Avoidance Agreement.

27. On a careful consideration of the rival contentions, we find that the issue involved in this appeal is with respect to applicability of provisions of DTAA of India-Singapore concerning Article 14 is one of the matter before the ld. CIT(A). Therefore, the issue was not with respect to TDS/TCS, but applicability and interpretation of provisions of DTAA. Therefore, we dismiss the argument of the ld. AR that it is low tax effect appeal.

28. Nonetheless, the appeal filed by the revenue is dismissed and consequently the CO filed by the assessee is allowed.

Pronounced in the open court on this 13^th day of December, 2024.