WAPCOS Ltd vs Addl. CIT

The captioned appeal has been filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) - XVI, New Delhi [‘CIT(A)’ in short] dated 27. 02. 2019 arising from the assessment order dated 27. 12. 2016 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2014- 15.

As per its grounds of appeal, the assessee has challenged the disallowance to the extent of Rs. 48,51,871/- under Section 40(a)(ia) towards expenditure by way of software purchases.

The assessee is a Government of India undertaking and a mini ratna company engaged in the business of providing technical consultancy service on turnkey basis in the field of hydro power in India and abroad. In the course of the assessment framed under Section 143(3), the Assessing Officer in ter a lia observed that the assessee - company has incurred a total software purchase of Rs. 1,47,10,650/-. It was noted by the Assessing Officer that purchase of software entails deduction of TDS in line with provision of Section 9(1)(iv) r. w. s. 195 of the Act and 194J for purchase of software from Indian and foreign jurisdiction. The Assessing Officer accordingly invoked provisions of Section 40(a)(ia) and disallowed the claim amounting to Rs. 1,22,38,197/-owing to non deduction of TDS on purchase of software.

Aggrieved, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee submitted that the assessee has duly deducted TDS on payments made outside India and it is only the payments made for purchases of software in India on which TDS has not been deducted. Thus, the observation of the Assessing Officer against the assessee is factually incorrect. He further submitted that the Assessing Officer has not disputed the genuineness and correctness of claim of expenses p er se but invoked Section 40(a)(ia) for disallowance only on the ground of non deduction of TDS on few payments made to domestic supplier. It was further contended before the CIT(A) that the assessee has only purchased software as a product and as such, the payment for acquisition of product cannot be termed as royalty and not susceptible to TDS provisions. It was contended that in case of outright purchase of software, there is no requirement to deduct TDS under Section 194J of the Act. It was pointed out that reference made to CBDT notification dated 13. 06. 2012 made by the Assessing Officer is wrongly applied in the context of the factual matrix. Such notification cannot take precedence over the legal principle propounded in the judicial precedents. A certificate from the supplier M/s. Nippon Data Systems Ltd. was placed in which it is statutory clarified that conditions prescribed in CBDT notification dated 13. 06. 2012 are satisfied and thus the deductor assessee was not under obligation to deduct TDS in respect of payments made to M/s. Nippon Data Systems Ltd. The CIT(A) analyzed the submissions made on behalf of the assessee in the light of the decision placed before him and held that the Assessing Officer is directed to examine and ascertain the correctness of claim of the assessee towards an amount of Rs. 73,86,326/- paid by the assessee to ESRI India Technologies and Rolta India Ltd. as reflected in their returns and due tax paid on oath. The CIT(A) however confirmed the balance disallowance of Rs. 48,51,871/-towards alleged default on account of non deduction of TDS.

Further aggrieved, the assessee preferred appeal before the Tribunal.

We have considered the rival submissions made by the respective sides. The disallowance of Rs. 48,51,871/- by invoking of Section 40(a)(ia) on the grounds of non deduction of TDS on purchase of software from domestic companies is subject matter of controversy.

The party - wise breakup of the disallowance of Rs. 48,51,871 is tabulated hereunder for better understanding of factual matrix:

S.No.

Name of person/party from which purchased

Disallowanc u/s.40(a)(ia) made by Assessing Officer

Relief allowed by CIT(A)

Quantum disputed before Hon’ble ITAT

1.

Nippon Data Systems Ltd.

32,81,034/-

Nil

32,81,034/-

2.

ESRI India

79,80,480/-

68,00,000/-

11,80,480/-

3

Rolta India Ltd.

5,24,898/-

5,24,898/-

NA

4.

Other Misc.

4,51,785/-

Nil

4,51,785/-

Total

48,51,871/-

To claim deduction in respect of party, namely, Nippon Data Systems Ltd. , the assessee has extensively relied upon the Notification No. 21/2012 [F. No. 142/10/2012 - SO(TPL)] S. O. 1323(E) issued by CBDT dated 13. 06. 2012 which is reproduced hereunder:

[TO BE PUBLISHED IN THE GAZETTE OF INDIA,EXTRAORDINARY, PART-II, SECTION 3, SUB-SECTION (11)] GOVERNMENT OF INDIA MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) (CENTRAL BOARD OF DIRECT TAXES) NOTIFICATION NO. 21/2012 [F.NO.L42/10/2012-SO(TPL)]S.0.1323(E),

DATED 13-6-2012

I.T.A. NO.3653/DEL/2019

In exercise of the powers conferred by sub-section(lF) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax shall be made on the following specified payment under section 194J of the Act, namely:-

Payment by a person (hereafter referred to as the transferee) for acquisition of software from another person, being a resident, (hereafter referred to as the transferor), where –

(i) The software is acquired in a subsequent transfer and the transferor has transferred the software without any modification;

(ii) tax has been deducted- (a) under section 194J on payment for any previous transfer of such software; or (b) under section 195 on payment for any previous transfer of such software from a non-resident, and

(iii) the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.

This notification shall come into force from the Ist day of July, 2012.

(J. Saravanan) Under Secretary(TPL-III)

1 The Ld. counsel also referred to confirmation dated 01.11. 2013 issued by one of the supplier Nippon Data Systems Ltd. wherein the supplier have claimed that it has received a declaration from the party/supplier that it has deducted TDS under Section 194J/withholding tax under Section 195 as per Income Tax Act for supply of software received by them. The supplier further confirms that the software purchased from the earlier transferor was sold to the assessee without any modification and it holds the status of ordinary resident of India. In the light of such confirmation, the assessee contends that in the light of Notification No. 21/2012 dated 13. 06. 2012 it is exempt from obligation adopted under Sections 194J/ 195 of the Act on the ground that the supplier of the software has acquired such software in a subsequent transfer and the transferor has transfer the software without any modification.

2 In the wake of submission made on behalf of the assessee, we are of the considered opinion that the conditions of the notification stands fulfilled in the instant case and therefore the obligations adopted under Section 194J/195 are read down. In the absence of such obligation to deduction TDS, the assessee cannot be treated as assessee in default so as to invoke Section 40(a)(ia) for carrying out disallowances. We thus find merit in the plea of the assessee for reversal of the action of the Revenue Authorities. The disallowance carried out on this score is thus deleted.

As regards ESRI India, we take note of the plea of the assessee that the amount of Rs. 11,80,480/- represents VAT on the supply of the software. It was contended on behalf of the assessee that the certificate from the supplier has been obtained under 1 s t proviso to sub Section (1) of Section 201 of the Act certifying that the tax has been paid by the recipient on the payments from the assessee on account of supply of software and thus the assessee should not be treated as assessee in default under Section 194J of the Act. However, the certificate has been given only for the principal amount of Rs. 68 lac and the remaining amount represents GST/ VAT on the principal amount. Thus, the disallowance under Section 40(a)(ia) on VAT component is not justified. We agree with such contentions on behalf of the assessee that where principal amount itself is covered by provisions of Section 194J of the Act. It would be farfetched to carry disallowance of VAT competent thereon. The claim of Assessee is thus allowed and the action of Revenue authorities are reversed.

The remaining amount of Rs.4,51,785/- represents nondeduction of TDS on miscellaneous payments. The assessee has failed to give proper details and explanation thereon. However, in the light of the decision of the Co-ordinate Bench in Muradul Haque vs. ITO, (2020) 117 taxmann.com 251 (Del), the disallowance under Section 40(a)(ia) on account of default towards non deduction of TDS has to be restricted to 30% of the expenses incurred as against 100% disallowed by the Assessing Officer. The Co-ordinate Bench therein observed that the amendment carried out under Section 40(a)(ia) w.e.f. 01.04.2015 is curative in nature and shall apply retrospectively. In the light of the decision of the Co-ordinate Bench, the disallowance of Rs.4,51,785/- is restricted to 30% thereon under Section 40(a)(ia) of the Act. In the light of the aforesaid discussion, the issue is allowed in part.

In the result, the appeal of the assessee is partly allowed.