Dy. CIT v. TVS Electronics Ltd.

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The Tax Publishers2012 TaxPub(DT) 2533 (Chen-Trib) : (2012) 052 SOT 0287 Income Tax Act, 1961 --Income--Accrual Annual maintenance contracts (AMCs) charges/revenue--Assessee engaged in manufacturing and sale of computer peripherals, had during the relevant previous year, entered into Annual Maintenance Contracts (AMC) with various customers to which it had sold its products. As per such AMCs, assessee was to provide maintenance support for a period of one year from the date of contract. Assessee had shown as income only that part of the revenue pertaining to the AMCs which fell within the relevant previous year. In other words, pro rata revenue for the period falling outside the previous year, was not offered as income. AO was not impressed with assessee's explanation. According to him, income accrued to the assessee at the time of raising the invoice for the AMC and therefore, assessee was bound to show the full amount as per AMC as its income. He, therefore, made an addition for the unexpired value of AMCs not offered by assessee as its income. Commissioner (Appeals) was appreciative of this contention of assessee and deleted the addition made by AO.Held: The unexpired period of contracts represent liability of assessee for meeting its maintenance obligations and therefore, corresponding revenue could not be recognized. In any case, as per assessee, any customer could terminate its AMC agreement before the expiry of the contract and the assessee was bound to refund the amount pertaining to the unexpired period therefore, pro rata amount of AMCs was rightly offered by assessee for taxation. There is no dispute that income not offered by the assessee pertained to unexpired period of AMC falling outside the end of the relevant previous year. There is also no dispute that a part of unexpired period always fell outside the relevant previous year, going into the subsequent year. There is also no dispute that assessee had recognized its income on pro rata basis for the duration of the AMC contracts in the relevant previous year. The clients of the assessee could, at any point, cancel the contract and get a refund for the unexpired period. This itself meant that the amount received by the assessee at the point of time it entered into an AMC was nothing but an advance, which on the progress of each day got converted into revenue. The income was accruing on a day-to-day basis based on the progress of time and it did not accrue on the day of entering into the contract. An obligation was there on the assessee to refund the unexpired value of AMC, if the AMC was cancelled by its customers. So, it cannot be said that whole of the income had accrued to the assessee at the point of time it entered into the AMC. The obligation arising out of the contract as well as earning of the income ran side by side and progressed simultaneously. Therefore, contention of the assessee that it could not recognize revenue for the unexpired period of AMC is on strong footing. Principle of matching concept of income and expenses, comes to the aid of the assessee in such a situation. Assessee, was justified in its claim that income relatable to the unexpired period of AMC could be considered only in the subsequent year and not in the relevant previous year. Commissioner (Appeals), had taken a correct decision which does not require any interference. [Para 6] Income Tax Act, 1961, Section 5 Income Tax Act, 1961 --TDS--Disallowance under section 40(a)(i)Payment to non-resident being fees for technical services (FTS)--Assessee had made payment to M/s R Ltd. based in Mauritius, for a market survey conducted by them for preparation of project report called 'Opportunities in Asia for Electronics'. AO noted that no tax was deducted at source while making payment to the concerned party. According to him, assessee was obliged to deduct tax at source under section 195. The company being a non-resident, as per AO, the payments made fell within the ambit of clause (vii) of section 9(1). It was nothing but fees for technical services, and for reaching this conclusion. AO relied on Explanation 2 to section 9(1)(vii). Therefore, he held that assessee had failed to deduct tax at source which it was obliged to do. Relying on the decision of Apex Court in the case of Transmission Corpn. of AP Ltd. v. CIT(1999) 239 ITR 587 742 (SC), AO held that assessee had violated section 195 and disallowance under section 40(a)(i). Commissioner (Appeals) held that assessee was not liable to deduct tax at source under section 195 and deleted, therefore, the disallowance made by AO. Held: Chapter III of the DTAA between India and Mauritius did not provide for taxing any fees paid for technical services and therefore, fees for technical services could only be considered as business income in the hands of the recipient and hence, taxable only in Mauritius. As per assessee, provisions of DTAA prevailed over the provisions of the Act and therefore, assessee could not be considered as one in default for not deducting tax at source. The income earned by the said Mauritious company was not taxable in India. According to him, the services were rendered outside India and the said non-resident was not having a permanent establishment in India. Therefore it could not be sold this issue requires a fresh look by AO. Orders of lower authorities on payments made for market survey, are set aside and the matter remitted back to AO for consideration afresh in accordance with law. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2533 (Chen-Trib) : (2012) 052 SOT 0287

Income Tax Act, 1961

--Income--Accrual Annual maintenance contracts (AMCs) charges/revenue--Assessee engaged in manufacturing and sale of computer peripherals, had during the relevant previous year, entered into Annual Maintenance Contracts (AMC) with various customers to which it had sold its products. As per such AMCs, assessee was to provide maintenance support for a period of one year from the date of contract. Assessee had shown as income only that part of the revenue pertaining to the AMCs which fell within the relevant previous year. In other words, pro rata revenue for the period falling outside the previous year, was not offered as income. AO was not impressed with assessee's explanation. According to him, income accrued to the assessee at the time of raising the invoice for the AMC and therefore, assessee was bound to show the full amount as per AMC as its income. He, therefore, made an addition for the unexpired value of AMCs not offered by assessee as its income. Commissioner (Appeals) was appreciative of this contention of assessee and deleted the addition made by AO.Held: The unexpired period of contracts represent liability of assessee for meeting its maintenance obligations and therefore, corresponding revenue could not be recognized. In any case, as per assessee, any customer could terminate its AMC agreement before the expiry of the contract and the assessee was bound to refund the amount pertaining to the unexpired period therefore, pro rata amount of AMCs was rightly offered by assessee for taxation.

There is no dispute that income not offered by the assessee pertained to unexpired period of AMC falling outside the end of the relevant previous year. There is also no dispute that a part of unexpired period always fell outside the relevant previous year, going into the subsequent year. There is also no dispute that assessee had recognized its income on pro rata basis for the duration of the AMC contracts in the relevant previous year. The clients of the assessee could, at any point, cancel the contract and get a refund for the unexpired period. This itself meant that the amount received by the assessee at the point of time it entered into an AMC was nothing but an advance, which on the progress of each day got converted into revenue. The income was accruing on a day-to-day basis based on the progress of time and it did not accrue on the day of entering into the contract. An obligation was there on the assessee to refund the unexpired value of AMC, if the AMC was cancelled by its customers. So, it cannot be said that whole of the income had accrued to the assessee at the point of time it entered into the AMC. The obligation arising out of the contract as well as earning of the income ran side by side and progressed simultaneously. Therefore, contention of the assessee that it could not recognize revenue for the unexpired period of AMC is on strong footing. Principle of matching concept of income and expenses, comes to the aid of the assessee in such a situation. Assessee, was justified in its claim that income relatable to the unexpired period of AMC could be considered only in the subsequent year and not in the relevant previous year. Commissioner (Appeals), had taken a correct decision which does not require any interference. [Para 6]

Income Tax Act, 1961, Section 5

Income Tax Act, 1961

--TDS--Disallowance under section 40(a)(i)Payment to non-resident being fees for technical services (FTS)--Assessee had made payment to M/s R Ltd. based in Mauritius, for a market survey conducted by them for preparation of project report called 'Opportunities in Asia for Electronics'. AO noted that no tax was deducted at source while making payment to the concerned party. According to him, assessee was obliged to deduct tax at source under section 195. The company being a non-resident, as per AO, the payments made fell within the ambit of clause (vii) of section 9(1). It was nothing but fees for technical services, and for reaching this conclusion. AO relied on Explanation 2 to section 9(1)(vii). Therefore, he held that assessee had failed to deduct tax at source which it was obliged to do. Relying on the decision of Apex Court in the case of Transmission Corpn. of AP Ltd. v. CIT(1999) 239 ITR 587 742 (SC), AO held that assessee had violated section 195 and disallowance under section 40(a)(i). Commissioner (Appeals) held that assessee was not liable to deduct tax at source under section 195 and deleted, therefore, the disallowance made by AO. Held: Chapter III of the DTAA between India and Mauritius did not provide for taxing any fees paid for technical services and therefore, fees for technical services could only be considered as business income in the hands of the recipient and hence, taxable only in Mauritius. As per assessee, provisions of DTAA prevailed over the provisions of the Act and therefore, assessee could not be considered as one in default for not deducting tax at source. The income earned by the said Mauritious company was not taxable in India. According to him, the services were rendered outside India and the said non-resident was not having a permanent establishment in India. Therefore it could not be sold this issue requires a fresh look by AO. Orders of lower authorities on payments made for market survey, are set aside and the matter remitted back to AO for consideration afresh in accordance with law.