Manoj Kumar Aggarwal ORDER
Mahavir Singh, Vice President
1. These four appeals by the assessee are arising out of the common order of Commissioner of Income Tax (Appeals)-8, Chennai in ITA Nos. 50/14-15, 94/15-16, 130, 131, 329/16-17 & 79/17-18 dated 22.02.2019. The assessments were framed by the DCIT/ACIT/ITO, Corporate Circle 4(1), Chennai for the relevant assessment years 2012-13, 2013-14, 2014-15 & 2015-16 u/s. 143(3) r.w.s. 92CA or 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act') vide their orders of different dates 30.03.2016, 31.03.2016, 31.12.2016 & 13.12.2017 respectively.
2. First, we will take up ITA No. 1391/CHNY/2019 for the assessment year 2012-13.
3. The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in treating the advance received from customers as income of the previous year relevant to this assessment year without considering the fact that it did not accrue to the assessee during the relevant year. For this, assessee has raised following Ground No. 2:-
2. Advance from customers
2.1 The CIT(A) erred in confirming the treatment of advance received from customers amounting to Rs. 32,46,007 as income of the previous year relevant to the above assessment year without considering the fact that it did not accrue to the Appellant during the relevant year.
2.2 The CIT(A) ought to have appreciated that the revenue recognition has been made by the Appellant in accordance with the method prescribed by Accounting Standard 9 issued by the Institute of Chartered Accountants of India and the same method has been regularly employed by the Appellant.
2.3 The CIT(A) ought to have appreciated that merely because the Appellant has received the entire amount in advance shall not mean that the Appellant is entitled to such income during the relevant assessment year.
2.4 The CIT(A) failed to appreciate that the advance received cannot be treated as income of the year as no corresponding services have been rendered to the clients during the year.
4. Brief facts are that the assessee runs an internet based matrimonial match making and advertisement portal called 'matrimony.com'. The AO on perusal of accounts of the assessee noted that the assessee has shown a sum of Rs. 18,59,43,115/- as advance received from customers as on 31.03.2012. The AO noted that the accounting treatment and taxability of the same is examined while framing assessment u/s. 143(3) of the Act for the assessment years 2010-11 & 2011-12. Therefore, he noted that in consistent view, he also treated the income as realized for the services rendered and related expenditure incurred, accounted for and allowed accordingly. Therefore, the AO treated the advance received from customers during the year amounting to Rs. 4,99,64,760/- out of total receipts of Rs. 18,59,43,115/- was brought to tax as business income for the relevant assessment year 2012-13. Aggrieved assessee preferred appeal before CIT(A).
5. The CIT(A) adjudicating this issue allowed 90% of the amount claimed received in advance and balance 10% has been allowed to be taxed in the next year. The CIT(A) noted that this is the case in which the assessee company has attempted to account the expenditure in the year of receipt but postponed the accounting of revenue in succeeding years. But the CIT(A) following the Tribunal's decision in assessee's own case for assessment years 2010-11 & 2011-12 allowed the ground but brought to tax an amount of Rs. 32,46,007/- being advance receipt from customers for tax by observing in para 10 as under:-
10. The claim made by the assessee as above is different from the facts narrated by the Assessing Officer in the assessment order. The assessee company had already accounted an amount of Rs. 4,99,64,760/- as subscription revenue received in advance. The treatment of the said issue has already been discussed in earlier paragraphs. This amount of Rs. 32,46,007/- pertains to sales which the assessee company had not been able to map, as the corresponding details had not been received from branches as well as customers. This un-reconciled revenue had been kept as advance receipts from customers. This different from any qualified subscription revenue held as advance received. To this extent, the representation made by the assessee is held as incorrect and self-serving. The explanation is rejected and the revenue received of Rs. 32,46,007/- is brought to tax in the assessment year 2012-13 itself on account of the corresponding services already rendered in the same assessment year. The grounds of appeal are rejected on this issue."
Aggrieved, assessee is in appeal before the Tribunal.
6. Before us, the ld. counsel for the assessee stated that exactly identical issue is covered in assessee's favour in assessee's own case for assessment year 2007-08 in ITA No. 2560/Chny/2017, order dated 17.10.2018, vide para 7 and the relevant portion reads as under:-
"However we are of the considered view that the views adopted by the Ld. AO as well as the views of the Ld. CIT(A) is erroneous. As per the provisions of the Act, there is no concept with respect to deferred expenditure. Therefore the entire expenditure incurred for earning revenue for the relevant assessment year and the revenue spilled over to the succeeding assessment year is allowable as deduction for the relevant assessment year when the expenditure incurred in the relevant assessment cannot be apportioned towards the income earned in the subsequent assessment year. At this juncture we are reminded of the various decisions of the Higher Judiciary wherein it was held that expenditure incurred towards advertisement is allowable as deduction in the relevant assessment year though certain benefit arising out of the same can be attributable to subsequent years. However, as per Mercantile System of Accounting, only the accrued income for the relevant assessment year can be treated as the income for the relevant assessment year. In the case of the assessee, there is no dispute that the amount of Rs. 2,68,12,597/- received by the assessee pertains to the services to be rendered in the immediate succeeding assessment year. Hence the assessee has rightly recognized its revenue of Rs. 2,68,12,597/- in the succeeding assessment year. Therefore the addition made by the Ld. AO which is further sustained by the Ld. CIT(A) by treating the fees received in advance for the succeeding assessment year as the income of the assessee for the relevant assessment year is erroneous. Hence we hereby set aside the order of the Ld. CIT(A) and direct the Ld. AO to delete the addition made by him for Rs. 2,68,12,597/-."
6.1. The ld. counsel for the assessee stated that in view of the above proposition the issue is covered, even by the decision of the Chennai Special Bench of this Tribunal in the case of ACIT vs. Mahindra Holidays & Resorts (I) Ltd., in ITA Nos. 2412 to 2416/Mds/2005, CO Nos. 7 to 11/Mds/2006 as well as by the decision of Hon'ble Supreme Court in the case of Rakesh Shantila Mardia vs. DCIT, MANU/SC/1329/2012 : 26 taxmann.com 253(SC).
7. When these facts were confronted to ld. Senior DR, he could not controvert the above fact situation.
8. After hearing rival contentions and going through the facts, we noted that the issue is squarely covered by the Tribunal decision and hence, taking a consistent view, we direct the AO to delete the addition and this ground of assessee's appeal is allowed.
9. The second issue in this appeal of assessee is as regards to the order of lower authorities not granting brought forward losses from the previous years for set off against the income computed under the normal provisions of the Act. For this, assessee has raised following Ground No. 4:-
4. The learned CIT(A) and AO erred in not granting brought forward losses from the previous assessment years for set-off against the income computed under normal provisions of the Act.
10. At the outset, the ld. counsel for the assessee took us through the statement of facts and grounds of appeal raised before CIT(A). The ld. counsel for the assessee subsequently drew our attention to ground nos. 5.1 & 5.2 raised before CIT(A), which reads as under:-
Set off of loss of earlier years
5.1 Without prejudice to the above grounds raised, the AO having arrived at assessed income of Rs. 3,84,07,949 erred in not setting off the brought forward business losses against the assessed income.
5.2 The AO failed to appreciate that the Appellant had huge brought forward loss from the earlier assessment years and if the same is set off there will not be any taxable income and consequently there will not be any tax demand.
Subsequently, the ld. counsel stated that these two grounds were not at all adjudicated by CIT(A) or not at all considered. He took us through the order of CIT(A) but we noted that CIT(A) has not adjudicated this issue.
11. When these facts were confronted to ld. Senior DR, he stated that the issue can be remanded back to the file of the CIT(A) afresh.
12. After hearing rival contentions and going through the facts of the case, we noted that the CIT(A) has not at all considered this issue and hence, the matter is remanded back to the file of the CIT(A) for fresh adjudication on this very issue.
13. The next common issue in ITA Nos. 1391 & 1392/CHNY/2019 for the assessment years 2012-13 & 2013-14 is as regards to the order of CIT(A) confirming the action of AO in disallowing expenses relatable to exempt income by invoking the provisions of section 14A r.w. rule 8D of the Income Tax Rules, 1962.
14. At the outset, the ld. counsel for the assessee stated that the assessee has not earned any dividend income and he drew our attention to the orders of the AO and read out para 6 relevant lines, where it is stated as that "It was submitted by the assessee that no exempt income was earned during the year because of which the provisions of section 14A are not applicable" in assessment year 2012-13. Similarly plea was taken before AO in assessment year 2013-14 as "It was submitted by the assessee that no exempt income was earned during the year because of which the provisions of section 14A are not applicable".
15. The ld. DR has not disputed that assessee has no dividend income. As the issue is covered by the Hon'ble Supreme Court's decision in the case of CIT v. Chettinad Logistics (P.) Ltd., (2018) 95 taxmann.com 250 (SC), wherein it was held that once there is no exempt income, no disallowance can be made by invoking the provisions of section 14A r.w. rule 8D of the Rules. As the issue is covered, we direct the AO to delete the disallowance made. Hence, this issue of the assessee's appeals is allowed.
16. The second issue in ITA No. 1392/CHNY/2019 for assessment year 2013-14 is as regards to the order of CIT(A) confirming the action of AO in treating the prior period revenue amounting to Rs. 7,01,42,914/- as income for the relevant assessment year without considering that the same income has been offered in assessment year 2012-13 and the same again cannot be added, as this will tantamount to double taxation. For this, assessee has raised following Ground No. 2:-
2. Treatment of prior period income
2.1 The CIT(A) erred in confirming the treatment of prior period revenue amounting to Rs. 7,01,42,914 as income of the above assessment year without considering the fact that the said amount has already been offered in the assessment year 2012-13 and therefore the addition amounts to taxing the income twice.
2.2 The CIT(A) ought to have appreciated that there is a change in the revenue recognition policy during the year with respect to subscription received from customers whereby the subscription received has been recognised in proportion to the services rendered from month on month to day by day basis.
2.3 The CIT(A) failed to appreciate that the change in the method of accounting is necessitated to adhere to the Generally Accepted Accounting Principles and there is no violation of principles of accountancy.
2.4 The CIT(A) failed to appreciate that the revenue has been included in two financial years i.e. FY 2011-12 and 2012-13 (relevant AY 2012-13 and AY 2013-14) and only to remove the cascading effect the amount has been reversed and excluded from the profits of the above assessment year.
2.5 The CIT(A) ought to have appreciated that the amount of Rs. 7,01,42,914 has been offered as income in AY 2012-13 hence there is no revenue loss.
2.6 The CIT(A) failed to consider the details of the working for Prior Period Income provided.
17. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the AO noticed from the financials of the assessee that the assessee admitted prior period income of Rs. 7,01,42,914/- but has not included in the computation of income. Hence, the AO noted that the assessee's revenue on day to day basis and claimed reduction of income on prior period items of Rs. 7,01,42,914/- is based on change of method of accounting. But the AO has not accepted the contention of the assessee and added the prior period income to the total income of the assessee. On appeal, the CIT(A) noted that the assessee cannot be allowed to reverse any income offered in earlier year while finalizing accounts in any future year. The CIT(A) confirmed the addition and dismissed the appeal of assessee. Aggrieved, now assessee is in appeal before the Tribunal.
18. Now, before us the ld. counsel for the assessee only made a request that the said amount has already been included in income and offered the same in assessment year 2012-13 and therefore, addition in assessment year 2013-14 tantamount to double addition. The ld. counsel filed complete details for assessment years 2013-14 & 2012-13 i.e., prior period income and disclosed the difference of Rs. 7,01,42,914/- which is included in assessment year 2012-13 i.e., financial year 2011-12. The assessee has filed the details of income but these cannot be verified at this stage. When these facts were confronted to ld. Senior DR, he stated that from these details, he cannot make out anything but could not controvert that the income should not be doubled taxed.
19. In view of the above facts, we noted that in case the prior period income has already been offered in assessment year 2012-13, the same should not be assessed in this year. The assessee will file these details before AO and will explain to the AO, how the assessee has included this income of Rs. 7,01,42,914/- in assessment year 2012-13 relevant to financial year 2011-12. The AO will verify and accordingly, decide the claim of assessee. In case, there is duplicity of addition, the AO will remove the addition in this year. This issue of assessee's appeal is set aside and allowed for statistical purposes.
ITA Nos. 1393 & 1394/CHNY/2019
20. The next common issue in these appeals of assessee is as regards to disallowance of advertisement expenses for non-deduction of TDS u/s. 195 of the Act, i.e., payment made to nonresident by invoking the provisions of section 40(a)(i) of the Act. For this, assessee has raised identically worded grounds in both the years and the facts are exactly identical in both the years except the quantum. Hence, we will take the facts from assessment year 2014-15 in ITA No. 1393/CHNY/2019. The relevant ground raised reads as under:-
2. Disallowance of advertisement charges
2.1 The CIT(A) erred in upholding disallowance of advertisement charges of Rs. 2,45,32,108 paid to Facebook Ireland Limited under section 40(a)(i) of the Income-tax Act, 1961 ("Act").
2.2 The CIT(A) erred in concluding that tax should be deducted on any payment to non-resident without appreciating that tax is required to be deducted only if the same is chargeable to tax in India under section 195 of the Act.
2.3 The CIT(A) ought to have appreciated that the income did not accrue or arise to the non-resident in India.
2.4 The CIT(A) ought to have appreciated that the payment is for online advertisement and the services provided by the non-resident does not fall within the meaning of royalty or fee for technical services under section 9(1)(vi)/(vii) of the Act or under the India-Ireland treaty.
2.5 The CIT(A) erred in relying on the decision of the ITAT, Bangalore in the case of Google India Private Limited without appreciating that the facts of the said case is distinguishable from the facts of the Appellant.
21. Briefly stated facts are that the assessee company is engaged in the business of providing services in connection with marriage alliance and related services. The company markets its product both through online and offline advertisements. During the year, the company has availed the services of Facebook, Ireland Ltd., for advertisement in order to promote the business of matrimony incurred advertisement cost of Rs. 2,45,32,108/-. The AO during the course of assessment proceedings, on examination of financials noted that the assessee has not deducted TDS towards advertisement charges paid to Facebook, Ireland Ltd., and according to the provisions of Section 195I of the Act and hence, applying the provisions of section 40(a)(i) of the Act, disallowed the advertisement charges paid to Facebook. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) relying on the case law of Google India Pvt. Ltd., of ITAT, Bangalore confirmed the disallowance by observing in para 23 as under:-
"23. The facts of the case of the assessee are similar to the facts of M/s. Google India Ltd. and the connected case of M/s. Google Ireland Limited. The taxability of advertising revenue in the source country has been upheld in this set of cases. In view of the same, it is held that the Assessing Officer has correctly disallowed the advertisement expenditure made without TDS by the assessee. The disallowance u/s. 40(a)(i) to the extent of Rs. 2,45,32,108/- for Assessment year 2014-15 and Rs. 2,74,74,487/- for Assessment year 2015-16. The grounds of appeal on this issue are rejected. The Assessing Officer is also directed to make suitable reference to CIT (International Taxation) for passing suitable orders u/s. 201(1) in this case.
Aggrieved, now assessee is in second appeal before the Tribunal.
22. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the ITAT, Bangalore in the case of Urban Ladder Home Decor Solutions Pvt. Ltd., in IT(TP)A Nos. 615 to 620/Bang/2020 considered the decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., vs. CIT, Civil Appeal Nos. 8733-8734 of 2018, dated March 02, 2021 (125 taxmann.com 42) wherein the Hon'ble Supreme Court exactly on same facts held that there is no requirement to deduct tax at source from the advertisement payments made for using the information technology facility u/s. 195 of the Act. The ITAT, Bangalore in the case of Urban Ladder Home Decor Solutions Pvt. Ltd. supra has considered this issue vide para 20 to 25 as under:-
20. In the case of Engineering Analysis Centre of Excellence (P) Ltd. (supra), the issue related to "issuing of license to use software", i.e., the software purchased by a person shall be used by the buyer for his own business purposes. Since the license was granted without parting the copy rights attached to the software, the Hon'ble Supreme Court held that the payments received by the non-resident software companies cannot be taxed as "royalty" under the provisions of DTAA and hence there is no requirement to deduct tax at source from the payment made to them by a resident assessee.
21. In the instant case, the recipients, i.e. M/s. Facebook and Rocket Science group only allow the assessee to use their facilities for the purpose of creating advertisement content. The payment made to Amazon Web Services (AWS) is only for using the information technology facilities provided by it, that too the billing would depend upon the extent of usage of those facilities. In fact, these non-resident companies do not give any specific license for use or right to of any of the facilities (which include software) and those facilities are not going to be used for the use in the business of the assessee. The right to use those facilities, as stated earlier, is intertwined with the main objective of placing advertisements in the case of Facebook and Mailchimp. In the case of AWS, the payment is made only for using of information technology infrastructure facilities on rental basis. Hence the question of transferring the copy right over those facilities does not arise at all. The agreements extracted above also make it clear that the copyright over those facilitating software is not shared with the assessee. In any case, the main purpose of making payment is to place advertisements only and not to use the facilities provided by the non-resident companies. Thus the facilities provided by the nonresident companies are only enabling facilities, which help a person to place his advertisement contents on the platform of Facebook or to use MailChimp facility effectively. In case of AWS, the payment is in the nature of rent payments for use of infrastructure facilities.
22. Accordingly, we are of the view that the these non-resident recipients stand on a better footing than those assessees before the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd. (supra). Accordingly, following the ratio laid down by Hon'ble Supreme Court, we hold that the payments made to the above said three non-resident companies do not fall within the meaning of "royalty" as defined in DTAA. The AO has not made out an alternative case that these payments are taxable as business income in India. Hence, there is no necessity for us to deal with that aspect.
23. We have noticed earlier that the Ld. CIT(A) has followed the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd. (supra). In the case of Engineering Analysis Centre of Excellence Private Ltd. (supra), the decision rendered by Hon'ble Karnataka High Court in the above said case has been overruled by Hon'ble Supreme Court. Hence on this reasoning also, the decision rendered by Ld. CIT(A) would fail.
24. In view of the foregoing discussions, we are of the view that the payments made by the assessee to the three non-resident companies referred above cannot be considered ad "royalty payments" and hence they do not give rise any income chargeable in India under Indian Income tax Act in all the three years under consideration. In that view of the matter, there is no requirement to deduct tax at source from those payments u/s. 195 of the Act. Hence the assessee herein cannot be considered as an assessee in default u/s. 201(1) of the Act.
25. Accordingly, we set aside the orders passed by Ld. CIT(A) for the years under consideration and direct the AO to delete the demand raised u/s. 201(1) of the Act and also the consequential interest charged u/s. 201(1A) of the Act in all the three years under consideration.
From the above, it is seen that the facts are exactly identical and hence, respectfully following, we delete the disallowance and allow this issue of assessee's appeals.
23. In the result, the appeals filed by the assessee in ITA Nos. 1391 & 1392/CHNY/2019 are allowed for statistical purposes and ITA Nos. 1393 & 1394/CHNY/2019 are allowed.
Order pronounced in the court on 20th April, 2022 at Chennai.
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