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Educating a person with respect to functionality of software doesn't amount to rendering of technical service: ITAT

Openwave Mobility, Inc. vs. DCIT - [2024] 162 taxmann.com 434 (Delhi - Trib.)

The assessee, a US-based company, was engaged in providing services relating to Transmission Control Protocol and Video Optimization Solutions to Telecom Operators across the Globe. During the relevant assessment year, it entered into a Software Licensing Agreement and Service Level Agreement by way of an Annexure to the Software License Agreement for providing annual maintenance and support services pursuant to which it received software licensing income and an Annual Maintenance Contract (AMC) service income.

Subsequently, the assessee furnished the return of income, declaring the receipts as non-taxable and claimed refund of the tax deducted. Meanwhile, in the assessment proceedings, the Assessing Officer (AO) proposed an addition to the assessee's income as FTS income for the receipts pertaining to the supply of software (including AMC services).

The aggrieved assessee filed objections before the Dispute Resolution Panel (DRP), which was rejected. The matter then reached before the Delhi Tribunal.

The Tribunal held that the Service Level Agreement, which envisaged rendition of support and maintenance services (AMC), forms part of the Software License Agreement by way of Annexure to the said agreement. Services provided by the assessee are thus ancillary and subsidiary to the licensing of software and would, therefore, be characterized in the same manner as that of the predominant or original transaction, which is the software supply in the present case.

Further, the training services are for acquainting with the operation or use of software. These activities do not qualify as 'make available' within the meaning of the expression contained in Article 12(4)(b) of the India-USA DTAA.

The meaning of the expression 'make available' has been derived from umpteen numbers of judicial precedents as well as Protocol to the India-USA DTAA. It was found that none of the conditions to qualify for the test of 'make available' were satisfied, as:

a) the service recipient is not able to apply any expertise or technology contained therein or use knowledge on its own without recourse to the service provider;

b) the service recipient is not at liberty to use the technical knowledge, skill, know-how and process of the assessee in its own right and

c) the service recipient cannot perform the services on its own and must necessarily seek the services of the assessee time and again.

Imparting training or educating a person on the functionality and attributes of software or application would not amount to rendering technical service under the DTAA. Thus, entire receipt from the supply of software licence and maintenance and support services rendered by the assessee were held to be non-taxable in India.

Claim Section 54 Benefit for Interior Decoration

Meenakshi Subramaniam - [2024] 162 taxmann.com 424 (Article)

One man, who had got interior decoration done for his new house had a worried look. His friend asked:

"What's the matter ?"

The man said:

"I was poring over income tax books. In one case of Asstt. CIT v. Sunil Bandacharya Joshi [IT Appeal 703 (Bang.) of 2016, dated 6-3-2018] the tax authorities said that purchasing and fixing doors of villa was not necessary. It was said to be not house 'improvement. If doors don't get benefit, how can I get tax exemption for interior decoration ?"

There has always been a bitter tussle over giving Section 54F exemption for interior decoration. Recently, however, the tables were turned as the Bangalore Tribunal in Sapna Hemanshu Shah v. Dy. CIT [2024] 160 taxmann.com 1194 ruled that interior decoration expenses can be claimed in section 54 cases, where a new house is constructed or purchased.

[2024 ] 160 taxmann.com 1194 (Bangalore Tribunal)

Sapna Hemanshu Shah v. Deputy Commissioner of Income Tax

The brief facts of the case are that the assessee filed return of income on 22/07/2013 declaring income of Rs.5,49,610/- but the AO held that the claim of Rs. 8,65,641/- made towards interior decoration was 'excess' and disallowed it under the capital gains head.

The backdrop of the case was that upon filing return, the case had been selected for scrutiny and statutory notices were issued to the assessee. The assessee submitted reply and it was observed that the assessee sold the residential house vide sale deed dated 15/01/2013 for consideration of Rs.1,56,50,000/-. The assessee had arrived at capital gain of Rs.1,25,06,186/- after reducing index cost of acquisition. Thereafter, the assessee claimed exemption on account of advance given for purchase of plots of Rs. 54,65,641/- and amounts deposited in capital gain account of Rs. 70,40,545/-. Accordingly, the capital gain tax was computed Nil. As per nomination agreement, Mr Hemansu M Shah, the husband of assessee had negotiated to purchase the property for total sale consideration of Rs.1,40,00,000/- against which he had paid Rs.46,00,000/- as advance to the vendor. Accordingly, Mr Hemanshu M. Shah received Rs. 46,00,000/- from Mrs Sapna Shah and transferred the right in favour of the assessee. The assessee also submitted capital gain statement and the advance of the vendor was of Rs.46,00,000/-.

Accordingly, the AO noticed that the claim of exemption on account of advance given for purchase of flats of Rs.54,65,641/- which he said "is not correct" and only advance given of Rs.46,00,000/- was allowed.

It was at that time that the excess claim of Rs.8,65,641/- by the assessee towards interior decoration were disallowed under the capital gain head and other disallowance was also made and the AO completed the assessment.

Aggrieved from the above order, the assessee filed appeal before the CIT(A). After examining the agreement dated 25/03/2013, the CIT observed that the agreement is not genuine and assessee failed to produce the bills, vouchers with regard to interiors, copy of purchase deed or any other reliable documents for substantiating her claim of expenditure of Rs. 8,65,641/- incurred on interiors. Accordingly, he dismissed the appeal of the assessee.

Aggrieved from the above order, the assessee filed appeal before the ITAT. The ld. AR reiterated the submissions made before the lower authorities and said that the assessee transferred the amount into her husband's bank account of Rs. 54,65,641/- on 25/03/2013 out of which Rs. 8,65,641/- was towards expenditure for interiors and assessee's husband has incurred it for making the house habitable. The money was not directly incurred by the assessee but as her husband had incurred, it was given on contract basis; therefore, bills and vouchers were kept by the contractors, which had not been handed over to the assessee.

He also submitted as per the agreement placed at paper book page No. 65-72 dated 25/03/2013 it was clear that the expenditure was to be incurred for interior decoration and there is no dispute on the payments made. Accordingly, he submitted that the assessee is eligible to get the cost of acquisition as a deduction on interiors expenditure of Rs. 8,65,641/- .

The ld AR of the assessee relied on the following judgments:-

Rajat B Mehta v. ITO [2018] 90 taxmann.com 176/169 ITD 178 (Ahd. – Trib.)

Meher R Surti v. ITO [2013] 40 taxmann.com 138/[2024] 61 SOT 5 (Mum. - Trib.) (URO)

Mrs. Rahana Siraj v. CIT [2015] 58 taxmann.com 333/232 Taxman 327 (Kar.)

Y. Manjula Reddy v. ITO [2022] 140 taxmann.com 441 (Bang. - Trib.)

On the other hand, the Ld.DR relied on the orders of the lower authorities and strongly submitted that the agreement made by the assessee for expenditure towards interiors of Rs. 8,65,641/- is not genuine as observed by the ld.CIT(A). The assessee "is also unable to produce any credible evidence towards expenditure incurred," therefore, the lower authorities are justified.

Considering the rival submissions, the Tribunal noted that the dispute is only towards interior decoration expenses as incurred by the assessee of Rs.8,65,641/- for want of credible evidences.

The Tribunal said:

"We note from the bank statement submitted by the assessee at paper book page No.57 that the assessee has paid amount on 25/03/2013 of Rs. 54,65,641/- vide cheque No.363832, out of which, Rs. 46,00,000/- was given as advance for purchase of the property and as per the paper book page No.65 to 72, the second party with the permission of the vendor, Shri Sanjay Udani has carried out lot of interior decorations in the schedule B property spending substantial amount of Rs. 8,65,641/- and it has been brought to the notice of the first party who was convinced about the interior decoration. The payment made by the assessee has not been disputed by any of the lower authorities and payment was made to her husband and both are residing together. The case law relied by the ld AR of the assessee supports the case of the assessee. Accordingly, the expenditure incurred by the assessee for interior decoration is eligible to get the benefit of deduction u/s 54 of the Act."

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

Order pronounced in court on 30th day of January,2024

Setting House in Order

Laurel and Hardy got an interior decorator to do their new house. But, then they heard that the income tax department was not giving exemption for comfortable houses, but habitable houses. Laurel told the income tax officer:

"We got an interior decorator who suggested round beds, a fountain in living room and paintings hanging upside down. The house is not at all comfortable. We turn round and round to get sleep in round beds, get soaked on entering living room and are afraid when the paintings will crash on our heads."

Providing relief for those who are buying or constructing a house, the Sapna Hemanshu case has categorically held that interior decoration expenses are allowable.

Home Truths

Vishwakarma, the gods' architect was recently, seen smiling. He was in a tizzy, all these days. He was making interior decorators create exquisite houses but somebody was turning them down. He made inquiries and found that income tax department was brushing them aside, by calling for habitable houses. What was worse was that interior decorator expenses were not being allowed. Now, after Sapna case, VIshwakarma is no longer in a fix.

There are solid reasons for allowing interior decoration expenses, when a taxpayer constructs or buys a new house.

• There is no condition in Section 54 that as expenditure on interiors to make the house plush and luxurious is not included in Section, the expenses should be disallowed.
• In law, it is permissible for an assessee to acquire a vacant site and put up a construction thereon and the cost of the new asset would be cost of land plus (+) cost of construction On the same analogy, even though if he purchased a new asset, which is habitable but which requires interior decoration like additions, alterations, modifications and improvements and if money is spent on those aspects, it becomes the cost of the new asset and therefore, he would be entitled to the benefit of deduction in determining the capital gains.
• The use of words 'purchased or construed' does not mean that the property can either be purchased or constructed and not a combination of both the actions. A property may have been purchased as a readymade unit but that does not restrict the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work.
• The Revenue's argument that 'cost of improvement' and shall be allowable as deduction u/s. 48/49 of the Act when the new residential house property purchased by the assessee is sold by the assessee but no benefit u/s. 54 of the Act can be allowed to the assessee with respect to this expenditure incurred by the assessee which is post the purchase of the new residential house as according to the Revenue , only the cost paid for acquiring new residential house is to be taken for the purposes of granting benefit u/s. 54 of the Act is wrong. It goes against the purpose of Section 54, in statute.
• Arguments that fixtures and fittings do not qualify for deduction u/s. 54 as they not capital assets under Section 2(14) and the same needs to be offered to tax as income from other sources are grossly wrong as furniture and fixtures form integral part of house.
• Fixing marbonite flooring and marble skirting in the dining room, bedroom and sitting rooms are said to be expenses towards repairs and renovation and not to make house habitable. Nothing can be more preposterous.
• If the tax-payer can purchase an residential house with one floor and later construct two more full-fledged floors on the same residential house and yet get benefit u/s 54 of the Act, as in B.B.Sarkar v. CIT [1981] 7 Taxman 239 (Cal.), why should interior decoration expenditure be disallowed?

Lost!

But, still in many cases interior decoration expenses were junked. In Sri Ramakrishna Nishtala v. Assistant Commissioner (IT Appeal No.164 (Bang.) of 2020) case, the assessee engaged interior works of Rs. 36,13,380/- for his new house. The Ld. CIT(A) observed that the assessee had incurred expenditure for interior decorator which was for making the house more comfortable. On verification of various invoices filed by the assessee, the Ld. CIT(A) held that expenditure on interiors to make the house plush and luxurious is not included in the total cost of the house paid to the builder and therefore cannot be considered as expenditure necessary to make the house habitable. He, thus, held that the assessee is not eligible for claiming the payment to interior decorators as investment in the construction of the house for the purpose of deduction under section 54F of Act. The assessee failed to win the case.

In Smt. Padmaja Gavini v. Assessee [IT Appeal No. 705 (Hyd.) of 2014, dated 24-12-2024] case, the assessee hired an interior decorator to carry out work on furniture and fittings. A sum of Rs. 23,50,000 was spent on the purpose. The income tax authorities disallowed the amount. The assessee argued that furniture and fittings form integral part of the flat. But, it was held that fixtures and fittings does not qualify for deduction u/s 54 as the same are not capital assets and the same needs to be offered to tax as income from other sources. Also, Section 2(14) specifically states that furniture and fittings are not capital assets and the same proceeds in respect thereof cannot get the benefit of exemption u/s. 54 or 54F, even in case furniture and fittings form integral part of the house. This resulted in the bringing into tax of the sum of Rs. 23,50,000 as 'income from other sources,' as the appeal of the assessee was dismissed.

In G Siva Rama Krishna, Hyderabad v. Dy. CIT [IT Appeal No.755 (Hyd.) of 2013, dated 16-12-2013] case, it was rather incomprehensible that interior decoration was frowned upon, while remodeling was opined to be alright. The learned CIT(A) observed that assessee had incurred the following expenditure on which the assessee has claimed deduction under section 54, namely:

1. Kitchen modular, Memoriam shutters, S S Baskets, hardened glass of Rs. 3,30,000/-.
2. Hall TV, showcase box type, plywood, teakwood, veneer finish, labour of Rs. 1,75,000/-.
3. Master bedroom, Children bedroom, second children bedroom, guest bedroom - cupboard box type, veneer finish, hardware, labour of Rs. 6,94,000/-.
4. Outside POP, sheets, wood frames, ceiling of Rs.93,000/-.
5. POP works for four bedrooms, hall, kitchen, drawing, pooja room, as per design light cutting of Rs.1,80,000/-.
6. Bathroom shower of Rs. 1,95,000/- (each Rs. 65,000).

The assessee said part of the expenditure has been incurred towards modular kitchen, cupboards, wood frames, fans and paintings, glass work, bathroom shower and polishing work etc., to make the house more habitable one to suit the need of the assessee and be allowable under section 54 of the I.T. Act.

The Income Tax Officer observed that interior, carpentery works and furniture expenses will not go into the cost of house as contemplated under section 54F. The Tribunal held:

"In our opinion, if these expenditures have been incurred for the purpose of remodeling of flat in normal course after purchasing the readymade flat, it is allowable However, if it is for beautifying the flat by removing the previous one, it cannot be considered for deduction under section 54F."

Won!

In some cases, assesses have won after battling it out in court. For instance, in Rajat B Mehta (supra) case, the tax authorities advanced a very amusing theory. It was said that most of the furniture items are removable, and, do not form part of house. It also cannot be said that furniture was purchased to make the house habitable. Therefore, the AO declined deduction u/s. 54 F to the extent of Rs 18 lakhs paid under a separate agreement for furniture and fixtures in the residential property purchase.

The court held that cost of investment in house is not restricted to civil construction. It was ruled that cost of furniture and fixtures form an integral part of cost. The assessee can claim investment in house alongwith furniture.

In Shrinivas R. Desai v. Asstt. CIT (OSD) [2013] 35 taxmann.com 170/145 ITD 12 (Ahd. – Trib.) a salaried employee, who brought a readymade residential unit and got interior decoration done at the house was, without much ado, disallowed the amount. The court ruled in his favour, by saying there is no restriction on the buyer from incurring any construction expenditure on improvisation or supplementary work of ready-made unit. The additional expenses so incurred would be eligible for qualifying investment under Section 54 of the Act.

In Robin Singh Chauhan v. ACIT [IT Appeal No. 7074 (Delhi) of 2017, dated 18-11-2021] case the tax authorities held that expenses incurred on interior decoration, beyond that what is required to make the, house habitable may not be allowed to claim benefit of deduction u/s 54 of Act. Further, bills and vouchers were not produced. The Tribunal favoured the assessee. Before the AO and CIT, the assessee had produced all bills, with numbers. No specific defect was alluded to and it was not pointed out which expenditure is not relatable for making the house habitable. The expenses were also disallowed on a summary basis, quoting 25% of total expenses. The Tribunal called this 'unjustified.'

In Rustom Homi Vakil v. Asstt. CIT [2016] 69 taxmann.com 42/158 ITD 588 (Mum.) case interior decoration expenses were made towards removal of mosaic flooring and laying of marble flooring, alteration of the kitchen, putting up compound wall, protecting the property with grill work etc; but were struck down. The Court ruled in favour of the assessee by making an erudite statement.

The word 'habitable' is highly subjective and has to be understood and interpreted in the context of the socio-economic status and standing of the tax-payer in the society. Section 54 of the Act only provides that the taxpayer has to purchase or construct a new residential house . One tax-payer can purchase or construct new residential house property for say even Rs 10 lacs and another tax-payer can purchase or construct new residential house property for say Rs 500 lacs, depending upon their socio-economic status and standing.

In Renu Ratnakar Bhattacharya v. CIT (Appeals) [IT Appeal No. 2146 (Mum.) of 2022, dated 15-12-2022] case the amount of Rs.1,50,000 paid towards blueprint for architect and charges rendered to interior decoration company amounting to Rs. 1200, 000 were allowed.

In Meher R. Surti (supra) case it was rightly remarked that a residential house means a proper habitable house, not merely a structure. Therefore, interior decoration expenses have to be given.

Summing Up

Whether it's a bedroom for guests, a childrens' room or just bathroom showers, interior decoration expenses have always attracted friction.

Regarding Section 54 exemptions, one should well remember the words of Mr Justice Krishna Iyer who once said:

"if you sell your house and make a profit, pay Caesar what is due to him. But if you buy or build another, subject to the conditions of Section 54(1), you are exempt."

Here's a funny story of what happened when Duryodhana wanted to clinch interior decoration expenses.

Duryodhana, after visiting the Pandavas magic palace was very angry. He summoned an interior decorator ordering him to make an abode where he should know where water was there on floor and where there was no water. The palace was ready. The interior decorator said;

"When you come across hidden water, you would automatically start jumping and when there's no water, you would automatically start running."

At assessment time, the income tax officer refused to give exemption to Duryodhana, saying that the house had become more comfortable.

The furious Duryodhana shouted:

"Comfort? Where's the comfort? Nowadays, I am just jumping or running. I cannot sit, stand or sleep."

That's it from us for today!

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