2010 (8) TMI 750 - AT - Income Tax

Rate of depreciation on the computer software - expenditure incurred on software treated treated as a capital expenditure - AO allowed the depreciation @ 25 per cent - CIT(A) accepted the claim of the assessee to allow the depreciation @ 60 per cent - HELD THAT - In the assessment year 2002-03 the software was not identified as a separate item for depreciation but from the assessment year 2003-04 software is the part of the computer for the purpose of the depreciation. Otherwise also as rightly held by the Ld CIT (A) the software cannot work in isolation but has to be loaded on computer and the later also cannot work without software. In sum and substance the software is integrated part of the total operation of the computer. Accordingly the issue is decided in favour of the assessee. Revenue has also raised the grievance that Ld CIT (A) erred in directing the AO to recomputed the exemption u/s 10A. In our opinion this is a consequential issue as higher rate of depreciation is allowed on the software. Accordingly ground is dismissed. Exemption u/s 10A - income generated from training given to the customer for the use of the software - he AO was of the view that the income generated from the training activity cannot be considered for the computation of deduction/exemption under section 10A and it is not on account of any development of software but training is given after software is delivered to the customer - HELD THAT - In the case of Sovika Infotek Ltd 2007 (7) TMI 441 - ITAT MUMBAI an identical issue has been considered by the Tribunal and it is held that the training activity of the assessee is intricately connected with the software development sale maintenance etc. and the same would be entitled for exemption under section 10B. Identical view is also taken in WOODWORD GOVERNORS INDIA (P.) LTD. 2007 (4) TMI 391 - ITAT DELHI while interpreting the scheme of section 80IB and held that income generated for providing the training to his employees of his customers for the use of the product sold to them and was also maintaining after sales services and the repairing the products sold to his customers and same is to be treated as profit derived for the purpose of section 80IB. As the scheme of section 10A is analogous to section 80IB the same principles are also applicable here also. We therefore confirm the order of Learned CIT (A) holding that the income generated from training given to the customer for the use of the software is eligible for exemption/deduction u/s 10A. Grievance of the assessee that it should form the part of the export turnover - CIT (A) directed AO to include the receipts of the training into the total turnover but exclude the same from the export turnover - We do not understand the logic behind the directions of the Learned CIT (A). It is a basic principle that the numerator and denominator of the formula are to be same and adjustment should be made both to denominator and numerator. Once it is held that it is intricately related with the export of the software then it has to be included into the export turnover also as admittedly same is brought in to India in convertible foreign exchange. We therefore direct the Assessing Officer to include said amount of training receipt into export turnover and also to the total turnover and thereafter work out allowable deduction/exemption under section 10A of the Act. Eligible profit for claiming deduction u/s 10A - Exchange gain on travelling expenses recovery - AO noted that the assessee has recovered travelling expenses from his customers which was received in foreign exchange due to the recovery of the travelling expenses in foreign exchange and treated the same as part of its eligible profit for the purpose of claiming exemption/deduction under section 10A - HELD THAT - Admittedly the gain is on account of reimbursement of expenditure incurred by the assessee from his customers and that is also on account of fluctuation in the rate of the foreign exchange. It can not be treated as an income derived by an undertaking from the export of articles or computer software. In our opinion the same cannot form part of eligible profit for claiming deduction under section 10A of the Act as it can not be treated as income derived from the export of the software. TP Adjustment - computation of Arm s Length Price along with the price in relation to international transactions entered into by the assessee with it s subsidiaries as commission has been paid on customisation fees - D.R. vehemently argued that there is no reason to pay the additional commission to the subsidiaries then the independent local distributors. It is argued that entire customisation work is done by the assessee only and there is no contribution by the subsidiaries in the customisation work entrusted by the users of the software manufactured by the assessee company HELD THAT - Though the subsidiaries are not directly involved in the customisation work of the software but at the same time they are only authorised to collect the customisation work in the market and other independent distributors are not doing said work. It is also seen that some of the independent distributors are paid higher commission then the subsidiaries without doing any job for collection of customization work. No interference is called in the order of the Ld CIT(A) on this issue. Accordingly the same is confirmed. Ground taken by the revenue is dismissed.

Summary

Issues Involved:
1. Rate of depreciation on computer software.
2. Eligibility of income from training activity for exemption under section 10A.
3. Inclusion of income from training activity in export turnover.
4. Eligibility of exchange gain on travel recovery for deduction under section 10A.
5. Transfer pricing adjustment regarding commission on customization fees.

Detailed Analysis:

1. Rate of Depreciation on Computer Software:
The revenue challenged the CIT(A)'s direction to allow depreciation on computer software at 60% instead of 25%. The CIT(A) opined that software is an integral part of computer operations and cannot be separated, thus warranting the same depreciation rate as computers. The Tribunal upheld this view, noting that software and computers are interdependent and that from the assessment year 2003-04, software is explicitly treated as part of the computer for depreciation purposes. Consequently, the Tribunal dismissed the revenue's appeal on this ground.

2. Eligibility of Income from Training Activity for Exemption under Section 10A:
The assessee included Rs. 21,76,680 from training activity in its income for section 10A exemption, which the Assessing Officer excluded, arguing it was not derived from software development. The CIT(A) held that training activity is incidental to the sale of software and essential for further sales, thus eligible for exemption. The Tribunal agreed, citing precedents from Sovika Infotek Ltd. and Woodword Governors India (P.) Ltd., confirming that training income is intricately connected with software development and eligible for section 10A exemption.

3. Inclusion of Income from Training Activity in Export Turnover:
The CIT(A) directed that training income be included in total turnover but excluded from export turnover. The Tribunal found this illogical, emphasizing that both numerator and denominator in the formula should be the same. Since the training income is intricately related to software export and brought in convertible foreign exchange, it should be included in both export and total turnover. The Tribunal directed the Assessing Officer accordingly, dismissing the revenue's appeal and allowing the assessee's cross-objection on this point.

4. Eligibility of Exchange Gain on Travel Recovery for Deduction under Section 10A:
The assessee claimed Rs. 20,75,709 from exchange gain on travel recovery as part of eligible profit for section 10A deduction, which the Assessing Officer and CIT(A) rejected. The Tribunal upheld this rejection, stating that the gain from reimbursement of travel expenses due to foreign exchange fluctuation cannot be treated as income derived from software export. Thus, the Tribunal dismissed the assessee's cross-objection on this issue.

5. Transfer Pricing Adjustment Regarding Commission on Customization Fees:
The Assessing Officer, based on the TPO's order, made an upward adjustment to the assessee's income concerning commission on customization fees paid to subsidiaries. The CIT(A) deleted this addition. The Tribunal upheld the CIT(A)'s decision, noting that subsidiaries, unlike independent distributors, are authorized to collect customization work, justifying the higher commission. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objection, providing detailed justifications for each issue based on the facts and relevant legal principles.