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2014 (2) TMI 602 - AT - Income TaxAllowability of software expenses - Whether the expenses are in the nature of research and development expenditure and allowed as revenue expenditure u/s 35(1)(iv) of the Act – Held that:- The decision in 3i Infotech Ltd. Versus Deputy Commissioner of Income-tax, Circle 10(3) Mumbai [2010 (7) TMI 843 - ITAT MUMBAI] followed - The assessee will be entitled to depreciation in the year of capitalization - the expenditure incurred by the assessee during the years under consideration which has been treated as work-in-progress is held to be capital expenditure and depreciation is held to be allowable to the assessee only in the year of capitalization of such expenditure - the expenditure incurred by the assessee during the year under consideration treated as capital work-in-progress are capital expenditure - However, the assessee will be eligible for depreciation on these expenditure in the year when these have been capitalized – the claim of allowability of the expenditure as per section 35(1)(iv) is rejected - Decided partly in favour of Assessee. Allowability of depreciation on capital work in progress – Held that:- The Tribunal is clear that the depreciation is allowable to the assessee – thus, the AO is directed to grant depreciation to the assessee. Claim of exemption u/s 10A of the Act – Held that:- The decision in of CIT vs.Gem Plus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] followed – the assessee is entitled to exemption under section 10A with reference with reference to addition of disallowance of PF/ESIC payments as the plain consequence of the disallowance and add back made by the AO has increased the business profits of the assessee - the exemption under section 10A is to be calculated accordingly. Transfer Pricing Adjustment – Held that:- The decision in 3i Infotech Ltd. Versus Deputy Commissioner of Income-tax, Circle 10(3) Mumbai [2010 (7) TMI 843 - ITAT MUMBAI] followed -The determination of ALP in respect of the transaction by which the Assessee deputed three of its employees to ICICI infotech, USA, by the TPO is therefore non est to that extent and cannot form the basis for making an addition to the total income - The AO therefore could not have made the impugned addition on the basis of the order of the TPO - Since the addition has been made by the AO only by placing reliance on the report of the TPO, the addition cannot be sustained. Whether the report of the TPO can be considered as material, information or document based on which the addition made by the AO could be sustained – Held that:- U/S.92C(3) the AO has power to determine ALP on the basis of material or information or document in his possession - but exercise of such power is conditional on the AO. CUP method could not be applied under the facts of the case as the Assessee has not transferred/seconded employees to any other independent enterprises - To test the arm's length pricing in the case of transfer/seconding of the employee's, it may be possible to use the CUP method where the same entity has undertaken similar transaction under comparable circumstances to independent enterprises - the similar transaction on the basis of which the TPO determined ALP was not with an independent enterprise and the said transaction was also with an Associated enterprise - even the determination of ALP by the TPO was not proper – the addition made by AO deleted – Decided in favour of Assessee. Pre-determined contract with the Bank – Compensation received – Nature of Amount received – Held that:- The assessee was providing back office support services to ICICI Bank in respect of retail lending business of ICICI Bank and was receiving payment as per agreement entered into by the assessee with the said Bank - This was one of the activity of the assessee - Thus it was a case where the compensation has been received by the assessee on losing its right to receive income in respect of services being rendered by the assessee to the Bank – the compensation received is a loss of source of income to the assessee and compensation has been determined on the basis of the said loss – Relying uponKettlewell Bullen And Company Limited Versus Commissioner Of Income-Tax, Calcutta [1964 (5) TMI 4 - SUPREME Court] - it is irrelevant that the assessee continued similar activity with the remaining agencies - the assessee has lost its source of income with respect to its agreement entered into by it with the bank - it has never rendered such services to any other person right from the inception and there is no material on record to contradict such argument of the assessee – there was no infirmity in the order passed by CIT(A) – thus, compensation received by the assessee was in the nature of capital – Decided against Revenue. Disallowance u/s 14A of the Act r.e Rule 8D of the Rules – Held that:- The decision in Godrej & Boyce Mfg. Company Ltd vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] followed - the provisions of Rule 8D are prospective and can be applied from A.Y 2007-08 onwards, however, disallowance 14A is to be made in the earlier years based on reasonable basis for computation of expenses relating to earning of exempt income – thus, the matter remitted back to the AO for fresh adjudication – Decided in favour of Revenue.
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