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2017 (11) TMI 2016 - AT - Income TaxTDS u/s 195 - disallowance of subscription charges paid under section 40(a)(i) paid to Forrester Research Inc., USA.- As argued the impugned payments were not chargeable to tax in India, not liable for TDS under section 195 - HELD THAT:- Respectfully following the aforesaid decision [2011 (10) TMI 370 - KARNATAKA HIGH COURT] in the assessee's own case (supra), we uphold the disallowance under Section 40(a)(i) of the Act of the payments made by the assessee to Forrester Research Inc., USA for non-deduction of tax at source under Section 195 of the Act. Finding no merit in this Ground No.2.1 raised by the assessee, we dismiss the same. Assessee's contention is that there was no amount payable as on 31.3.2005 and therefore no disallowance is called for under Section 40(a)(i) - AR fairly conceded that in the case of Palam Gas Service [2017 (5) TMI 242 - SUPREME COURT]has held that the word ‘payable’ in Section 40(a)(ia) of the Act not only covers amount payable as on the last day of the previous year but also covers amount actually paid. Respectfully following the aforesaid decision of the Hon'ble Apex Court (supra), we uphold the orders of the authorities below and consequently dismiss ground No.2.2 raised by the assessee. Depreciation be allowed at 60% in respect of the software expenses paid to overseas entities - In our considered view, this ground is liable to be dismissed as the Assessing Officer has disallowed the expenditure under Section 40(a)(i) and not as capital expenditure. Software expenses paid to Indian entities and software expenses related to overseas branches are eligible for depreciation at 60% after holding that these payments were not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) - During the period relevant to Assessment Year 2005-06, there was no liability to deduct tax at source under Section 194J in respect of software expenses paid to Indian entities as the term ‘Royalty’ in Section 194J was introduced by the Taxation Laws Amendment Act, 2006 w.e.f. 13.7.2006. Therefore CIT (Appeals) has rightly held that software expenses paid to Indian entities are not liable for disallowance under Section 40(a)(ia) of the Act. Similarly, CIT (Appeals) also held that since software expenses are related to overseas branch offices, these payments are not liable for TDS and therefore not liable for disallowance under Section 40(a)(i). Having held so, it is seen that the learned CIT (Appeals) has erroneously treated both these expenses as ‘capital expenditure’ and allowed depreciation at 60%. In our view, since the Assessing Officer has disallowed the above payments under Section 40(a)(ia) of the Act for not making TDS thereon, treatment of the same payments as capital expenditure by the learned CIT (Appeals) is not correct. The learned CIT (Appeals) having already held that the above expenses i.e. software expenses paid to Indian entities and software expenses related to overseas branch offices are not liable for disallowance under Section 40(a)(ia) of the Act, and consequently these payments would be eligible for deduction in computing the business income and as a result, the question of allowing depreciation at 60% thereon does not arise. Ground of the assessee's appeal are accordingly allowed. Correctness of the finding of AO that provision for software expenses is also liable for disallowance under Section 40(a)(i) of the Act for not deducting tax at source thereon and the correctness of the finding of the learned CIT (Appeals) that the aforesaid provision is not eligible for any depreciation as the amount was only a provision - We find that the Hon'ble Karnataka High Court in the case of KPTCL [2016 (2) TMI 412 - KARNATAKA HIGH COURT] held that there would be no liability to deduct tax at source on the amount of provision in the absence of accrual of income to the payees - The aforesaid decision of the Hon'ble Karnataka High Court (supra), was followed by the co-ordinate bench of this Tribunal in the case of TE Connectivity India P. Ltd. [2016 (5) TMI 1222 - ITAT BANGALORE] to hold that the provision amount is not liable for TDS as no income accrues in the hands of the payees. AO is accordingly directed to examine and decide the issue of TDS on provisions for software expenses and consequent disallowance, if any, u/ 40(a)(i) of the Act, following the aforesaid decisions of KPTCL (supra) and of the coordinate bench in the case of TE Connectivity India P. Ltd. (supra) after affording the assessee adequate opportunity of being heard. Ground of the assessee's appeal are partly allowed for statistical purposes. Brand building expenses - AO treated the brand building expenses as ‘deferred revenue expenditure’ and held that they were to be allowed over a period of five years as he was of the view that these expenses result in long term enduring benefit which is not limited to the year under consideration alone - HELD THAT:- On a perusal of the orders of the authorities below, it appears to us that the AO and CIT (Appeals) in coming to their views have merely gone by the nomenclature ‘brand building expenditure’ without actually examining the nature of each expenditure under the above head. In view of the above, we restore this issue of ‘brand building expenditure’ back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head ‘brand building’ and decide the issue of allowability of brand building expenditure as revenue expenditure in the light of our observations and after affording the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be duly considered. Disallowance u/s. 14A - HELD THAT:- The action of the AO in making the disallowance under the head ‘Income from other sources’ is not correct since the facts show that the disallowance under Section 14A of the Act represents the business expenditure incurred by the assessee in relation to exempt income. Such disallowance would go to increase the assessee's business income and consequently the assessee would be entitled to proportionate deduction under Section 10A of the Act in respect of such increase in business income. In coming to this view, we draw support from the decision of Gemplus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] we direct the Assessing Officer to allow proportionate deduction under Section 10A of the Act on account of the disallowance made under Section 14A Foreign tax credit u/s 90 even in respect of income which is exempt under Section 10A - HELD THAT:- Remand to the file of the Assessing Officer for verification of details and documents in respect of the issue of allowability of foreign tax credit in respect of income eligible for deduction under Section 10A of the Act is also allowable under Section 90 of the Act in the light of the decision of the Hon'ble Karnataka High Court in the case of Wipro Ltd. [2015 (10) TMI 826 - KARNATAKA HIGH COURT] and adjudication thereon after affording the assessee adequate opportunity of being heard and to file details and submissions in this regard that shall be duly considered. The Assessing Officer is accordingly directed. Consequently, additional ground No.1 is treated as allowed for statistical purposes. Provision for warranty - HELD THAT:- Respectfully following the decision of the co-ordinate Bench of this Tribunal in the assessee's own case which was rendered after considering the decision of the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd.[2009 (5) TMI 16 - SUPREME COURT] we uphold in principle the assessee's claim of provision for warranty and remand this issue to the file of the Assessing Officer for examination of the basis of provision towards warranty, the claim made and the expenditure incurred towards warranty obligation in accordance with the observations of the Hon'ble Apex Court in the case of Rotork Controls India P. Ltd. (supra). Consequently, Ground of Revenue’s appeal are allowed for statistical purposes. Depreciation on Software Expenses - Revenue contends that the CIT (Appeals) erred in allowing depreciation @ 60% in respect of software payments made to Indian entities and related to overseas branches - HELD THAT:- We have held that the learned CIT (Appeals) erroneously treated both the above payments as ‘capital expenditure’ and allowed depreciation @ 60% thereon. In our view the Assessing Officer disallowed the above payments under Section 40(a)(i) / (ia) of the Act for not making TDS, treatment of the same payments as capital expenditure and allowing depreciation @ 60% by the learned CIT (Appeals) is not correct and hence bad in law. We therefore reverse the order of the learned CIT (Appeals) on this issue and restore the finding of the Assessing Officer in the matter. Computation of deduction u/s 10A - HELD THAT:- We set aside the issue of reduction of foreign currency expenditure from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination and verification of the issue afresh based on factual evidence. Assessee's claim for inclusion of rental income from Infosys BPO Ltd. and BSNL, Chennai as profits of the business in computing deduction under Section 10A of the Act, when these incomes were not derived from the export of computer software - HELD THAT:- Whether interest income, income from sale of scrap, export incentive, rental income, etc. are eligible for deduction under Section 10A of the Act has been considered by the Hon'ble High Court of Karnataka in the case of Subex Ltd.[2015 (1) TMI 875 - KARNATAKA HIGH COURT] held that rental income by virtue of sub-section (4) of Section 10 of the Act is deemed to be business of the undertaking for the purpose of extending the benefit of deduction under Section 10A of the Act. Also see WIPRO LTD. [2010 (8) TMI 1053 - KARNATAKA HIGH COURT] Thus we are of the view that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A of the Act in the case on hand. Consequently, Ground No.9 of the revenue’s appeal is dismissed. Deduction under Section 10A - HELD THAT:- In our considered view, the issue raised in these grounds are covered against revenue by the decision of the Hon'ble High Court of Karnataka in the case of CIT Vs. Tata Elxsi Limited [2011 (8) TMI 782 - KARNATAKA HIGH COURT] wherein it is held that communication expenses reduced from export turnover should also be reduced from total turnover while computing the deduction under Section 10A - Respectfully following the aforesaid decision we dismiss ground Nos.10 to 12 raised by revenue.
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