2020 (12) TMI 556 - AT - Income Tax

Disallowance of purchase of software u/s 40(a)(i) for non-deduction of tax at source - A.O. treated the purchases of computer software as payment in the nature of royalty - CIT(A) held that the payment made by the assessee for purchase of software was in respect of copy righted article and accordingly held that disallowance u/s 40(a)(i) of the Act is not called for - HELD THAT - The instant case relates to the financial year 2009-10 relevant to the assessment year 2010-11 and the payments have been made for purchase of software prior to the date of pronouncement of the decision in the case of Samsung Electronics Company Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT and also prior to the amendment of Sec. 9(1)(vi) of the Act. Accordingly following the above said decision rendered by the Tribunal we hold that the disallowance u/s 40(a)(i) of the Act cannot be made in the facts of the present case. Accordingly we confirm the decision rendered by Ld. CIT(A) on this issue on the above said reasoning. Disallowance of provision for warranty - HELD THAT - As decided in own case 2018 (6) TMI 1732 - KARNATAKA HIGH COURT both the Appellate Authorities below were justified in returning the proper findings of facts on the relevant material before them and have rightly found that the provisions of warranty made by the Respondent-Assessee Company was on the basis of the scientific and consistent method and therefore the present appeal of the Revenue does not give rise to any substantial question of law and the same deserves to be dismissed and is accordingly dismissed. Disallowance of foreign exchange loss arising on revaluation of foreign exchange exposures as at the year end - AO noticed that the assessee has revalued its assets and liabilities with foreign exchange exposure as at the year end on marked to market basis and declared net gain - A.O. disallowed the loss holding that it is contingent in nature - HELD THAT - We notice that this issue has been decided in favour of the assessee by coordinate bench of Tribunal in the case of Quality Engineering Software Technologies Pvt. Ltd. 2015 (1) TMI 869 - ITAT BANGALORE wherein held forward contracts are in respect of consideration for export proceeds which are revenue items. There is an actual contract for sale of merchandise. In this factual matrix it is clear in our view that the transaction in question will not qualify to be called as speculative transaction. In view of the facts and circumstances of the case on hand as discussed above we hold that the provision on derivative contracts is allowable as expenditure. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance made under Section 40(a)(i) of the Income-tax Act, 1961 in respect of software purchases.
2. Disallowance of provision for warranty expenses.
3. Disallowance on foreign exchange loss.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Software Purchases:
The first issue concerns the disallowance of software purchases by the Assessing Officer (A.O.) under Section 40(a)(i) of the Income-tax Act, 1961, due to non-deduction of tax at source. The A.O. classified the software purchases as royalty payments, necessitating tax deduction at source, which the assessee failed to do. The Commissioner of Income Tax (Appeals) [CIT(A)] ruled that the payments were for copyrighted articles and thus not subject to disallowance under Section 40(a)(i). The Tribunal upheld this view, citing prior Tribunal decisions and the fact that the payments were made before the Karnataka High Court's ruling in Samsung Electronics Co. Ltd. (345 ITR 494) and the retrospective amendment to Section 9(1)(vi) by the Finance Act 2012. The Tribunal referenced similar cases where disallowance was not applicable due to the timing of the payment and the subsequent legal clarifications.

2. Disallowance of Provision for Warranty Expenses:
The second issue pertains to the disallowance of the provision for warranty expenses by the A.O., who argued the provision was not scientifically made and was thus disallowed. The CIT(A) reversed this disallowance, referencing prior Tribunal decisions in the assessee's favor for earlier assessment years. The Tribunal supported the CIT(A)'s decision, noting the Karnataka High Court's ruling in the assessee’s favor for the 2006-07 assessment year, which validated the provision for warranty as consistent and scientific. The Tribunal cited the Supreme Court's guidelines in Rotork Controls India P. Ltd., emphasizing that provisions should be based on historical trends and reliable estimates, thus affirming the CIT(A)'s decision.

3. Disallowance of Foreign Exchange Loss:
The third issue involves the disallowance of foreign exchange loss on revaluation of foreign exchange exposures. The A.O. disallowed the loss, considering it contingent in nature. The CIT(A) allowed the deduction, referencing ITAT decisions in similar cases, such as Quality Engineering and Software Technologies Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, citing that the forward contracts were related to revenue items and not capital accounts, and thus the revaluation losses were allowable as deductions. The Tribunal dismissed the A.O.'s reliance on CBDT Instruction No.3/2010, stating that it was not applicable in this context.

Conclusion:
The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s decisions on all three issues. The Tribunal emphasized the timing of payments and legal clarifications for software purchases, the scientific and consistent method for warranty provisions, and the nature of foreign exchange losses related to revenue items. The Tribunal's decision was pronounced in the open court on December 2, 2020.