TMI Blog2011 (2) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the asst. year 2006-07, being the payments made to German company and Singapore company respectively. confirming the disallowance for the asst. year 2005-06 being the payment made to Indian company. Nature of FCCB expenses ''Capital or Revenue'' - HELD THAT:- The assessee company had incurred expenses in connection with the issue of foreign currency convertible bonds. The assessing authority held that the bond holders had the option to convert the bonds to equity shares and therefore, the collection of funds through the issue of bonds needs to be treated as to increase the capital and therefore the connected expenses would be capital in nature and hence disallowed. Quantum of benefit available u/s010A - HELD THAT:- It is held in ITAT, SAK Soft Ltd.,[ 2009 (3) TMI 243 - ITAT MADRAS-D] , that the exclusion must be made from total turnover as well. Therefore, we direct the AO to exclude the telecommunication charges from total turnover as well and revise the computation of the quantum of benefit available u/s010A. - I.T.A Nos.741 & 742/Bang/2010, I.T.A Nos.774 & 775/Bang/2010 - - - Dated:- 8-2-2011 - DR. O. K. NARAYANAN, VICE PRESIDENT AND SMT. P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ii) The assessee has obtained exclusive and non-transferrable rights to market and sub-licence the software and user documentations and to use the software source to modify, enhance, change or convert the software packages as and when necessary in the light of marketing requirements. iii) The assessee-company is basically a trader and distributor of software products. The assessee purchases licences, source codes and makes sales and distribution of updated products to end customers. iv) What the assessee has purchased is comprehensive software packages and the right to sell to multiple customers and not any article or asset as explained by the assessee. v) Therefore, the payments made by the assessee were in the nature of Royalty as explained in Explanation 2 to Section 9(1)(vi) of the Act and accordingly liable to tax as the income arising to the foreign suppliers are to be treated as income accruing or arising in India. 07. On the basis of the above findings, the assessing authority held that tax should have been deducted at source u/s.194J when payments were made to foreign suppliers against the purchase of software. No TDS was made which attracted the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertible, the assessing authority treated the bond proceeds as increase to capital. Accordingly, he treated the expenditure of ₹ 6,63,50,038/- as capital in nature as it was incurred for raising the capital of the assessee company. The said expenditure was also disallowed. 12. As in the earlier year 2005-06, the assessee had purchased software and claimed 60% depreciation amounting to ₹ 38,20,11,156/-. As already stated, the assessing authority treated the payments as having made towards Royalty liable for TDS. As there was no TDS made, sections 40(a)(i)/40(a)(ia) were invoked and the claim of depreciation was disallowed. 13. In the assessment year, the assessee-company had claimed the benefit of section 10A. While computing the said benefit the assessing authority excluded the telecommunication charges from the export turnover without a corresponding deduction from total turnover, thereby reduced the quantum of benefit, marginally. 14. To summarise, the disallowances made by the assessing authority were as follows : Sl. No Assessment years Item particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, he accepted the alternate contention of the assessee made on the basis of exception provided u/s.9(1)(b) of the Act. 20. In the assessment year 2005-06, the total payments of ₹ 3,53,20,000/- were made to the following parties : M/s. SYSTAT Software GmBH Germany .. ₹ 1,36,44,000 M/s. S2 Softtech Pvt. Ltd., - India .. ₹ 2,16,76,000 21. In the assessment year 2006-07, the entire payment of ₹ 39,08,79,350/- was made to M/s. Aamer Pacific, a Singapore company. 22. In the case of the payments made to the two foreign companies noted above, the Commissioner of Income-tax(A) found that those companies do not have any Permanent Establishment in India (PE). The services were rendered by those companies outside India. The payments were made outside India. The income was earned outside India. The income did not accrue or arise in India. He held that therefore the payments made to the above stated two foreign companies were covered by the exception provided in section 9(1)(b) and no tax was deductible and section 194J was not attracted and so also sections 40(a)(i)/ 40(a)(ia). He further relied on the following decisions, as well : Ishikawajima-Harim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld as incurred for obtaining technical services and liable for tax ? If so, whether the payments made to foreign companies were liable for TDS or not ? iii) Whether FCCB issue expenses are in the nature of Capital or Revenue ? iv) Whether the adjustment of telecommunication charges made u/s.10A is justified or not ? 29. We heard Shri. G. V. Gopala Rao, the learned Commissioner of Income-tax for the Revenue and Shri. V. Srinivasan, the Chartered Accountant appearing for the assessee. 30.1. The issue of depreciation has been discussed in detail in pages 02 to 10 of the assessment order for the assessment year 2005-06. The Commissioner of Income-tax(A) also has examined the issue in detail as discussed in pages 03 to 07 of his order. The assessing authority has held that the assessee has acquired only the right to use the software products and therefore the payments made would amount to payment of royalty where section 9 applies and consequently sections 194J and 40(a)((i)/40(a)(ia). 30.2. The Commissioner of Income-tax(A) has held that the above finding was based only on certain clauses of the agreements and he has not considered the clauses which enabled the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to securing of a licence to modify and market the software. The assessing authority has not discussed the clauses relating to purchase by exercising option and he has also not acknowledged the fact that the assessee had exercised the option and purchased the products. 30.6. In the light of the above facts, we find that the Commissioner of Incometax( A) is justified in holding that the assessee had purchased the software and capitalized the cost in asset account. Therefore, he is justified in holding that the payments made by the assessee against purchase of software cannot be held as Royalty . The Commissioner of Income-tax(A) is justified in deleting the disallowance of depreciation for both the assessment years under appeal. 30.7. The first issue of depreciation allowance on software is decided in favour of the assessee-company. 31. The Commissioner of Income-tax(A) has further held that sections 40(a)(i)/40(a)(ia) do not apply to depreciation as depreciation is not an expenditure in the nature of interest, rent, royalty, fees mentioned in those sections and depreciation cannot be disallowed for violation of section 194J. As the issue has already been decided on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s.9(1)(b) applies to the payments made to the two foreign companies. 33.8. The Hon'ble jurisdictional High Court in the case of Jindal Thermal Power Company Ltd., v. DCIT (26 DTR 172) (Kar) has held that the criteria of rendering service in India and the utilization of service in India laid down by Hon'ble Supreme Court in Ishikawajma's case remains the same in spite of Explanation inserted to Section 9(2). 33.9. Therefore, the Commissioner of Income-tax(A) is justified in deleting the disallowance of ₹ 1,36,44,000/- for the asst. year 2005-06 and ₹ 39,08,79,350/- for the asst. year 2006-07, being the payments made to German company and Singapore company respectively. 33.10.So also the Commissioner of Income-tax(A) is justified in confirming the disallowance of ₹ 2,16,76,000/- for the asst. year 2005-06 being the payment made to Indian company, M/s. S2 Softtech Pvt. Ltd., 34.1. Next is whether FCCB issue expenses are capital or revenue in nature. The assessee company had incurred expenses in connection with the issue of foreign currency convertible bonds. Assessee claimed the expenses as deductible as the expenses were incurred to raise l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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