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ITO-9 (2) (2) , Mumbai Versus M/s Kalypto Risk Technologies P. Ltd. And Vice-Versa

2016 (7) TMI 1180 - ITAT MUMBAI

Disallowance of depreciation on capitalization of software development - Held that:- As the assessee is a software development company and the cost of the development of the software is an intangible asset and the product license are IPR’s. In view of the provision of the Act and AS-26 and further the fact that the cost of development of the software is an intangible asset and the IPR’s is the product, license is not in dispute, therefore, we find no infirmity in the conclusion drawn by the ld. .....

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by the department. Neither the ld. Commissioner of Income Tax (Appeals) found any suppression of sale nor anything was pointed before us. Even otherwise, nothing was brought on record by the Revenue evidencing that the project was completed during the year itself, thus, we affirm the stand of the ld. Commissioner of Income Tax (Appeals).This matter was kept for clarification by the Bench with respect to the front end commissions and as per the facts as emerging from the records, orders of the a .....

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agent i.e. 3I Infotech nor it could be brought on record that any technical services or technical knowhow or technical expertise, experience or expertise is provided by the 3I Infotech, Dubai and also the front commission pertains to the period prior to the new circular no. 7/2009 dated 22.10.2009, we hold that there was no liability on the part of the assessee to deduct tax at source on the said payment u/s 195 of the Act and the AO erred in invoking the provisions of Section 40(a) of the Act r .....

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4/2008 for which invoice for USD 70000 was raised which is 50% of USD 1,40,000. It is also noted that in case of product, License Company and accounting of the Revenue is based on percentage completion of work method. We find no suppression of sale as has been alleged by the Revenue. We have also perused and analyzed the agreement entered into between the parties and found that practically no work was commenced in the month of March, thus, no addition was warranted. - Rejection of books of a .....

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treating the proportionate value of incidental expenses - Held that:- Assessing Officer has not pointed out any infirmity in the explanation of the assessee. The totality of facts, clearly indicates merits in the contention of the assessee and as canvassed by the assessee, the ld. Assessing Officer made the addition to the cost of treating the proportionate value of incidental expenses ignoring the standard practices adopted by the assessee. In view of the explanation of the assessee, we allow .....

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ll as the Revenue is in cross appeal for A.Y. 2009-10, challenging the order dated 10/12/2009, whereas, the Revenue is aggrieved by the impugned order dated 12/12/2011 (A.Y. 2008-09) of the ld. First Appellate Authority, Mumbai. 2. First, we shall take up appeal of the Revenue (ITA No.1275/Mum/2012) for A.Y. 2008-09, wherein, the first ground pertains to deleting the addition of ₹ 18,57,208/-, made on account of disallowance of depreciation on capitalization of software development. The cr .....

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48 and 449 of the paper book by further submitting that IPR s useful life should not exceed ten years by contending that deprecation is governed by appendix of Income Tax Rules, wherein, rate of depreciation is provided at the rate of 25%, whereas, the Assessing Officer has applied rate of 10% for the whole year. It was also pleaded that the assessee was assessed u/s 143(3) of the Act by the same Assessing Officer for A.Y. 2007-08 to 2012-13, granting relief to the assessee by the Assessing Offi .....

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erial available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, the facts, in brief, are that the assessee is a private limited company, engaged in development of risk based software mainly for banking industry. The assessee along with development of software also providing annual maintenance contract (AMC), after completion of warranty period. As per the assessee, normally, the development of software and its implementation services are like a pr .....

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e same, which was regularly followed by the assessee and the department accepted the same. However, the ld. Assessing Officer applied the amortization over a period of ten years ignoring the rates of depreciation, provided under the Income Tax Act, 1961, u/s 32, Rule 5(appendix -1 part-B). The ld. Assessing Officer asked the assessee to justify the claimed expenses under the head depreciation against intangible assets capitalized in software development. The assessee explained his position, howe .....

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ess this expenditure can be directly attributed to making the asset ready for use. b. Clearly identified inefficiencies and initial operating losses incurred before an asset achieves planes performance; and c. Expenditure on training the staff to operate the asset. Past Expenses not to be Recognised as an Asset 58. Expenditure on an intangible item that was initially recognised as an expense by a reporting enterprise in previous annual financial statements or interim financial reports should not .....

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itions are met, the subsequent expenditure should be added to the cost of the intangible asset. Amortisation period 63. The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Amortisation should commence when the asset is available for use. 64. As the future economic b .....

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et including: (a) the expected usage of the asset by the enterprise and whether the asset could be efficiently managed by another management team; (b) typical product life cycles for the asset and public information on estimates of useful lives of similar types of assets that are used in a similar way; (c) technical, technological or other types of obsolescence; (d) the stability of the industry in which the asset operates and changes in the market demand for the products or services output from .....

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65. Given the history of rapid changes in technology, computer software and many other intangible assets are susceptible to technological obsolescence. Therefore, it is likely that their useful life will be short. 66. Estimates of the useful life of an intangible asset generally become less reliable as the length of the useful life increases. This Standard adopts a presumption that the useful life of intangible assets is unlikely to exceed ten years. Know-how, patents, copyrights, trademarks, l .....

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by way of renovation or improvement in or in relation to a building referred to in Explanation 1 of clause (ii) of sub-section (1) of section 32, the percentage to be applied will be the percentage specified against sub-item (1) or (2) of item 1 as may be appropriate to the class of building in or in relation to which the renovation or improvement is effected. Where the structure is constructed or the work is done by way of extension of any such building, the percentage to beapplied would be su .....

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m passenger motor vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "roadroller". The expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxicab", "motor-cab", "tractor" and "road-roller" shall have the meanings respectively assigned to them in se .....

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from the plant to the storage facility. 10. "Speed boat" means a motor boat driven by a high speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometres per hour in still water / and so designed that when running at a speed, it will plane, i:e; its bow will rise from the water] 2.3. If this issue is analyzed with respect to principle of consistency, it is also noted that for A.Y. 2007-08, no addition was made by the same Assessing Officer. Further .....

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106 ITR 1 (SC) ii. Security Printers 264 ITR 276(Del.) iii. CIT vs Neo Polypack Pvt. Ltd. 245 ITR 492 (Del.) iv. CWT vs Allied Finance Pvt. Ltd. 289 ITR 318 (Del.) v. Berger Paints India Ltd. vs CIT 266 ITR 99 (SC) vi. DCIT vs United Vanaspati (275 ITR 124) (AT)(Chandigarh ITAT) vii. Union of India vs Kumudini N. Dalal 249 ITR 219 (SC) viii. Union of India vs Satish Pannalal Shah 249 ITR 221 ix. B.F.Varghese vs State of Kerala 72 ITR 726 (Ker.) x. CIT vs Narendra Doshi 254 ITR 606 (SC) xi. CIT v .....

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ation is also a principle which has to be followed. Before us, no contrary facts or any adverse material was brought on record by the Revenue, therefore, we find no infirmity in the finding/conclusion of the ld. First Appellate Authority. We affirm his view being uncontroverted on fact. 2.4. Thus, totality of facts, clearly indicates that the assessee is a software development company and the cost of the development of the software is an intangible asset and the product license are IPR s. In vie .....

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i Infotech being suppressed sales as per agreement with 3i Infotech. 3.1. The crux of argument advanced by ld. DR is in support to the assessment order by inviting out attention to the finding contained in the order of the ld. Assessing Officer as well as of the ld. Commissioner of Income Tax (Appeals). On the other hand, the ld. counsel for the assessee drew our attention to page 62 of the paper book, containing agreement with the assessee dated 29/10/2010, page 72, page 74 with respect to term .....

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al i.e. $ 1,60,000. Our attention was further invited to page 75 containing the ledger account of the party. It was also explained that prior to issue of Circular No. 7 of 2009 dated 22/10/2009 income was not taxable in India (page 253 of the paper book) and further Circular NO.786 dated 07/02/2000 (page 254 of the paper book). It was explained that the case of the assessee is prior to circular, thus, the circular has to be applied prospectively for which reliance was placed upon the jurisdictio .....

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d for which the said foreign agent is paid the front end commission for securing the export order of the software for the assessee company, realize the payments from the ultimate user of the software i.e. Skype Bank and to remit the same to the assessee company in India. Further statement was also made by the ld counsel for the assessee that the said 3I Infotech, Dubai has not rendered any part of the services in or from India and all the services for generating export order in favour of the ass .....

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any is the owner of the said proprietary software . The said 3I Infotech has sublicensed the said proprietary software to Skype Bank, Nigeria on the terms and conditions set forth in the agreement. The ld AR relied upon the decision of Hon ble Madras High Court in the case of CIT v. Farida Leather Company in Tax Case Appeal No. 484 of 2015 , judgment dated 20-01-2016. The ld counsel made statement that the foreign agent rendered all services outside India and no part of services are rendered in .....

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assessee. On being asked by the Bench,the Ld DR did not controvert the statement and submissions made by the ld counsel for the assessee. 3.2. We have considered the rival submissions and perused the material available on record. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that the A .....

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onsidered in para 4.2 of the impugned order and then reached to conclusion. The working mentioned in para 4.2 is exactly in terms of the agreement, wherein, no contradiction was pointed out by the department. Neither the ld. Commissioner of Income Tax (Appeals) found any suppression of sale nor anything was pointed before us. Even otherwise, nothing was brought on record by the Revenue evidencing that the project was completed during the year itself, thus, we affirm the stand of the ld. Commissi .....

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nging export order of software in favour of the assessee company and since it could not be brought on record by the Revenue that services were rendered from or in India by the said foreign agent i.e. 3I Infotech nor it could be brought on record that any technical services or technical knowhow or technical expertise, experience or expertise is provided by the 3I Infotech, Dubai and also the front commission pertains to the period prior to the new circular no. 7/2009 dated 22.10.2009, we hold tha .....

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Officer, whereas, the ld. Counsel for the assessee invited our attention to the agreement dated 27/03/2008 (Page 91 of the paper book) which was agreed upon in Dubai. Our attention was further invited to page 113 of the paper book (schedule III) by contending that the assessee employed technician in Dubai for whom visa was applied, therefore, it was practically impossible to employ within three days, therefore, the assessee billed on 01st April, 2008 by inviting our attention to page 132 of the .....

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issioner of Income Tax (Appeals) justifiably examined the documentary evidence filed by the assessee (Para 5.2 of the impugned order), terms of the agreements, and found that 50% of the payment were to be received on implementation. The contract was signed on 27/03/2008 and up to 31/03/2008, there was no implementation of work rather the work started on 01/04/2008 for which invoice for USD 70000 was raised which is 50% of USD 1,40,000. It is also noted that in case of product, License Company an .....

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o M/s Centurian Bank of Punjab, being unaccounted sales. The crux of argument on behalf of the Revenue, is identical to the ground raised. On the other hand, the ld. counsel for the assessee contended that the facts are identical to ground no. 3. 5.1. We have considered the rival submissions and perused the material available on record. We have also perused the agreement along with the terms of contract as per which 50% of the license fee and 50% of the implementation was to be received as advan .....

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on the customer during the year itself. There is no question of suppression of sale as has been alleged. We affirm the stand of the ld. Commissioner of Income Tax (Appeals). 6. The next ground pertains to addition of ₹ 19,00,044/- ($ 48200) on account of M/s Ducont FZ-LLC, being unaccounted sales as per agreement with M/s Duncont FZLLC. The crux of argument on behalf of the Revenue is identical to the ground raised by defending the addition made by the ld. Assessing Officer. On the other .....

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n para 7.2 along with the circular no. 7 of 2009 dated 22/10/2009 withdrawing all circulars and find that the ld. Assessing Officer erroneously made addition of 100% of front end commission of $ 48200, whereas, the invoice was in fact raised on only of 40% of the contract value. The circular are to be applied prospectively unless and until specifically mentioned to be applicable retrospectively. We affirm the stand of the ld. Commissioner of Income Tax (Appeals). 7. The next ground pertains to d .....

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to page 253 to 257 of the paper book. 7.1. We have considered the rival submissions and perused the material available on record. Before the ld. Commissioner of Income Tax (Appeals), the stand of the assessee was that the alleged circular no.7, dated 22/10/2009 is not applicable to the facts of the case as the same is effective prospectively. We note that the ld. Assessing Officer applied Circular No. 7 of 2009 to the transaction of the assessee prior to F.Y. 2007-08 when the circular was not in .....

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decision shall apply to the front end commission of ₹ 62,83,660 paid by the assessee to 3i Infotech, Dubai and ₹ 19,00,044/- paid by the assessee to M/s Ducont FZ-LLC in the instant ground of appeal 8. The last ground raised by the assessee pertains to applicability of section 145(1) and 145(3) in rejecting the books of accounts by the Assessing Officer. The crux of the argument on behalf of the Revenue is identical to the ground raised. On the other hand, the ld. counsel for the ass .....

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skins, one of the big audit firms, who have not commented anything adverse/deviation in their audit report, thus, we find no infirmity in the conclusion of the ld. Commissioner of Income Tax (Appeals). We affirm the same. Finally, we find no merit in the appeal of the Revenue, consequently, dismissed. 9. Now, we shall take up the appeal of the assessee (ITA No.2295/Mum/2013) for A.Y. 2009-10, wherein, first ground raised, pertains to confirming the addition of ₹ 30,33,657/-, arbitrarily, t .....

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ation on fixed assets of the premises used by the employees (located in the premises). It was explained that from A.Y. 2007-08 and till date, no disturbance to the claim of the assessee was made and the Assessing Officer accepted for A.Y. 2007-08, 2008-09 and merely for A.Y. 2009-10, he says other administrative cost also to be allocated. It was contended that no adjustment was made in other years. Our attention was invited to accountant standard AS-26 (Page 446 of the paper book) and further pa .....

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contention because in the absence of contrary facts/adverse material, the department is expected to follow the consistency. Even otherwise, as para 54 (Page 446) with respect to AS-26, the following are not components of the cost of an internally generated intangible asset. a. Selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to making the asset ready for use. b. Clearly identified inefficiencies and initial operating losses incurr .....

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es the planned performances; and (c) Expenditure on training the staff to use the internally generated software. 9.3. In view of the above, we note that the ld. Assessing Officer has not pointed out any infirmity in the explanation of the assessee. The totality of facts, clearly indicates merits in the contention of the assessee and as canvassed by the assessee, the ld. Assessing Officer made the addition to the cost of treating the proportionate value of incidental expenses ignoring the standar .....

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r a period of 10 years by applying of 10% ignoring the rates of depreciation as provided by the Act under section 32 Rule 5 (Appendix 1-part B). 10.1. The crux of argument on behalf of the assessee is identical to ground no. 1 of the appeal of the Revenue for A. Y. 2008-09. The ld. DR consented that this ground is identical to the ground in the appeal of the Revenue. 10.2. We have considered the rival submissions and perused the material available on record. An elaborate discussion has been made .....

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d not controvert the assertion of the assessee. 11.1. So far as the issue of suppression of sale is concerned, we have deliberated upon, identically, on the issue while discussing ground no. 2 for A.Y. 2008-09 in the appeal of the Revenue, wherein, we find that there was no suppression of sale by the assessee as was alleged by the Assessing Officer, therefore, on the same reasoning, we allow this ground of the assessee. 12. The next ground with respect to not allowing the front end commission as .....

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on in earlier para of this order, while deciding the appeal of the Revenue for A.Y. 2008-09, having discussed Circular No.7 of 2009 dated 22/10/2009, which was held to be not applicable to the facts of the case and further holding that it is applicable prospectively, thus, this ground of the assessee is also allowed. 13. The last ground pertains to making disallowance of ₹ 1,14,681/- u/s 40(a)(ia) of the Act instead of disallowing of ₹ 4,000/- on which TDS amounting to ₹ 453 wa .....

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8 of the assessment. The ld. counsel for the assessee, explained that there was typographical error in writing the due date of remittance to the government. We have perused the record and find merit in the contention of the AR because instead of 07th February of 07th March, 2000, it was on 07th February and 07 March, 2009, thus, since there is no loss to the Revenue. The claim of the assessee is further fortified by page 42 of the paper book. Thus, this ground of the assessee is allowed as TDS .....

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