TMI Blog2020 (12) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the fact that the assessee is following mercantile system of accounting. The assessee being a company, it is required to follow accounting standards prescribed by ICAI and also by the Central Government under the Income Tax Act. As per accounting standard-1 prescribed by the Central Government, the assessee is required to make provision for all known liabilities and losses even though the amount cannot be determined with certainty. Assessee has explained the basis for creating the provision for expenses. The Ld. A.R. also submitted that the accounts of the assessee have been audited by the statutory auditors and they did not find any fault with the quantum of provision for software expenses created by the assessee. Hence it is not a case that there was no basis for creating the Provision for software purchases. Accordingly, we are of the view that the provision for software expenses created by the assessee cannot be considered as contingent liability. Disallowance u/s 40(a)(i) is liable to be deleted for the year under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance. Disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct (b) Whether Ld CIT(A) has power to remit the issue of disallowance of software expenses treating it as Capital expenditure to the file of AO? 4. The assessee is engaged in the business of providing business process outsourcing services . 5. We shall take up the appeal of the revenue first. In its appeal, the first issue contested by the revenue relates to deduction claimed u/s 10A of the Act i.e. whether expenses that were reduced from export turnover should also be reduced from the total turnover or not. The assessee claimed deduction u/s 10A of the Act. While computing the deduction u/s 10A, the assessee reduced communication expenses from both export turnover and total turnover and accordingly computed amount of deduction. The A.O. was of the view that the communication expenses should be deducted from only export turnover and not from Total turnover. Accordingly, he recomputed the deduction u/s 10A of the Act. The Ld. CIT(A) allowed the claim of the assessee by following the decision rendered by Hon ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (2012) 349 ITR 98. The revenue has challenged the said decision of CIT(A) by submitting that the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software expenses amounting to ₹ 3.89 crores. The A.O. disallowed the provision for software expenses by observing that it is only provision in nature. It appears that the A.O. has taken the view that the provision for software expenses is a contingent liability. 10. The Ld. CIT(A) also confirmed the disallowance by concurring with the view taken by the A.O. The Ld. CIT(A) also held that the provision for expenses is liable to be disallowed u/s 40(a)(i) of the Act for non-deduction of tax at source. In this regard, the Ld. CIT(A) followed the decision rendered by Bangalore bench of Tribunal in the case of IBM India Pvt. Ltd. (2015) 59 Taxmann.com 107 wherein it was held that the TDS provisions will also apply to provision for expenses created by the assessee. 11. The Ld. A.R. submitted that the provision for software expenses is created by the assessee as at the yearend as per the accounting standards prescribed by Income Tax department as well as ICAI. As per the accounting standars, provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance made u/s 40(a)(i) of the Act. In support of this proposition, the Ld. A.R. relied on the decision rendered by Bangalore bench of Tribunal in the case of M/s. Acer India Pvt. Ltd. Vs. DCIT (IT(IT)A Nos.107 to 114/Bang/2018 dated 5.10.2020). Accordingly, the Ld. A.R. submitted that the disallowance made u/s 40(a)(i) should be deleted in respect of provision for software expenses for the year under consideration, since it pertained to the period prior to the date of rendering of decision by Hon ble Karnataka High Court in the case of Samsung Electronics Ltd. (supra). 13. On the contrary, the Ld. CIT(DR) submitted that the provision for software expenses are in the nature of contingent liability and hence the same was disallowed by A.O. and Ld. CIT(A). In the alternative, the Ld. CIT(A) has held that the provision for software expenses is liable for deduction of tax at source. Since the assessee has failed to deduct tax there from, the Ld. CIT(A) has disallowed the same u/s 40(a)(i) also. 14. We heard the rival contentions on this issue and perused the record. The first question is whether the provision for software expenses is a contingent liability or not. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,000 5. Microsoft Corporation 15,94,890 6. Skelta Software Private Ltd. 1,52,070 7. Ariba India Private Ltd. 12,50,000 8. Thomson Financial 1,33,424 9. BIQ LLC 5,52,000 10. Hewlett Packard Singapore 32,790 11. Oracle Corporation 45,57,088 12. EMC Information Systems 1,08,810 13. Tungsten Network 1,18,03,850 Total 3,89,30,461 6.1 The appellant also made following submissions: 2. Provision for software expenses amounting to ₹ 3,89,30,461 was made in respect of software licenses used, license updates, support services, software implementation services, soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next issue contested by the assessee is disallowance of Software expenses of ₹ 1,35,82,093/- u/s 40(a)(i) of the Act. The AO disallowed this amount also for non-deduction of tax at source from the payment made for purchase of software. While dealing with the earlier issue, we have held that the assessee cannot be fasted with TDS liability on account of subsequent decision of Court or subsequent amendment to the Act. We have also extracted the decision rendered by the co-ordinate bench in the case of Infineon Technologies India Pvt. Ltd (supra). The said decision shall apply to this addition also. Since the year under consideration falls prior to the date of decision rendered by Hon ble Karnataka High Court in the case of Samsung Electronics Ltd (supra), following the decision rendered by the co-ordinate bench in the case of Infineon Technologies India Pvt. Ltd (supra), we hold that no disallowance u/s 40(a)(i) is required to be made during the year under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance. 20. The next issue contested by the assessee relates to disallowance of software expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of purchase invoices. 23. The Ld. CIT (A) noticed that some of the invoices were related to financial year 2009-10 and not to the year under consideration. Accordingly, the Ld. CIT(A) restored the matter to the file of the A.O. with the following directions. All purchase of software licenses, for which detail of license period is available on the invoices or is produced by the appellant and if the same is for a period up to two years, the same should be allowed as revenue expenditure, provided the invoice relates to the FY 2010-11 and tax at source has been deducted on the same. In case the invoice relates to some earlier year, the expenditure needs to be disallowed as prior period expenditure. In case relevant invoice is not produced, the amount needs to be disallowed as being not verifiable. In relation to expenditure incurred for software implementation, maintenance services, software AMC charges and fees for included services, the same needs to be treated as revenue expenditure and allowed as such provided tax at source has been deducted on the same. In case of non deduction of tax at source the same needs to be disallowed under Section 40(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33,14,298/-. The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software . The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
