TMI Blog2021 (1) TMI 463X X X X Extracts X X X X X X X X Extracts X X X X ..... regard should be examined by the AO and for the purpose we set aside the order of CIT(Appeals) and remand the issue to the AO for fresh consideration. Addition u/s 40(a)(ia) - Payment for software license fees - AO was of the view that payment in question was in the nature of royalty or fees for technical services and therefore taxable in India - whether payment for software license fee made by the Appellant is the consideration not for Copyright but for Copyrighted Article and hence, would not fall under the definition of the Royalty both under the Act and the respective DTAA between India and USA? - HELD THAT:- As relying on S. ALLEGIS SERVICES INDIA PVT. LTD. [ 2017 (9) TMI 1799 - ITAT BANGALORE] we hold that disallowance u/s. 40(a)(i) of the Act in the present case cannot be sustained as the obligation to deduct tax at source was in respect of the date and period prior to the decision rendered by the Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT] . Deduction u/s. 10A computation - communication charges inclusion - HELD THAT:- Taking into consideration the decision rendered by the Hon ble High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g difference as the same has been reversed in the next year and offered to tax. 2.5. The learned CITA(A) erred in not considering the submission filed by the Appellant during the course of hearing in this regard. 3. The assessee is a company engaged in the business of software development services. In the course of assessment proceedings, the AO noticed that the assessee had claimed a sum of ₹ 1,82,04,000 as exchange loss on forward covered contracts. In support of the claim for deduction, the assessee submitted before the AO as follows:- The company regularly enters into forward contracts during the normal course of its business to hedge the foreign currency payable/receivable by it on working capital account in order to guard itself against foreign exchange fluctuations. The company has been consistent in its practice of recognizing the gains/losses resulting out of forward contracts and has been offering the income, if any, to tax arising from such contracts in accordance with AS 11. Various courts have held that for the purposes of ascertaining taxable profits of a business, the principles of accounting should be applied so long as they are not in contradict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case, the assessee entered into a forward contract in order to protect its interest against fluctuations in foreign currency in respect consideration for export proceeds and there was an actual contract for sale of merchandise. The Tribunal held that such transactions cannot be termed as speculative transaction. 8. Reliance was also placed by him on the decision of the Hon ble Bombay High Court in the case of CIT v. D. Chetan (2016) 75 taxmann.com 300 (Bom). In the aforesaid case, the assessee entered into forward contract for the purpose of hedging in the course of normal business activities of import and export to cover up losses on account of differences in foreign exchange valuation. The Hon ble Court held that losses on account of differences would not be a speculative activity, but a business activity and deduction claimed should be allowed. The Hon ble High Court held as follows:- 7. The impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals), independently come to the conclusion that the transaction entered into by the Respondent assessee is not in the nature of speculative activities. Further the hedging transactions were enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Tribunal when it rendered its decision in S. Vinodkumar Diamonds (P.) Ltd. ( supra ). In the above case, this court has held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity. 9. It was contended by the ld. counsel for the assessee that the facts of the assessee s case are identical to the case decided by the Hon ble Bombay High Court and the deduction claimed should be allowed. 10. We have considered the rival submissions. A perusal of the order of the AO shows that the AO called upon the assessee to justify the allowability of the losses on account of exchange loss on forward contracts. The assessee gave two submissions dated 8.1.2014 and 23.1.2014, copies of which are placed at page nos. 26-27 28-34 respectively. In both the submissions, the details of forward contracts has not been mentioned. 11. As far as law on the issue is concerned, it is very clear that the forward contracts entered into for the purpose of protecting against loss and which has a nexus to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it will amount to a transfer of right to use software and would constitute royalty within the meaning of Article 12 of DTAA between India and USA. 14. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. Before us, the ld. counsel for the assessee submitted that payments in question had been made in the previous year relevant to AY 2010-11. He brought to our notice that the decision of Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) was rendered on 15.10.2011 and prior to the aforesaid decision, the law with regard to TDS for software licences was in favour of the assessee and the view taken was that there was no obligation to deduct tax on purchase of software licence. Since the obligation to deduction tax at source is at the time of making payment or credit in the books of account of the assessee and since as on that date, the law was that there need not be a TDS obligation, there may not be any disallowance u/s. 40(a)(i). The ld. counsel for the assessee in this regard has placed reliance on the following decisions:- 1. Allegis Services India (P.) Ltd. v. DCIT (2017) 86 taxmann.com 63 (Bengaluru Trib) 2. Teekays ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 section 194J/195 of the Act. It is submitted that 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 definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15, 2011). Courts have consistently upheld this principle as seen in: ● ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) ● Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) ● Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) ● Channel Gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. It has also referred to in the case of Sonic Biochem Extractions Pvt. Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations:- The assessee purchased software, capitalized the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer involved the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of royalty . Explanation 2 to section 9(1)(vi) cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f royalty. Respectfully following the decision of co-ordinate Bench of this Tribunal, we delete the disallowance made by the Assessing Officer. 17. Following the aforesaid decision, we hold that disallowance u/s. 40(a)(i) of the Act in the present case cannot be sustained as the obligation to deduct tax at source was in respect of the date and period prior to the decision rendered by the Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) . 18. In the result, the appeal by the assessee is partly allowed. ITA No.1660/Bang/2019 (Appeal by the Revenue) 19. The grounds of appeal raised read as follows:- 1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The Ld. CIT (A) erred in allowing the assessee's appeal on the issue of deduction claimed u/s 10A where the matter is pending before the Hon'ble Supreme Court and the same has not reached finality. 3. The Ld. CIT (A) erred in allowing the assessee's claim of contribution to recognized superannuation fund by accepting the additional evidence in violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record room because of space constraint. By the time the said documents were located, the AO had already passed his order by disallowing the said sum. Hence, the assessee was prevented by sufficient reason from producing the said documents before the Assessing Officer. Further, the assessee has furnished the copy of the approval for the AY 2010-11 by the Commissioner of Income Tax (LTU) and also copy of the deed of Superannuation Fund executed on 06.07.2009 as additional evidence vide their submission dated 7 February 2017. In view of this, assessee submitted that the said additional evidence may be accepted and the relief to be given in this regard. As the assessee has furnished copy of approval by CIT(LTU) and as the concerned approval has existed for the pertinent assessment year, the CIT(Appeals) observed that the claim of contribution to prove superannuation fund has to be allowed and deleted the disallowance made by the AO. 24. The ld. DR reiterated the stand of revenue as contained in ground No.3. We are of the view that the stand taken by the revenue cannot be sustained. The recognition of superannuation fund granted by the CIT, LTU is a department s own document and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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