TMI Blog2021 (8) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to the question whether the Provision for software is a contingent liability or not, we notice the same has been decided in favour of the assessee by this bench of Tribunal in the assessee s own case in AY 2011-12 [ 2020 (12) TMI 470 - ITAT BANGALORE] . As assessee has furnished break-up details of Provision for software expenses identifying the provision so made with the vendors, who had supplied software. CIT(A) has extracted the relevant details in paragraph 6.0 of his order passed for both the years under consideration. Hence the reasoning given by the Tribunal in AY 2011-12 for allowing the identical claim is applicable to these two years also. Accordingly, we hold that the Provision for software expenses cannot be considered as contingent liability. Accordingly, we set aside the orders passed by Ld CIT(A) on this aspect in both the years under consideration. Disallowance u/s 40(a)(i) for non-deduction of tax at source on provision for software expenses - HELD THAT:- The issue relating to disallowance u/s 40(a)(i) requires to be set aside to the file of the AO for deciding this issue in accordance with the decision rendered by Hon ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection given by Ld CIT(A) with regard to the accounting year, claim of state tax. Disallowance u/s 14A - HELD THAT:- It is imperative that the AO should examine the claim of the assessee having regard to the accounts of the assessee and if he is not satisfied with the said workings, then only the AO can have resort to the provisions of Rule 8D of I T Rules. The Mumbai bench of Tribunal has also expressed identical view in the case of Tata Projects Ltd vs. ACIT [ 2021 (1) TMI 393 - ITAT MUMBAI] . In the instant case, admittedly the AO did not examine the correctness of the workings furnished by the assessee by having regard to the accounts of the assessee. Hence the AO could not have resorted to apply provisions of Rule 8D for computing disallowance as required u/s 14A of the Act. For the above said reason, the Ld CIT(A) was not justified in confirming the working made by the AO. We set aside the order passed by Ld CIT(A) on this issue in AY 2013-14 and direct the AO to delete the addition made by him u/s 14A of the Act. - ITA Nos.492 & 493/Bang/2018, ITA Nos.1151 & 1157/Bang/2018 - - - Dated:- 23-8-2021 - Shri N.V. Vasudevan, Vice President And Shri B.R. Baskaran, Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as filed a SLP in the Hon'ble Supreme Court challenging the above said decision of the Hon'ble Karnataka High Court. 6. We heard the parties on this issue. The Ld. A.R. submitted that the decision rendered by Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) has since been upheld by Hon'ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. (2018) 93 Taxmann.com 33. We notice that the decision rendered by Hon'ble Karnataka High Court has been upheld by Hon'ble Supreme Court in the case of HCL Technologies Ltd (supra) with the following observations: 17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT V. Tata Elxsi Ltd. (2012) 204 Taxman 321/17/taxmann.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under section 10A of the I.T. Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an identical issue is extracted below:- 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 no dispute with 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. Paragraph (4)(i) of Accounting Standard - 1 provides as under: Prudence: 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 the available information. Further, the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) has explained the nature of provision for expenses created by the assessee as under: A provision is a liability which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, software AMC charges etc availed/utilized during the year from various vendors. In the absence of invoices received from vendors for these services, at year end, the respective user dept's provide the likely payments to be made for the software licenses/services utilized during the year. The appellant made provision for the said expenditure and included the same under the head 'software expenses' for the year ending 31st March, 2011. 16. We notice that the 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing four types of situations, which has been narrated as under:- 4. The appeals before us may be grouped into four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. (iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or endusers. (iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, nonresident suppliers to resident Indian distributors or end-users. 10.6 The Hon'ble Supreme Court analysed sample agreements in respect of all the four categories and gave the following finding:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 10.7 After analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with non-resident software suppliers, provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The agreements entered by the assessee with the non-resident software suppliers are required to be examined to find out whether the licence that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a licence which imposes restrictions or conditions for the use of computer software. 10.9 In the instant cases, the relevant agreements have not been examined by the tax authorities. In fact, the assessee has also appears to have not produced the agreements before the AO. Accordingly, we are of the view that the issue relating to disallowance u/s 40(a)(i) requires to be set aside to the file of the AO for deciding this issue in accordance with the decision rendered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd (supra), after duly examining the relevant agreements. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO. 11. The next common issue urged by the assessee relates to the disallowance made u/s 40(a) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) to do so. We notice that an identical issue has been decided by this bench of Tribunal in the assessee s own case relating to AY 2011-12 in ITA No.491/Bang/2018 dated 11-12- 2020. The relevant observations made and the decision taken by the Tribunal are extracted below:- 20. The next issue contested by the assessee relates to disallowance of software expenses treating the same as capital in nature. Since the Ld CIT(A) has remanded this issue to the file of the AO with certain directions, the revenue is questioning the authority of Ld CIT(A) to do so. 21. The facts relating to this issue are discussed in brief. We noticed earlier that the assessee had claimed expenses towards software purchases as deduction to the tune of ₹ 24,97,00,999/-. The AO disallowed following items out of the above said claim:- Provision for software purchases - ₹ 3,89,30,461 Disallowance u/s 40(a)(i)/(ia) - ₹ 1,35,82,093 The balance amount was ₹ 19,71,88,445/-. The AO treated this amount as capital in nature. The observations made by the AO are extracted below:- 6.3 For the balance amount of ₹ 19,71,88,445/- it is seen that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intenance 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) of the Act. In relation to expenditure incurred for IT consumables e.g. CDs, printer cartridges etc., the same needs to be treated as revenue expenditure. In case of software where the same can be used perpetually e.g.Operation system software like Windows, Application software like MS Office etc., the same needs to be treated as capital in nature. This is for the reason that in case of such software there is no restriction or limitation on its period of use. New versions of these software keep on becoming available in the market however there is no restriction on the use of the earlier version and a person can always choose not to buy the new version and continue with the version. A high rate of depreciation, which is 60% takes care of obsolescence of such software. 24. The revenue is questioning the authority of Ld. CIT(A) in restoring the matter to the file of A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the ITA No.491/Bang/2018 Infosys BPM Ltd., Bengaluru operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. Infact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t issue of benefit under Section 10A which is parimateria to Section 10AA of the Act was recently decided by the Hon ble Supreme Court in the case of Yokogawa India Ltd. (supra) and the SC held that the provision of Section 10A of the Act is in nature of deduction. The conclusion which can be drawn from a combined reading of the decision in case of Wipro Limited (Supra) and Yokogawa India Ltd. (Supra) will thus be that appellant would be eligible to claim benefit of Section 90/91 of the Act in relation to Foreign Tax Credit/State taxes paid in foreign country including the tax credit for which claim was made during assessment proceedings except in relation to such taxes paid in foreign country on an income on which benefit of Section 10AA is available to the appellant as the benefit under 10AA is in nature of a deduction and not exemption. 10.5 Further the accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in United States, falls within two year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Karnataka High Court, we are of the view that, what is required to be seen is whether the income u/s 10AA is chargeable to tax u/s 4 and is includible in the total income u/s 5. The fact that the assessee is not paying tax due to exemption or deduction granted under the Act is not relevant. Accordingly, we set aside the order of Ld CIT(A) in so far as it is contrary to the decision rendered by Hon ble Karnataka High Court in the case of Wipro Ltd (supra). The other directions given by Ld CIT(A) with regard to the accounting year, claim of state tax , do not require any disturbance. 13.4 Accordingly, we restore this issue to the file of AO to determine the Foreign Tax credit in the light of decision rendered by Hon ble Karnataka High Court in the case of Wipro Ltd and also the direction given by Ld CIT(A) with regard to the accounting year, claim of state tax. 14. In AY 2013-14, the assessee is urging the issue relating to disallowance made u/s 14A of the Act. 14.1 The AO noticed that the assessee has declared exempt income of ₹ 6,79,42,191/-. It disallowed a sum of ₹ 10,81,981/- u/s 14A of the Act. The assessee has allocated a portion of administra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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