TMI Blog2022 (11) TMI 723X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from training fee and related course material, is not entitled for deduction u/s.10B of the Act. Therefore, consistent with view taken by the co-ordinate bench, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the assessee. As regards alternate claim of the assessee, the AO is directed to verify the claim and if found correct, the assessed net income under the head income from other sources . Rental income under the head income from other sources - AO has assessed rental income under the head income from other sources on the ground that said income is not in the nature of profits gains derived from export unit and thus, denied deduction claimed u/s.10A - HELD THAT:- The issue needs to be set aside to the file of the AO for further verification. In case, the assessee derived rental income from lease of land building, then definitely said income is assessable under the head income from house property and consequent action needs to be followed. But, in case, rental income is derived from lease of plant machinery or equipment, then same needs to be assessed under the head income from other sources and consequent action needs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO to exclude expenditure incurred towards software development and foreign exchange loss from total turnover also. Depreciation on IPR - HELD THAT:- As in the assessee s own case for the AY 2002-03 where the Tribunal after considering relevant facts held that IPR is eligible for depreciation u/s.32(1)(i) of the Act. Therefore, consistent with view taken by the co- ordinate Bench, we are of the considered view that there is no error in the reasons given by CIT(A) to delete additions made towards disallowance of depreciation on IPR and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue. Nature of expenditure - expenditure on purchase of software - Revenue expenditure or capital expenditure - HELD THAT:- Although, the assessee has purchased software to replace with existing software in a computer system, but same does not give any enduring benefit, because the life of software is very short. Therefore, the same cannot be considered as capital in nature. We find that the jurisdictional high Court of Madras in the case of Southern Roadways Ltd., [ 2006 (10) TMI 82 - MADRAS HIGH COURT] has considered an identical iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Inc., and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue. Allocation of disallowance of expenses among STP Units and non-STP Units in the ratio of 90% and 10% on the basis of income of the assessee - allocation of disallowance on said expenses is whether it should be on the basis of income or turnover - AO has disallowed certain liabilities u/s.43B as per Tax Audit Report and allocated said disallowances to STP Units and non-STP Units on the basis of income derived by the assessee - HELD THAT:- In our considered view, turnover would be the appropriate ratio for allocation of expenses to STP Units non-STP Units instead of income. Because, income of STP Units non-STP Units may depend upon various factors including fixed overhead expenses and other parameters. Therefore, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to allocate disallowance of expenses u/s.43B of the Act, to STP Units non-STP Units on the basis of export turnover and domestic turnover and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue. - ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same needs to be assessed under the head income from other sources , then only net income after expenses needs to be assessed. 3.2 The ld.Sr.DR/Dr.S.Palanikumar, for the Revenue, on the other hand, supporting the order of the Ld.CIT(A) submitted that this issue is covered against the assessee by the decision of the ITAT Chennai Benches, in assessee s own case, for the AY 1996-97 in ITA Nos.1597 1598/Mds/2008, wherein, the Tribunal after considering the nature of receipt, held that income from sale of course material, is assessable under the head income from other sources . 3.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee is in the business of software development services and derived income from export of software and services from Software Technology Park Units (in short STP Units ). The assessee also derived income from training and related course materials. The assessee had declared income from course material under the head other income in the P L A/c. Further, from the details filed by the assessee, it is undoubtedly clear that income from course material, is not at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the Ld.CIT(A), submitted that there is no clarity on income derived by the assessee, whether it is from leasing of land building or any other equipment. Therefore, the AO has rightly assessed said receipt under the head income from other sources and their orders should be upheld. 4.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. It is an admitted fact that the assessee has declared rental income under other income in the P L A/c. Further, there is no details as regards whether rental income is derived from leasing of land building or any plant machinery or equipment. Further, even in the assessment order there is no details about nature of rental receipt. Although, the Ld.CIT(A) directed the AO to assess rental receipt under the head income from business profession and also allow consequent expenses, but there is no discussion on nature of rent received by the assessee. Therefore, we are of the considered view that the issue needs to be set aside to the file of the AO for further verification. In case, the assessee derived rental income from lease of land building, then defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on non-compete fee by following the decision of ITAT in the assessee s own case for the AYs 2001-02 2002-03, where the Tribunal held that non-compete fee is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act. The matter reached to the Hon ble Madras High Court and the jurisdictional High Court of Madras had considered an identical issue in the case of Pentasoft Technology Ltd. (supra) and held that non-compete fee is in the nature of intangible asset in terms of sec. u/s.32(1)(ii) of the Act, and would be a capital asset entitled for depreciation. The relevant findings of the Hon ble Madras High Court are as under: 11. We have carefully considered the submissions made on either side and perused the materials available on record. 12. The assessee entered into an agreement dated 23.02.2000 with Pentamedia Graphics Limited. Under the said agreement PMGL was a transferor and the assessee was the transferee. The transferor was carrying on business in multimedia and software development and it identified the multimedia, which is poised for major growth in future as its core business and decided to hive off the software business and training and the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was disallowed. 13. The First Appellate Authority, on appeal by the assessee against the said finding of the Assessing Officer, observed that the assessee has not only acquired trade mark but also licence to sell 25 different types of products acquired from PMGL, which it had sold to India and abroad after acquisition i.e. on 1.4.1999 and that the assessee also acquired commercial right to conduct training programmes with the use of trade mark pentasoft and engaged in software development and export in the line of various software products acquired from PMGL exclusively. Further it took note of the fact that PMGL has been restrained to engage in the two activities by virtue of the non-competition agreement between them for which the assessee paid Rs.180 crores to PMGL. Therefore, after taking note of the AS26 issued by ICAI, that IPRs and non-compete fee are classifiable as intangible assets as in the assessees case it satisfies the criteria, viz., it was identifiable; it was controllable and economic benefits flowed out to the enterprise. Since the three criteria were satisfied and the assets were unconditionally transferred by PMGL, the First Appellate Authority held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be relevant to refer to the said provision, which reads as under: Depreciation: 32(1) [in respect of depreciation of (i)........... (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed -] Therefore, in terms of the above provision, deduction is allowable in respect of depreciation of patents, copy rights, trade marks, licence, franchise, etc or any other business or commercial rights of similar nature. There is no difficulty insofar as the trade mark and copy rights, which have been transferred in favour of the assessee. 19. The only issue is whether non-compete agreement/arrangement would fall within the ambit of clause (ii) of Section 32(1) of the Act. 20. It is the case of the Revenue that this non-compete fee is in the nature of a negative right and it cannot be of a commercial right of similar nature and the expression similar nature shall be relatable to patents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said right shall cease and vest in the exchange when his membership gets forfeited to the exchange; that on such forfeiture the right of membership gets vested in the exchange and on such vesting the exchange has the right to deal with it as it may think fit. That, on forfeiture even the right of nomination vests in the exchange. Thus, a non-defaulting continuing member owns the right of nomination with respect to the membership of the exchange till his right of membership is forfeited to the exchange. However, the Hon ble Supreme Court observed that the right of membership including the right of nomination gets vested in the exchange on the demise/default committed by the member; that on such forfeiture and vesting in the exchange, the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/defaulting member to the exchange or clearing house. 26. It further held that it is this right of membership, which allows the non-defaulting member to participate in the trading session on the floor of the exchange. The said membership right is the business or commercial right conferred by the rules of the Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, supporting the order of the Ld.CIT(A), submitted that as per law, export turnover and total turnover has been defined and further, while computing deduction u/s.10A/10B of the Act, expenses incurred in foreign currency needs to be excluded from export turnover. However, same need not be excluded from total turnover. But, he fairly agreed that the issue is covered in favour of the assessee by the decision of the Hon ble Supreme Court in the case of HCL Technologies Ltd. (supra). 7.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The issue of computation of deduction u/s.10A of the Act, in light of definition of export turnover and total turnover, has been resolved by the Hon ble Supreme Court in the case of HCL Technologies Ltd., where it was held that expenses deducted from export turnover needs to be deducted from total turnover. Therefore, we are of the considered view that the AO the Ld.CIT(A) is erred in not excluded expenses deducted from export turnover from total turnover and thus, we direct the AO to exclude expenditure incurred towards software development and foreign exchange loss from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred by the assessee for purchase of software is capital in nature, because it gives enduring benefit and thus, the Ld.CIT(A) is erred in deleting additions made towards capital expenditure. 9.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Although, the assessee has purchased software to replace with existing software in a computer system, but same does not give any enduring benefit, because the life of software is very short. Therefore, the same cannot be considered as capital in nature. We find that the jurisdictional high Court of Madras in the case of Southern Roadways Ltd., (supra) has considered an identical issue and held that there is an enduring benefit, it does not result in acquisition of any capital asset and merely enhanced the productivity or efficiency of the system and thus, it cannot be considered as capital in nature. The Ld.CIT(A) after considering relevant facts and also by following the decision in the case of Southern Roadways Ltd., (supra) has rightly deleted the additions made by the AO and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next issue that came up for our consideration from Ground No.5 of the Revenue s appeal is additions towards credits in respect of M/s.RS Co. Inc. and M/s.Pentafour Software Solution Inc. The AO has made additions towards creditors in absence of confirmation form the party. The Ld.CIT(A) deleted the additions made by the AO on the basis of subsequent payment made by the assessee to the creditors. 11.1 We have heard both the parties, and perused the materials available on record and we find that the assessee has filed details of ledger account along with payment to creditors in subsequent FY before the Ld.CIT(A) and the Ld.CIT(A) has forwarded additional evidences filed by the assessee to the AO and the AO could not rebut the details filed by the assessee in the Remand Report, except saying that letter sent have not been served or replied by the parties. We find that confirmation of settlement of credit subsequently from creditors were already produced before the Ld.CIT(A). Notices by the AO being returned/unserved cannot be the reason to hold the credit, is not genuine. Creditors are carried over from FY 2001-02 and are not credits/appearing for the first time during the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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