TMI Blog2017 (11) TMI 2016X X X X Extracts X X X X X X X X Extracts X X X X ..... vers amount payable as on the last day of the previous year but also covers amount actually paid. Respectfully following the aforesaid decision of the Hon'ble Apex Court (supra), we uphold the orders of the authorities below and consequently dismiss ground No.2.2 raised by the assessee. Depreciation be allowed at 60% in respect of the software expenses paid to overseas entities - In our considered view, this ground is liable to be dismissed as the Assessing Officer has disallowed the expenditure under Section 40(a)(i) and not as capital expenditure. Software expenses paid to Indian entities and software expenses related to overseas branches are eligible for depreciation at 60% after holding that these payments were not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) - During the period relevant to Assessment Year 2005-06, there was no liability to deduct tax at source under Section 194J in respect of software expenses paid to Indian entities as the term Royalty in Section 194J was introduced by the Taxation Laws Amendment Act, 2006 w.e.f. 13.7.2006. Therefore CIT (Appeals) has rightly held that software expenses paid to Indian entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee adequate opportunity of being heard. Ground of the assessee's appeal are partly allowed for statistical purposes. Brand building expenses - AO treated the brand building expenses as deferred revenue expenditure and held that they were to be allowed over a period of five years as he was of the view that these expenses result in long term enduring benefit which is not limited to the year under consideration alone - HELD THAT:- On a perusal of the orders of the authorities below, it appears to us that the AO and CIT (Appeals) in coming to their views have merely gone by the nomenclature brand building expenditure without actually examining the nature of each expenditure under the above head. In view of the above, we restore this issue of brand building expenditure back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head brand building and decide the issue of allowability of brand building expenditure as revenue expenditure in the light of our observations and after affording the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be duly co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes. Depreciation on Software Expenses - Revenue contends that the CIT (Appeals) erred in allowing depreciation @ 60% in respect of software payments made to Indian entities and related to overseas branches - HELD THAT:- We have held that the learned CIT (Appeals) erroneously treated both the above payments as capital expenditure and allowed depreciation @ 60% thereon. In our view the Assessing Officer disallowed the above payments under Section 40(a)(i) / (ia) of the Act for not making TDS, treatment of the same payments as capital expenditure and allowing depreciation @ 60% by the learned CIT (Appeals) is not correct and hence bad in law. We therefore reverse the order of the learned CIT (Appeals) on this issue and restore the finding of the Assessing Officer in the matter. Computation of deduction u/s 10A - HELD THAT:- We set aside the issue of reduction of foreign currency expenditure from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination and verification of the issue afresh based on factual evidence. Assessee's claim for inclusion of rental income from Infosys BPO Ltd. and B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.163,39,66,280. The case was taken up for scrutiny. In view of the international transactions reported by the assessee for the year under consideration, a reference under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') was made by the Assessing Officer to the Transfer Pricing Officer (TPO) for determination of the Arm s Length Price (ALP) thereof. The TPO passed the order under Section 92A of the Act vide order dt.27.6.2008 in which no TP Adjustment to the ALP of the assessee's international transactions was proposed or made. The Assessing Officer completed the assessment under Section 143(3) of the Act vide order dt.31.12.2008, wherein the assessee's income was determined at Rs.351,52,97,339 in view of various addition / disallowances made to the returned income. 2.2 Aggrieved by the order of assessment dt.31.12.2008 for Assessment Year 2005-06, the assessee preferred an appeal before the CIT (Appeals)-1, Bangalore. The learned CIT (Appeals) disposed off the appeal vide order dt.16.11.2012 allowing the assessee partial relief. 3. Both the assessee and revenue are aggrieved by the order of the learned CIT (Appeals) dt.16.11.2012 for Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the impugned expenditure. 5.1 The learned Commissioner of Income tax (Appeals) I, Bangalore has erred in holding that software expenses paid to Indian entities amounting to Rs. 9,01,36,454/- are eligible for depreciation at 60% after concluding that these payments were not liable for TDS for the AY 2005-06. On facts and in the circumstances and law applicable, the impugned expenditure is to be fully allowed as deduction as claimed by the appellant. 6.1 The learned Commissioner of Income tax (Appeals) I, Bangalore has erred in holding that overseas branch expenses amounting to Rs. 11,49,721/- is eligible for depreciation at 60% after concluding that the provisions of section 40(a)(i) are not applicable in respect of the impugned expenditure. On facts and in the circumstances and law applicable, the impugned expenditure is to be fully allowed as deduction as claimed by the appellant. 7.1 The learned Commissioner of Income tax (Appeals) I, Bangalore has erred in not giving any finding as to whether provision for software expenses amounting to Rs. 7,36,83,260/- is liable for disallowance under section 40(a)(i) / 40(a)(ia). 7.2 The learned Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. On facts and in the circumstances of the case and law applicable, interest is not leviable under section 234B and 234D. The appellant denies its liability to pay interest under section 234B and 234D. 5. Ground No.1 being general in nature, no adjudication is called for thereon. 6. Ground No.2 - Disallowance of Subscription charges paid to Forrester Research Inc., USA. 6.1 This ground is raised by the assessee in respect of the disallowance under Section 40(a)(i) of the Act of subscription charges amounting to Rs.2,15,26,941 paid to Forrester Research Inc., USA for non-deduction of tax thereon under Section 195 of the Act. 6.2.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the co-ordinate bench of this Tribunal in its orders in the assessee's own case for Assessment Years 2000-01 to 2003-04 in ITA Nos.145 to 148/Bang/2004 dt.11.11.2005 held that similar payments made to Gartner Group were not liable for TDS under Section 195 of the Act. However, the aforesaid decision of the coordinate bench (supra) was reversed by the Hon'ble Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real meaning as the depreciation table itself specifies that software is an item eligible for depreciation @ 60%. However, after having observed as above at para 7.4 of the order of assessment, the Assessing Officer proceeded to allow depreciation @ 25% for the reason that the assessee (i) acquired a right to use software which is an intangible asset eligible for 25% depreciation and (ii) the assessee took a considered decision in making TDS in respect of the aforesaid sum of Rs.97,84,35,963. On appeal, the learned CIT (Appeals) observed that the aforesaid software expenditure was mainly incurred for software development and the use of software licenses was for a limited period. After this observation, the learned CIT (Appeals) however proceeded to uphold the Assessing Officer s action in treating software expenditure as capital expenditure and in allowing depreciation thereon at 25%. 8.2.1 We have heard the rival contentions, perused and carefully considered the material on record. As per the material on record, out of the total software expenses of Rs.126,27,52,200, the assessee deducted tax at source only in respect of Rs.97,84,35,963. On a perusal of these details, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a computer system to work. Such software enhances the efficiency of the 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. In fact, 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 period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the material on record. We have restored the issue of allowability of software expenses as capital or revenue to the file of the Assessing Officer. If the software expenditure is treated as revenue expenditure, then the quantum of claiming depreciation would not arise. The issue of depreciation remains only if the software expenses are held to be capital expenditure. We find from a perusal of the order of assessment that in para 7.4 thereof that the Assessing Officer himself has noted that depreciation of software expenses is to be allowed at 60%, but ultimately allowed the assessee depreciation at 25%. As per Sec. 32(1)(ii) depreciation @ 25% is applicable in respect of know-how, patents, copy rights, trademarks, licenses, franchises or any other business or commercial right of similar nature, being intangible assets, acquired on or after 1.4.1998. In the case of Amway India Enterprises Vs. DCIT (2008) 111 ITD 112 (SB) (Delhi), it was held that computer software is eligible for depreciation @ 60% This decision of the ITAT, Delhi (SB) in the case of Amway India Enterprises (supra) has been upheld by the Hon'ble High Court of Delhi. In DCIT Vs. Datacraft India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word payable in section 40(a)(ia) of the Act not only covers amount payable on the last day of the previous year but also covers amounts actually paid. Consequently, Ground No. 4.3 of the assessee's appeal is dismissed. 12 . Ground No.4.4 12.1 In Ground 4.4 (supra) the assessee contends that without prejudice, depreciation be allowed at 60% in respect of the software expenses of Rs.11,94,50,304 paid to overseas entities. In our considered view, this ground is liable to be dismissed as the Assessing Officer has disallowed the expenditure under Section 40(a)(i) and not as capital expenditure. Consequently, finding no merit in Ground NO.4.4 raised by the assessee, the same is dismissed. 13. Ground Nos.5.1 and 6.1 . 13.1 In these grounds (supra), the assessee contends that the learned CIT (Appeals) has erred in concluding that software expenses of Rs.9,01,36,459 paid to Indian entities and software expenses of Rs.11,49,721 related to overseas branches are eligible for depreciation at 60% after holding that these payments were not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) of the Act. 13.2 We have heard the rival contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative placed reliance on the decision of the Hon'ble High Court of Karnataka in the case of KPTCL Vs. DCIT (2016) 383 ITR 59 (Kar) and the decision of the co-ordinate bench of this Tribunal in the case of TE Connectivity India P. Ltd. Vs. ITO in ITA No.3/Bang/2015 dt.25.5.2016 and contended that provisions are not liable for TDS and therefore not liable for disallowance under Section 40(a)(ia) of the Act. 14.2 Per contra, the learned Departmental Representative for revenue supported the order of the learned CIT (Appeals) and placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of IBM India P. Ltd. Vs. ITO (TDS) in ITA Nos.749 to 752/Bang/2012 1588 to 1591/Bang/2012 dt.14.5.2015 to contend that provisions are liable for TDS. 14.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hon'ble Karnataka High Court in the case of KPTCL Vs. DCIT (supra) held that there would be no liability to deduct tax at source on the amount of provision in the absence of accrual of income to the payees. The observations of the Hon'ble High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, if any, u/ 40(a)(i) of the Act, following the aforesaid decisions of the Hon'ble Karnataka High Court in the case of KPTCL Vs. DCIT (supra) and of the coordinate bench in the case of TE Connectivity India P. Ltd. (supra) after affording the assessee adequate opportunity of being heard. Consequently, ground Nos.7.1 to 7.4 of the assessee's appeal are partly allowed for statistical purposes. 15 . Ground Nos.8.1 and 8.2 15.1 These grounds are raised in respect of the issue of brand building expenses of Rs.33,65,47,924 incurred by the assessee. In the order of assessment the Assessing Officer treated the brand building expenses as deferred revenue expenditure and held that they were to be allowed over a period of five years as he was of the view that these expenses result in long term enduring benefit which is not limited to the year under consideration alone. On appeal, the learned CIT (Appeals) noted that the brand building expenditure were incurred towards marketing and sales events, subscription to research agencies, participation in seminars, etc. which provided benefits in terms of growth in income in excess of industry average rates and increase in cliente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment proceedings the assessee worked out the disallowance u/s. 14A of the Act at Rs.9,22,131; comprising 50% of salary of employee plus 5% of salary of Senior Vice President. The Assessing Officer, however, computed the disallowance under Section 14A of the Act at Rs.35,20,566; which comprised 50% of the salary of both the employee s and the Senior Vice President and added the same as Income from other sources . Before us, the learned Authorised Representative of the assessee submitted that while it had no grievance with respect to the disallowance under Section 14A of the Act computed by the Assessing Officer at Rs.35,20,566, it is aggrieved by the Assessing Officer s action of treating the same as Income from other sources rather than in disallowing the same from assessee's business income. 16.2 In our considered view, the action of the Assessing Officer in making the disallowance under the head Income from other sources is not correct since the facts show that the disallowance under Section 14A of the Act represents the business expenditure incurred by the assessee in relation to exempt income. Such disallowance would go to increase the assessee's bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to this order. ADDITIONAL GROUNDS OF APPEAL 20. By way of petition dt.26.4.2016, the assessee has prayed for admission of the following additional grounds of appeal : 1. The ld. Assessing Officer be directed to allow the claim of foreign tax credit under Section 90 of the Income Tax Act, 1961 even in respect of income which is exempt under Section 10A of the Income Tax Act, 1961 on the basis of and in conformity with the decision of the jurisdictional High Court in the case of Wipro Limited V. DCIT dt.25.3.2015 (2016) 382 ITR 179. 2. The ld. Assessing Officer be directed to allow the claim of credit for state taxes paid outside India either as a deduction in computing the total income or as relief under Section 91 of the Income Tax Act, 1961 even in respect of income which is exempt under Section 10A and 10AA of the Income Tax Act, 1961 on the basis of and in conformity with the decision of the jurisdictional High Court in the case of Wipro Limited Vs. DCIT dt.25.3.2015 (2016) 382 ITR 179. 21. We have heard the rival contentions in respect of the admission of the aforesaid additional grounds of appeal raised by the assessee (supra). Taking into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee submitted that in any case deduction should be allowed in respect of state taxes paid outside India. In this regard, the learned Authorised Representative of the assessee also placed reliance on the decision in the case of Reliance Infrastructure Ltd. (supra) cited by the ld. DR. 23.4 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. Taking into consideration the facts and circumstances of the case and also our decision in restoring the additional ground No.1 to the file of the Assessing Officer for consideration and adjudication, we remand the issue raised in additional ground No.2 to the file of the Assessing Officer for verification of details and documents in respect of the assessee's claim for state taxes paid outside India under Section 91 of the Act in the light of the aforesaid decisions of the Hon'ble Karnataka High Court in the case of Wipro Ltd. Vs. CIT (supra) and of the Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd. (supra) and to adjudicate thereon. Needless to add, the assessee shall be afforded adequate opportunity of being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer for examination of the facts in connection with the claim made and expenditure actually incurred towards warranty obligation in accordance with the observations of the Hon ble Apex Court in the case of Rotork Controls India P. Ltd . (supra). 27.2.2 Respectfully following the decision of the co-ordinate Bench of this Tribunal in the assessee's own case in ITA No.471/Bang/2003 dt.17.4.2012, which was rendered after considering the decision of the Hon ble Apex Court in the case of Rotork Controls India P. Ltd. (supra ), we uphold in principle the assessee's claim of provision for warranty and remand this issue to the file of the Assessing Officer for examination of the basis of provision towards warranty, the claim made and the expenditure incurred towards warranty obligation in accordance with the observations of the Hon'ble Apex Court in the case of Rotork Controls India P. Ltd. ( supra). Consequently, Ground Nos.2 to 5 of Revenue s appeal are allowed for statistical purposes. 28. Ground Nos.6 7 Depreciation on Software Expenses . In these grounds (supra), Revenue contends that the learned CIT (Appeals) erred in allowing depreciation @ 60% in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at as export turnover in so far as the actual export or deemed export of computer software is concerned, it is required to exclude freight charges, telecommunication charges or insurance attributable to the delivery of computer software outside India and only if it is a situation of receiving amount for providing technical services outside India in connection with development or production of computer software, export turnover is computed after excluding the expenditure if any incurred in foreign exchange in providing technical services outside India. After having held so, the Hon'ble High Court remanded the matter to the file of the Assessing Officer to record a finding as to the nature of activity, keeping in view the legal position as discussed in its order, its observations thereon and to answer the question of reduction of expenses from export turnover. In view of the above, we set aside the issue of reduction of foreign currency expenditure from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination and verification of the issue afresh based on factual evidence and in the light of the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration was in respect of income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation. The Hon'ble Court held that these items were eligible for deduction under Section 10A of the Act. At para 166 thereof; the Hon'ble Court followed its own earlier order in the case of Wipro Ltd. in ITA No.507 / 2002 dt.25.8.2010, in respect of income from sale of scrap, export incentive and rent received to hold as under : 166. This Court had occasion to consider the substantial questionof law in assessee's case itself in ITA 507 . 2002 decided on 25.8.2010 while dealing with the income from sale of scrap, export incentive and rent received, answered the question in favour of the assessee ;and against the revenue. At para 169 thereof the Hon'ble Court held as under : 169. As all these questions are decided and answered in favour of the assessee in the aforesaid case, this question of law is answered in favour of the assessee and against revenue. 30.3.3 Respectfully following the decisions of the Hon'ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO (supra) and Wipro Ltd. Vs. DCIT (supra), as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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