2011 (2) TMI 1414 - AT - Income Tax

Assessee wins on software depreciation, foreign payments, FCCB expenses, and telecom charges.

The Tribunal upheld the assessee's claim for depreciation on software purchases, rejecting the assessing authority's characterization of the payments as ... Disallowance of depreciation - HELD THAT:- We find that the CIT( A) is justified in holding that the assessee had purchased the software and capitalized the cost in asset account. Therefore, he is justified in holding that the payments made by the assessee against purchase of software cannot be held as 'Royalty' and deleting the disallowance of depreciation for both the assessment years under appeal. Payments and Services made outside India exception available u/s.09(1)(b) - HELD THAT:- it was held in Ishikawajima-Harima Heavy Industries v. DIT [2007 (1) TMI 91 - SUPREME COURT],that the services which are sources of income sought to be taxed in India must (i) be utilized in India and (ii) rendered in India. In the present case of payments to foreign countries, both the conditions have not been satisfied simultaneously. Therefore, the exception available u/s.09(1)(b) applies to the payments made to the two foreign companies. Hence, the CIT(A) is justified in deleting the disallowance for the asst. year 2005-06 and for the asst. year 2006-07, being the payments made to German company and Singapore company respectively. confirming the disallowance for the asst. year 2005-06 being the payment made to Indian company. Nature of FCCB expenses ''Capital or Revenue'' - HELD THAT:- The assessee company had incurred expenses in connection with the issue of foreign currency convertible bonds. The assessing authority held that the bond holders had the option to convert the bonds to equity shares and therefore, the collection of funds through the issue of bonds needs to be treated as to increase the capital and therefore the connected expenses would be capital in nature and hence disallowed. Quantum of benefit available u/s010A - HELD THAT:- It is held in ITAT, SAK Soft Ltd.,[2009 (3) TMI 243 - ITAT MADRAS-D], that the exclusion must be made from total turnover as well. Therefore, we direct the AO to exclude the telecommunication charges from total turnover as well and revise the computation of the quantum of benefit available u/s010A. Issues Involved:1. Depreciation on software purchases and whether the payments amount to Royalty.2. Market promotion expenses and their classification as technical services.3. Nature of FCCB issue expenses (Capital or Revenue).4. Adjustment of telecommunication charges under section 10A.Detailed Analysis:1. Depreciation on Software Purchases and Royalty:The assessee claimed depreciation on software purchases, treating them as additions to the existing Block of Assets. The assessing authority disallowed this, treating the payments as Royalty under Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961, and invoked sections 40(a)(i) and 40(a)(ia) due to non-deduction of TDS. The Commissioner of Income-tax(A) found that the assessee had purchased the software and capitalized the cost, thus disagreeing with the assessing authority's view that the payments were for Royalty. The Tribunal upheld this finding, stating that the assessee had indeed purchased the software and was entitled to depreciation, thereby deciding the issue in favor of the assessee.2. Market Promotion Expenses:The assessee incurred expenses for market support activities, which the assessing authority treated as payments for technical services under Explanation 2 to section 9(1)(vii), invoking sections 40(a)(i)/40(a)(ia) due to non-deduction of TDS. The Commissioner of Income-tax(A) agreed that these were technical services but applied the exception under section 9(1)(b) for payments made to foreign companies without a Permanent Establishment (PE) in India. The Tribunal upheld this view, confirming the disallowance of payments to the Indian company but allowing the payments to foreign companies, as they were not liable for TDS.3. FCCB Issue Expenses:The assessee claimed expenses related to the issue of Foreign Currency Convertible Bonds (FCCB) as deductible. The assessing authority treated these as capital expenses due to the potential conversion of bonds to equity. The Commissioner of Income-tax(A) and the Tribunal held that these expenses were revenue in nature, as the funds were initially raised as a liability and the conversion to equity was a future contingency. Thus, the issue was decided in favor of the assessee.4. Adjustment of Telecommunication Charges under Section 10A:The assessing authority excluded telecommunication charges from the export turnover without a corresponding deduction from the total turnover, reducing the section 10A benefit. The Tribunal directed that the exclusion must be made from both the export and total turnover, in line with the ITAT Chennai Special Bench decision in the case of SAK Soft Ltd., thereby deciding the issue in favor of the assessee.Conclusion:- The assessee's appeal for A.Y. 2005-06 was dismissed.- The assessee's appeal for A.Y. 2006-07 was allowed.- The Revenue's appeals for A.Ys. 2005-06 and 2006-07 were dismissed.Order pronounced on February 8, 2011, at Bangalore.