2008 (10) TMI 676 - AT - Income Tax

Tribunal rules on depreciation claim, foreign tax credit adjustment, and other tax issues

Subex Ltd. Versus ITO

The Tribunal partly allowed the assessee's appeals, directing the Assessing Officer to reassess the depreciation claim on intellectual property rights ... - Issues Involved:1. Disallowance of depreciation on intellectual property rights (IPR).2. Exclusion of telecommunication expenses from export turnover for section 10A deduction.3. Setting off loss of non-eligible business against profits of eligible business for section 10A deduction.4. Treatment of rental income from sub-letting of property for section 10A deduction.5. Adjustment of foreign tax credit.6. Deletion of addition on account of provision for warranty.7. Inclusion of belated export proceeds in computing section 10A deduction.Issue-wise Detailed Analysis:1. Disallowance of Depreciation on Intellectual Property Rights (IPR):The assessee acquired intellectual property rights (IPR) consisting of software codes and licenses during FY 2001-02. The cost of these assets was written off against the share premium account as approved by the Karnataka High Court. The Assessing Officer (AO) disallowed the depreciation claim, arguing that the asset was not shown in the balance sheet and was treated as 'miscellaneous expenditure'. The CIT(A) upheld this view, stating that the write-off resulted in NIL cost of acquisition, thus making depreciation inapplicable. The Tribunal, however, noted that the write-off against the share premium account should not affect the statutory right to claim depreciation under section 32. It restored the matter to the AO to ascertain the nature of the IPR and its usage for business purposes, and to allow depreciation if the asset qualifies as an intangible asset under section 32.2. Exclusion of Telecommunication Expenses from Export Turnover for Section 10A Deduction:The AO excluded telecommunication expenses related to the delivery of computer software from the export turnover. The Tribunal held that if such expenses are part of the consideration for export, they should be excluded from the export turnover. However, it also ruled that any amount excluded from the export turnover should similarly be excluded from the total turnover, following precedents set by various decisions of the Tribunal.3. Setting Off Loss of Non-Eligible Business Against Profits of Eligible Business for Section 10A Deduction:The AO adjusted the loss from a non-eligible business unit against the profits of the eligible unit before allowing the deduction under section 10A. The CIT(A) upheld this adjustment based on the jurisdictional High Court's decision in Himatshingike Seide Ltd. The Tribunal, however, ruled that losses from non-eligible units should not be set off against profits of eligible units for computing section 10A deductions. It directed the AO to compute the deduction without setting off the non-eligible unit's losses.4. Treatment of Rental Income from Sub-Letting of Property for Section 10A Deduction:The AO treated the rental income from sub-letting a property in Canada as 'income from other sources' and excluded it from the profits eligible for section 10A deduction. The CIT(A) agreed, stating there was no direct nexus between the rental income and the business of software development. The Tribunal upheld this view, noting that the rental income did not arise from the business carried on by the assessee and hence should be taxed as 'income from other sources', while the rent paid for the property should be allowed as a business expense under section 37.5. Adjustment of Foreign Tax Credit:This issue was neither addressed by the AO nor by the CIT(A). The Tribunal restored the matter to the AO for consideration, along with the issue of depreciation.6. Deletion of Addition on Account of Provision for Warranty:The CIT(A) allowed the provision for warranty as an ascertained liability based on precedents set by the Tribunal in similar cases. The Tribunal upheld this decision, referencing the jurisdictional High Court's ruling in the case of Wipro GE Medical System, which allowed such provisions as deductible expenses.7. Inclusion of Belated Export Proceeds in Computing Section 10A Deduction:The CIT(A) directed the AO to include belated export proceeds in the computation of section 10A deduction after verifying the facts. The Tribunal found the CIT(A)'s direction appropriate and required no interference, noting that the AO should consider the delayed export proceeds subject to section 10A provisions.Conclusion:The Tribunal partly allowed the appeals of the assessee, requiring the AO to re-examine the issues of depreciation on IPR and foreign tax credit, while upholding the CIT(A)'s decisions on the other issues. The appeals filed by the revenue were dismissed.