SAP software payments, treaty non-discrimination and depreciation rules prevent TDS-based disallowance on capitalised assets.

Payment for acquisition and installation of SAP software, capitalised as a computer asset, was analysed as not constituting royalty or fee for technical services merely because it was remitted to a foreign parent. The India-Germany tax treaty non-discrimination clause in Article 24(1) was noted as preventing a more burdensome treatment through section 40(a)(i) in the resident payer's hands. Depreciation on the capitalised software asset was also stated to remain governed by section 32, so it could not be denied solely for failure to deduct tax at source, subject only to verification of actual user period exceeding 180 days.

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Issues: (i) Whether the amount paid for SAP software was in the nature of royalty or fee for technical services and could attract section 40(a)(i) in view of Article 24(1) of the India-Germany tax treaty; (ii) Whether depreciation on the capitalised software/computer asset could be disallowed for want of tax deduction at source.

Issue (i): Whether the amount paid for SAP software was in the nature of royalty or fee for technical services and could attract section 40(a)(i) in view of Article 24(1) of the India-Germany tax treaty.

Analysis: The payment was made for acquisition and installation of software and had been capitalised as part of computer assets. On the facts found, the payment was not interest and could not be characterised as royalty or fee for technical services merely because it was remitted to the foreign parent. In any event, the non-discrimination clause in Article 24(1) of the India-Germany tax treaty prevented the foreign recipient from being subjected to a more burdensome treatment through section 40(a)(i) in the hands of the resident payer for the relevant assessment year.

Conclusion: The amount was not chargeable under section 40(a)(i) and the finding against the assessee was unsustainable.

Issue (ii): Whether depreciation on the capitalised software/computer asset could be disallowed for want of tax deduction at source.

Analysis: Disallowance under section 40(a)(i) operates in computing business income and does not govern depreciation admissible under section 32. Depreciation cannot be denied merely because tax was not deducted at the time of remittance. The only factual verification required was whether the asset had been used for more than 180 days, in which event full depreciation would follow.

Conclusion: The depreciation disallowance was not justified and the matter was remitted only for verification of the period of user.

Final Conclusion: The appeal succeeded on the core controversy concerning tax deduction at source and depreciation, with the assessee obtaining substantive relief on the principal additions.

Ratio Decidendi: Section 40(a)(i) cannot be invoked to disallow depreciation under section 32 on a capitalised software asset, and a payment for acquisition of software is not to be treated as royalty or fee for technical services on the facts found, particularly where the treaty non-discrimination clause applies.

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