2010 (1) TMI 624 - AT - Income Tax

Payment to parent for SAP software not interest, royalty or fee for technical services; s.40(a)(i) inapplicable, depreciation partly restored

ITAT, DELHI held that payment to the parent for installation/purchase of SAP software was neither interest, royalty nor fee for technical services and ... Disallowance of depreciation - Non-deduction of tax at source - payment made to the parent company for software SAP - nature of the expenditure incurred towards installation of software named SAP - royalty or fee for technical services - HELD THAT:- Apparently, the payment made towards installation of software is not in the nature of interest. The assessee had made payment to parent company for the purpose of software. The payment made for purchase of software cannot be treated either as royalty or even for technical services. Therefore, the payment for SAP software cannot be charged to tax in India as interest or royalty or fee for technical services. The Id. A.R. of the assessee has also contended that even if the income is chargeable to tax in India because of non-discrimination clause 24(1) of DTAA between Republic of India and Federal Republic of Germany, the nationals of a contracting state shall not be subjected in other contracting state to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirement to which nationals of that other state in the same circumstances and under the same conditions are/or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to the persons who are the residents of one or of both the contracting states. In our considered opinion the payment made for acquisition of an asset whether it is a revenue expenditure or capital, provisions of section 40(a)(i) of the Act will not be applicable in case of resident assessee for assessment year 2000-01. Therefore, as per decision of ITAT in the case of Millennium Infocom Tech Ltd. [2008 (1) TMI 437 - ITAT DELHI-E] and also in the case of Herbal Life International India Pvt. Ltd.[2006 (2) TMI 220 - ITAT DELHI-D] because of non-discriminatory clause 24(1) of DTAA with India and Germany the foreign national cannot be subjected to provisions of section 40(a)(i) of the Act. Therefore, the Id. CIT (A) was not justified in holding that the amount paid by the assessee for acquisition of computers was chargeable to tax in India. Accordingly, this ground of appeal is decided in favour of the assessee. As regards the claim of assessee for depreciation on assets capitalized, depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction u/s 32 of the Act. Accordingly, in our considered opinion, the assessing officer was not justified in disallowing 50% of depreciation on the ground that provisions of section 40(a)(i) were applicable. However, the assessing officer will verify the fact whether the assets in respect of which expenditure has been capitalized have been used in business for period more than 180 days. If the assets have been used for more than 180 days, the assessing officer will allow full depreciation, as claimed by the assessee. The assessing officer is directed accordingly. In the result, the appeal filed by the assessee is partly allowed. Issues:1. Jurisdiction u/s 1472. Disallowance of depreciation amounting to Rs. 54,74,602/-3. Nature of payment for software SAP and applicability of sec. 40(a)(i)Jurisdiction u/s 147:The appellant did not press the ground of appeal related to jurisdiction u/s 147, leading to its dismissal.Disallowance of Depreciation:The Assessing Officer disallowed depreciation of Rs. 54,74,602/- due to non-deduction of tax at source on payment made to the parent company for software SAP. The CIT(A) upheld the disallowance, considering the payment as royalty/fee for technical services. The appellant argued that the payment was for software purchase, not royalty, citing relevant case laws. The Tribunal found that the payment for software acquisition was not taxable in India under DTAA, thus ruling in favor of the appellant.Nature of Payment for Software SAP:The dispute revolved around whether the payment for software SAP should be treated as royalty/fee for technical services. The CIT(A) upheld the disallowance, considering the payment as royalty/fee for technical services. The appellant contended that the payment was for software acquisition, not royalty, citing non-discrimination clause 24(1) of DTAA. The Tribunal agreed with the appellant, ruling that sec. 40(a)(i) did not apply to a resident assessee for AY 2000-01. The Tribunal directed the AO to verify asset usage for depreciation allowance.Conclusion:The Tribunal partly allowed the appeal, holding that the payment for software SAP was not taxable under sec. 40(a)(i) due to DTAA provisions. The disallowance of depreciation was also overturned, with directions to verify asset usage for full depreciation allowance. Other issues related to subsequent year depreciation claim and interest under sections 234-B and C were dismissed as consequential.