2014 (2) TMI 602 - AT - Income Tax

Assessee's Appeals Partly Allowed, Revenue's Appeals Dismissed: Tribunal's Decision Upheld Legal Precedents

3i Infotech Limited Versus The Additional Commissioner of Income Tax

3i Infotech Limited Versus The Additional Commissioner of Income Tax - TMI Issues Involved:1. Allowability of software development expenses.2. Transfer of employees to foreign subsidiaries.3. Treatment of compensation received for termination of a business agreement.4. Disallowance under Section 14A of the Income Tax Act.5. Short credit of TDS.6. Levy of interest under Section 234D.7. Initiation of penalty under Section 271(1)(c).Detailed Analysis:1. Allowability of Software Development Expenses:The primary issue was whether software development expenses should be treated as capital or revenue expenditure. The Tribunal referred to its earlier decision for the assessment year 2002-03, where it was held that such expenses are capital in nature. The Tribunal upheld this view, stating that the expenses incurred on developing software products are capital expenditures and eligible for depreciation in the year of capitalization. The Tribunal rejected the alternative claim under Section 35(1)(iv) for deduction as scientific research expenditure, as the software development was for specific client projects, not general research.2. Transfer of Employees to Foreign Subsidiaries:The Tribunal addressed the issue of transfer pricing adjustments for employees transferred to associated enterprises. The Tribunal found that the TPO exceeded his jurisdiction by determining the ALP for transactions not referred to him by the AO. Moreover, it was held that the AO's addition based on the TPO's report was invalid as it was not supported by evidence and was based on assumptions. The Tribunal concluded that there was no necessity to determine the ALP for the transfer of employees, as it did not erode the Indian tax base.3. Treatment of Compensation Received for Termination of a Business Agreement:The Tribunal examined whether the compensation of Rs. 15 crores received for terminating an agreement with ICICI Bank was a capital or revenue receipt. The Tribunal upheld the CIT(A)'s decision that the compensation was a capital receipt. It was held that the termination of the agreement resulted in the loss of a source of income, affecting the profit-making structure of the assessee. The Tribunal relied on the Supreme Court's decisions in Kettlewell Bullen & Co. Ltd. and Oberoi Hotels (P.) Ltd., which supported the view that compensation for loss of a source of income is a capital receipt.4. Disallowance under Section 14A:The Tribunal addressed the disallowance made under Section 14A, which was calculated by applying Rule 8D. The Tribunal directed the AO to recompute the disallowance based on the reasonable basis for expenses related to earning exempt income, following the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. The Tribunal restored the issue to the AO for re-adjudication after giving the assessee an opportunity to present its case.5. Short Credit of TDS:The Tribunal directed the AO to verify and grant credit for the TDS claimed by the assessee in the return of income. The issue was restored to the AO for verification and appropriate action.6. Levy of Interest under Section 234D:The Tribunal held that the levy of interest under Section 234D is consequential and directed the AO to recompute the interest based on the income determined after giving effect to the Tribunal's order.7. Initiation of Penalty under Section 271(1)(c):The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(c) as premature.Conclusion:The appeals filed by the assessee were partly allowed, and the appeals filed by the revenue were dismissed. The Tribunal's decisions were based on detailed analysis and adherence to legal precedents, ensuring that the issues were addressed comprehensively and in accordance with the law.