Tribunal decision: Appeals partly allowed for AY 2005-06, remand for further verification.

The Tribunal partly allowed both the assessee's and the revenue's appeals for Assessment Year 2005-06. Several issues were remanded to the Assessing Officer for further verification and adjudication, including the disallowance of subscription charges to a US entity, treatment of software expenses, disallowance of software expenses paid to overseas entities, provision for software expenses, brand building expenses classification, disallowance under Section 14A, foreign tax credit, interest charges, state taxes credit, provision for warranty, depreciation on software expenses, foreign currency expenses reduction, rental income inclusion, and communication expenses under Section 10A.

---

---

Issues Involved:
1. Disallowance of subscription charges paid to Forrester Research Inc., USA under Section 40(a)(i).
2. Disallowance of software expenses as capital in nature.
3. Disallowance of software expenses paid to overseas entities under Section 40(a)(i).
4. Depreciation on software expenses paid to Indian entities and overseas branches.
5. Provision for software expenses and its eligibility for depreciation.
6. Brand building expenses as revenue or capital expenditure.
7. Disallowance under Section 14A.
8. Double taxation relief under Section 90.
9. Interest under Sections 234B and 234D.
10. Allowability of foreign tax credit under Section 90.
11. Allowability of credit for state taxes paid outside India.
12. Provision for warranty.
13. Depreciation on software expenses.
14. Reduction of foreign currency expenses from export turnover.
15. Inclusion of rental income in computing deduction under Section 10A.
16. Communication expenses under Section 10A.

Detailed Analysis:

1. Disallowance of Subscription Charges Paid to Forrester Research Inc., USA:
The Tribunal upheld the disallowance under Section 40(a)(i) of the Act of subscription charges amounting to Rs.2,15,26,941 paid to Forrester Research Inc., USA for non-deduction of tax under Section 195. This decision was based on the Hon'ble Karnataka High Court's ruling in the assessee's own case for earlier years, which held that similar payments constituted royalty and were liable for TDS under Section 195.

2. Disallowance of Software Expenses as Capital in Nature:
The Tribunal noted that the software expenses were recurring in nature and used in day-to-day business operations. The Hon'ble High Court of Karnataka in CIT Vs. IBM India Limited held that such expenses are revenue in nature. The Tribunal remanded the issue to the Assessing Officer to examine the nature and purpose of the software expenses and decide accordingly.

3. Disallowance of Software Expenses Paid to Overseas Entities:
The Tribunal upheld the disallowance of software expenses amounting to Rs.11,94,50,304 paid to overseas entities under Section 40(a)(i) for non-deduction of tax under Section 195, following the Karnataka High Court's decisions in CIT Vs. Synopsys International Old Ltd. and CIT Vs. Samsung Electronics Co. Ltd.

4. Depreciation on Software Expenses Paid to Indian Entities and Overseas Branches:
The Tribunal held that since these expenses were not liable for disallowance under Section 40(a)(i), they should be treated as revenue expenditure and allowed as deduction in computing business income. The question of allowing depreciation at 60% did not arise.

5. Provision for Software Expenses and Its Eligibility for Depreciation:
The Tribunal directed the Assessing Officer to examine the issue of TDS on provisions for software expenses amounting to Rs.7,36,83,260, following the Karnataka High Court's decision in KPTCL Vs. DCIT, which held that provisions are not liable for TDS in the absence of accrual of income to the payees.

6. Brand Building Expenses as Revenue or Capital Expenditure:
The Tribunal remanded the issue to the Assessing Officer to verify the nature and description of the brand building expenditure and decide its allowability as revenue expenditure.

7. Disallowance Under Section 14A:
The Tribunal directed the Assessing Officer to allow proportionate deduction under Section 10A on account of the disallowance made under Section 14A, following the Bombay High Court's decision in Gemplus Jewellery India Ltd.

8. Double Taxation Relief Under Section 90:
The Tribunal noted that the Assessing Officer had allowed foreign tax credit claimed in the return of income while giving effect to the CIT (Appeals) order. The issue of variation in deduction under Section 10A was remanded to the Assessing Officer for consideration.

9. Interest Under Sections 234B and 234D:
The Tribunal upheld the charging of interest under Sections 234B and 234D as consequential and mandatory, directing the Assessing Officer to recompute the interest chargeable while giving effect to the order.

10. Allowability of Foreign Tax Credit Under Section 90:
The Tribunal remanded the issue to the Assessing Officer for verification and adjudication in the light of the Karnataka High Court's decision in Wipro Ltd. Vs. DCIT.

11. Allowability of Credit for State Taxes Paid Outside India:
The Tribunal remanded the issue to the Assessing Officer for verification and adjudication in the light of the Karnataka High Court's decision in Wipro Ltd. Vs. DCIT and the Bombay High Court's decision in Reliance Infrastructure Ltd.

12. Provision for Warranty:
The Tribunal upheld the assessee's claim for provision for warranty, remanding the issue to the Assessing Officer for examination of the basis of provision and expenditure incurred towards warranty obligation, following the Apex Court's decision in Rotork Controls India P. Ltd.

13. Depreciation on Software Expenses:
The Tribunal reversed the CIT (Appeals) order treating software payments as capital expenditure and allowing depreciation at 60%, restoring the Assessing Officer's finding that these payments were disallowed under Section 40(a)(i).

14. Reduction of Foreign Currency Expenses from Export Turnover:
The Tribunal remanded the issue to the Assessing Officer for examination and verification in the light of the Karnataka High Court's decision in the assessee's own case.

15. Inclusion of Rental Income in Computing Deduction Under Section 10A:
The Tribunal held that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A, following the Karnataka High Court's decisions in Subex Ltd. Vs. ITO and Wipro Ltd. Vs. DCIT.

16. Communication Expenses Under Section 10A:
The Tribunal dismissed the revenue's grounds, holding that communication expenses reduced from export turnover should also be reduced from total turnover while computing the deduction under Section 10A, following the Karnataka High Court's decision in CIT Vs. Tata Elxsi Limited.

Conclusion:
Both the assessee's and the revenue's appeals for Assessment Year 2005-06 were partly allowed, with several issues remanded to the Assessing Officer for further verification and adjudication.

---