Section 40(a)(ia) cannot deny depreciation on capitalised intellectual property rights, while internet charges were not technical services.

Internet and leased line charges were treated as communication expenses, not fees for technical services, so section 40(a)(ia) disallowance did not apply. A liability write-back relating to interior work required verification because section 41(1) operates only where the underlying amount had earlier been allowed as a deduction; the matter was remanded for limited factual examination. Depreciation on purchased intellectual property rights could not be disallowed under section 40(a)(ia) merely because the payment was characterised as royalty, as statutory depreciation on a capitalised asset is not deductible expenditure under that provision.

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Issues: (i) whether internet or leased line charges constituted fees for technical services so as to attract tax deduction and disallowance under section 40(a)(ia); (ii) whether the write-back of a liability relating to interior work, stated to have been capitalised, could be assessed under section 41(1); (iii) whether depreciation claimed on purchased intellectual property rights could be disallowed under section 40(a)(ia) on the footing that the payment was royalty.

Issue (i): whether internet or leased line charges constituted fees for technical services so as to attract tax deduction and disallowance under section 40(a)(ia).

Analysis: The payment was found to relate to internet usage and communication charges. In the absence of any element showing that the mere use of internet bandwidth amounted to technical services, the earlier view relied upon by the appellate authority was accepted. The expenditure was therefore not treated as fees for technical services.

Conclusion: Decided in favour of the assessee.

Issue (ii): whether the write-back of a liability relating to interior work, stated to have been capitalised, could be assessed under section 41(1).

Analysis: The decisive question was whether the liability had ever been claimed as revenue expenditure. If the amount had only been capitalised and not allowed as a deduction, section 41(1) would not apply on write-back. As the factual position was not properly verified, the finding required examination of the relevant records.

Conclusion: The issue was remanded to the Assessing Officer for limited verification.

Issue (iii): whether depreciation claimed on purchased intellectual property rights could be disallowed under section 40(a)(ia) on the footing that the payment was royalty.

Analysis: The payment for software-related intellectual property rights was held to be royalty, but the disallowance provision was held to operate only against expenditure claimed as a deduction. Depreciation on a capitalised asset is a statutory allowance and is not itself an outgoing expenditure within section 40(a)(ia). The claim for depreciation therefore could not be denied on that basis.

Conclusion: Decided in favour of the assessee.

Final Conclusion: The Revenue succeeded only to the limited extent that one issue was sent back for verification, while the substantive additions relating to internet charges and depreciation on the intellectual property rights were rejected.

Ratio Decidendi: Section 40(a)(ia) applies to amounts claimed as deductible expenditure and does not permit disallowance of statutory depreciation on a capitalised asset; section 41(1) applies only where the liability earlier formed part of a deduction or allowance.

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