Tribunal upholds deletion of addition under IT Act for purchase of software from related party

The Tribunal dismissed the revenue's appeal challenging the deletion of the addition of Rs. 86,49,923 under Section 40A(2)(b) of the IT Act for purchase expenditure on software from a related party. The Tribunal found that the software purchased by the assessee was for resale, with some sold during the relevant year and the rest forming part of closing stock. It was noted that the software was customized as per user needs, and there was no evidence of excessive pricing. The decision of the Ld. CIT(A) to delete the addition was upheld.

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Issues: Disallowance of purchase expenditure under Section 40A(2)(b) of the IT Act for software purchased from a related party.

Analysis:
1. The appeal by the revenue contested the order of the Ld. Commissioner of Income-Tax (Appeals) for Assessment Year 2014-15 regarding the addition of Rs. 86,49,923 made under Section 40A(2)(b) of the IT Act on account of purchase expenditure. The main contention was the deletion of this addition by the Ld. CIT(A) based on the grounds that the purchased software was freely available on the internet for downloading, and the unsold software was considered as part of the closing stock without affecting the profit.

2. The facts leading to the dispute revealed that the assessee, a resident corporate entity engaged in the business of export/import of chemicals and trading in computer parts, was assessed for the impugned Assessment Year. The income was determined after certain additions, including the disallowance of Rs. 86.49 lakhs on certain purchases made by the assessee. The assessee had purchased software from a related entity, Verixo Technologies Pvt. Ltd., for resale, which was disallowed by the Ld. AO based on excessive and unreasonable rates, especially for software like Linux, which is free and open-source.

3. The assessee challenged the disallowance before the Ld. CIT(A), who observed that the expenditure was not claimed as there was a debit for the purchase of software, a credit for the sale of software, and closing stock. The Ld. CIT(A) concluded that the disallowance was not justified. The revenue further appealed the decision.

4. During the appeal, the Ld. Departmental Representative supported the Ld. AO's stand, while the Ld. Authorized Representative for the assessee submitted that the software formed part of the closing stock and had been sold in subsequent years as per stock records.

5. The Tribunal carefully considered the submissions and perused the relevant material. It was found that the assessee purchased software for resale, some of which was sold during the impugned Assessment Year, and the remaining was reflected in the closing stock. The Tribunal noted the closing stock details and sales invoices, emphasizing that the software was tailor-made as per user requirements. Additionally, there was no evidence to support the claim that the price paid by the assessee was excessive or unreasonable. Consequently, the appeal was dismissed, upholding the Ld. CIT(A)'s decision.

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