Software purchases don't constitute royalty, depreciation allowed despite non-deduction of TDS under section 40

The ITAT Bangalore allowed the assessee's appeal regarding depreciation claims on software purchases and server/network equipment. The AO had disallowed depreciation under section 40(a)(i)/(ia) for non-deduction of TDS, treating software payments as royalty. The Tribunal held that depreciation is a mandatory statutory deduction distinct from expenditure provisions under section 40, which applies to outgoing amounts subject to TDS. Following Supreme Court precedent, mere software purchases without commercial exploitation rights don't constitute royalty. For server/network equipment, the Tribunal granted 60% depreciation following previous decisions, rejecting the AO's 15% restriction.

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Issues Involved:
1. Transfer Pricing
2. Restriction of depreciation claimed on server/network equipment
3. Disallowance of depreciation claimed on purchase of software u/s 40(a)(i)/(ia) of the Income-tax Act, 1961
4. Interest under Section 234A, 234B, and 234C of the Act

Summary of Judgment:

1. Transfer Pricing:
The transfer pricing issues for the years under consideration in both the assessee's and revenue's appeals were rendered infructuous due to the Mutual Agreement Procedure (MAP) between India and Korea. Accordingly, the respective grounds for AY 2011-12 to AY 2014-15 in both appeals were dismissed as infructuous.

2. Restriction of Depreciation Claimed on Server/Network Equipment:
The Tribunal noted that the issue of depreciation on server/network equipment was covered by its own decision in the assessee's case for AY 2009-10, where it allowed higher depreciation by following decisions of the Hon'ble Madras High Court and Hon'ble Hyderabad Tribunal. Consequently, the revenue's grounds on this issue for AY 2011-12 to AY 2014-15 were dismissed.

3. Disallowance of Depreciation Claimed on Purchase of Software u/s 40(a)(i)/(ia):
The Tribunal observed that the assessee capitalized the software purchases and claimed depreciation at 60%. The AO disallowed the depreciation by treating the payments as royalty and invoking section 40(a)(i)/(ia) due to non-deduction of TDS. However, the Tribunal held that depreciation is a statutory deduction and not an outgoing expenditure, thus not subject to disallowance under section 40(a)(i)/(ia). This view was supported by the Hon'ble Karnataka High Court in PCIT vs. Tally Solutions Pvt. Ltd. and the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT. Accordingly, the assessee's grounds on this issue for AY 2011-12 to AY 2014-15 were allowed.

4. Interest under Section 234A, 234B, and 234C:
The Tribunal did not specifically address the grounds related to interest under Sections 234A, 234B, and 234C, implying that these were either not pressed or not relevant for adjudication in the context of the primary issues.

Conclusion:
The appeals filed by the assessee were allowed as per revised grounds, and the appeals filed by the revenue were dismissed for the years under consideration. The order was pronounced in the open court on 30th May, 2024.

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