2024 (11) TMI 229 - AT - Income Tax

Software depreciation allowed despite no TDS deduction; temporary testing equipment imports not taxable under section 28(iv)

Samsung R&D Institute India - Bangalore Pvt. Ltd. Versus JCIT, Special Range - 6, Bangalore And (Vice-Versa)

ITAT Bangalore allowed the assessee's appeal on two issues. First, the tribunal held that no disallowance under section 40(a)(i) can be made for ... Disallowance u/s. 40(a)(i) of the depreciation claim by the assessee on computer software - HELD THAT:- Disallowance of the depreciation claimed by the assessee u/s. 40(a)(i) for the reason that the assessee has failed to deduct tax at source on the capitalised software. These facts being identical to the facts pertaining to AY 2014-15 [2024 (6) TMI 876 - ITAT BANGALORE] we are of the considered view that the ratio laid down in the above decision of the coordinate bench is applicable for the year under consideration also. Accordingly, respectfully following the said decision of the coordinate bench we hold that no disallowance u/s. 40(a)(i) can be made towards depreciation on computer software on the ground that no TDS was deducted on the payments made towards computer software. The grounds raised by the assessee in this regard are thus allowed. Addition made u/s. 28(iv) - AO noticed that the assessee has received assets free of cost from AEs located outside India to whom the assessee is providing software development services - HELD THAT:- From the plain reading of the section 28(iv) it is clear that if a benefit in the nature of income is arising from business the same shall be taxable under the head profits and gains from business or profession. Therefore the limited question before us is whether import of assets free of cost for testing purposes is a benefit in the nature of income arising from the business of software development to the assessee. In the present case assessee received certain equipments free of cost for the purpose of testing the compatibility of the software developed by the assessee in those equipments. It is an undisputed fact that these equipments are either returned or destroyed once the testing is completed (refer relevant observations of the CIT(A) in this regard). Accordingly there is no dispute that the impugned assets are not made available to the assessee permanently to give any benefit of enduring nature as the assets are either returned or destroyed. Further considering the nature of asset and the purpose for which it is imported, there is merit in the contention that these assets in isolation cannot be used for any purpose to derive any benefit since these are testing equipments or prototypes. Now coming to the issue of whether the import of assets free of cost is resulting in a benefit in the nature of income to the assessee, it is relevant to check if the impugned transaction would have otherwise resulted in a benefit in the nature of income to the assessee. The assessee is in the business of providing software development services to its AEs only. The arm's length pricing of the said services have already been tested by the TPO and the dispute on the pricing is resolved through MAP with the competent authorities of India and Korea wherein the cost of indirect benefits received by the assessee should have been embedded while arriving at the margin. Therefore it cannot be alleged that the price charged towards the software development services is reduced/adjusted by the assessee against the benefit of assets imported free of cost to justify addition under section 28(iv) and that the revenue has not brought anything on record to substantiate such a contention. Even assuming that there is nexus between the price charged towards rendering of services and import of assets free of cost the addition in our view could be done through a TP adjustment towards price charged for software development and in assessee's case the price is already agreed under MAP. Therefore there is no justification for making the addition under section 28(iv) again on the ground that had there been a cost paid towards import of these assets the same would have resulted in increased income to the assessee since the billing is done on cost plus basis. AO is not correct in making addition under section 28(iv) of the Act given that the assets imported free of cost for testing purposes are either returned or destroyed by the assessee and that the pricing towards software development services rendered are agreed under MAP. Decided against revenue. Issues Involved:1. Disallowance under Section 40(a)(i) of the Income Tax Act regarding the depreciation claim on computer software.2. Addition made under Section 28(iv) of the Income Tax Act concerning assets received free of cost.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(i) of the Act:The primary issue was whether the depreciation claimed by the assessee on computer software could be disallowed under Section 40(a)(i) due to the non-deduction of tax at source on payments made for the purchase of software. The Tribunal noted that the CIT(A) upheld the disallowance based on a previous decision for AY 2014-15, which was subsequently reversed by a coordinate bench. The Tribunal reiterated that depreciation is a statutory deduction and not an expenditure, as clarified by the Hon'ble Karnataka High Court in the case of PCIT vs. Tally Solutions Pvt. Ltd. Depreciation is not considered an outgoing expenditure; hence, the provisions of Section 40(a)(i), which apply to expenditures, are not applicable. The Tribunal followed the precedent set in earlier years and concluded that no disallowance under Section 40(a)(i) could be made for depreciation on computer software, thereby allowing the grounds raised by the assessee.2. Addition under Section 28(iv) of the Act:The second issue concerned the addition made under Section 28(iv) for assets received free of cost from associated enterprises (AEs). The AO considered these assets as benefits arising from business and added their value under Section 28(iv). The assessee argued that these assets were used solely for testing software compatibility and were either returned or destroyed, thus not resulting in any benefit or perquisite. The Tribunal examined whether the assets provided any irretrievable benefit to the assessee. It emphasized that for a benefit to be taxable under Section 28(iv), it must be irretrievable and intended to circumvent income. The Tribunal found that the assets were used exclusively for testing and were not retained by the assessee, negating any enduring benefit. Additionally, the Tribunal noted that the arm's length pricing of the services rendered, including any indirect benefits, had been settled through the Mutual Agreement Procedure (MAP). Consequently, the Tribunal held that the AO was incorrect in making the addition under Section 28(iv), as the assets did not provide any taxable benefit in the nature of income. The appeal of the assessee was allowed, and the addition under Section 28(iv) was deleted.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the disallowance under Section 40(a)(i) for depreciation on computer software was unwarranted, and the addition under Section 28(iv) for assets received free of cost was not justified. The appeal of the Revenue was dismissed as the grounds raised became infructuous following the resolution under MAP. The order was pronounced in the open court on 22nd October 2024.