Tax treatment of employee stock options, cross-border services, finance leases, software depreciation and unabsorbed depreciation clarified for corporate taxpayers.
Employee stock option expenditure and principal payments under finance leases are treated as allowable revenue expenditure, notwithstanding book capitalisation of leased assets. Unearned income shown as a current liability is not taxable in the relevant year. Overseas termination, interconnect, bandwidth, legal and professional payments to non-residents are not subject to withholding where the payments are not royalty or otherwise chargeable in India, including where services are performed outside India and recipients lack an Indian permanent establishment. Computer software falls within the computers depreciation block. Unabsorbed depreciation from earlier years remains eligible for carry-forward without time restriction.
Issues: (i) Whether expenditure incurred under an employee stock option plan is revenue expenditure; (ii) Whether unearned income reflected as a current liability is taxable in the relevant year; (iii) Whether overseas termination, interconnect usage and bandwidth charges paid to non-residents constitute royalty requiring tax deduction at source; (iv) Whether legal and professional charges paid to overseas entities require tax deduction at source; (v) Whether principal payments under finance leases are allowable as revenue expenditure; (vi) Whether computer software is eligible for depreciation at the rate applicable to computers; and (vii) Whether unabsorbed depreciation relating to earlier assessment years can be carried forward without time restriction.
Issue (i): Whether expenditure incurred under an employee stock option plan is revenue expenditure.
Analysis: Earlier coordinate decisions in the assessee's own case, which remained unreversed, characterized the employee stock option expenditure as revenue in nature. No basis for departure from that settled position was shown.
Conclusion: Employee stock option expenditure is allowable as revenue expenditure, in favour of the assessee.
Issue (ii): Whether unearned income reflected as a current liability is taxable in the relevant year.
Analysis: The deletion of the addition followed unreversed decisions in the assessee's own earlier years on identical facts. The same treatment was applied consistently for the relevant assessment years.
Conclusion: The unearned income recorded as a current liability is not taxable in the relevant year, in favour of the assessee.
Issue (iii): Whether overseas termination, interconnect usage and bandwidth charges paid to non-residents constitute royalty requiring tax deduction at source.
Analysis: Explanation 6 to Section 9(1)(vi), Section 195 and Section 40(a)(i) of the Income-tax Act, 1961 were relevant. The payees were non-residents without a permanent establishment in India, and the payments for overseas transmission and bandwidth services were not royalty or otherwise taxable in India. Earlier unreversed decisions on the same issue governed the matter.
Conclusion: The payments do not constitute royalty, no withholding obligation arises, and no disallowance is permissible, in favour of the assessee.
Issue (iv): Whether legal and professional charges paid to overseas entities require tax deduction at source.
Analysis: The services were rendered outside India and the payments were not chargeable to tax in India. Applying the earlier unreversed decisions on identical payments, Sections 195 and 40(a)(i) of the Income-tax Act, 1961 did not require withholding or consequent disallowance.
Conclusion: No tax was required to be deducted from the overseas legal and professional charges, and the expenditure is allowable, in favour of the assessee.
Issue (v): Whether principal payments under finance leases are allowable as revenue expenditure.
Analysis: Although the leased assets were capitalised in the books in accordance with Accounting Standard-19, the income-tax claim was governed by the nature of finance-lease payments. The treatment as revenue expenditure was supported by CBDT Circular No. 20 of 2001 dated 19.02.2001 and the applicable precedent.
Conclusion: Principal payments under the finance leases are allowable as revenue expenditure, in favour of the assessee.
Issue (vi): Whether computer software is eligible for depreciation at the rate applicable to computers.
Analysis: The applicable depreciation schedule expressly included computer software within the block of computers and prescribed the higher depreciation rate from the relevant assessment year.
Conclusion: Computer software is eligible for depreciation at the rate applicable to computers, in favour of the assessee.
Issue (vii): Whether unabsorbed depreciation relating to earlier assessment years can be carried forward without time restriction.
Analysis: Section 32(2) of the Income-tax Act, 1961, CBDT Circular No. 14 of 2011 and the earlier decision in the assessee's own case supported unrestricted carry forward of the unabsorbed depreciation notwithstanding the earlier eight-year limitation.
Conclusion: Unabsorbed depreciation relating to the earlier assessment year is eligible for carry forward without time restriction, in favour of the assessee.
Final Conclusion: The disputed additions and disallowances do not survive, and the claimed tax treatments concerning expenditure, depreciation and carry-forward remain available under the applicable law.