TaxTMI 
TaxTMI 
2011 (2) TMI 1414
X X X X Extracts X X X X
X X X X Extracts X X X X
....proprietary products such as SYSTAT, SIGMA PLOT, SIGMA STAT, PEAKFIT, iCAPELLA and other packages of IBM, Texas Instruments, Mathworks, etc., 04. The assessee company filed its returns for the assessment years 2005-06 and 2006-07 on a total income of Rs. 22,97,28,090/- and Rs. 15,99,42,940/- respectively. 05. In the relevant previous year period, the assessee company had purchased softwares mainly from foreign companies. The purchase was for Rs. 77,70,44,460/- and for Rs. 57,70,15,039/- respectively for the assessment years 2005-06 and 2006-07. The assessee treated these new acquisitions as additions to the existing Block of Assets and claimed depreciation allowance @ 60%. The assessee stated that the softwares were purchased for its own use, analogous to plant and machineries of manufacturing units. The assessee stated that the purchases were not meant for re-sale but to develop products and packages so as to provide the same to customers, out of which the assessee generated its income. 06. The assessing authority could not accept the claim of depreciation allowance as deductible. He examined the purchase agreements entered into between the assessee-company and the different su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1)(vii) and held the payments are accountable for TDS u/s.194J. As no TDS was made by the assessee company, sections 40(a)(i)/40(a)(ia) were invoked and the claim of Rs. 3,53,20,000/- was disallowed. 09. In the previous year relevant to the assessment year 2006-07 also, the assessee company had incurred such expenditure to the extent of Rs. 45,93,52,988/- which was claimed as deduction in its income-tax computation. The details of the expenditure are as follows: Payments made to : (1) Systat Software GmBH-Germany .. Rs 21,23,600 (2) Aamer Pacific P. Ltd., .. Rs. 39,08,79,350 Rs. 39,30,02,950 FCCB Issue Expenses .. Rs. 6,63,50,038 Rs. 45,93,52,988 10. The payments to the foreign companies were made towards market exploration expenditure as already stated for the assessment year 2005-06. On the same grounds considered for asst.year 2005-06, the assessing authority treated the payment made to Aamar Pacific P. Ltd as payments made for technical services liable for TDS u/s.194J. As no TDS was made, sections 40(a)(i) and 40(a)(ia) were invoked and that amount was disallowed. 11. The FCCB issue expenses were incurred in connection with issu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re of interest, royalty, fee for technical services and similar items and not depreciation allowance. Accordingly, the Commissioner of Income-tax(A) deleted the disallowance of depreciation for both the assessment years. 18. In the case of market promotion expenditure (Deferred Revenue Expenditure), the Commissioner of Income-tax(A) agreed with the view of the assessing authority. He found that the services obtained by the assessee related to marketing support, product branding, marketing survey, road shows etc in Europe. He held that the above mentioned services could not have been provided with out expert support based on technical knowledge and managerial capacity. Accordingly, he held that such payments were made for technical services covered u/s.9 of the Income-tax Act. 19. Having held that the payments were made for technical services, on the facts of the case, he accepted the alternate contention of the assessee made on the basis of exception provided u/s.9(1)(b) of the Act. 20. In the assessment year 2005-06, the total payments of Rs. 3,53,20,000/- were made to the following parties : M/s. SYSTAT Software GmBH - Germany .. Rs. 1,36,44,000 M/s. S2 Softtech Pvt. Ltd., -....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rieved on questions of depreciation allowance on software ; payments made to foreign companies for market promotion ; and FCCB issue expenses. The assessee is aggrieved by the confirmation of disallowance of payments made to Indian company for market promotion and on the adjustment of telecommunication expenses u/s.10A. The assessee has also raised grounds against levy of interest u/s.234B and 234C. 28. On the basis of the common grounds raised in this cross appeals, the following issues arise for our consideration : i) Whether the assessee is entitled for depreciation on the purchase cost of software and for that matter whether the assessee has purchased Assets itself or only a right to use and if so, whether the payments amount to Royalty ? ii) Whether the expenses incurred for market prospecting could be held as incurred for obtaining technical services and liable for tax ? If so, whether the payments made to foreign companies were liable for TDS or not ? iii) Whether FCCB issue expenses are in the nature of Capital or Revenue ? iv) Whether the adjustment of telecommunication charges made u/s.10A is justified or not ? 29. We heard Shri. G. V. Gopala Rao, the learned Commis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng those products to develop its own branded proprietary software packages. While discussing the issue of marketing expenditure incurred in Europe, the Assessing Officer himself has acknowledged the promotion of assessee's patented products like Pcats, Witel and bwd asset (Para 21 of te assessment order). In para 3 of the order the Assessing Officer has referred to the proprietary products like SYSTAT, SIGMA PLOT, SIGMA STAT, PEAKFIT, iCAPELLA, etc 30.5. As rightly observed by the Commissioner of Income-tax(A), the assessee has exercised its option to purchase the products. The payments were made against purchases. The pricing has been made on purchase basis. The assessing authority is seen to have examined certain clauses of the agreements on selective basis by reproducing the clauses relating to securing of a licence to modify and market the software. The assessing authority has not discussed the clauses relating to purchase by exercising option and he has also not acknowledged the fact that the assessee had exercised the option and purchased the products. 30.6. In the light of the above facts, we find that the Commissioner of Incometax( A) is justified in holding that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company have been rightly treated as fee for technical services. 33.5. This issue is decided in favour of the Revenue. 33.6. But, the German company and Singapore company did not have any PE in India. Payments were made outside India. Services were rendered outside India. Profits were generated in the hands of those companies outside India. 33.7. The Hon'ble Supreme Court in Ishikawajima-Harima Heavy Industries v. DIT (288 ITR 408) (SC), has held that the services which are sources of income sought to be taxed in India must (i) be utilized in India and (ii) rendered in India. In the present case of payments to foreign countries, both the conditions have not been satisfied simultaneously. Therefore, in the light of above judgement, the exception available u/s.9(1)(b) applies to the payments made to the two foreign companies. 33.8. The Hon'ble jurisdictional High Court in the case of Jindal Thermal Power Company Ltd., v. DCIT (26 DTR 172) (Kar) has held that the criteria of rendering service in India and the utilization of service in India laid down by Hon'ble Supreme Court in Ishikawajma's case remains the same in spite of Explanation inserted to Section 9(2). 3....