AI Drafter 
TaxTMI 
TaxTMI 
2020 (12) TMI 470
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....a) Deduction allowed u/s 10A of the Act (b) Whether Ld CIT(A) has power to remit the issue of disallowance of software expenses treating it as Capital expenditure to the file of AO? 4. The assessee is engaged in the business of providing "business process outsourcing services". 5. We shall take up the appeal of the revenue first. In its appeal, the first issue contested by the revenue relates to deduction claimed u/s 10A of the Act i.e. whether expenses that were reduced from export turnover should also be reduced from the total turnover or not. The assessee claimed deduction u/s 10A of the Act. While computing the deduction u/s 10A, the assessee reduced communication expenses from both export turnover and total turnover and accordingly computed amount of deduction. The A.O. was of the view that the communication expenses should be deducted from only export turnover and not from Total turnover. Accordingly, he recomputed the deduction u/s 10A of the Act. The Ld. CIT(A) allowed the claim of the assessee by following the decision rendered by Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (2012) 349 ITR 98. The revenue has challenged the said dec....
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....bove said amount included provision for software expenses amounting to Rs. 3.89 crores. The A.O. disallowed the provision for software expenses by observing that it is only provision in nature. It appears that the A.O. has taken the view that the "provision for software expenses" is a contingent liability. 10. The Ld. CIT(A) also confirmed the disallowance by concurring with the view taken by the A.O. The Ld. CIT(A) also held that the provision for expenses is liable to be disallowed u/s 40(a)(i) of the Act for non-deduction of tax at source. In this regard, the Ld. CIT(A) followed the decision rendered by Bangalore bench of Tribunal in the case of IBM India Pvt. Ltd. (2015) 59 Taxmann.com 107 wherein it was held that the TDS provisions will also apply to provision for expenses created by the assessee. 11. The Ld. A.R. submitted that the provision for software expenses is created by the assessee as at the yearend as per the accounting standards prescribed by Income Tax department as well as ICAI. As per the accounting standars, provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best es....
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....ly, the Tribunal has deleted the disallowance made u/s 40(a)(i) of the Act. In support of this proposition, the Ld. A.R. relied on the decision rendered by Bangalore bench of Tribunal in the case of M/s. Acer India Pvt. Ltd. Vs. DCIT (IT(IT)A Nos.107 to 114/Bang/2018 dated 5.10.2020). Accordingly, the Ld. A.R. submitted that the disallowance made u/s 40(a)(i) should be deleted in respect of provision for software expenses for the year under consideration, since it pertained to the period prior to the date of rendering of decision by Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd. (supra). 13. On the contrary, the Ld. CIT(DR) submitted that the provision for software expenses are in the nature of contingent liability and hence the same was disallowed by A.O. and Ld. CIT(A). In the alternative, the Ld. CIT(A) has held that the provision for software expenses is liable for deduction of tax at source. Since the assessee has failed to deduct tax there from, the Ld. CIT(A) has disallowed the same u/s 40(a)(i) also. 14. We heard the rival contentions on this issue and perused the record. The first question is whether the provision for software expenses is a cont....
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....2,000 10. Hewlett Packard Singapore 32,790 11. Oracle Corporation 45,57,088 12. EMC Information Systems 1,08,810 13. Tungsten Network 1,18,03,850 Total 3,89,30,461 6.1 The appellant also made following submissions: 2. Provision for software expenses amounting to Rs. 3,89,30,461 was made in respect of software licenses used, license updates, support services, software implementation services, software AMC charges etc availed/utilized during the year from various vendors. In the absence of invoices received from vendors for these services, at year end, the respective user dept's provide the likely payments to be made for the software licenses/services utilized during the year. The appellant made provision for the said expenditure and included the same under the head 'software expenses' for the year ending 31st March, 2011." 16. We notice that the assessee has explained the basis for creating the provision for expenses. The Ld. A.R. also submitted that the accounts of the assessee have been audited by the statutory auditors and they did not find any fault with the quantum of provision for software expenses create....
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....with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC IT(TP)A Nos.405 & 474/Bang/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in: ♦ ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) ♦ Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) ♦ Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) ♦ Channel Guide India Ltd. v. ACIT (25 taxmann.com 25) ♦ DCI v. Virola International (20 14(2) TMI 653) ♦ CIT v. Kotak Securities Ltd. (20 taxmann.com 8....
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.... of decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd (supra), following the decision rendered by the co-ordinate bench in the case of Infineon Technologies India Pvt. Ltd (supra), we hold that no disallowance u/s 40(a)(i) is required to be made during the year under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance. 20. The next issue contested by the assessee relates to disallowance of software expenses treating the same as capital in nature. Since the Ld CIT(A) has remanded this issue to the file of the AO with certain directions, the revenue is questioning the authority of Ld CIT(A) to do so. 21. The facts relating to this issue are discussed in brief. We noticed earlier that the assessee had claimed expenses towards software purchases as deduction to the tune of Rs. 24,97,00,999/-. The AO disallowed following items out of the above said claim:- Provision for software purchases - Rs. 3,89,30,461 Disallowance u/s 40(a)(i)/(ia) - Rs. 1,35,82,093 The balance amount was Rs. 19,71,88,445/-. The AO treated this amount as capital in natur....
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....needs to be disallowed as being not verifiable. * In relation to expenditure incurred for software implementation, maintenance services, software AMC charges and fees for included services, the same needs to be treated as revenue expenditure and allowed as such provided tax at source has been deducted on the same. In case of non deduction of tax at source the same needs to be disallowed under Section 40(a) of the Act. * In relation to expenditure incurred for IT consumables e.g. CDs, printer cartridges etc., the same needs to be treated as revenue expenditure. * In case of software where the same can be used perpetually e.g. Operation system software like Windows, Application software like MS Office etc., the same needs to be treated as capital in nature. This is for the reason that in case of such software there is no restriction or limitation on its period of use. New versions of these software keep on becoming available in the market however there is no restriction on the use of the earlier version and a person can always choose not to buy the new version and continue with the version. A high rate of depreciation, which is 60% takes care of ob....
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....tion of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. Infact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue exp....