TaxTMI 
TaxTMI 
2021 (8) TMI 993
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....eating it as Capital exp. INDIVIDUAL ISSUES:- (B) Granting of Foreign Tax Credit is urged in AY 2012-13. (C) Disallowance made u/s 14A is urged in AY 2013-14. 3. Following issues are urged by the revenue in both the years. (i) Computation of deduction u/s 10AA by reducing expenses from both export turnover and total turnover. (ii) Whether Ld CIT(A) has got power to remit the issue relating to disallowance of software expenses treating it as Capital in nature. 4. The assessee is engaged in the business of providing "Business process outsourcing services". 5. We shall take up the appeals filed the revenue first. In both the appeals, the first issue contested by the revenue relates to deduction claimed u/s 10AA 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 10AA of the Act. While computing deduction, the assessee reduced communication expenses from both export turnover and total turnover and accordingly computed quantum of deduction. The A.O. was of the view that the communication expenses should be deducted from only....
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....e of software expenses by treating the same as Capital in nature. Hence the relevant grounds of both the parties shall be adjudicated together in the later part of this order. 9. We shall now take up the appeal of the assessee. The first common issue urged by the assessee relates to disallowance of "Provision for software expenses". The assessee had claimed software expenses as deduction treating the same as revenue expenses in both the years. The AO disallowed the claim of the assessee partially under three different heads as given below:- (a) Provision for software expenses - Contingent liability (b) Disallowance of software expenses u/s 40(a) (c) Disallowance of remaining software expenses treating the same as Capital in nature. However, the AO allowed depreciation there on and disallowed only net amount. 10. The first type of disallowance is the disallowance of "Provision for software expenses" claimed by the assessee treating the same as contingent liability. The Ld CIT(A) concurred with the view taken by him. However, he observed that, if the above said claim is treated as ascertained liability, then the disallowance of the said claim is warra....
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....lant made submissions vide letter submitted on 4.12.2017. The breakup of the vendors to whom payment was to be made and for which provision was created is as follows: Sl.No. Particulars Amount in (Rs.) 1. CA (India)Technologies P. Ltd. 98,12,314 2. Wipro Limited 9,34,510 3. Sonata Information 79,92,715 Technologies Ltd. 4. Select Softwares (I) P Ltd. 6,000 5. Microsoft Corporation 15,94,890 6. Skelta Software Private Ltd. 1,52,070 7. Ariba India Private Ltd. 12,50,000 8. Thomson Financial 1,33,424 9. BIQ LLC 5,52,000 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 toRs. 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....
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....of software and hence there is no requirement of deducting tax at source u/s 195 of the Act. Accordingly he contended that the disallowance u/s 40(a)(i) could not be made. 10.5 We heard Ld D.R and perused the record. The claim of the assessee is that the software has been purchased from foreign suppliers or through their distributors. The Hon'ble Supreme Court, in the case of Engineering Analysis Centre of Excellence (P) Ltd (supra), has examined the question whether the payments made to non-resident software suppliers is "royalty" and hence TDS u/s 195 of the Act was required to be deducted on those payments or not. The Hon'ble Supreme Court examined this question considering four types of situations, which has been narrated as under:- "4. The appeals before us may be grouped into four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident supp....
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....trictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On ....
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....nics Co Ltd (supra). 10.8 A perusal of the decision rendered by Hon'ble Supreme Court would bring out following principles: - (a) Relevant DTAA provisions are required to be considered for determining the question whether the payments made by the assessee to non-resident companies for purchase of software are in the nature of Royalty or not. (b) Where ever India has entered Double Taxation Avoidance Agreement with the country of non-resident supplier, there is no necessity to refer to the provisions of sec. 9(1)(vi) of the Act for the payments made to the nonresident persons, unless the domestic provisions are beneficial to those persons. (c) The agreements entered by the assessee with the non-resident software suppliers are required to be examined to find out whether the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. 10.9 In the instant cases, the relevant agreements have not been examin....
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....ndered by the Hon'ble Supreme Court will not apply. In that case, the nature of payments needs to be examined in accordance with the provisions of sec. 9(1)(vi) of the Act. In the absence of relevant details, we are unable to decide this issue. Accordingly, we restore this issue also to the file of the AO for examining it afresh in the light of discussions made supra. 12. The next issue contested in both the years relates to the 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. We notice that an identical issue has been decided by this bench of Tribunal in the assessee's own case relating to AY 2011-12 in ITA No.491/Bang/2018 dated 11-12- 2020. The relevant observations made and the decision taken by the Tribunal are extracted below:- "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 authorit....
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....purchase of software licenses, for which detail of license period is available on the invoices or is produced by the appellant and if the same is for a period up to two years, the same should be allowed as revenue expenditure, provided the invoice relates to the FY 2010-11 and tax at source has been deducted on the same. * In case the invoice relates to some earlier year, the expenditure needs to be disallowed as prior period expenditure. * In case relevant invoice is not produced, the amount 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....
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....for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition 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 ITA No.491/Bang/2018 Infosys BPM Ltd., Bengaluru operation. It is an aid in manufacturing process rather than the too....
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.... on this issue in both the years and restore the same to the file of the AO for examining it afresh in the light of discussions made supra. 13. In AY 2012-13, the assessee has raised a ground relating to rejection of claim for credit of "Foreign Tax Credit". The assessee has raised this issue before Ld CIT(A). We notice that the assessee has placed reliance on the decision rendered by Hon'ble jurisdictional Karnataka High Court in the case of Wipro Ltd (2016)(382 ITR 179) in support of its claim. However, the Ld CIT(A) rejected the claim of the assessee with the following observations:- "10.4 However, it is important to note that issue of benefit under Section 10A which is parimateria to Section 10AA of the Act was recently decided by the Hon'ble Supreme Court in the case of Yokogawa India Ltd. (supra) and the SC held that the provision of Section 10A of the Act is in nature of deduction. The conclusion which can be drawn from a combined reading of the decision in case of Wipro Limited (Supra) and Yokogawa India Ltd. (Supra) will thus be that appellant would be eligible to claim benefit of Section 90/91 of the Act in relation to Foreign Tax Credit/State taxes paid in fo....
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....harged because of the exemption given under Section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii)." 13.3 On a careful perusal of the decision rendered by Hon'ble Karnataka High Court, we are of the view that, what is required to be seen is whether the income u/s 10AA is chargeable to tax u/s 4 and is includible in the total income u/s 5. The fact that the assessee is not paying tax due to exemption or deduction granted under the Act is not relevant. Accordingly, we set aside the order of Ld CIT(A) in so far as it is contrary to the decision rendered by Hon'ble Karnataka High Court in the case of Wipro Ltd (supra). The other directions given by Ld CIT(A) with regard to the accounting year, claim of s....