TaxTMI 
TaxTMI 
2024 (11) TMI 229
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...., mobile devices and networking and other similar products. The assessee filed the return of income for AY 2015-16 on 30.11.2015 declaring a total income of Rs. 238,85,10,090/-. Since the assessee had international transactions with its AEs, a reference was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) to determine the arm's length price of the international transactions the assessee had with its AEs. The TPO passed an order u/s. 92CA of the Income Tax Act, 1961 (the Act) on 26.10.2018 proposing a TP adjustment of Rs. 1,86,94,215/- towards software development services rendered by the assessee to its AEs and the AO passed the assessment order incorporating the TP adjustments. The AO besides the TP adjustments made a disallowance of Rs. 18,20,990/- u/s. 40(a)(i) of the Act on the depreciation claimed by the assessee on computer software for the reason that the assessee did not deduct tax at source on the payments made towards purchase of software. The AO also made an addition of Rs. 7,37,33,056/- u/s. 28(iv) of the Act towards the value of equipments given by the AEs free of cost to the assessee for the purpose of software development and testing. Aggrieve....
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....11-12 to 2014-15 vide order dated 30.05.2024 has considered the issue of disallowance u/s. 40(a)(i) towards depreciation on computer software for the reason that the assessee has not deducted tax at source on computer software and held that : - "13. Under section 40(a)( i) any interest (not being interest on loan issued for public before 1/4/1938), royalty fee for technical services or sum chargeable under this Act which is payable outside India or inside India to a non-resident not being a company or to a foreign company on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year or in the subsequent before the expiry of the time prescribed under sub-section (1) of section 200 shall not be allowed as deduction while computing the income chargeable under the head "Profit and gains of business or profession". 13.1 There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone o....
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....re and therefore, provisions of Section 40(a)(i) and (ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under Section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax (Appeals) has held that the payment has been made by the assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore, the provision of Section 40(a)(ia) of the Act is not attracted in respect of a claim for depreciation. The aforesaid finding has rightly been affirmed by the tribunal. The findings recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal cannot be termed as perverse. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered ag....
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....ssues raised in the grounds 3-6 for A.Ys. 2011-12 to 2013-14 and ground nos. 3-5 for A.Y. 2014-15 of assessee's appeal stands allowed." 8. For the year under consideration also the AO has made 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 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) of the Act 9. During the course of assessment the 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. The assets received free of cost included testing bo....
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....t case, the assessee failed to furnish relevant material/documents to demonstrate the actual nature of assets received free of cost. 4.7 Consequently, the goods received free of cost from clients (who are also Associated Enterprises) are being adjudged as benefit arising from business and added u/s. 28(iv) of IT Act." 10. On further appeal the CIT(A) upheld the addition made by the AO by holding that: - "17.1 Having considered the submissions, and on perusal of the details filed, it is noted that various computer hardware assets have been received free of cost during the Financial Year 2014-15. Though it was claimed that the assets have been received on free of cost basis from its AEs, the Appellant failed to submit any documentation to understand the terms and conditions of such unusual arrangement, if any. During the appeal proceeding, the appellant was specifically asked to show how such free of cost assets have been disclosed in the audited financials of its AEs and in its own books. However, the appellant could not produce such documents for verifications Some stray information filed indicate that few assets have been returned back to the AE, whereas majority of these fre....
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.... the equipments. (iii) It is undisputed that the Assessee is a captive service provider and the only customers of the Assessee are its AEs (please see pages 2-3 of the assessment order). That being the case, there can be no allegation of the Assessee benefitting from the equipments by utilizing it in its business otherwise. (iv) Moreover, it is submitted that the Assessing Officer has not specifically pointed out as to what benefit is being derived by the Assessee. In para 4.4 of the order, the Assessing Officer has only made out a vague allegation that the purpose of giving the assets free of cost is for the Assessee to avoid income tax/customs cost, which is wholly erroneous and baseless. The equipments being brought in for rendering services which are export, customs duty is not leviable. Further, there is no income-tax being avoided as a result of the equipments being made available free of cost. It is submitted that at the threshold, it is for the Assessing Officer to demonstrate what benefit is being derived by the Assessee, and in the absence thereof, no addition can be made under Section 28(iv) of the Act. 'Benefit' should be in the nature of income. (v) It ....
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.... is given to a social media influencer for promotion of the product on social media, the CBDT has inter alia clarified that "if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act." 12. The ld DR on other hand vehemently argued that the assessee has derived indirect benefit from the import of assets free of cost and hence the provisions of section 28(iv) would get attracted. The ld DR further submitted that considering that the assessee is billing the AEs at cost plus mark up basis, had these assets been bought by incurring cost then the income which is directly linked to the cost would be more to that extent. Therefore the ld DR argued that the income foregone by the assessee by importing the assets free of cost would attract the provisions of section 28(iv) of the Act. The ld DR further argued that these assets have been used in the business of the assessee for testing th....
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....ch of the Tribunal in the case of Helios Food Improvers (P.) Ltd. vs DCIT (ITA No.1748/Mum/2003 dated 28.02.2007 "16. ****** Further, the words "benefit" or "perquisite" have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term "perquisite" denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word "benefit" has also to be interpreted in the same manner i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage. ***** We are further of the opinion that provisions of Section 28(iv) can be applied in a number of situations but the bottom-line or crucial fact would always be circumvention of income by taking or receiving income in other forms.***" 16. Therefore the test for a....