TaxTMI 
TaxTMI 
2025 (5) TMI 1572
X X X X Extracts X X X X
X X X X Extracts X X X X
....will be followed mutatis mutandis for the issues permeating in the assessment years shown above. 3. Ground of appeal raised by the Assessee in ITA No.1194/Chny/2024 for AY 2011-12 are as under: "The grounds of appeal listed below are without prejudice to each other. Issue No. 1 - Disallowance under section 14A of the Income-tax Act, 1961 ('the Act') computed as per Rule 8D of the Income-tax Rules, 1962 ('the Rules') 1. The learned CIT(A) erred in facts and law in upholding the applicability of Section 14A of the Act read with Rule 8D of the Rules thereby confirming the disallowance made by the learned Assessing Officer ('AO') under the normal provisions of the Act. 2. The learned CIT(A) has erred in not appreciating the fact that the Appellant has not earned any exempt income during the subject year and hence, the provisions of Section 14A read with Rule 8D of the Rules shall not be invoked. 3. Without prejudice to the above, the learned CIT(A) has erred in not appreciating the fact that the learned AO has invoked the provisions of Section 14A read with Rule 8D of the Rules without providing a finding on incurrence of expenditure in r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....failed to consider the fact that disallowance under section 40(a)(i) results in enhancement of business income and the same shall be eligible for enhanced deduction under section 10A/ 10AA of the Act. b) Payments towards license to use software - ('Software License') 12. The learned CIT(A) has erred in law and facts by not appreciating the fact that the software license payments are covered under the exclusion provided in sub-clause (b) to clause (vi) of section 9(1) of the Act. 13. Without prejudice to the above, the learned CIT(A) erred upholding the disallowance made up the learned AO for the aforesaid payments under Section 40(a)(i) of the Act which have already been paid within the previous year and were not outstanding as at the year end. 14. Without prejudice to the above grounds of appeal, even if the payments made are to be considered as payments for purchase of 'software', the same cannot be treated as 'royalty' under the relevant DTAA's, as the Appellant only acquires a right to use of the 'copyrighted article' and not rights over the 'copyright' itself. 15. The learned CIT(A) failed to appreciate the fact that the above issue....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lant claims to have not incurred any expenditure in respect of exempt income, the Appellant has maintained common set of books of account for taxable and exempt income. Hence, the possibility of incurring common expenditure for both segments cannot be ruled out and therefore, there is no error in the AO's act of invoking rule 8D to compute the disallowance u/s 14A for the purpose of earning dividend and therefore the grounds of appeal nos 8 and 9 stand dismissed. ..........." 4.4 Aggrieved by the aforesaid action of Ld. CIT(A), the Assessee is in appeal before us. For AY 2010-11, the Assessee submitted various arguments before us which we have summarised as follows: - The provisions of section 14A of the Act cannot be applied as the assessee has not incurred any expenditure in earning exempt income. - As per provisions of sub-section (2) and (3) to section 14A of the Act, the AO does not have power to compute disallowance under section 14A as per provisions of Rule 8D, even for A.Ys. 2008-09 and onwards, if the AO does not express dissatisfaction. - For the purpose of computation of disallowance u/s. 14A of the Act read with rule 8D, the inves....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing Officer was not justified in making excessive disallowance beyond the dividend income declared by the Assessee. 10. A Division Bench of Karnataka High Court, to which one of us (Vineet Kothari, J) was a party, held in the case of Pragathi Krishna Gramin Bank v. Jt CIT [2018] 95 taxmann.com 41 256 Taxman 349 (Kar.) that disallowance under section 14A beyond and in excess of actual exempted income is per se asburd and hypothetical and it cannot be so made. ....................... 11. Affirming the view of the Punjab and Haryana High Court in the case of Pr. CIT v. State Bank of Patiala [2017] 88 taxmann.com 667, the Hon'ble Supreme Court in the case of Maxopp Investment Ltd.(supra) held in paragraphs 40 and 41 as under: "40 We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he investment in shares is to be examined by the AO. (Emphasis Supplied)" 12. Another Bench of Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 248 Taxman 55 wherein the Division Bench of the Court followed another Division Bench judgment in the case of Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.) and held that the view of the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 11-2-2014, which has been relied by the Tribunal in the impugned order cannot be upheld and the disallowance under section 14A of the Act cannot go beyond the extent of exempted income itself. ........ ............ 9. We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Ware Housing Corporation v. Commissioner of Income-tax [2000] 242 ITR 450/109 taxmann.com 145 (SC) in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come-tax Rules, 1962. 23. The appeal is accordingly disposed of. No costs." 5. Thus, by following the above decision, the present Tax Case Appeal is dismissed and the substantial questions of law are answered against the Revenue. No costs." 5.2 In the present facts and circumstances of the case and by respectfully following the judicial precedent (supra), we are of the view that the action of the ld.CIT(A) cannot be countenanced and hence we direct the AO to restrict the disallowance u/s. 14A of the Act to the exempt income earned for A.Y.2010-11. The Assessee also submitted that the regarding the issue of enhancement of the exemption u/s. 10A, 10AA of the Act, this issue was not discussed by the Ld. CIT(A) in their orders. 5.3 For AY 2010-11 the Assessee submitted that the AO provided the relief under Section 10A / 10AA of the Act on the enhanced profits arising due to disallowance under Section 14A of the Act. Now, given that the disallowance u/s. 14A of the Act is restricted to exempt income earned for AY 2010-11, we direct the AO to recompute the consequential relief u/s. 10A/ 10AA of the Act on the enhanced profits arising due to disallowance under Sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....12-13 Assessee (ITA No. 1205/CHNY/2024) 6 to 10 (b) Payments towards license to use software ('Software License') Assessment Year Appeal by Ground No. AY 2010-11 Assessee (ITA No. 1193/CHNY/2024) 12 to 17 AY 2011-12 Assessee (ITA No. 1194/Chny/2024) 12 to 17 AY 2012-13 Assessee (ITA No. 1205/CHNY/2024) 11 to 16 8.1 During the AY 2010-11, the assessee had made payments to non-resident vendors towards procurement of license to use software in its business ('Software License') and software Annual Maintenance Charges ('AMC') for regular upgrades of the latest version of the software, corrective patches, resolution of issues in the software over online/ remote mode. The assessee has not deducted tax at source on the aforesaid payments made to non-resident vendors on the premise that the same is not taxable in India under the provisions of the Act. 8.2 The AO had concluded that taxes are required to be withheld on payments made towards Software AMC and Software License based on provisions of the Act and had disallowed the payments u/s. 40(a)(ia) of the Act. Payments towards Software Annual Maintenance Charges ('Software AMC') ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he non-resident vendors would fall within the purview of the exclusionary clause provided in section 9(1)(vii)(b) of the Act, as the payments made by the assessee (a resident) are utilized to earn income from a source outside India as the Company is an exporter of computer software and related services. Reliance in this regard was placed on various decisions as listed below: o CIT Vs Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany by BHEL 262 ITR 513 (Mad HC) reference in this regard is made to Page No. 220 (Para No. 8) of the case law paper book o Deputy/Joint Commissioner of Income-tax (OSD) vs Aspire Systems India (P.) Ltd [2023] 157 taxmann.com 699 (Chennai ITAT) reference in this regard is made to Page No. 381 (Para No. 12) of the case law paper book o Titan Industries v ITO (11 SOT 206 Bang.) o Lufthansa Cargo India (P) Ltd v DCIT (91 ITD 133 Del.) o ITO v Bajaj Hindustan Ltd (47 SOT 74 Mum. (URO)) o Ajappa Integrated Project Management Consultants P. Ltd vs. ACIT (33 CCH 207 Chen) o Mahindra Holidays & Resorts (97 DTR (Chennai Trib) 393) o Aqua Omega Services P Ltd v ACIT (23 ITR Trib 191 Chen) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the non-resident vendors in relation to Software AMC for years under appeal (i.e. AY 2010-11 to AY 2012-13) were made to vendors who are resident of Singapore, USA, Netherlands, Australia, United Kingdom, Canada, Germany and Austria. Further, the Ld.AR submitted the year-wise list of payments made to these non-resident vendors which is reproduced below for ease of reference: Assessment Year 2010-11 S No Name of Company Country of residence Currency Amount (in foreign currency) Amount (in Rs. ) Payments made towards Software AMC - Countries with 'make available' clause 1 Riverbed Technology Inc USA USD 6,137 2,97,779 2 Inflow Technologies (Singapore) Pte Ltd Singapore USD 190 9,073 3 Riverbed Technology Inc USA USD 6,137 2,87,027 Total of payments (with 'make available' clause) (A) 12,464 5,93,879 Total of payments (without 'make available' clause) (B) 0 0 Total Software AMC payments (C) = (A)+(B) 12,464 5,93,879 Assessment Year 2011-12 S No Name of Company Country of residence Currency Amount (in foreign currency) Amount (in Rs. ) Payments m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat on being granted opportunity to rebut, the Revenue has failed to draw our attention to any material on record supporting its plea that both payees(supra) are not Singaporean entities. Coming to its argument that the annual maintenance charges amount to 'technical services' within the meaning of section 9(1)(vii), go against the case law of GE India Technology Centre Pvt. Ltd vs CIT 327 ITR 465 holding that section 195 applies only when the payment is taxable in India in the hands of non-resident payee which is not the case in hand as the concerned payees have carried out maintenance contracts outside India without 'making available' any technology. There is also no element of any technology changing hands as stipulated in the DTAA (supra). Thus, we agree with the findings of the CIT(A) that the assessee was not under any obligation to deduct TDS in question and section 9 r.w.s 195 is not applicable. In these circumstances, we reject the relevant grounds raised in the appeal. The Revenue's appeal I.T.A.No.1202/Mds/2013 is dismissed." 11.1 The revenue represented by ld.DR did not bring on record any arguments to controvert the above decision placed on record before us....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under section 10A/ 10AA of the Act. For A.Y.2010-11, the ld.AR also pointed out that the AO provided the relief under Section 10A/ 10AA of the Act on the enhanced profits arising due to disallowance of payment of Software AMC. Now, given that the aforesaid decision of this Tribunal results in reduced disallowance for AY 2010-11, we direct the AO to recompute the consequential relief under Section 10A/ 10AA of the Act on the enhanced profits arising due to disallowance of payments towards Software AMC. 15. For A.Y. 2011-12 and A.Y.2012-13, we follow this Tribunal decision in assessee's own case in ITA No.1798 & 1799/Mds/2014 vide order dated 15.07.2016 for the A.Y.2009-10 and direct the AO to compute the relief under Section 10A/ 10AA of the Act on the enhanced profits arising due to disallowance of payments towards Software AMC. 16. Accordingly, the Grounds of appeal filed by the assessee on payments in relation to Software AMC is Partly Allowed. Payments towards Software License: 17. On appeal before the Ld.CIT(A) by the assessee, the Ld. CIT(A) upheld the action of the AO vide Para no. 3.5.7 & 3.5.8 in it's order for A.Y. 2011-12. The relevant Para No. 3.5.7 & 3.5.8 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....view of the exclusionary clause provided in section 9(1)(vi)(b) of the Act, as the payments made by the assessee (a resident) are utilized to earn income from a source outside India as the assessee is an exporter of computer software and related services. - The assessee cannot be expected to effect tax deduction at source on the payments due to subsequent amendment made under the Explanation 4 to section 9(1)(vi) of the Act. Reliance was placed on various judgement in this regard by the ld.AR. - If a payment is treated as royalty under the Act, the same may not still be subject to withholding tax under section 195 of the Act, if the said payment is not treated as royalty under the applicable DTAA. Reliance was placed on Union of India v Azadi Bachao Andolan - 263 ITR 707 (SC) and various other decisions. - The payments made during the subject A.Y. are not taxable as royalty as the same relates to payment for the acquisition of a 'copyrighted article' and not the 'copyright' as such and hence, is not 'royalty' under the relevant DTAA. Reliance was placed on the Apex Court decision in the case of Engineering Analysis Centre of Excellence (P.) Lt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticle and copyright of the software do not constitute 'royalty' and therefore, there is no liability to deduct tax on payments. CIT (A) noticed that the beneficial provisions of DTAA should be taken into account. Further, he mentioned that an insertion of Explanation 4 to section 9(1)(i) in the - absence of amendment to definition of 'royalty' in the relevant DTAA, the payment for 'copyrighted article' shall not be considered as 'royalty'. For this proposition, CIT (A) relied on the judgment of the Hon'ble Delhi High Court in the case of DIT vs. Nokia Network OY (358 ITR 259). Aggrieved with the above, Revenue raised the Ground no.6 with its sub-grounds and argued that the said Delhi High Court judgment in the case of Nokia Network OY (supra) will not be accepted by the Revenue as the same is in appeal before the Apex Court. It is the requirement of the Revenue that the issue should be raised before the Tribunal to keep the issue alive for future. 27. They also raised argumentative grounds saying that the amended provisions to section 9 of the Act has retrospective effect from 1.6.1976 as the amendments are clarificatory in nature. Rebut....
X X X X Extracts X X X X
X X X X Extracts X X X X
....63/Chny/2024 (AY 2011-12): 24. Ground of appeal raised by the department in ITA No.1263/Chny/2024 for AY 2011-12 are as under: 1. The order of the Id. CIT(A) is opposed to law and facts of the case. 2. The Id. CIT(A) erred in directing to allow set off of loss incurred by the eligible units u/s. 10A/10AA against the profits of other units without appreciating that the issue, whether the stage of deduction u/s. 10A/10AA is at the Gross Total Income stage or at the Computation of total income stage decided in the case of CIT vs. Yokogawa India Ltd. [2016] Tax Corp (DT) 67973 (SC) is still pending for reconsideration by three judges Bench of the Supreme Court and hence has not reached finality. 3. The Id. CIT(A) erred in directing to verify and allow depreciation on software licence @ 60% if the same is an application software without appreciating the fact that the assessee had only acquired a license to use the software and further classified the same as "intangible asset" in the books of the assessee, as such the depreciation rates as applicable to "licenses" as stated in Part B of New Appendix- 1 of the IT Rules, which 25% shall only be applicable to s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is as regards to the order of ld.CIT(A) in allowing the set-off of losses incurred by the units claimed deduction u/s. 10AA of the Act against the taxable income of other units. We note that this issue is squarely covered by the decision of this Tribunal in assessee's own case in ITA No.160 & 233/ Chny/ 2022 for AY 2015-16 and by the decision of Hon'ble Madras High Court in assessee's own case and it has been noted by the ld.CIT(A) also in para 3.3.4 wherein the Ld.CIT(A) allowed set-off of losses against the profits of eligible units for claiming deduction u/s. 10AA of the Act. The relevant finding of CIT(A) in para 3.3.4 reads as under: "...... 3.3.4 During the course of the hearing, the Appellant placed reliance on the judgment of the Honorable Madras High Court, in Appellant's own appeals for AY 2004-05 on the same issue, vide order dated 20-Nov-2020. The Appellant relied on the following extracts of the said Order: "9. As far as the substantial question of law with regard to Set off of brought forward losses before allowing tax holiday deduction is concerned, the same is covered by the decision in CIT v. M/s. Yokogawa India Ltd. [(2016) Tax Corp (DT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision." 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es incurred by the units u/s. 10AA of the Act, the profits and set-off of losses against other taxable profits of the business made by the assessee, we respectfully following the decision of Hon'ble Madras High Court and the decision of Hon'ble Supreme Court in the case of CIT vs. Yokogawa India Ltd. 391 ITR 274 (SC) direct the AO to allow the losses incurred by the units u/s. 10AA of the Act to set off with the profits taxable profits of the business made by the assessee by upholding the order of the ld.CIT(A) in this matter. 27.1 Accordingly, this issue raised in the Grounds of appeal based on chart mentioned supra, filed by the Revenue for A.Y 2010-11 to A.Y 2014-15 are dismissed. 28. Issue 4: Treatment of computer software as 'Intangible asset' and restriction of depreciation thereon to 25 percent Assessment Year Appeal by Ground No. AY 2011-12 Department (ITA No. 1263/CHNY/2024) 3 AY 2012-13 Department (ITA No. 1264/CHNY/2024) 3 AY 2013-14 Department (ITA No. 1265/CHNY/2024) 3 AY 2014-15 Department (ITA No. 1266/CHNY/2024) 3 29. The facts relating to the issue of treatment of computer software as 'Intangible asset' and rest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hrough general customized application software. The assessee acquired software licenses capitalized during the relevant years in the books of accounts and claimed depreciation at 60%. In paragraph 20 of the order passed by the Tribunal, the nature of items, on which, the assessee claimed depreciation at 60%, has been listed out and they are 17 in number, from which, we find that substantial amount of server licenses, which have been obtained by the assessee are customized and some of which are single user licenses. 8. The question would be as to whether the software application, which was acquired by the assessee would fall under Entry 5 of Part A of New Appendix I, which states that computers including computer software are entitled to depreciation at 60%. Note 7 of the Appendix defines the expression 'computer software' to mean any programs recorded on CD or disc, tape, perforated media or other information storage devices. 9. The case of the Revenue is that software are licenses and that they are intangible assets and would fall under Part B of New Appendix I, which deals with knowhow, patents, copyrights, trademarks, licenses, franchises or any other b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd Rs. 1,71,88,219/- for A.Y.2012-13. On appeal by the assessee before the Ld.CIT(A), the Ld.CIT(A) held the issue in favour of the Assessee. Relevant extract of the Ld.CIT(A) order for AY 2011-12 is as follows: "....... 3.7.3 l have carefully considered the facts of the case and the submissions of the AR. I have also gone through the arguments of the AO. The AR during the hearing stated that the AO has treated the un-realized gain on mutual fund units remaining unsold in the hands of the Appellant recognized in the financial statements as having accrued to the Appellant during the AY 2011- 12 under consideration on the presumption that the units have been sold by the Appellant during the financial year. However, it is clear that these units were unsold during the year end and as informed by the AR, the capital gain on sale of mutual funds were offered to tax as income from Capital Gains in the year in which they were sold. 3.7.4 In light of the above, relying on the above facts, I direct the AO to delete the disallowance on unrealized gains on mutual fund units remaining unsold at the end of the year added as income of current year. Accordingly, the grou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITA No. 1265/CHNY/2024) 4 AY 2014-15 Department (ITA No. 1266/CHNY/2024) 4 36. The facts relating to the issue of Disallowance under section 14A read with rule 8D in computing the book profits u/s. 115JB of the Act is common for all the A.Ys with that of the normal provisions A.Y.2010-11 to A.Y.2014-15 36.1 The Ld. AO has added the amount of disallowance u/s. 14A of the Act to the book profits by treating the same as the amount of expenditure relatable to any income to which section 10 applies as per the provisions of clause (f) to Explanation 1 of section 115JB of the Act. 36.2 The Ld. CIT(A) while dealing with the issue under the provisions of section 115JB of the Act held the issue in favour of the Assessee by relying on the recent decision of this Hon'ble Tribunal in the assessee's own case vide order dated 29.12.2023 in ITA No. 233/Chny/2022. 37. This ground in the appeal of Revenue is as regards to the order of ld.CIT(A) in deleting the disallowance u/s. 14A read with rule 8D in computing book profits u/s. 115JB of the Act. We find that this issue is squarely covered by the decision of this Tribunal in assessee's own case in ITA No.160 & 233/Chny/ 2022....