2010 (1) TMI 624 - AT - Income Tax

DTAA - the assessee made SAP maintenance expenses of Rs. 1,82,48,673/- to the parent company M/s SMA Demag AG Germany without deducting tax in India during the financial year 1999-2000 relevant to Assessment Year 2000-01 - The assessee filed the copy of audited accounts showing the additions to the computer amounting to Rs.4,32,23,878/-which included the amount of Rs. 1,82,48,673 - Since the amount was not charged to profit and loss account, the provisions of sec. 40(a)(i) have no applicability - Id. Sr. D.R. submitted that maintenance charges for software SAP are in the nature of royalty and, therefore, for deduction u/s 40(a)(i)) the tax at source has to be made - the payment made for acquisition of an asset whether it is a revenue expenditure or capital, provisions of section 40(a)(i) of the Act will not be applicable in case of resident assessee for assessment year 2000-01 - Accordingly, this ground of appeal is decided in favour of the assessee Disallowance of depreciation - depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source - Provisions of section 40(a)(i) are not applicable for claim for deduction u/s 32 of the Act - the appeal filed by the assessee is partly allowed

Summary

Issues:
1. Jurisdiction u/s 147
2. Disallowance of depreciation amounting to Rs. 54,74,602/-
3. Nature of payment for software SAP and applicability of sec. 40(a)(i)

Jurisdiction u/s 147:
The appellant did not press the ground of appeal related to jurisdiction u/s 147, leading to its dismissal.

Disallowance of Depreciation:
The Assessing Officer disallowed depreciation of Rs. 54,74,602/- due to non-deduction of tax at source on payment made to the parent company for software SAP. The CIT(A) upheld the disallowance, considering the payment as royalty/fee for technical services. The appellant argued that the payment was for software purchase, not royalty, citing relevant case laws. The Tribunal found that the payment for software acquisition was not taxable in India under DTAA, thus ruling in favor of the appellant.

Nature of Payment for Software SAP:
The dispute revolved around whether the payment for software SAP should be treated as royalty/fee for technical services. The CIT(A) upheld the disallowance, considering the payment as royalty/fee for technical services. The appellant contended that the payment was for software acquisition, not royalty, citing non-discrimination clause 24(1) of DTAA. The Tribunal agreed with the appellant, ruling that sec. 40(a)(i) did not apply to a resident assessee for AY 2000-01. The Tribunal directed the AO to verify asset usage for depreciation allowance.

Conclusion:
The Tribunal partly allowed the appeal, holding that the payment for software SAP was not taxable under sec. 40(a)(i) due to DTAA provisions. The disallowance of depreciation was also overturned, with directions to verify asset usage for full depreciation allowance. Other issues related to subsequent year depreciation claim and interest under sections 234-B and C were dismissed as consequential.