2013 (3) TMI 372 - HC - Income Tax

Software expenses - revenue v/s capital - Whether Tribunal failed to appreciate that as regards the software it was a case of a sale of copyrighted article and hence the expenditure could not be treated as revenue in nature? - Held that - The issues of software expenses stand covered by the decision of CIT Vs. GE Capital Services Ltd. 2007 (7) TMI 185 - DELHI HIGH COURT that expenditure incurred are not capital expenditure as due to technological changes and the need to upgrade the software on a regular basis it cannot be said that the software was of an enduring nature - in favour of assessee. Approvals under section 10A - whether the Approval granted by the Director of STPI was sufficient approval so as to satisfy the conditions relating to Sec 10A of? - Held that - Central Board of Direct Taxes and an instruction (Instruction No.1/06 dated 31.3.2006) issued clarifying the position with regard to the deduction under Section 10A that the claim of deduction under Section 10A of the said Act should not be denied to the Software Technology Park units only on the ground that the approval/registration to such units had been granted by Directors of the Software Technology Parks. Also inter-ministerial communication dated 23.3.2006 issued by the Secretary, Ministry of Communications and Technologies makes it clear that the approvals issued by the Directors of the Software Technology Parks of India have the authority of the Inter-Ministerial Standing Committee and that all approvals granted by the STPI Directors are therefore deemed to be valid. The position is also clear from a letter dated 6.5.2009 issued by the Central Board of Direct Taxes to the Joint Secretary, Ministry of Commerce and Industry wherein a distinction has been drawn between the provisions of section 10A and 10B of the Income Tax Act, 1961 and in which it has been clarified that a unit approved by the Director under the Software Technology Parks scheme will be allowed exemption only under Section 10A as a STPI unit and not under 10B as a 100% export oriented unit - in favour of assessee.

Summary

Issues:
1. Validity of approval granted by the Director of STPI under Section 10A of the Income Tax Act.
2. Nature of software expenses incurred by the assessee.
3. Interpretation of conditions under Section 10A(2) regarding the approval for software technology parks.

Analysis:

1. The first issue revolves around the validity of the approval granted by the Director of the Software Technology Parks of India (STPI) under Section 10A of the Income Tax Act. The assessing officer initially rejected the claim under Section 10A, stating that only the Inter-Ministerial Standing Committee could grant approval for units in the Software Technology Park. However, an instruction by the Central Board of Direct Taxes clarified that approvals by STPI Directors would be considered valid. Various communications, including one from the Ministry of Communications and Technologies, affirmed that STPI Directors were authorized to issue approvals with the authority of the Inter-Ministerial Standing Committee. Consequently, the High Court held that the approval granted by the Director of STPI would be deemed as approval from the specified authority, satisfying the conditions under Section 10A(2) of the Act.

2. The second issue pertains to the nature of software expenses incurred by the assessee. The appellant argued that the software expenses were revenue in nature, while the respondent relied on a decision of the Court in CIT Vs. GE Capital Services Ltd. to support their stance. The Court agreed that the issues regarding software expenses were covered by the previous decision, thereby affirming that the software expenses were revenue in nature.

3. The third issue involves the interpretation of conditions under Section 10A(2) regarding the approval for software technology parks. The Court highlighted that for an undertaking to benefit from Section 10A, it must fulfill specific conditions, including commencing production in a software technology park. The Court emphasized that the approval granted by the Director of STPI was valid, as clarified by the CBDT's instruction and various communications. Additionally, the Court differentiated between Section 10A and 10B of the Income Tax Act, emphasizing that the approval by STPI Directors sufficed for Section 10A benefits. Consequently, the Court dismissed the appeal, concluding that there was no substantial question of law requiring determination.

In summary, the High Court upheld the validity of the approval granted by the Director of STPI, affirmed the revenue nature of software expenses, and clarified the interpretation of conditions under Section 10A(2) for software technology parks, ultimately dismissing the appeal.