2015 (11) TMI 917 - AT - Income Tax

Telecommunication expenses for delivery of software out side India - whether 10 per cent. of the total telecommunications expenses are to be allowed or 50 per cent - Held that - As per the agreement between the assessee and its customers overseas, communication expenses were to be borne by the customer. In such circumstances, there could be no expenses incurred by the assessee for delivery of computer software outside India. Nevertheless, the assessee has on his own, on a conservative approach, disallowed 10 per cent. of the telephone expenses as incurred by the STPI unit as attributable to delivery of software outside India. In the given circumstances, we do not find any merit in ground raised by the Revenue. - Decided in favour of assessee. Exclusion of reimbursement of certain expenses from both export turnover and total turnover for the purpose of computing deduction under section 10A - Held that - Whatever is excluded from the export turnover has also to be excluded from the total turnover as laid down by the hon ble High Court of Karnataka in CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT - Decided in favour of assessee. Disallowance u/s 40(a)(ia) - whether the assessee had purchased software which is in nature of a licence paid for usage of the software and the consideration for such licences would fall within the definition of the royalty defined in Explanation to section 9(1)(vi) and hence deduction of tax at source under section 194J should have been done by the assessee? - Held that - Mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copy right and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of royalty . Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilisation in the day-to-day business. See SMS Demag Pvt. Ltd. Versus DCIT 2010 (1) TMI 624 - ITAT, DELHI - 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 - Decided in favour of assessee.

Summary

Issues:
1. Telecommunication expenses for delivery of software outside India.
2. Exclusion of reimbursement of certain expenses from export turnover and total turnover.
3. Disallowance under section 40(a)(ia) for not deducting tax at source on software purchase.

Analysis:

Issue 1: Telecommunication expenses for delivery of software outside India
The appellant, a software development company, claimed deduction under section 10A of the Income-tax Act, excluding 10% of telecommunication expenses from export turnover. The Assessing Officer previously excluded 50% of such expenses. The Commissioner of Income-tax (Appeals) found only 10% attributable to software delivery outside India, based on evidence. The Tribunal upheld this decision, noting that communication expenses were customer-borne, and the appellant conservatively excluded 10% expenses. The Revenue's appeal was dismissed.

Issue 2: Exclusion of reimbursement of certain expenses
Grounds 3 and 4 concerned excluding reimbursement from export and total turnover for section 10A deduction. The Revenue disputed the High Court's ruling, pending in the Supreme Court. The Tribunal upheld the Commissioner's decision, emphasizing the binding nature of the High Court's decision, dismissing Revenue's contentions.

Issue 3: Disallowance under section 40(a)(ia) for software purchase
The appellant purchased software without deducting tax at source, leading the Assessing Officer to disallow depreciation under section 40(a)(ia). The Commissioner held that retrospective amendments on software being royalty did not apply to the appellant's purchase. Citing relevant case law, the Tribunal upheld the Commissioner's decision, dismissing the Revenue's appeal based on similar precedents.

In conclusion, the Tribunal upheld the Commissioner's decisions on all issues, dismissing the Revenue's appeals in each instance. The judgments were based on the interpretation of relevant tax provisions, evidence presented, and established legal principles, ensuring fair application of the law in each case.