2015 (11) TMI 1893 - AT - Income Tax

Nature of expenses - software expenses - revenue or capital expenses - assessee is in the business of media planning executing and buying in the field of advertising and marketing and other related services - HELD THAT - We find that these software license costs which has been paid by the assessee is for using of software for its day-to-day business requirements as stated by the assessee before the AO. These softwares keep are ever changing from time to time and did not have a useful life for very long period and at one point of time it becomes obsolete. Thus it cannot be held that they are capital in nature on account of enduring benefit. As decided in Asahi India Safety Glass Ltd 2011 (11) TMI 2 - DELHI HIGH COURT and Raychem RPG Ltd 2011 (7) TMI 953 - BOMBAY HIGH COURT have held that these softwares do not form part of the profit making apparatus and merely facilitate the assessee s trading operation or enabled the management to conduct the assessee s business more efficiently and more profitable. Thus they have to be treated as revenue expenditure. TDS u/s 195 - disallowance being the provision made for the expenditure to be reimbursed in connection with the software allocation cost by the foreign AE/group company Mindshare Asia Pacific - AO observed that such a payment on account of reimbursement of software cost amounts to royalty within the meaning of Explanation to section 9(1)(vi) and TDS should have been deducted by the assessee while making the payment - assessee contended that it is merely reimbursement of cost of software expenses incurred by the Group company which has been allotted to the assessee and is not a Royalty within the meaning of Explanation 2 to Section 9(1)(vi) - HELD THAT - These softwares have not been developed by the Parent Company or any AE but have been centrally procured so that same can be allotted and given to the various Group entities in order to ensure proper functioning; proper coordination and quality. Whatever cost had been incurred for procuring the software from third parties has been allocated among the group entities on the proportionate basis. Such an allocation has not been disputed except for holding that the reimbursement of cost paid by the assessee to the Parent/ AE Company amounts to Royalty . Such a reimbursement of cost cannot be held to be for any transfer of any right or giving any right to use within the ambit and scope of any of the definition as given in Explanation 2 to section 9(1)(vi). Once such a payment does not fall within any of the parameters set out in Explanation 2 then it cannot be held that it is in the nature of royalty . Mindshare Asia Pacific is procuring the software from somewhere else and loading the cost on proportionate basis to various group entities without any mark-up hence on reimbursement of such a cost assessee was not liable to deduct TDS on account of royalty - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of software expenses claimed as revenue expenditure.
2. Disallowance on account of provision of expenditure to be reimbursed to the parent/group company.
3. Disallowance on account of replacement of old monitors and artificial carpet charges.

Issue 1 - Disallowance of Software Expenses:
The appellant challenged the disallowance of software expenses treated as capital expenditure by the AO. The AO rejected the appellant's contention that the software expenses should be treated as revenue expenditure. The CIT(A) upheld the AO's decision based on enduring benefit. However, the ITAT found that the software expenses were for day-to-day business requirements, with a limited useful life, making them revenue expenditure. Citing relevant case laws, the ITAT allowed the software expenses as revenue expenditure, as done in previous years. Hence, ground no. 1.1 was allowed in favor of the appellant.

Issue 2 - Disallowance of Expenditure Reimbursement:
The AO disallowed a provision made for expenditure to be reimbursed to the parent/group company, treating it as royalty and invoking section 40(a)(i) for non-deduction of TDS. The CIT(A) confirmed this disallowance. The appellant argued that the reimbursement was not royalty as per the parameters of Explanation 2 to Section 9(1)(vi). The ITAT examined the details of software costs allocated and procurement process, finding that the reimbursement did not fall within the definition of royalty. As a result, the disallowance of Rs. 84,50,557 was deleted, and ground no. 2 was allowed in favor of the appellant.

Issue 3 - Disallowance of Replacement Expenses:
The AO disallowed expenses related to the replacement of old monitors and artificial carpet charges, stating they were not covered under the definition of 'current repairs'. However, detailed arguments or findings related to this issue were not provided in the summary.

In conclusion, the ITAT Mumbai allowed the appellant's appeal on the disallowance of software expenses and reimbursement expenditure, finding them to be revenue expenditures and not falling under the category of royalty, respectively. The disallowance related to replacement expenses was not discussed in detail in the provided summary.