2016 (12) TMI 1398 - AT - Income Tax

Compensation paid of to Microsoft Corporation, USA - allowable deduction in u/s 37(1) - Held that - In the facts of the present case, use of pirated software by the assessee and its group companies which is the property of Microsoft Corporation and others admittedly, resulted in loss of business of Microsoft Corporation. Where because of civil suit between the parties, there was compromise entered into between the parties for payment of compensation for loss of business and also covering the cost of litigation, then such an amount is to be allowed as business expenditure in the hands of assessee under section 37(1) of the Act. The Explanation to section 37(1) of the Act does not apply to such understanding between the two private parties. The Kolkata Bench of Tribunal in ITO Vs. M/s. MPR Marketings Pvt. Ltd. (2013 (12) TMI 1061 - ITAT KOLKATA ) has laid down similar proposition, which has been approved by the Hon ble High Court of Calcutta and we find support from the said ratio. Accordingly, we allow the claim in favour of assessee Computation of MAT credit - Held that - The assessee is in appeal before us and the alternate plea raised by the assessee is that where the tax payable has been computed after including surcharge and education cess, then MAT credit should be allowed on the total amount i.e. tax with surcharge and education cess and should not be restricted only to the tax payable. This issue is decided by the Delhi Bench of Tribunal in the case of Richa Global Exports (P.) Ltd. (2012 (9) TMI 99 - ITAT DELHI ), wherein the Tribunal held that MAT credit payable under section 115JB is only income tax and does not include surcharge or education cess. Therefore, where it is only income tax that is paid under the provisions of section 115JB of the Act, it is natural that tax credit under section 115JAA of the Act will only be of income tax and not of surcharge and education cess. The said proposition was applied by the CIT(A) in denying the claim of assessee. The assessee has failed to controvert the same and in view thereof, we find no merit in the ground of appeal raised by the assessee.

Summary

Issues Involved:
1. Disallowance of compensation paid to Microsoft Corporation, USA.
2. Computation of MAT credit under section 115JAA of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Compensation Paid to Microsoft Corporation, USA:

The primary issue in this appeal was the disallowance of ?23,33,278/- paid to Microsoft Corporation, USA. The assessee, engaged in software development, had used pirated Microsoft software, leading to a civil suit by Microsoft. The parties settled, and the assessee paid ?35 lakhs as compensation, of which ?23,33,278/- was the assessee's share. The Assessing Officer disallowed this expense, citing it as an infraction of the Copyright Act, thus invoking Explanation to Section 37(1) of the Income Tax Act, which disallows expenses incurred for any purpose that is an offense or prohibited by law.

The CIT(A) upheld this disallowance, interpreting the payment as a penalty for copyright infringement. However, the assessee contended that the payment was a settlement cost, not a penalty or an offense under the law, and thus should be deductible as a business expense under Section 37(1). The assessee argued that the payment was made to safeguard its business operations and was not prohibited by law.

The Tribunal analyzed whether the payment was for an infraction of law or a business expense. It concluded that the payment was a contractual liability, not a penalty, and was made to compensate Microsoft for business losses, not as a fine for legal infringement. The Tribunal noted that penalties typically involve government authorities, not private parties. Therefore, the payment was deemed an allowable business expense under Section 37(1), and the appeal on this ground was allowed.

2. Computation of MAT Credit under Section 115JAA:

The second issue concerned the computation of MAT credit. The assessee claimed MAT credit under Section 115JAA, calculating it on the tax payable after reducing the MAT credit. However, the Assessing Officer computed surcharge, income tax, and education cess on the tax payable before allowing MAT credit, thus ignoring the MAT credit for setting off against surcharge and education cess.

The CIT(A) upheld the Assessing Officer's method, relying on the Delhi Bench of Tribunal's decision in Richa Global Exports (P.) Ltd., which held that MAT credit under Section 115JAA includes only income tax, not surcharge or education cess. The Tribunal found no merit in the assessee's appeal on this ground, affirming that MAT credit should only apply to income tax, excluding surcharge and education cess.

Conclusion:

The Tribunal allowed the appeal regarding the disallowance of compensation paid to Microsoft Corporation, recognizing it as a deductible business expense. However, it dismissed the appeal concerning the computation of MAT credit, upholding the CIT(A)'s method of excluding surcharge and education cess from MAT credit calculation. The final judgment resulted in a partial allowance of the assessee's appeal.