2019 (4) TMI 681 - AT - Income Tax

Addition u/s 40A(2)(b) - related party transaction - AO alleged that rates is excessive and unreasonable as Linux was free and open-source software - HELD THAT - Upon perusal, the undisputed position that emerges is the fact that the assessee has purchased the stated software under 6 bills for resale. The part of these software has been sold by the assessee during impugned AY and the balance software have been reflected as Closing Stock under the head electronics which is evident from closing stock details. The perusal of quantitative details reveals that the assessee is having closing stock of these items for ₹ 84.02 Lacs. Further, the assessee has sold the software in subsequent years which is evident from sales invoices placed on record. So far as the observations that the Linux was free open source software, is concerned, it has been submitted that the said software has been tailor made by the assessee as per the user s requirement and the said fact remain uncontroverted. Another noteworthy point is that fact that nothing has been placed on record by AO to support the finding that the price paid by the assessee was excessive or unreasonable, in any manner, having regards to the market price of these goods. Under these circumstances, no infirmity could be found in the impugned order. Appeal stands dismissed.

Summary

Issues: Disallowance of purchase expenditure under Section 40A(2)(b) of the IT Act for software purchased from a related party.

Analysis:
1. The appeal by the revenue contested the order of the Ld. Commissioner of Income-Tax (Appeals) for Assessment Year 2014-15 regarding the addition of ?86,49,923 made under Section 40A(2)(b) of the IT Act on account of purchase expenditure. The main contention was the deletion of this addition by the Ld. CIT(A) based on the grounds that the purchased software was freely available on the internet for downloading, and the unsold software was considered as part of the closing stock without affecting the profit.

2. The facts leading to the dispute revealed that the assessee, a resident corporate entity engaged in the business of export/import of chemicals and trading in computer parts, was assessed for the impugned Assessment Year. The income was determined after certain additions, including the disallowance of ?86.49 lakhs on certain purchases made by the assessee. The assessee had purchased software from a related entity, Verixo Technologies Pvt. Ltd., for resale, which was disallowed by the Ld. AO based on excessive and unreasonable rates, especially for software like Linux, which is free and open-source.

3. The assessee challenged the disallowance before the Ld. CIT(A), who observed that the expenditure was not claimed as there was a debit for the purchase of software, a credit for the sale of software, and closing stock. The Ld. CIT(A) concluded that the disallowance was not justified. The revenue further appealed the decision.

4. During the appeal, the Ld. Departmental Representative supported the Ld. AO's stand, while the Ld. Authorized Representative for the assessee submitted that the software formed part of the closing stock and had been sold in subsequent years as per stock records.

5. The Tribunal carefully considered the submissions and perused the relevant material. It was found that the assessee purchased software for resale, some of which was sold during the impugned Assessment Year, and the remaining was reflected in the closing stock. The Tribunal noted the closing stock details and sales invoices, emphasizing that the software was tailor-made as per user requirements. Additionally, there was no evidence to support the claim that the price paid by the assessee was excessive or unreasonable. Consequently, the appeal was dismissed, upholding the Ld. CIT(A)'s decision.