2019 (7) TMI 799 - AT - Income Tax

Capitalization of software expenses and allowing of depreciation - HELD THAT - As decided in assessee's own case for the assessment year 2008-09 2014 (11) TMI 1202 - ITAT BANGALORE we deem it proper to restore this issue back to the file of the AO to examine and reappraise the additional evidence filed by the assessee in respect of expenditure incurred on purchase of software of ₹ 10 lakhs and above and decide the issue in accordance with the decisions in the case of Toyota Kirloskar Motors P. Ltd. 2013 (2) TMI 108 - KARNATAKA HIGH COURT and Amway India Enterprises 2011 (11) TMI 4 - DELHI HIGH COURT . Disallowance u/s 40(a)(ia) - AMC expenses - assessee contended that it has purchased software, hence TDS provision not applicable - HELD THAT - AR filed material and explained that the company has not been granted any Rights in the software purchase and only obtained limited Rights for usage. We found that these aspects and information were not dealt in the assessment proceedings. Therefore, we remit this issue to the file of the AO to verify and examine the applicability of TDS provisions with material evidence filed and judicial decisions and the ground of appeal is allowed for statistical purposes. Marked to Market ( M2M ) loss - disallowance on the basis that the said loss is notional and contingent in nature - HELD THAT - As contention of the AR is that this is allowable whereas we are of the opinion that hedging should not be more than the receivables. Whereas the AR submitted that it is within limits of exports and substantiated with material in the paper book - DR submitted that these facts are to be verified and the matter has to be examined whether export proceeds have been received within time allowed for filing of return by the Income-tax Act. Accordingly, we are of the substantive opinion that the matter has to be restored back to the file of the AO for verification of facts and receipt of export proceeds as envisaged in the course of hearing. Accordingly, this ground of appeal is allowed for statistical purposes. Charging of interest u/s 234B and 234C are consequential and direct the AO accordingly. Deduction u/s 10A on the capitalization of software expenses - HELD THAT - As perused the order of the CIT(A), dealt where the CIT(A) has considered the alternative submission of the assessee that in case disallowance in regard to capitalization of software expenditure, the same has to be considered for deduction u/s 10A and the AO was directed to re-work. Whereas the learned DR supported the order of the AO and no new material was filed to controvert the observations of the CIT(A). Accordingly, we uphold the order of the CIT(A) on this issue and dismiss the ground of appeal of the revenue. Deduction u/s 80JJA in respect of additional wages paid to software engineer - HELD THAT - We are of the opinion, that the matter requires a fresh look by AO. The CIT(A) had given relief to the assessee, despite the remand report of the AO in which he had mentioned the non-eligibility of the assessee in view of the notification issued by Government of Karnataka under Industrial Employment Act. We therefore, set aside the order of the authorities below and remit this issue to the file of the AO for fresh consideration afresh in accordance with law. Deduction u/s 10A - directing the AO to exclude data link charges and other expenditure both from export turnover as well as total turnover - HELD THAT - We found that the CIT(A) has considered the decision of the Hon ble Karnataka High Court in the case of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT and passed a reasoned order which cannot be interfered and uphold the same and dismiss the ground of appeal.

Issues Involved:
1. Disallowance of Annual Maintenance Contract (AMC) expenses and software purchases under section 40(a)(ia).
2. Capitalization of software expenses and depreciation rate.
3. Disallowance of Marked to Market (M2M) loss.
4. Levy of interest under sections 234B and 234C.
5. Deduction under section 10A on capitalized software expenses.
6. Eligibility for deduction under section 80JJAA for additional wages paid to software engineers.
7. Exclusion of specific expenditure from export turnover and total turnover for section 10A deduction.

Issue-wise Detailed Analysis:

1. Disallowance of Annual Maintenance Contract (AMC) expenses and software purchases under section 40(a)(ia):
The assessee argued that there was no requirement for tax deduction at source (TDS) on software purchases and AMC charges, supporting their claim with substantial documentation. The Tribunal found that the aspects related to TDS applicability were not sufficiently examined during the assessment proceedings. Consequently, the issue was remitted to the Assessing Officer (AO) for re-examination with the provided evidence and judicial decisions. This ground of appeal was allowed for statistical purposes.

2. Capitalization of software expenses and depreciation rate:
The Tribunal noted that the issue of software expenses had been previously considered in the assessee's favor for earlier assessment years. The Tribunal restored the issue back to the AO to reappraise the additional evidence filed by the assessee and decide the matter in accordance with relevant judicial decisions. This ground was also allowed for statistical purposes.

3. Disallowance of Marked to Market (M2M) loss:
The assessee contended that the M2M loss was not notional but a business loss arising from hedging contracts for foreign currency receivables. The Tribunal found that the facts needed verification, particularly whether the export proceeds were received within the time allowed by the Income-tax Act. The issue was remitted back to the AO for verification, and this ground was allowed for statistical purposes.

4. Levy of interest under sections 234B and 234C:
The Tribunal directed that the levy of interest under sections 234B and 234C was consequential and should be computed accordingly by the AO.

5. Deduction under section 10A on capitalized software expenses:
The Revenue contested the CIT(A)'s direction to allow deduction under section 10A on capitalized software expenses. The Tribunal upheld the CIT(A)'s order, noting that no new material was presented to challenge the CIT(A)'s observations. This ground of appeal by the Revenue was dismissed.

6. Eligibility for deduction under section 80JJAA for additional wages paid to software engineers:
The Revenue argued that software engineers could not be equated with 'workmen' as defined under the Industrial Disputes Act. The Tribunal referred to its earlier decisions and found that the matter required fresh consideration by the AO. The issue was remitted back to the AO for re-evaluation in accordance with the law, and this ground was allowed for statistical purposes.

7. Exclusion of specific expenditure from export turnover and total turnover for section 10A deduction:
The Revenue challenged the CIT(A)'s direction to exclude data link charges and other expenditures from both export turnover and total turnover. The Tribunal upheld the CIT(A)'s order, which was based on the Karnataka High Court's decision in the case of Tata Elxsi. This ground of appeal by the Revenue was dismissed.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed for statistical purposes, with several issues remitted back to the AO for further examination and reappraisal. The Tribunal's directions emphasized the need for a thorough verification of facts and adherence to judicial precedents in resolving the disputed issues.

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