2020 (3) TMI 1195 - AT - Income Tax

TP Adjustment - determination of Arm s Length Price (ALP) in respect of an international transaction of rendering of Software Development Services by the Assessee to its Associated Enterprise - HELD THAT - At the time of hearing it was brought to our notice by the learned counsel for the Assessee that the issue with regard to determination of ALP has been settled under Mutual Agreement Procedure (MAP) between the Assessee and the revenue and the AO has under rule 44H(4) of the Income Tax rules, 1962 has given effect to the MAP resolution vide proceedings dated 22.2.2016. Hence, the relevant grounds of appeal raised by the Assessee as well as the revenue are dismissed as not requiring adjudication. Deduction u/s.80JJAA in respect of employment of new workmen - first reason assigned by the AO for denying the claim for deduction u/s.80JJAA of the Act was that persons working in software industry cannot be said to be Workmen for the purpose of Sec.80JJAA - HELD THAT - AO also noticed that in Assessee s own case for AY 2001-02 and 2002-03, the Tribunal had not accepted the stand of the revenue in this regard but still chose not to follow the decision of the Tribunal as the revenue has not accepted the decision of Tribunal and had preferred appeal to the Hon ble High Court on this aspect of deduction u/s.80JJAA - On the question whether the employees employed in software industry can be said to be Workmen , the Bangalore Bench of ITAT has already settled this issue in Assessee s own case. The Tribunal held that Software Industry has also been notified as Industry for the purpose of Industrial Disputes Act, 1947 by the State of Karnataka and that the employees employed in software development industry render technical services and not services in the nature of supervisory or management character. In view of the aforesaid decision of the Tribunal, we are of the view that the above reason given by the AO for denying the benefit of deduction u/s.80JJAA of the Act cannot be sustained. In fact the CIT(A) in the impugned order has also not sustained the disallowance of deduction u/s.80JJAA of the Act on this ground and has followed the earlier order of the Tribunal in Assessee s own case. Additional wages paid to these 287 employees were not eligible to deduction u/s.80-JJAA of the Act because these employees did not work for more than 300 days in FY 2006-07 relevant to AY 2007-08, the wages paid to these employees in AY 2008-09 will also not qualify for deduction u/s.80JJAA - if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wages to such work men in the present year even if such workmen was employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more. By the very same reasoning the fact that in the first year of employment the additional wages paid is not allowed deduction for the reason that the workmen did not work for 300 days or more but if the next two Assessment years, if he works for more than 300 days each, then the deduction u/s.80JJAA of the Act has to be allowed. It is not proper to say that if the deduction is refused in the first year of employment of the new employee then for the next two succeeding Assessment Years also, the benefit of deduction will not be available. Such an approach defeats the very purpose for which deduction u/s.80JJAA of the Act is allowed for three consecutive Assessment years. This aspect has now been clarified in the Finance Act, 2018 by adding a second proviso to the definition of additional employee in Explanation (ii) to Sec.80JJAA of the Act. Even prior to such curative or clarificatory amendment, we are of the view that the claim for deduction u/s.80JJAA of the Act cannot be and ought not to have been disallowed on this ground. We therefore direct that the deduction claimed by the Assessee should be allowed. Capital work in progress written off - Whether expenditure in question cannot be regarded as capital expenditure and was incidental to carrying on business of the Assessee and was revenue expenditure? - HELD THAT - Identical claim has been considered capital expenditure by the tribunal in AY 2007-08, we find no reason to take a contrary view. The nature of the capital work in progress written off being identical, respectfully following the decision of the Tribunal, we uphold the orders of the revenue authorities. We also find all the case laws cited by the learned counsel for the Assessee before us were dealt with and distinguished by the AO. We are also of the view that the damages though was in connection with a claim for not engaging the services of the contractor in future for other contracts cannot be regarded as having no nexus with the capital work in progress written off in the books of accounts of the Assessee and therefore to that extent the claim for deduction and cannot be allowed as deduction and were rightly held to be capital expenditure by the revenue authorities. Assessee has submitted that a sum was disallowed u/s.40(a)(i)/(ia) of the Act and that sum is also part of the sum of ₹ 4,42,14,942 which was disallowed by the AO as capital expenditure and therefore to the extent of ₹ 61,04,942/- there has been a double addition made by the revenue authorities. We are of the view that it would be just and appropriate to direct the AO to look into this aspect while giving effect to the decision of the Tribunal after affording opportunity of being heard to the Assessee and if the contention is found to be correct, allow relief to the Assessee. Disallowance of additional depreciation claimed - description of the items of plant and machinery on which additional depreciation was claimed by the Assessee were such that those items cannot be regarded as Plant and Machinery but were to be regarded as Office Equipment on which additional depreciation cannot be claimed u/s.32(1)(iia) - HELD THAT - Application of section 32(1)(iia ) what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the specific provision contained in section 32(1)(iia ). In the light of the aforesaid decision in VTM LIMITED 2009 (9) TMI 35 - MADRAS HIGH COURT we are of the view that one of the basis on which the revenue authorities disallowed the claim of the Assessee for disallowance of additional depreciation cannot be sustained. Whether the assets on which the Assessee claimed additional depreciation should be regarded as Plant or Office Equipment ? - In the case of CIT Vs. IBM World Trade Corpn. 1977 (11) TMI 4 - BOMBAY HIGH COURT wherein the Hon ble Bombay High Court held the expression office equipment used in Sec.33 should be construed in context of appliances which are generally used in office as an aid for proper function of office and that EA machines, data processing machines installation and operation of which is on scientific basis, and which has their roles to play cannot be equated with office appliances and therefore such machines are Plant and not Office appliances . As we have already observed there is complete lack of details to decide whether the assets in question are Plant or Office equipment in the absence of the role these assets perform and purpose for which these assets are used by the Assessee. We therefore set aside the order of CIT(A) on this limited issue of determining whether the assets on which additional depreciation is claimed by the Assessee can be regarded as Plant. The Assessee is directed to furnish the details and description to the AO in this regard, who shall decide the issue afresh in accordance with law. TDS u/s 194C OR 194I - payment of lease rental on finance lease of cars - addition u/s.40(a)(i) 40(a)(ia) - HELD THAT - We are of the view that the AO made the addition only on the basis of provisions of Sec.194C of the Act and he did not invoke the provisions of Sec.194I of the Act. As far as provisions of Sec.194C of the Act is concerned, we are of the view that the CIT(A) has rightly come to the conclusion that payment of lease rentals under a finance lease will not attract the provisions of Sec.194C of the Act. Nature of expenditure - Treating amount paid towards automation software as revenue expenditure - AO however did not allow the claim of the Assessee by concluding that the expenditure was capital expenditure and therefore only depreciation at 60% would be allowed and not the entire expenditure - HELD THAT - A copy of the group cost allocation Agreement dated 24.3.2006 is at page -406 of Assessee s paper book. The agreement is between Texas Instruments Inc., USA and the Assessee. The Agreement refers to the US parent company of the Assessee having acquired license to use EDA tools from the vendors and the right of the Assessee to use the same and the fact that billing will be done on the Assessee on the basis of actual use of the software by the Assessee. It is thus clear that the Assessee had acquired no right or interest whatsoever in the EDA tools and had only a right to use the software. It is not the case of the revenue that the EDA tools was not connected to the business of the Assessee. In such circumstances, we are of the view that the deduction was rightly allowed by the CIT(A) as revenue expenditure.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) in respect of international transactions.
2. Deduction under Section 80JJAA of the Income Tax Act, 1961.
3. Disallowance of capital work in progress written off.
4. Disallowance of additional depreciation claimed.
5. Disallowance under Section 40(a)(i) & 40(a)(ia) for non-deduction of TDS on lease rentals.
6. Treatment of expenses on automation software as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Determination of Arm’s Length Price (ALP):
The appeals regarding the determination of ALP in respect of an international transaction of rendering Software Development Services were dismissed as not requiring adjudication. This was because the issue had been settled under the Mutual Agreement Procedure (MAP) between the Assessee and the Revenue, and the Assessing Officer (AO) had given effect to the MAP resolution.

2. Deduction under Section 80JJAA:
The Assessee's claim for deduction under Section 80JJAA amounting to ?7,57,22,069/- was initially denied by the AO on the grounds that software professionals cannot be considered "workmen" under the Industrial Disputes Act, 1947. However, the Tribunal held that software industry employees qualify as "workmen" as per previous Tribunal decisions and the Karnataka State notification. The Tribunal further clarified that the deduction should be allowed for three consecutive assessment years if the employees work for more than 300 days each year, even if the condition was not met in the first year. The Tribunal directed the AO to allow the deduction claimed by the Assessee.

3. Disallowance of Capital Work in Progress Written Off:
The Assessee's claim for deduction of ?4,42,14,942/- related to capital work in progress written off was denied by the AO and upheld by the CIT(A). The Tribunal, following its earlier decision for AY 2007-08, held that the expenditure was capital in nature and not allowable as revenue expenditure. However, the Tribunal directed the AO to verify and allow relief if there was a double addition of ?61,04,942/- due to disallowance under Section 40(a)(i)/(ia).

4. Disallowance of Additional Depreciation Claimed:
The AO denied the Assessee's claim for additional depreciation of ?1,61,35,457/- on the grounds that the assets were "office equipment" and not "plant and machinery" used in manufacturing software. The Tribunal, citing the Madras High Court's decision in CIT Vs. VTM Ltd., held that the assets need not be directly used in manufacturing to qualify for additional depreciation. The Tribunal remanded the issue to the AO to determine whether the assets could be classified as "plant" based on their use in the Assessee's business.

5. Disallowance under Section 40(a)(i) & 40(a)(ia) for Non-Deduction of TDS on Lease Rentals:
The AO disallowed ?7,87,93,536/- for non-deduction of TDS on lease rentals under a finance lease arrangement, treating it as a contractor payment under Section 194-C. The CIT(A) and the Tribunal held that the payment was not for a "work" contract and did not attract TDS under Section 194-C. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

6. Treatment of Expenses on Automation Software as Revenue or Capital Expenditure:
The AO treated the Assessee's expenditure of ?135,52,51,594/- on automation software as capital expenditure, allowing only depreciation. The CIT(A) and the Tribunal held that the Assessee had only a right to use the software and did not acquire any ownership or enduring benefit. The Tribunal upheld the CIT(A)'s decision to treat the expenditure as revenue expenditure, dismissing the Revenue's appeal.

Conclusion:
The Tribunal partly allowed the Assessee's appeal, directing the AO to allow the deduction under Section 80JJAA and to re-examine the classification of assets for additional depreciation. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on lease rentals and automation software expenses.