2020 (4) TMI 747 - AT - Income Tax

TDS u/s 195 - software expenses u/s 40(a) (i) for non-deduction of TDS - payments towards purchase of 'off-the-shelf shrink-wrapped software' as 'Royalty' under the Act as well as under the India-Malaysia tax treaty - HELD THAT - The issue is against assessee vide decision in CIT v Samsung Electronics Co. Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT wherein it is held that payments towards purchase of software are in the nature of 'royalty' and liable for TDS. - Decided against assessee. Sales promotion and advertisement expenses u/s 37 (1) - HELD THAT - In the present facts of the case the expenditure towards advertisement has been incurred by assessee for promoting sales and therefore, ratio laid down in the decisions relied upon by Ld. AR is squarely applicable i.e. SPICE DISTRIBUTION LTD. 2014 (9) TMI 732 - DELHI HIGH COURT , M/S. ASIAN PAINTS (INDIA) LTD. 2016 (11) TMI 258 - BOMBAY HIGH COURT and INDO NISSIN FOODS LTD. 2012 (11) TMI 1246 - KARNATAKA HIGH COURT - Accordingly, we direct Ld. AO/TPO to delete addition made on account of advertisement expenses under section 37 (1). Disallowance of warranty expenses - HELD THAT - Assessee's case dearly fans in line with the legal ratio set out by the various appellate decisions cited at Bar in so far as the provision for warranty stood crystallized as soon as the sate was made which a customer would like to be fulfilled within the warranty period and is at the cost of an assessee's goodwill. Therefore, the residual amount purported to have been held by the Assessing Officer as an excess provision cannot be considered as a contingent provision and not an ascertained liability. The warranty period continues beyond an year which fact was rightly considered by the Id. CIT(A). - Decided against revenue. Disallowance of foreign exchange loss - DR submitted that foreign exchange loss cannot be allowed, as the transactions are speculative in nature and contingent in character - HELD THAT - Accounting treatment is to recognise exchange fluctuation gain or loss in the profit and loss account as on the valuation date. Hon ble Supreme Court in case of CIT vs Woodward Governor India (P) Ltd 2009 (4) TMI 4 - SUPREME COURT held that, a transaction in which a legal liability has been incurred before it is actually disbursed would be regarded as revenue in nature. In the facts of present case assessee incurred foreign exchange loss far year under consideration towards trading activities, and therefore it is directly attributable to business of assessee, which is an allowable expenditure. TPA - AMP expenses addition - HELD THAT - No adjustment needs to be done in respect of AMP expenses as relying on assessee's own case 2019 (5) TMI 1541 - ITAT BANGALORE

Summary

Issues Involved:
1. Treatment of payments for 'off-the-shelf shrink-wrapped software' as 'Royalty'.
2. Disallowance under Section 40(a)(i) for non-deduction of tax under Section 195.
3. Disallowance of payments to local software vendors under Section 40(a)(i).
4. Restriction of disallowance under Section 40(a)(i) to the amount outstanding or payable at the end of the year.
5. Treatment of media advertisement expenses as capital in nature.
6. Disallowance of sales promotion and advertisement expenses under Section 37(1).
7. Levying interest under Section 234B.
8. Initiating penalty proceedings under Section 271(1)(c).
9. Allowance of warranty expenses.
10. Allowance of foreign exchange loss.
11. Deletion of AMP expenditure.

Issue-wise Detailed Analysis:

1. Treatment of Payments for Software as 'Royalty':
The learned AO treated payments for 'off-the-shelf shrink-wrapped software' as 'Royalty' under the Act and the India-Malaysia tax treaty. This was upheld based on the decision of the Karnataka High Court in CIT v Samsung Electronics Co. Ltd., which held that payments towards software are in the nature of 'royalty' and liable for TDS.

2. Disallowance under Section 40(a)(i) for Non-Deduction of Tax:
The AO disallowed an amount under Section 40(a)(i) for non-deduction of tax under Section 195. This was also upheld based on the same rationale as the software payments being treated as 'royalty'.

3. Disallowance of Payments to Local Software Vendors:
This ground was dismissed as it did not arise from the order passed by the authorities below.

4. Restriction of Disallowance to Amount Outstanding or Payable:
The assessee did not press this ground, and it was dismissed accordingly.

5. Treatment of Media Advertisement Expenses as Capital in Nature:
The AO treated media advertisement expenses as capital in nature, resulting in an enduring benefit. However, the Tribunal found that advertisement expenses to promote sales cannot be treated as capital expenditure. It relied on various High Court decisions, which held that advertisement expenses are revenue in nature as they do not have a long-lasting effect.

6. Disallowance of Sales Promotion and Advertisement Expenses:
The AO disallowed sales promotion and advertisement expenses under Section 37(1). The Tribunal directed the AO to delete the addition made on account of advertisement expenses, finding them to be incurred wholly and exclusively for business purposes.

7. Levying Interest under Section 234B:
This ground was consequential in nature and was not specifically adjudicated.

8. Initiating Penalty Proceedings under Section 271(1)(c):
This ground was deemed premature at this stage and was not adjudicated.

9. Allowance of Warranty Expenses:
The AO/TPO had disallowed warranty provisions. The Tribunal, following earlier decisions in the assessee's own case, upheld the warranty provisions as they were based on a scientific methodology and consistent practice, thus dismissing the revenue's ground.

10. Allowance of Foreign Exchange Loss:
The AO disallowed foreign exchange loss, considering the transactions speculative. The Tribunal found that the assessee consistently recognized gains/losses from forward contracts per Accounting Standard 11. It concluded that the foreign exchange loss incurred towards trading activities was directly attributable to the business and thus allowable.

11. Deletion of AMP Expenditure:
The AO/TPO had made adjustments on account of AMP expenses. The Tribunal, following its decisions for previous years, held that no adjustment was needed as the economic ownership of the brand lay with the assessee, and there was no international transaction on account of AMP expenses.

Final Outcome:
The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed. The Tribunal directed the deletion of additions made on account of advertisement expenses and upheld the allowance of warranty expenses and foreign exchange loss. The treatment of software payments as 'royalty' and the disallowance under Section 40(a)(i) were upheld.