2021 (2) TMI 1026 - AT - Income Tax

Short-term capital gain or business profit transfer of computer software to its holding company - transfer of the 'CONNET computer software by the Appellate to its holding company - determination of value of assets on the date of transfer - transfer of the software with a notional fair market value of the computer software - As argued computer software was transferred to MPHR US at its book written down value being 1NR 1,27,31,017/-, which was less than the tax written down value of the computer software being INK 1,48,19,687/-, and thus the value at which the block had been adjusted resulted in a short-term capital loss to the Appellant - HELD THAT - Assessee has developed this software and transferred the same to its holding company, certifying it as commercial unviable and whatever the cost received by the assessee from its holding company as the cost of writing off of the software. It is not clear whether if there is any commercial value to the software which was transferred to the holding company, at present it may not be commercially viable, but it is not clear whether this software will be of use to its holding company in future. Since assessee has invested lot of labour and invested resources to develop software which is used by the customers of the holding company. Assessee has developed this software and utilized the same in its business and claimed the depreciation as well during this intervening period. Therefore, it clearly indicates that software was utilized in the running of the business of the assessee vis- -vis holding company. Since, there is not record submitted by the assessee or its holding company that the software under consideration is completely discarded. In our considered view, the software which was transferred to the holding company which was used by the assessee in its business, the actual cost of the software was ₹ 2,01,87,114/- and assessee has used the above software in its business and claimed depreciation Cost of the assets Relevace at the time of writing off of the assets in the books of the assessee - The written down value of the assets at the time of writing off of the assets was ₹ 1,27,31,017/-. Since this assets was developed by the assessee and utilized by the assessee in it business and if at all mark up is applied, it can be applied only to the cost of the assets which was transferred to its holding company. Therefore, even though the AO has applied 20% as ad-hoc premium, in our considered view, normal premium charged on this type of assets are within 10-20% and AO has adopted higher value of the premium. For the sake of justice, in our considered view, premium of 15% may be proper and accordingly, we direct the AO to calculate the premium 15% on the value of assets on the date of transfer and accordingly complete the assessment. Resultantly, the ground of assessee are partly allowed.

Summary

Issues Involved:
1. Addition of ?1,14,93,520 as short-term capital gain.
2. Confirmation of the addition by CIT(A).
3. Valuation method for the computer software.
4. Imputation of a 20% premium on the software's cost.
5. Dismissal of penalty proceedings under section 271(1)(c).
6. Levy of interest under section 234B.

Detailed Analysis:

1. Addition of ?1,14,93,520 as Short-Term Capital Gain:
The assessee developed a computer software named 'CONNECT' and capitalized it in its books. The software was later claimed to be commercially unviable and transferred to the holding company, with the cost reimbursed. The AO added ?1,14,93,520 as business profit, considering the original cost of the software and a 20% premium, which was contested by the assessee.

2. Confirmation of the Addition by CIT(A):
The CIT(A) upheld the AO's addition, stating that the assessee provided incorrect details about the software being discarded instead of transferred. The CIT(A) noted the lack of cooperation and supporting documents from the assessee, questioning the genuineness of the transaction and the supplementary agreement with the holding company.

3. Valuation Method for the Computer Software:
The assessee argued that the software's value should be based on its written-down value at the time of transfer, which was ?1,27,31,017, resulting in a short-term capital loss. The AO, however, calculated the software's value based on its original cost plus a 20% premium, leading to the addition of business profit.

4. Imputation of a 20% Premium on the Software's Cost:
The AO applied a 20% premium on the software's cost to determine its fair market value, which the assessee contested as arbitrary and without basis. The Tribunal found that a 15% premium was more appropriate, directing the AO to recalculate the premium accordingly.

5. Dismissal of Penalty Proceedings Under Section 271(1)(c):
The Tribunal dismissed the ground related to penalty proceedings as premature, indicating that it was not yet ripe for consideration.

6. Levy of Interest Under Section 234B:
The Tribunal also dismissed the ground related to the levy of interest under section 234B, noting that it was consequential in nature.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to apply a 15% premium on the software's written-down value of ?1,27,31,017 and complete the assessment accordingly. The grounds related to penalty proceedings and interest levy were dismissed. The appeal resulted in a partial relief for the assessee.