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2021 (8) TMI 993 - AT - Income TaxDeduction claimed u/s 10AA - whether expenses that were reduced from export turnover should also be reduced from the total turnover or not? - assessee reduced communication expenses from both export turnover and total turnover and accordingly computed quantum of deduction - HELD THAT - The decision rendered in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT has since been upheld by Hon'ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd.. 2018 (5) TMI 357 - SUPREME COURT wherein held what is excluded from 'export turnover' must also be excluded from total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible. Nature of expenses - disallowance of software expenses by treating the same as Capital in nature - disallowance of Provision for software expenses claimed by the assessee treating the same as contingent liability - HELD THAT - With regard to the question whether the Provision for software is a contingent liability or not, we notice the same has been decided in favour of the assessee by this bench of Tribunal in the assessee s own case in AY 2011-12 2020 (12) TMI 470 - ITAT BANGALORE . As assessee has furnished break-up details of Provision for software expenses identifying the provision so made with the vendors, who had supplied software. CIT(A) has extracted the relevant details in paragraph 6.0 of his order passed for both the years under consideration. Hence the reasoning given by the Tribunal in AY 2011-12 for allowing the identical claim is applicable to these two years also. Accordingly, we hold that the Provision for software expenses cannot be considered as contingent liability. Accordingly, we set aside the orders passed by Ld CIT(A) on this aspect in both the years under consideration. Disallowance u/s 40(a)(i) for non-deduction of tax at source on provision for software expenses - HELD THAT - The issue relating to disallowance u/s 40(a)(i) requires to be set aside to the file of the AO for deciding this issue in accordance with the decision rendered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd 2021 (3) TMI 138 - SUPREME COURT after duly examining the relevant agreements. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO. Disallowance u/s 40(a) of the Act in respect of software purchases - HELD THAT - A.R placed his reliance on the decision rendered by Hon ble Supreme court in the case of Engineering Analysis Centre of Excellence (P) Ltd 2021 (3) TMI 138 - SUPREME COURT and contended that there is no necessity to deduct tax at source from the payments made for software purchases. As noticed earlier, the details relating to this disallowance made in both the years are not forthcoming from the assessment record or from the submission made by the assessee. The decision rendered by Hon ble Supreme Court shall apply only to the payments made for non-resident suppliers of software or through their distributors (Indian or foreign), since the provisions of sec. 195 is applicable on sum chargeable under the provisions of this Act , subject to the principles discussed in an earlier paragraph. If the assessee has purchased the software from the domestic supplier, then the decision rendered by the Hon ble Supreme Court will not apply. In that case, the nature of payments needs to be examined in accordance with the provisions of sec. 9(1)(vi) of the Act. In the absence of relevant details, we are unable to decide this issue.Accordingly, we restore this issue also to the file of the AO for examining it afresh in the light of discussions made supra. Rejection of claim for credit of Foreign Tax Credit - HELD THAT - What is required to be seen is whether the income u/s 10AA is chargeable to tax u/s 4 and is includible in the total income u/s 5. The fact that the assessee is not paying tax due to exemption or deduction granted under the Act is not relevant. Accordingly, we set aside the order of Ld CIT(A) in so far as it is contrary to the decision rendered in the case of Wipro Ltd 2015 (10) TMI 826 - KARNATAKA HIGH COURT -The other directions given by Ld CIT(A) with regard to the accounting year, claim of state tax , do not require any disturbance - We restore this issue to the file of AO to determine the Foreign Tax credit in the light of decision rendered by Hon ble Karnataka High Court in the case of Wipro Ltd and also the direction given by Ld CIT(A) with regard to the accounting year, claim of state tax. Disallowance u/s 14A - HELD THAT - It is imperative that the AO should examine the claim of the assessee having regard to the accounts of the assessee and if he is not satisfied with the said workings, then only the AO can have resort to the provisions of Rule 8D of I T Rules. The Mumbai bench of Tribunal has also expressed identical view in the case of Tata Projects Ltd vs. ACIT 2021 (1) TMI 393 - ITAT MUMBAI . In the instant case, admittedly the AO did not examine the correctness of the workings furnished by the assessee by having regard to the accounts of the assessee. Hence the AO could not have resorted to apply provisions of Rule 8D for computing disallowance as required u/s 14A of the Act. For the above said reason, the Ld CIT(A) was not justified in confirming the working made by the AO. We set aside the order passed by Ld CIT(A) on this issue in AY 2013-14 and direct the AO to delete the addition made by him u/s 14A of the Act.
Issues Involved:
1. Disallowance of Provision for Software Expenses. 2. Disallowance of Software Expenses under Section 40(a). 3. Disallowance of Software Expenses treating it as Capital Expenditure. 4. Granting of Foreign Tax Credit (FTC) for AY 2012-13. 5. Disallowance under Section 14A for AY 2013-14. 6. Computation of Deduction under Section 10AA. 7. Power of CIT(A) to remit the issue relating to disallowance of software expenses treating it as Capital in nature. Detailed Analysis: 1. Disallowance of Provision for Software Expenses: The assessee claimed software expenses as deduction, treating them as revenue expenses. The Assessing Officer (AO) disallowed the claim under three heads: Provision for software expenses as contingent liability, disallowance under Section 40(a) for non-deduction of tax at source, and treating the remaining software expenses as capital in nature. The ITAT referred to its previous decision for AY 2011-12, where it was held that the provision for software expenses cannot be considered as a contingent liability. The Tribunal upheld this view for the current years, stating that the provision was created based on a reliable estimate and was not a contingent liability. 2. Disallowance of Software Expenses under Section 40(a): The AO disallowed software expenses for non-deduction of tax at source, following the Karnataka High Court decision in Samsung Electronics. The ITAT noted the Supreme Court's decision in Engineering Analysis Centre of Excellence, which held that payments to non-resident software suppliers are not "royalty" and thus not subject to TDS under Section 195. The ITAT remanded the issue to the AO to examine the relevant agreements and determine if the payments were to non-resident suppliers, in which case no TDS would be required. 3. Disallowance of Software Expenses treating it as Capital Expenditure: The AO treated software expenses as capital in nature and allowed depreciation. The CIT(A) remanded the issue to the AO with directions to classify expenses based on the software's validity period and nature. The ITAT referred to the Karnataka High Court decisions in Toyota Kirloskar Motors and IBM India Ltd., which differentiated between revenue and capital expenses based on the software's usage period. The ITAT remanded the issue to the AO for re-examination in light of these decisions. 4. Granting of Foreign Tax Credit (FTC) for AY 2012-13: The CIT(A) denied FTC for taxes paid on income eligible for deduction under Section 10AA, considering the Supreme Court's decision in Yokogawa India Ltd. The ITAT disagreed, citing the Karnataka High Court's decision in Wipro Ltd., which allowed FTC for income chargeable to tax under Sections 4 and 5, regardless of Section 10AA deductions. The ITAT remanded the issue to the AO to determine FTC in accordance with the Wipro Ltd. decision and CIT(A)'s directions on accounting years and state taxes. 5. Disallowance under Section 14A for AY 2013-14: The AO disallowed additional expenses under Section 14A by applying Rule 8D without examining the assessee's computation. The ITAT noted that the AO must first be dissatisfied with the assessee's claim before applying Rule 8D. Since the AO did not examine the assessee's computation, the ITAT directed the AO to delete the additional disallowance. 6. Computation of Deduction under Section 10AA: The AO reduced communication expenses only from export turnover, not total turnover, for Section 10AA deduction. The CIT(A) allowed the assessee's claim, following the Karnataka High Court's decision in Tata Elxsi, upheld by the Supreme Court in HCL Technologies. The ITAT found no reason to interfere with CIT(A)'s decision. 7. Power of CIT(A) to remit the issue relating to disallowance of software expenses treating it as Capital in nature: The ITAT addressed the revenue's challenge to CIT(A)'s authority to remand the issue. The ITAT upheld CIT(A)'s directions for re-examination by the AO, based on the Karnataka High Court's criteria for classifying software expenses as revenue or capital. Conclusion: The appeals by the assessee were allowed, and the revenue's appeals were partly allowed. The ITAT remanded several issues to the AO for re-examination, providing detailed guidelines based on judicial precedents and statutory provisions.
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