2021 (10) TMI 1258 - AT - Income Tax

Disallowance of excess depreciation on computer software - assessee had purchased software being operating system for Windows and claimed depreciation as per Rule 5 of IT Rules, 1962 @ 60% as applicable to computer and computer software. The AO restricted depreciation claimed on computer software @ 25% as applicable to intangible assets being patent, license etc on the ground that payment made by the assessee for acquiring license for software is nothing but an intangible asset - HELD THAT - Computer software (whether canned form or uncanned form) is goods and a tangible asset by itself. Further Rule 5 of IT Rules, 1962 governing the rate of depreciation for software, has prescribed 60% depreciation on computer and computer softwares. Since, the assessee has purchased software like Windows, MS Office and other operating system which is embaded in computer system and thus, the same is construed as an integrated part of computer system which is eligible for depreciation @ 60% as claimed by the assessee, but not 25% as applicable to intangible asset as considered by the Ld. AO. Therefore, we are of a considered view that the AO as well as CIT(A) were erred in restricting depreciation on software to 25% as against 60% as claimed by the assessee. Hence, we direct the AO to allow depreciation @ 60% as claimed by the assessee. TDS u/s 195 - disallowance of payment made to a non-resident for purchase of software u/s. 40(a)(i) - assessee has purchased copyrighted software from a service provider from USA and assessee has not deducted TDS u/s. 195 for the reason that software license purchased from non-resident supplier is not in the nature of Royalty as defined u/s. 9(1)(vi) - HELD THAT - In the case of CIT vs M/s. Dassault Systems Simulia P Ltd., 2021 (4) TMI 180 - MADRAS HIGH COURT had considered an identical issue and held that whether assessee had purchased only a right to use copyright, i.e., software and not entire copyright itself, amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not payment of royalty for the use of copyright in the computer software, and same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 were not liable to deduct any TDS u/s. 195 of the Act, 1961. In this case, the assessee has purchased software from supplier in USA and said software is a copyrighted article - payment made by the assessee for purchase of software to non-resident supplier is outside the scope of the definition of Royalty as defined u/s. 9(1)(vii) and thus, the assessee does not required to deduct TDS u/s. 195 and consequently, payment made for purchase of software cannot be disallowed u/s. 40(a)(i) of the Act for non-deduction of tax at source. Hence, we direct the AO to delete the additions made towards disallowance of payments made to non-resident for purchase of software. Assessee appeal allowed.

Summary

Issues:
1. Condonation of delay in filing appeal before the Tribunal.
2. Disallowance of excess depreciation on computer software.
3. Disallowance of payment made to a non-resident for purchase of software.

Condonation of Delay:
The appellant sought condonation of a 12-day delay in filing the appeal before the Tribunal, citing administrative activities associated with merger activities as the reason for the delay. The Tribunal considered the reasons provided and concluded that the delay was unintentional, falling under a reasonable cause for condonation of delay. The appeal was admitted for adjudication.

Disallowance of Excess Depreciation on Computer Software:
The dispute revolved around the depreciation claimed on computer software by the assessee at 60%, while the AO restricted it to 25% as applicable to intangible assets. The Tribunal determined that computer software, including Windows and operating systems, qualifies as an integrated part of a computer system eligible for 60% depreciation, not 25% as considered by the authorities. The AO and CIT(A) were found to be in error, and the AO was directed to allow depreciation at 60% as claimed by the assessee.

Disallowance of Payment to Non-Resident for Purchase of Software:
The issue involved the disallowance of payment made to a non-resident for the purchase of software due to non-deduction of tax at source under section 195 of the IT Act, 1961. The AO treated the payment as royalty, citing a Karnataka High Court decision. However, the Tribunal disagreed, stating that the payment was for a copyrighted article, not a copyright itself, falling outside the definition of Royalty under section 9(1)(vii). Legal principles, including court decisions, were cited to support the distinction between a copyrighted article and copyright. The Tribunal directed the AO to delete the disallowance of payments made to the non-resident for the purchase of software.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing the eligibility of computer software for higher depreciation rates and clarifying that payments for copyrighted articles do not constitute royalty, thus not requiring TDS deduction under section 195 of the IT Act, 1961.