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2023 (2) TMI 150 - AT - Income TaxTDS u/s 195 - Royalty - cost incurred in connection with off the shelf software products - HELD THAT -Assessee stated that this issue is covered in favour of assessee by Tribunal decision in 2022 (8) TMI 1341 - ITAT CHENNAI wherein the Tribunal considered the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd., 2021 (3) TMI 138 - SUPREME COURT and allowed the claim of assessee. We delete the disallowance and allow the appeal of assessee on this issue. Addition made on account of amount pertaining to provision of loss contracts and AO concluding that the provision for anticipated loss is a uncertain liability and not allowable as deduction u/s.37 - HELD THAT - We noted that this issue needs verification at the level of AO, who will verify whether the assessee has declared this income and are accepted by Revenue in assessment year 2015-16 2016-17 by reversing the entry of provision for loss contract created by assessee - But in any eventuality, the issue on principle is covered by the decision of Hon ble Supreme Court in the case of Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT and hence respectfully following the same, we accept the arguments of the ld.AR on principle but remit the matter back to the file of the AO for verification purposes. This issue of assessee s appeal is allowed for statistical purposes. Disallowing charges paid in respect of Employees Stock Option Plan (ESOP) - HELD THAT - We noted that the expenses incurred by assessee by way of payment to its parent company, which has in turn issued shares to the employees of the assessee, the expenditure seems towards disbursing compensation to the employees for their services and hence, the same is to be treated as revenue in nature as held by the Tribunal in the case of Caterpillar India Pvt. Ltd. 2017 (4) TMI 1138 - ITAT CHENNAI as well as TE Connectivity Services India Pvt. Ltd. 2022 (9) TMI 1413 - ITAT BANGALORE - Respectfully following the decision of Co-ordinate Bench of Chennai and Bangalore, we allow the claim of assessee.
Issues Involved:
1. Disallowance of cost incurred on off-the-shelf software products treated as royalty. 2. Addition made on account of provision for loss contracts. 3. Disallowance of charges paid in respect of Employees Stock Option Plan (ESOP). Detailed Analysis: Issue 1: Disallowance of Cost Incurred on Off-the-Shelf Software Products Treated as Royalty The first issue pertains to the disallowance of costs incurred on off-the-shelf software products, treated as royalty by the Assessing Officer (AO). The assessee argued that the expenditure represented cost-to-cost reimbursement of expenses incurred on behalf of the assessee by overseas entities, with no income arising in the hands of these entities, thus negating the obligation to withhold taxes under the provisions of the Income Tax Act. The AO, however, treated the transaction as royalty under section 9(1)(vi)(b) of the Act, relying on a retrospective amendment brought by the Finance Act, 2007, and disallowed the amount under section 40(a)(i). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the payment for software constituted royalty within the meaning of Article 12(3) of the DTAA. The Tribunal, however, referred to a previous decision in the assessee's own case and the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., which held that amounts paid for off-the-shelf software products do not constitute royalty and are not liable for withholding tax under section 195. Consequently, the Tribunal deleted the disallowance and allowed the appeal in favor of the assessee. Issue 2: Addition Made on Account of Provision for Loss Contracts The second issue involves the addition made by the AO on account of provision for loss contracts, which was deemed an unascertained liability and not allowable as a deduction under section 37 of the Act. The assessee had recorded a provision for loss contracts amounting to Rs.5,32,47,117/- in its books, claiming it represented the excess of estimated contract expenditure over estimated contract revenues. The AO disallowed the provision, considering it an estimated and contingent liability. The CIT(A) upheld this disallowance. The assessee argued that the provision was reversed in subsequent years and offered to tax, thus making the disallowance revenue-neutral. The Tribunal agreed with the assessee in principle, citing the Supreme Court's decision in Excel Industries Ltd., which held that revenue-neutral items should not be disturbed. However, the Tribunal remitted the matter back to the AO for verification of whether the income was indeed offered in subsequent years and accepted by the Revenue. Issue 3: Disallowance of Charges Paid in Respect of Employees Stock Option Plan (ESOP) The third issue concerns the disallowance of charges paid in respect of ESOP. The AO disallowed the amount of Rs.33,89,770/-, treating it as a capital expenditure and not allowable under section 37. The CIT(A) confirmed this disallowance. The assessee contended that the ESOP expenses were in the nature of employee compensation and should be treated as revenue expenditure. The Tribunal referred to decisions in similar cases, including Caterpillar India Pvt. Ltd. and TE Connectivity Services India Pvt. Ltd., which held that ESOP expenses are allowable as revenue expenditure. The Tribunal, therefore, allowed the claim of the assessee, treating the ESOP expenses as revenue in nature. Conclusion: The Tribunal's judgment addressed the three main issues by: 1. Deleting the disallowance of software costs treated as royalty, following the Supreme Court's precedent. 2. Remitting the provision for loss contracts back to the AO for verification while agreeing in principle with the assessee's argument. 3. Allowing the ESOP expenses as revenue expenditure based on precedents and the nature of the expenses. The appeal was partly allowed for statistical purposes, with specific instructions for verification and reconsideration on the provision for loss contracts.
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