2017 (5) TMI 1826 - AT - Income Tax

Nature of expenses - software expenses - revenue or capital expenses - HELD THAT - We are of the view that the impugned expenditure incurred by the assessee is revenue expenditure, because the same has been incurred towards the purchase of application software and upgradation charges which were required to run efficiently the existing software as well as license charges for using the existing software uninterruptly so as to run the business efficiently. CIT(A) was not correct in confirming the disallowance and we accordingly delete this disallowance. Expenditure was towards replacement of existing assets - HELD THAT -Considering the nature of activities undertaken by assessee, there is lot of wear and tear to the building which necessitates incurring of expenditure and the expenses were normal repair expenditure. As further noted that going by the nature of expenses incurred it cannot be stated that any new asset has come into existence and that similar expenses were incurred by the assessee in earlier years and have been allowed by the Revenue in scrutiny assessments and that AO has not brought any material which could prove of bringing any new asset into existence or that the expenditure was towards replacement of existing assets. Revenue has not brought any material on record to point out any fallacy in the finding of CIT(A). In view of the aforesaid facts, we see no reason to interfere with the order of CIT(A) and thus this ground of Revenue is dismissed. Non deduction of TDS - Expenses as Clearing and Forwarding charges on export - Assessee challenged the proposed disallowance by the A.O. on the ground that the payments are nothing but reimbursement charges and, therefore, not liable for any deduction of tax at source - HELD THAT - We find that the order of the First Appellate Authority in A.Y. 2008-09 was challenged before the Tribunal but this relief given by the First Appellate Authority was never questioned before the Tribunal. This means that the issue has attained finality. Since in earlier assessment year, the deletion of the disallowance was not challenged before the Tribunal, we do not find any reason why on similar set of facts, such issue be raised before the Tribunal. We do not find any merit in this grievance of the revenue. Ground no. 2 is dismissed. Transfer Pricing Adjustment - payment of guarantee commission - HELD THAT - There is no dispute that all the three entities that is the assessee company, the lender company and the guarantor company are Associated Enterprises. There is also no dispute that the assessee has borrowed the money on interest of 12.25% per annum as against interest of 15% quoted by the Bank. Considering the guarantee commission of 0.75% paid by the assessee, the total cost of borrowing comes to 13% which is still lower than the rate of 15% quoted by the Bank. This in itself justifies the payment of guarantee commission. FAA has given a categorical finding in relation to similar transactions in earlier assessment year, where no adjustment was made by the AO/TPO. Another undisputed fact is that the operating margin of the assessee company is at 18.21% which is much better as compared to the average margin of 10.36% of the other comparables. On this account also, the payment of guarantee commission is justifiable. Appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Treatment of software expenses as revenue or capital expenditure.
2. Disallowance of expenses considered capital in nature.
3. Disallowance of expenses under Section 40(a)(ia) for non-deduction of tax at source.
4. Deletion of Transfer Pricing Adjustment.

Issue-wise Detailed Analysis:

1. Treatment of Software Expenses as Revenue or Capital Expenditure:

The primary issue was whether software expenses should be classified as revenue or capital expenditure. The Tribunal noted that similar facts had arisen in the assessee's own case for AY 2007-08, where the expenses were treated as capital by the CIT(A). However, the Tribunal in the previous case had decided in favor of the assessee, treating the expenses as revenue. The Tribunal observed that the expenses were for application software and upgrades necessary to maintain operational efficiency in a fast-changing technology environment. The software expenses did not create a new asset but were essential for running existing software efficiently. The Tribunal cited the Delhi High Court's decision in CIT v. Asahi India Safety Glass Ltd, emphasizing that expenses enabling efficient business operations without creating fixed capital should be treated as revenue expenditure. Consequently, the Tribunal upheld the CIT(A)'s decision to treat the software expenses as revenue expenditure and dismissed the Revenue's appeal on this ground.

2. Disallowance of Expenses Considered Capital in Nature:

The second issue involved the disallowance of expenses deemed capital by the AO. The CIT(A) had found that the expenses were for normal repairs and did not result in the creation of a new asset. The Tribunal noted that similar expenses had been allowed in earlier years and that the AO had not provided evidence to prove the creation of a new asset. The Tribunal, following the CIT(A)'s findings and the principle of consistency, dismissed the Revenue's appeal on this ground.

3. Disallowance of Expenses Under Section 40(a)(ia) for Non-Deduction of Tax at Source:

The third issue was the disallowance of clearing and forwarding charges on export under Section 40(a)(ia) due to non-deduction of tax at source. The assessee argued that these were reimbursement charges and thus not liable for tax deduction. The CIT(A) had deleted the disallowance, noting that similar disallowances in earlier years had been deleted and not challenged further by the Revenue. The Tribunal observed that since the issue had attained finality in earlier years, there was no merit in the Revenue's appeal, and thus, it was dismissed.

4. Deletion of Transfer Pricing Adjustment:

The final issue was the deletion of a Transfer Pricing Adjustment of Rs. 23,51,667/-. The assessee had paid a guarantee commission to its AE for a loan, which the TPO deemed unnecessary due to the assessee's strong financial position. The CIT(A) had deleted the adjustment, citing the rule of consistency as no such adjustment was made in earlier years for similar transactions. The Tribunal noted that the total cost of borrowing, including the guarantee commission, was still lower than the bank's quoted rate, justifying the commission payment. Additionally, the assessee's operating margin was significantly higher than comparables, further justifying the expense. The Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions regarding the treatment of software expenses, disallowance of capital expenses, non-deduction of tax at source, and the Transfer Pricing Adjustment.