2024 (12) TMI 1048 - AT - Income Tax

Disallowance of deduction on account of payment made to L T Ltd. in respect of reimbursement of such Employee related option scheme - HELD THAT - The payments made by the assessee has never been doubed by the AO/Ld. CIT(A). It is also not case of the revenue that, the same has not been subjected to the TDS by the assessee or by the holding company. The confirmation of L T in respect of treating the reimbursed cost received from assessee under the head other income has never been questioned. There is no contrary evidences/documents placed by the revenue on record before us to doubt the evidences filed by the Ld. AR. Under such circumstances we do not find any reason to doubt the expenditure incurred by the assessee on cost to cost basis. It is also not the case of the revenue that the mark-up has been charged by the assessee has these documents are made by the assessee in respect of those employees who were deputed by the parent company to assist the assessee. It has to be therefore considered to have been incurred for the purposes of business. We therefore of the opinion that this expenditure is allowable u/s. 37(1). Nature of expenditure - Software License Fee - HELD THAT - Admittedly, the assessee capitalised such software that are purchased on perpetual license model. However there is no denial of the fact that, there are certain software purchased by the assessee which are useful only for short period of time or that requires regular update, for which subscription fee is to be paid. Revenue has not doubted the fact that, software is used by the assessee depending upon the project and therefore cannot be treated as being held by the assessee for enduring benefit. In fact it is noted that, in respect of such software the assessee is not acquiring any right embedded therein. As noted that such short term license software basically facilities for effective running of the assessee s business, and is not in the nature of profit-making apparatus. It is also noted that assessee has not been benefited by bringing into existence any new asset to these software licenses purchased and therefore purely qualifies for being considered as revenue expenditure. Deduction u/s 10A - as submitted that assessment year 2002-03 being the 1st year of the deduction u/s 10A and claim was disallowed by the AO holding that the STP unit was set up in the portion of the same premises where the assessee was already carrying on its business and that it constituted spitting up of the existing business - HELD THAT - It is an admitted position that assessee is a sophisticated hardware/software to produce and export engineering designs, drawings, plans, analysis reports et cetera. Assessee is governed by the directorate of software technology Parks of India being the STP registered unit. It is not doubted that the assessee has received consideration in convertible foreign exchange and has made declaration before the exchange control for conversion of the foreign exchange into Indian currency. We refer to the decisions of coordinate bench of Outsourcing Services Pvt.Ltd 2011 (5) TMI 594 - ITAT, DELHI wherein, it has been held that export of customised electronic data as required by the definition of computer software would make an assessee eligible to claim the deduction under section 10A of the act. Further the CBDT issued circular no. 2/2013 dated 17/01/2014, wherein more has been clarified that as regards the issue relating to export of computer software, direct tax benefit under section 10 A, 10AA and 10 B of the act is available. As regards the primary conditions based on which the Ld.AO denied the claim, we note that, Hon ble Karnataka High Court 2020 (9) TMI 1019 - KARNATAKA HIGH COURT upheld the observations of Hon ble Bangalore Tribunal for assessment years 2008-09 to 2010-11 allowing the claim No infirmity in the view taken by the Ld.CIT(A) in allowing the claim of assessee. Treatment of loss arising on forward contracts to be held as regular business loss by the CIT(A) as against speculation - HELD THAT - Under section 43 (5) of the act, speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of commodities settled otherwise than by the actual delivery or transfer of such commodity. However in the present facts of the case, assessee being neither a dealer in foreign exchange or the any, other commodities, but was an exporter of the software services, in order to hedge against any losses, booked foreign-exchange in the forward market with the bank. As some of the contracts entered into by assessee for export of services failed in some cases loss was earned. Thus in our opinion the loss so earned by the assessee was in the course of rendering its services outside India and has to be treated as a business loss. See Vishindas Holaram 2014 (9) TMI 788 - BOMBAY HIGH COURT

Issues Involved:

1. Disallowance of ESOP-related expenses.
2. Software expenditure as revenue or capital in nature.
3. Deduction under Section 10A of the Income Tax Act.
4. Treatment of provisions for leave encashment and bonus.
5. Treatment of loss on forward contracts as business loss or speculation.

Issue-wise Detailed Analysis:

1. Disallowance of ESOP-related Expenses:

The primary issue contested by the assessee was the disallowance of Rs. 3,35,38,024/- paid to L&T Ltd. for ESOP benefits provided to the assessee's employees or employees deputed by L&T Ltd. The assessee argued that the expenses were reimbursement costs for stock options issued to employees and were incurred on a cost-to-cost basis. The Assessing Officer (AO) disallowed these expenses, treating them as capital in nature due to the absence of a formal written contract. The Tribunal, however, found that the expenses were incurred for business purposes and were allowable under Section 37(1) of the Income Tax Act. The Tribunal relied on the principle that expenses incurred to motivate employees are deductible, as supported by precedents like Biocon Ltd. vs. DCIT.

2. Software Expenditure as Revenue or Capital in Nature:

The revenue challenged the treatment of software expenses as revenue expenditure. The AO had capitalized these expenses, allowing only depreciation. The Tribunal upheld the CIT(A)'s finding that software expenses, which were incurred for short-term licenses and maintenance, were revenue in nature. The Tribunal noted that these expenses did not result in an enduring benefit or acquisition of a new asset, thus qualifying as revenue expenditure. The decision was supported by precedents, including the Bombay High Court's ruling in PCIT vs. Holcim Services (South Asia) Ltd.

3. Deduction under Section 10A of the Income Tax Act:

The revenue contested the deduction under Section 10A for the assessment year 2011-12, arguing that the STP unit was not a new undertaking but a split of an existing business. The Tribunal referred to the Karnataka High Court's decision, which upheld the deduction for previous years, confirming that the STP unit was independent and eligible for the deduction. The Tribunal found no new evidence to overturn this position and dismissed the revenue's appeal.

4. Treatment of Provisions for Leave Encashment and Bonus:

The revenue's appeal included an issue regarding the increase of book profits by provisions for leave encashment and bonus, treated as unascertained liabilities. The Tribunal found this issue to be academic, as normal profits exceeded book profits, and dismissed it without further adjudication.

5. Treatment of Loss on Forward Contracts as Business Loss or Speculation:

The revenue challenged the treatment of loss on forward contracts as a business loss for the assessment year 2013-14. The AO had treated these as speculative due to the absence of actual delivery. The Tribunal upheld the CIT(A)'s view that the forward contracts were entered into to hedge against foreign exchange fluctuations, incidental to the assessee's business. It was determined that the losses were business losses, not speculative, based on precedents like CIT vs. Vishindas Holaram.

Conclusion:

The Tribunal allowed the assessee's appeals on all issues, affirming the CIT(A)'s decisions, and dismissed the revenue's appeals for all assessment years under consideration. The Tribunal emphasized the business purpose of the expenses and the applicability of relevant legal precedents in its judgment.

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