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2016 (7) TMI 1180 - AT - Income TaxDisallowance of depreciation on capitalization of software development - Held that - As the assessee is a software development company and the cost of the development of the software is an intangible asset and the product license are IPR s. In view of the provision of the Act and AS-26 and further the fact that the cost of development of the software is an intangible asset and the IPR s is the product license is not in dispute therefore we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals) to make the impugned addition. Addition made on account of sales of dollar being suppressed sales as per agreement with 3i Infotech - Held that - Commissioner of Income Tax (Appeals) justifiably considered the agreement specially the terms and conditions as has been considered in para 4.2 of the impugned order and then reached to conclusion. The working mentioned in para 4.2 is exactly in terms of the agreement wherein no contradiction was pointed out by the department. Neither the ld. Commissioner of Income Tax (Appeals) found any suppression of sale nor anything was pointed before us. Even otherwise nothing was brought on record by the Revenue evidencing that the project was completed during the year itself thus we affirm the stand of the ld. Commissioner of Income Tax (Appeals).This matter was kept for clarification by the Bench with respect to the front end commissions and as per the facts as emerging from the records orders of the authorities below and statements and submissions as made by both the counsels we are of considered view that the front end commission as are paid by the assessee company to M/s 3I Infotech Dubai the pith and substance of the agreement of the assessee with the foreign agent M/s 3I Infotech Dubai is for arranging export order of software in favour of the assessee company and since it could not be brought on record by the Revenue that services were rendered from or in India by the said foreign agent i.e. 3I Infotech nor it could be brought on record that any technical services or technical knowhow or technical expertise experience or expertise is provided by the 3I Infotech Dubai and also the front commission pertains to the period prior to the new circular no. 7/2009 dated 22.10.2009 we hold that there was no liability on the part of the assessee to deduct tax at source on the said payment u/s 195 of the Act and the AO erred in invoking the provisions of Section 40(a) of the Act read with Section 195 of the Act. We confirm the orders of the CIT(A). Addition made on account of unaccounted sales - Held that - Commissioner of Income Tax (Appeals) justifiably examined the documentary evidence filed by the assessee (Para 5.2 of the impugned order) terms of the agreements and found that 50% of the payment were to be received on implementation. The contract was signed on 27/03/2008 and up to 31/03/2008 there was no implementation of work rather the work started on 01/04/2008 for which invoice for USD 70000 was raised which is 50% of USD 1, 40, 000. It is also noted that in case of product License Company and accounting of the Revenue is based on percentage completion of work method. We find no suppression of sale as has been alleged by the Revenue. We have also perused and analyzed the agreement entered into between the parties and found that practically no work was commenced in the month of March thus no addition was warranted. Rejection of books of accounts - Held that - The books of accounts were rejected by the ld. Assessing Officer on the plea that accounting standard were not complied with by the assessee. However we note that the books of accounts were audited by M/s Delloitte Haskins one of the big audit firms who have not commented anything adverse/deviation in their audit report thus we find no infirmity in the conclusion of the ld. Commissioner of Income Tax (Appeals). Addition to the cost of software development cost by treating the proportionate value of incidental expenses - Held that - Assessing Officer has not pointed out any infirmity in the explanation of the assessee. The totality of facts clearly indicates merits in the contention of the assessee and as canvassed by the assessee the ld. Assessing Officer made the addition to the cost of treating the proportionate value of incidental expenses ignoring the standard practices adopted by the assessee. In view of the explanation of the assessee we allow this ground and more specifically when for earlier assessment year the department had been accepting the claim of the assessee and in the impugned year no contrary facts were brought on record.
Issues Involved:
1. Deletion of addition on account of disallowance of depreciation on capitalization of software development. 2. Addition on account of suppressed sales to M/s 3i Infotech. 3. Addition on account of unaccounted sales to M/s Mushreq Bank. 4. Addition on account of unaccounted sales to M/s Centurian Bank of Punjab. 5. Addition on account of unaccounted sales to M/s Ducont FZ-LLC. 6. Disallowance of commission expenses. 7. Rejection of books of accounts under section 145(1) and 145(3). 8. Addition to the cost of software development cost by treating the proportionate value of incidental expenses. 9. Addition by adjusting the useful life of the asset and depreciation on intangible assets. 10. Suppression of sales and front-end commission payable. 11. Disallowance under section 40(a)(ia) for delayed TDS remittance. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Disallowance of Depreciation on Capitalization of Software Development: The Revenue's appeal challenged the deletion of ?18,57,208/- made on account of disallowance of depreciation on software development capitalization. The Assessing Officer applied a 10% depreciation rate instead of the 25% rate provided under Income Tax Rules. The Commissioner of Income Tax (Appeals) considered the provisions of the Act and AS-26, concluding that the software development cost is an intangible asset. The principle of consistency was upheld, as no additions were made in other assessment years, affirming the CIT(A)'s decision. 2. Addition on Account of Suppressed Sales to M/s 3i Infotech: The Revenue added $252,000 as unaccounted sales. The assessee argued the billing was in accordance with the agreement, and the front-end commission was for securing export orders. The Tribunal found no evidence of services rendered in India by the foreign agent and held there was no liability to deduct tax at source under section 195, affirming the CIT(A)'s decision. 3. Addition on Account of Unaccounted Sales to M/s Mushreq Bank: The Revenue claimed suppression of $70,000 sales. The assessee contended the agreement was signed in Dubai, and the project implementation started on 01/04/2008. The Tribunal found no work commenced in March, thus no suppression of sales, affirming the CIT(A)'s decision. 4. Addition on Account of Unaccounted Sales to M/s Centurian Bank of Punjab: The Revenue alleged ?3,02,726/- as unaccounted sales. The assessee explained the billing was as per the agreement, and the revenue recognition was based on the percentage completion method. The Tribunal found no suppression of sales, affirming the CIT(A)'s decision. 5. Addition on Account of Unaccounted Sales to M/s Ducont FZ-LLC: The Revenue added $48,200 as unaccounted sales. The Tribunal noted the addition was made erroneously as only 40% of the contract value was invoiced. The Tribunal upheld the CIT(A)'s decision, applying the circular prospectively. 6. Disallowance of Commission Expenses: The Revenue contended the CIT(A) ignored Circular No. 7/2009. The Tribunal found the circular was applied to transactions prior to its issuance, which was not applicable. The Tribunal upheld the CIT(A)'s decision, affirming the front-end commission expenses. 7. Rejection of Books of Accounts under Section 145(1) and 145(3): The Assessing Officer rejected the books on the plea of non-compliance with accounting standards. The Tribunal noted the books were audited by a reputable firm with no adverse comments, affirming the CIT(A)'s decision. 8. Addition to the Cost of Software Development Cost by Treating the Proportionate Value of Incidental Expenses: The assessee argued the consistent practice of capitalizing certain expenses was accepted in previous years. The Tribunal upheld the principle of consistency, allowing the assessee's claim. 9. Addition by Adjusting the Useful Life of the Asset and Depreciation on Intangible Assets: The Tribunal found the issue identical to the Revenue's ground for A.Y. 2008-09. The Tribunal upheld the consistent practice of applying the depreciation rate as per the Act, allowing the assessee's claim. 10. Suppression of Sales and Front-end Commission Payable: The Tribunal found no suppression of sales by the assessee, as discussed in the Revenue's appeal for A.Y. 2008-09. The Tribunal allowed the assessee's claim. 11. Disallowance under Section 40(a)(ia) for Delayed TDS Remittance: The assessee contended a typographical error in the due date of TDS remittance. The Tribunal found merit in the assessee's claim, allowing the ground as there was no loss to the Revenue. Conclusion: The appeals of the Revenue were dismissed, and the appeal of the assessee was allowed. The Tribunal upheld the principle of consistency, the proper application of accounting standards, and found no suppression of sales or disallowance of commission expenses. The Tribunal also allowed the assessee's claims regarding depreciation rates and incidental expenses, affirming the CIT(A)'s decisions.
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