2018 (7) TMI 745 - AT - Income Tax

Depreciation on computer software purchased separately (SAP software) - @60% OR 25% applicable to intangible assets - Held that - As relied upon the order of the Tribunal in the case of ACIT Vs. Zydus Infrastructure P.Ltd. (2016 (8) TMI 696 - ITAT AHMEDABAD) held that licenced software are also subjected to depreciation at the rate of 60%. Tribunal also observed that even if depreciation is lowered, then there would not be any change in taxable income of the assessee, as the assessee-company is a unit eligible for deduction under section 10A of the Income Tax Act, and therefore, in either way, the entire exercise would be revenue neutral and adjudication becomes merely an academic. Claim of deduction u/s.10AA of the Act on exchange fluctuation gain - Held that - It is undisputed that appellant realized foreign exchange on account of export from eligible unit at SEZ. Further in value terms there are two entries i.e. entry of sale on the date of export as per invoice and entry of gain / loss on account of realisation of such sale. There is no other activity of sale or services but it is on account of two different value of foreign currency for two different time frames related to one sale, hence such gain /loss is part and parcel of sale and, profit/income of the eligible unit entitled for deduction u/s.10AA of the Act. AO is directed not to reduce foreign exchange rate fluctuation gain from profits of business while computing deduction u/s.10AA

Summary

Issues Involved:
1. Depreciation rate on computer software (SAP software) purchased separately.
2. Deduction under section 10AA of the Income Tax Act on exchange fluctuation gain.

Issue-wise Detailed Analysis:

1. Depreciation Rate on Computer Software:
The primary issue was whether the CIT(A) erred in allowing depreciation at 60% on computer software (SAP software) instead of 25% applicable to intangible assets. The assessee claimed depreciation at 60% on software, which the AO restricted to 25%, arguing that SAP software, being an application software and an intangible asset, did not qualify for the higher rate. The CIT(A) allowed the assessee's claim, noting that the Income Tax Act and judicial pronouncements do not differentiate between computer and computer software or the license to use them. The Tribunal upheld the CIT(A)'s decision, stating that the Income Tax Act does not categorize software into 'system software' and 'application software' for depreciation purposes, and SAP, being an integrated business system, qualifies for 60% depreciation. The Tribunal also noted that a similar issue in the assessee's case for the assessment year 2010-11 was decided in favor of the assessee, making the current year's issue revenue-neutral and academic.

2. Deduction under Section 10AA on Exchange Fluctuation Gain:
The second issue was whether the CIT(A) erred in allowing the assessee's claim of deduction under section 10AA on exchange fluctuation gain. The assessee claimed a deduction under section 10AA for exchange rate fluctuation gain, arguing that it was derived from export and thus part of the business profits. The AO disagreed, treating the gain as separate income not related to the export business. The CIT(A) allowed the claim, citing various judicial pronouncements and noting that the gain was directly related to the export business. The Tribunal agreed with the CIT(A), referencing the Tribunal's decision for the assessment year 2010-11 and other judicial precedents, which held that foreign exchange gains arising from export transactions are integral to the business profits derived from exports. The Tribunal confirmed the CIT(A)'s order, rejecting the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal confirmed that the assessee is entitled to 60% depreciation on SAP software and that exchange fluctuation gains qualify for deduction under section 10AA, being part of the business profits derived from export activities.