2020 (5) TMI 160 - AT - Income Tax

Disallowance of depreciation on the WDV of imported software - assessee had claimed depreciationon the WDV of imported software - assessee did not deduct tax at source on the payment made for purchase of software, the AO took the view that depreciation claimed by the assessee is not allowable as deduction u/s 40(a)(ia) - HELD THAT - We are concerned here with AY 2012-13 and during the year under consideration, the assessee has claimed only depreciation thereon. In the earlier years, the AO had only disallowed the depreciation claimed by the assessee by invoking the provisions of sec.40(a)(ia) i.e., the AO has not disturbed the action of the assessee in capitalizing the payment of ₹ 5.00 crores. Hence the issue of capitalizing the payment has attained finality. Hence we are not able to understand as to how the CIT(A) can direct the AO to treat the amount of depreciation as royalty payment. The foregoing discussions would show that the CIT(A) has rendered his decision without properly appreciating the facts surrounding the issue. In any case, the facts presented by Ld A.R also, in our view, requires verification. Hence, we are of the view that this issue requires fresh examination at the end of the ld CIT(A). Accordingly we set aside the order passed by CIT(A) on this issue and restore the same to his file for examining it afresh, after affording adequate opportunity of being heard to the assessee. Disallowance for non deduction of tax at source u/s 195 - payment was made outside India for services rendered outside India i.e in Uganda - payment to a person for the purpose of handling of all operations including coordinating with Indian teams for maintaining, rectifying problems, testing, upgrading /supporting customers, contentproviders etc. in Uganda - HELD THAT - Since the facts relating to this issue is identical in nature of assessee own case for asst. year 2011-12, we hold that disallowance made u/s 40(a)(i) is not justified and accordingly direct the AO to delete the same. Disallowance of write off of miscellaneous expenses - deduction being the rental/telephone deposits written off - HELD THAT - Though the assessee claims that these payments were made in the normal course of business, we noticed that the rent deposits have been made to 5 persons and advance rent has been paid to one person. The payments made to 3 persons have been described as advance for services . Though there is no dispute with regard to the principle that the payment made in the normal course of conducting business, if not recoverable is allowed as deduction, yet we noticed that the AO did not examine the nature of payment and the fact whether these payments were made in the course of conduction of business. We have noticed earlier that the AO has disallowed the claim by holding that all the payments have been made on capital account. Accordingly we are of the view that this issue requires fresh examination at the end of the AO. Accordingly we set aside the order passed by the ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the nature of payment and decide the same afresh in the light of the discussions made supra.

Summary

Issues Involved:
1. Tax effect and applicability of CBDT Circular No.17/2019.
2. Disallowance of depreciation on imported software.
3. Disallowance of payments made outside India under Section 40a(i).
4. Disallowance of write-off of miscellaneous expenses.

Issue-wise Detailed Analysis:

1. Tax Effect and Applicability of CBDT Circular No.17/2019:
The appeal filed by the Revenue was dismissed due to the tax effect being less than ?50.00 lakhs, as per CBDT Circular No.17/2019. The Tribunal noted that the tax effect involved in the appeal was less than ?50.00 lakhs, precluding the Revenue from pursuing the appeal. However, the Tribunal granted liberty to the Revenue to move an appropriate application within the limitation period if it was found that the tax effect was more than ?50.00 lakhs or if the issues fell under the exceptions provided in the Circular.

2. Disallowance of Depreciation on Imported Software:
The assessee claimed depreciation of ?30.99 lakhs on "imported software." The AO disallowed this claim under Section 40(a)(ia) of the Act, as the assessee did not deduct tax at source on the payment made for the software. The CIT(A) treated the payment for Intellectual Property (IP) rights as "royalty" under Explanation-2 of Section 9(1)(vi) of the Act, following the Karnataka High Court decision in Samsung Electronics Co. Ltd., and directed the AO to treat the depreciation claim as a deduction for royalty payment. The Tribunal found contradictions in the facts presented and noted that the CIT(A) did not consider the ITAT's earlier decision, which held that the payment of ?5.00 crores to Shri Mohan Raju was not royalty. The Tribunal set aside the CIT(A)'s order and remanded the issue for fresh examination.

3. Disallowance of Payments Made Outside India Under Section 40a(i):
The CIT(A) confirmed the disallowance of payments made outside India to two persons. The assessee did not press the ground relating to the disallowance of ?5,17,951/-. Regarding the disallowance of ?7,62,090/- paid to Saabwe Paul Kisitu, the CIT(A) treated the payment as "fee for technical services" under Article 12 of the India-Uganda DTAA. However, the Tribunal noted that an identical issue in the assessee's case for AY 2011-12 was decided in favor of the assessee, treating the payment under Article 14 (independent personal services) of the DTAA, which is not taxable in India in the absence of a permanent establishment. The Tribunal followed the earlier decision and directed the AO to delete the disallowance.

4. Disallowance of Write-off of Miscellaneous Expenses:
The assessee claimed a deduction of ?3.67 lakhs for rental/telephone deposits written off. The AO and CIT(A) disallowed the claim, considering it capital in nature. The Tribunal noted that the payments were made in the normal course of business and referenced the Karnataka High Court decision in Pr. CIT Vs. IDS Software Solutions India Pvt. Ltd., which allowed a similar claim. However, the Tribunal found that the AO did not examine the nature of the payments and remanded the issue for fresh examination by the AO.

Conclusion:
The Tribunal dismissed the Revenue's appeal due to the low tax effect and remanded the issues of disallowance of depreciation and write-off of miscellaneous expenses for fresh examination. The disallowance of payments made outside India was deleted following the Tribunal's earlier decision. The assessee's appeal was treated as allowed for statistical purposes.