2022 (4) TMI 532 - AT - Income Tax

Revenue Recognition - Correct head of income - gain on sale / Assignment of Intellectual Property Rights (IPR) - whether assessable to tax at all ? - whether it has to be assessed to tax under the head Income from Business or Profession or Capital Gain - assessee is in the business of rendering software development services (SWD services) and software development products (SWD products). - HELD THAT - The contention of the assessee that the assessee was not in the business of buying and selling IPR s and was only engaged in creating and exploiting IPRs is devoid of any merit. The business of the assessee is developing software for telecom companies. The revenue that the assessee derives in its business is from software services, product and technology licencing and commissioning services. In the course of its business, it develops software and becomes owner of the copyright therein, depending on the contract with its customer. The assessee licences software and derives income in the form of license fee or sells software and derives income from sale of software. This would be clear from the revenue recognition policy of the assessee as would be evident from Note 2(j) of the Notes to financial statement The revenue received by the assessee from licensing the IPR to Spreadtrum was at all times earlier offered to tax by the assessee as licence fee / royalty and declared as business revenue. The sum received under the Arbitration award was also offered to tax as business income. It is only the sum received under the Settlement Agreement that was claimed as not taxable. It is therefore clear that the independently owned IPR and Foreground Information which partakes the character of stock-in-trade for companies like that of the assessee was not a capital asset within the meaning of section 2(14) of the Act and therefore the sum received by the assessee cannot fall within the ambit of the head of Income from Capital Gain . The assessee did not receive the sum in question for giving up any source of income as the assessee was free to exploit independently owned IPR as well as Foreground information and therefore the argument that the sum received is capial receipt for losing a source of income and therefore not chargeable to tax, is devoid of any merits. In view of the above assessee transferred capital asset and that capital gain cannot be brought to tax due to the fact that it was not possible to compute capital gain and thefore the machinery provisions fail and therefore the charge itself fails. - Decided against assessee. Contingent liability - sum shown as payable to other employees - HELD THAT - We are of the view that the liability in question was not certain and was contingent. No basis for the claim being certan has been given by the assessee, especially when the payment itself is voluntary and in the nature of an incentive. The fact that part of the sum claimed as deduction was revised in the subsequent year also lends credence to the conclusion of the AO that the liability was contingent in nature. Hence, the ground of appeal of the assessee is held to be without any merit. However, we direct that the sum reversed in subsequent year and offered to tax shall not be taxed so as to avoid double taxation of the same income. The AO is directed to allow relief in the subsequent Assessment Year. We hold and direct accordingly. Sum payable to Chairman and MD and wholetime Director and CFO - additional payment made to the Chairman MD and WTD CFO were for services rendered - HELD THAT - AO has failed to highlight that the decision of the Special bench states that as regards the rendering of services by the employees for payment of bonus/commission, the only requirement of section 36(1)(ii ) is that some services should have been rendered. Adequacy of services is not a relevant consideration. It is not necessary that payment should be made commensurate to the rendering of services or there should be some extra services rendered for payment on account of bonus or commission. The AO has stated that a law firm was appointed in the US for the arguing the arbitration proceedings and that the services of the CEO or CFO in the arbitration or settlement negotiation was only supervisory in nature. Therefore, the AO has himself conceded that the CEO or CFO has rendered services towards the arbitration proceedings, however remote. Whereas the CEO and CFO cannot take a hands-off approach and had played a significant role in strategizing and providing inputs to the lawyers. The lawyers themselves cannot guide the legal matters Hence, applying the ratio in the case of Dalal Broacha Stock Trading 2011 (6) TMI 251 - ITAT, MUMBAI , the expense is to be allowed under section 36(1)(ii). Disallowing deduction of a sum paid to BSE Ltd., while computing income from business - HELD THAT - The sum was paid to BSE Ltd., to give effect to a scheme of amalgamation of Sasken Network Engineering Ltd., with the assessee. The AO and CIT(A) held that the expenditure is capital expenditure and disallowed the claim of the assessee for deduction. The assessee contends that the expenditure is revenue in nature and in the alternative submitted that the assesee should be allowed deduction under section 35DD of the Act which allows expenditure on amalgamation at 1/5th of the expenditure over a period of 5 Assessment Years. After considering rival submissions, we are of the view that without going into the question whether the expenditure is capital or revenue in nature, it would be just and appropriate to direct the AO to allow 1/5th of expenditure under section 35DD of the Act. Thus, ground No.6 is partly allowed. Disallowance of profession fees paid - assessee claimed that it engaged the consultant for formulating business strategy for future growth - AO and CIT(A) held that strategy for future business growth cannot be regarded as revenue expenditure and disallowed the claim for deduction - HELD THAT - Consultancy services were procured from a consultant regarding the growth opportunities available in the embedded and digital space. The Study was to help Sasken evaluate whether the market size where we operate is large enough and whether it was a growing market. This exercise was undertaken since the company had been de growing for the last 5 years. Thus we are of the view that the plea of the assessee to allow deduction deserves to be accepted. Ground No.7 is accordingly allowed. Non-grant of credit for Foreign Taxes (FTC) - credit for Foreign Taxes paid were in relation to foreign branches and overseas customers of the non-SEZ units for which no deduction under section 10AA was claimed by the assessee - AO denied benefit of FTC for the reason that since the non-SEZ unit was incurring loss, no tax was payable in India - CIT(A) confirmed the order of the AO - HELD THAT - The fact that the Assessee suffered loss in Non-SEZ unit and therefore the claim for FTC cannot be allowed cannot be accepted as taxability is not the criteria to deny FTC. Thus ground No.8 is allowed. MAT credit - HELD THAT - As it is seen that due to an order under section 154 dated 04.10.2018 for Assessment Year 2013-14 wherein MAT credit was reduced by ₹ 37.23 lakhs, the MAT credit for Assessment Year amounting to ₹ 12.34 lakhs were disallowed. The final order in Assessment Year 2013-14 on the issue will have consequential effect and the AO is directed to give consequential relief. Disallowance of processing fees paid to BSE Ltd - whether AO and CIT(A) have erred in not considering the said expenditure as deductible under section 35DD over a period of 5 years? - HELD THAT - We are of the view that it would be just and appropriate to direct the AO to consider the claim of the assessee in the light of CBDT Circular No.37/2016 dated 02.11.2016 on the approach to be adopted on such claims. The AO will afford opportunity of being heard to the assessee before deciding on the issue.

Summary

Issues Involved:
1. Taxability of gains from the sale/assignment of Intellectual Property Rights (IPR).
2. Deduction of provision made for payments to stakeholders and employees.
3. Deduction of managerial remuneration under section 36(1)(ii).
4. Deduction of expenses related to amalgamation under section 35DD.
5. Deduction of professional fees paid to consultants.
6. Grant of Foreign Tax Credit (FTC).
7. Reduction of MAT credit.
8. Charging of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Taxability of Gains from Sale/Assignment of IPR:
The primary issue was whether the gain from the sale/assignment of IPR should be taxed as "Income from Business or Profession" or "Capital Gain." The assessee argued that the IPR constituted a capital asset under section 2(14) of the Income Tax Act, and the transfer of such IPR should be taxed under "Capital Gains." The assessee relied on various legal precedents to support its claim that the IPR was a capital asset and the consideration received was for the transfer of such asset. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the IPR was developed in the normal course of business, and the revenue received from licensing the IPR was always offered as business income. The Tribunal upheld the AO's view, stating that the IPR was not a capital asset but stock-in-trade, and the sum received could not fall under "Income from Capital Gain."

2. Deduction of Provision for Payments to Stakeholders and Employees:
The assessee made a provision of ?28,84,38,000 for payments to stakeholders and employees, claiming it as a deduction. The AO and CIT(A) disallowed the deduction, considering it a contingent liability. The Tribunal agreed with the AO and CIT(A), stating that the liability was not certain and was contingent. However, the Tribunal directed that the sum reversed in the subsequent year should not be taxed to avoid double taxation.

3. Deduction of Managerial Remuneration under Section 36(1)(ii):
The assessee claimed a deduction for managerial remuneration paid to the Chairman, Managing Director, and Whole Time Director under section 36(1)(ii). The AO disallowed the deduction, arguing that the payment was not for services rendered but was an appropriation of profit. The Tribunal, however, allowed the deduction, stating that the remuneration was approved by the shareholders and the Nomination and Remuneration Committee, and was within the limits prescribed under the Companies Act, 2013. The Tribunal held that the payment was for services rendered and could not be re-characterized as a distribution of profit.

4. Deduction of Expenses Related to Amalgamation under Section 35DD:
The assessee incurred expenses of ?18 lakhs paid to BSE Ltd. for giving effect to a scheme of amalgamation. The AO and CIT(A) disallowed the expenditure, treating it as capital expenditure. The Tribunal directed the AO to allow 1/5th of the expenditure under section 35DD, which allows deduction of expenses on amalgamation over five assessment years.

5. Deduction of Professional Fees Paid to Consultants:
The assessee paid ?3,50,07,500 to M/s. Mckinsey and Co., USA, for formulating a business strategy for future growth. The AO and CIT(A) disallowed the expenditure, considering it capital in nature. The Tribunal allowed the deduction, stating that the expenditure was for updating business knowledge and adopting better ways of organizing the business, which is a revenue expenditure.

6. Grant of Foreign Tax Credit (FTC):
The AO denied FTC on the ground that the non-SEZ unit was incurring a loss and no tax was payable in India. The Tribunal allowed the FTC, referring to the Karnataka High Court's decision in Wipro Ltd., which held that income under section 10A is chargeable to tax and includible in total income, even if exempted for a period.

7. Reduction of MAT Credit:
The AO reduced MAT credit by ?12,34,134 due to an order under section 154 for Assessment Year 2013-14. The Tribunal directed the AO to give MAT credit as per the final orders passed for Assessment Year 2013-14.

8. Charging of Interest under Sections 234B and 234C:
The Tribunal directed that the charging of interest under sections 234B and 234C should be consequential, and the AO should give consequential relief.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on certain issues while upholding the AO's and CIT(A)'s decisions on others. The Tribunal's detailed analysis ensured that the legal principles and relevant provisions of the Income Tax Act were appropriately applied.