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TMI Blog2011 (2) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... reign companies. Hence, the CIT(A) is justified in deleting the disallowance for the asst. year 2005-06 and for the asst. year 2006-07, being the payments made to German company and Singapore company respectively. confirming the disallowance for the asst. year 2005-06 being the payment made to Indian company. Nature of FCCB expenses Capital or Revenue - HELD THAT:- The assessee company had incurred expenses in connection with the issue of foreign currency convertible bonds. The assessing authority held that the bond holders had the option to convert the bonds to equity shares and therefore, the collection of funds through the issue of bonds needs to be treated as to increase the capital and therefore the connected expenses would be capital in nature and hence disallowed. Quantum of benefit available u/s010A - HELD THAT:- It is held in ITAT, SAK Soft Ltd.,[ 2009 (3) TMI 243 - ITAT MADRAS-D] , that the exclusion must be made from total turnover as well. Therefore, we direct the AO to exclude the telecommunication charges from total turnover as well and revise the computation of the quantum of benefit available u/s010A. X X X X Extracts X X X X X X X X Extracts X X X X ..... non-transferrable rights to market and sub-licence the software and user documentations and to use the software source to modify, enhance, change or convert the software packages as and when necessary in the light of marketing requirements. iii) The assessee-company is basically a trader and distributor of software products. The assessee purchases licences, source codes and makes sales and distribution of updated products to end customers. iv) What the assessee has purchased is comprehensive software packages and the right to sell to multiple customers and not any article or asset as explained by the assessee. v) Therefore, the payments made by the assessee were in the nature of Royalty as explained in Explanation 2 to Section 9(1)(vi) of the Act and accordingly liable to tax as the income arising to the foreign suppliers are to be treated as income accruing or arising in India. 07. On the basis of the above findings, the assessing authority held that tax should have been deducted at source u/s.194J when payments were made to foreign suppliers against the purchase of software. No TDS was made which attracted the provisions of law stated in sections 40(a)(i) and 40(a)(ia). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. 12. As in the earlier year 2005-06, the assessee had purchased software and claimed 60% depreciation amounting to ₹ 38,20,11,156/-. As already stated, the assessing authority treated the payments as having made towards Royalty liable for TDS. As there was no TDS made, sections 40(a)(i)/40(a)(ia) were invoked and the claim of depreciation was disallowed. 13. In the assessment year, the assessee-company had claimed the benefit of section 10A. While computing the said benefit the assessing authority excluded the telecommunication charges from the export turnover without a corresponding deduction from total turnover, thereby reduced the quantum of benefit, marginally. 14. To summarise, the disallowances made by the assessing authority were as follows : Sl. No Assessment years Item particulars 2005-06 2006-07 1. Depreciation allowance Para 07 & 12 above ₹ 46,23,33840 ₹ 16,68,78,386 2. Market Promotion Expenses Para 08 & 10 above ₹ 3,53,20,000 ₹ 39,08,79,350 3. FCCB Issue Expenses Para 11 above -- Rs 6,63,50,038 4. 10A Computation Adjustment Para 13 above -- ₹ 39,03,051 15. The above mentioned disallowances and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (PE). The services were rendered by those companies outside India. The payments were made outside India. The income was earned outside India. The income did not accrue or arise in India. He held that therefore the payments made to the above stated two foreign companies were covered by the exception provided in section 9(1)(b) and no tax was deductible and section 194J was not attracted and so also sections 40(a)(i)/ 40(a)(ia). He further relied on the following decisions, as well : Ishikawajima-Harima Heavy Industries v. DIT (288 ITR 408) (SC) ; Jindal Thermal Power Company Ltd., v. DCIT (26 DTR 172) (Kar). 23. Accordingly, the Commissioner of Income-tax(A) deleted the disallowance of ₹ 1,36,44,000/- for the assessment year 2005-06 and the disallowance of ₹ 39,08,19,350/- for the assessment year 2006-07. However, he confirmed the disallowance of Indian payment of ₹ 2,16,76,000/- for the assessment year 2005- 06. 24. On the question of disallowance of FCCB issue expenses, the Commissioner of Income-tax(A) held that FCCB is nothing but an interest bearing liability. The mere fact that loans can be converted to equity at the option of the lender at a later date do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in pages 03 to 07 of his order. The assessing authority has held that the assessee has acquired only the right to use the software products and therefore the payments made would amount to payment of royalty where section 9 applies and consequently sections 194J and 40(a)((i)/40(a)(ia). 30.2. The Commissioner of Income-tax(A) has held that the above finding was based only on certain clauses of the agreements and he has not considered the clauses which enabled the assessee to exercise the option to purchase the products and where in fact, the assessee had exercised the option and purchased the products. 30.3. The nature of the business carried on by the assessee has been discussed by the Assessing Officer for assessment y ear 2005-06 in para 03 of his order, which is extracted below : "3. The assessee-company (hereinafter CSIL) was established in the year 1991. The company started as a distributor of anti-virus software in Bangalore and later moved on to become solo authorized distributor of MATLAB in South Asia in 1993. The assessee-company provides enterprise statistical analytics and engineering simulation software products and solutions across the globe. The company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for both the assessment years under appeal. 30.7. The first issue of depreciation allowance on software is decided in favour of the assessee-company. 31. The Commissioner of Income-tax(A) has further held that sections 40(a)(i)/40(a)(ia) do not apply to depreciation as depreciation is not an expenditure in the nature of interest, rent, royalty, fees mentioned in those sections and depreciation cannot be disallowed for violation of section 194J. As the issue has already been decided on the facts of the case that software were procured as purchases, we need not proceed to consider the above legal controversy. 32. The Commissioner of Income-tax(A) has further held that for the assessment year 2005-06, the disallowance would not be justified as the law did not include royalty which was inserted only from assessment year 2006-07. This finding holds good. 33.1. The second common issue is that of payments made for expenses incurred in market mobilization. The payment of ₹ 1,36,44,000/- was made to German Company in the asst.year 2005-06. A sum of ₹ 2,16,76,000/- was paid to an Indian company, M/s. S2 Softtech Pvt. Ltd. In the asst. year 2006-07, ₹ 39,08,79,350/- wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax(A) is justified in confirming the disallowance of ₹ 2,16,76,000/- for the asst. year 2005-06 being the payment made to Indian company, M/s. S2 Softtech Pvt. Ltd., 34.1. Next is whether FCCB issue expenses are capital or revenue in nature. The assessee company had incurred expenses in connection with the issue of foreign currency convertible bonds. Assessee claimed the expenses as deductible as the expenses were incurred to raise loan finance. The assessing authority held that the bond holders had the option to convert the bonds to equity shares and therefore, the collection of funds through the issue of bonds needs to be treated as to increase the capital and therefore the connected expenses would be capital in nature and hence disallowed. 34.2. We agree with the view of the Commissioner of Income-tax(A) that the expenses are not capital in nature. As on 31.03.2006, the previous year ending for the asst. year 2006-07, the funds collected by the assessee company through the issue of FCCB, were in the nature of liability. The assessee company was bound to discharge the bonds on due dates. The assessee was paying interest to bond-holders. It is c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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