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TMI Blog2020 (12) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... ot? - addition u/s 40(a)(i) of the Act for non-deduction of tax at source - HELD THAT:- There is no dispute with regard to the fact that the assessee is following mercantile system of accounting. The assessee being a company, it is required to follow accounting standards prescribed by ICAI and also by the Central Government under the Income Tax Act. As per accounting standard-1 prescribed by the Central Government, the assessee is required to make provision for all known liabilities and losses even though the amount cannot be determined with certainty. Assessee has explained the basis for creating the provision for expenses. The Ld. A.R. also submitted that the accounts of the assessee have been audited by the statutory auditors and they did not find any fault with the quantum of provision for software expenses created by the assessee. Hence it is not a case that there was no basis for creating the Provision for software purchases. Accordingly, we are of the view that the provision for software expenses created by the assessee cannot be considered as contingent liability. Disallowance u/s 40(a)(i) is liable to be deleted for the year under consideration. Accordingly, we set aside t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Ld CIT(A) has power to remit the issue of disallowance of software expenses treating it as Capital expenditure to the file of AO? 4. The assessee is engaged in the business of providing "business process outsourcing services". 5. We shall take up the appeal of the revenue first. In its appeal, the first issue contested by the revenue relates to deduction claimed u/s 10A of the Act i.e. whether expenses that were reduced from export turnover should also be reduced from the total turnover or not. The assessee claimed deduction u/s 10A of the Act. While computing the deduction u/s 10A, the assessee reduced communication expenses from both export turnover and total turnover and accordingly computed amount of deduction. The A.O. was of the view that the communication expenses should be deducted from only export turnover and not from Total turnover. Accordingly, he recomputed the deduction u/s 10A of the Act. The Ld. CIT(A) allowed the claim of the assessee by following the decision rendered by Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (2012) 349 ITR 98. The revenue has challenged the said decision of CIT(A) by submitting that the revenue has filed a SLP i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 3.89 crores. The A.O. disallowed the provision for software expenses by observing that it is only provision in nature. It appears that the A.O. has taken the view that the "provision for software expenses" is a contingent liability. 10. The Ld. CIT(A) also confirmed the disallowance by concurring with the view taken by the A.O. The Ld. CIT(A) also held that the provision for expenses is liable to be disallowed u/s 40(a)(i) of the Act for non-deduction of tax at source. In this regard, the Ld. CIT(A) followed the decision rendered by Bangalore bench of Tribunal in the case of IBM India Pvt. Ltd. (2015) 59 Taxmann.com 107 wherein it was held that the TDS provisions will also apply to provision for expenses created by the assessee. 11. The Ld. A.R. submitted that the provision for software expenses is created by the assessee as at the yearend as per the accounting standards prescribed by Income Tax department as well as ICAI. As per the accounting standars, provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. The Ld. A.R. further submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n support of this proposition, the Ld. A.R. relied on the decision rendered by Bangalore bench of Tribunal in the case of M/s. Acer India Pvt. Ltd. Vs. DCIT (IT(IT)A Nos.107 to 114/Bang/2018 dated 5.10.2020). Accordingly, the Ld. A.R. submitted that the disallowance made u/s 40(a)(i) should be deleted in respect of provision for software expenses for the year under consideration, since it pertained to the period prior to the date of rendering of decision by Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd. (supra). 13. On the contrary, the Ld. CIT(DR) submitted that the provision for software expenses are in the nature of contingent liability and hence the same was disallowed by A.O. and Ld. CIT(A). In the alternative, the Ld. CIT(A) has held that the provision for software expenses is liable for deduction of tax at source. Since the assessee has failed to deduct tax there from, the Ld. CIT(A) has disallowed the same u/s 40(a)(i) also. 14. We heard the rival contentions on this issue and perused the record. The first question is whether the provision for software expenses is a contingent liability or not. There is no dispute with regard to the fact that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork 1,18,03,850 Total 3,89,30,461 6.1 The appellant also made following submissions: 2. Provision for software expenses amounting to ₹ 3,89,30,461 was made in respect of software licenses used, license updates, support services, software implementation services, software AMC charges etc availed/utilized during the year from various vendors. In the absence of invoices received from vendors for these services, at year end, the respective user dept's provide the likely payments to be made for the software licenses/services utilized during the year. The appellant made provision for the said expenditure and included the same under the head 'software expenses' for the year ending 31st March, 2011." 16. We notice that the assessee has explained the basis for creating the provision for expenses. The Ld. A.R. also submitted that the accounts of the assessee have been audited by the statutory auditors and they did not find any fault with the quantum of provision for software expenses created by the assessee. Hence it is not a case that there was no basis for creating the Provision for software purchases. Accordingly, we are of the view that the provision for software expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC IT(TP)A Nos.405 & 474/Bang/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in: ♦ ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) ♦ Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) ♦ Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) ♦ Channel Guide India Ltd. v. ACIT (25 taxmann.com 25) ♦ DCI v. Virola International (20 14(2) TMI 653) ♦ CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 26. The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon'ble jurisdictional High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required to be made during the year under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance. 20. The next issue contested by the assessee relates to disallowance of software expenses treating the same as capital in nature. Since the Ld CIT(A) has remanded this issue to the file of the AO with certain directions, the revenue is questioning the authority of Ld CIT(A) to do so. 21. The facts relating to this issue are discussed in brief. We noticed earlier that the assessee had claimed expenses towards software purchases as deduction to the tune of ₹ 24,97,00,999/-. The AO disallowed following items out of the above said claim:- Provision for software purchases - ₹ 3,89,30,461 Disallowance u/s 40(a)(i)/(ia) - ₹ 1,35,82,093 The balance amount was ₹ 19,71,88,445/-. The AO treated this amount as capital in nature. The observations made by the AO are extracted below:- "6.3 For the balance amount of ₹ 19,71,88,445/- it is seen that the company has treated it as revenue expenditure. It is to be stated that considering the life of software, this expenditure has been inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax at source has been deducted on the same. In case of non deduction of tax at source the same needs to be disallowed under Section 40(a) of the Act. • In relation to expenditure incurred for IT consumables e.g. CDs, printer cartridges etc., the same needs to be treated as revenue expenditure. • In case of software where the same can be used perpetually e.g. Operation system software like Windows, Application software like MS Office etc., the same needs to be treated as capital in nature. This is for the reason that in case of such software there is no restriction or limitation on its period of use. New versions of these software keep on becoming available in the market however there is no restriction on the use of the earlier version and a person can always choose not to buy the new version and continue with the version. A high rate of depreciation, which is 60% takes care of obsolescence of such software." 24. The revenue is questioning the authority of Ld. CIT(A) in restoring the matter to the file of A.O. The assessee is contending that the entire amount of ₹ 19.71 crores should be allowed as revenue expenditure. 25. The Ld A.R submitted that the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. Infact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process ..... X X X X Extracts X X X X X X X X Extracts X X X X
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