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TMI Blog2021 (7) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... - KARNATAKA HIGH COURT] which have held that TDS is not required to be made out of payment made for software purchasesby Hon ble Karnatak, following the above said decision we hold that the TDS liability cannot be fastened upon the assessee retrospectively and accordingly disallowance u/s 40(a)(i) is not called for even if the software purchases is treated as revenue expenditure. Accordingly, we are of the view that there is no reason to treat the cost of software capitalized by the assessee as revenue expenditure. Accordingly we set aside the order passed by Ld. CIT(A) and direct the AO to treat the cost of software as capital expenditure and delete the disallowance made on this issue. Addition of rental income due to the difference found out in form no.26-AS - difference in the income reported by the assessee under form No.26AS - DR submitted that the claim of the assessee requires examination at the end of the A.O - HELD THAT:- We find merit in the submission made by Ld. D.R. Accordingly, we restore this issue to the file of the AO for examining the explanations furnished by the assessee. After affording adequate opportunity of being heard to the assessee, the A.O. may take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered only those investments which have yielded exempt income for the purpose of computing average value of investments, while computing disallowance u/r 8D(2)(iii) of I T Rules. For this proposition the Ld. A.R. placed his reliance on the decision rendered by Special bench of Tribunal in the case of ACIT Vs. Vireet Investments Pvt. Ltd. (50 ITR (Trib.) 313). 6. The ld. D.R., on the contrary, submitted that the disallowance u/s 14A of the Act is called for, since the assessee has earned exempt income. 7. We heard rival contentions on this issue and perused the record. The assessee is contending that it is having own funds and interest free funds exceeding the value of investments and hence the decision rendered by Hon ble jurisdictional High Court in the case of Micro Labs Ltd. (supra) is applicable. The assessee is also placing reliance on the decision rendered by Special bench of Tribunal in the case of Vireet Investments Pvt. Ltd. (supra). The above said contentions urged before us require verification of facts prevailing in this case. Accordingly, we are of the view that this issue requires fresh examination at the end of the A.O. Accordingly, we set aside the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wares', which were capitalized and depreciation @ 60% was claimed thereon. The Assessing Officer proceeded to disallow the depreciation claimed by the assessee by invoking the provisions of section 40(a)(i) of the Act in respect of the aforesaid payments made for purchase of computer and software which was capitalized by the assessee. We find that the similar issue was considered and adjudicated in favour of the assessee and against revenue by a co-ordinate bench of this Tribunal in the case of Kawasaki Microelectronics Inc - India Branch V. DDIT (IT), Circle 1(1), Bangalore in its order IT(IT)A No.1512/Bang/2010 dt.26.6.2015. In this regard, at paras 3 to 8 of its order (supra), the co-ordinate bench has held as under :- 3. The only issue raised for our consideration and adjudication is regarding disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act in respect of the payments made for purchase of software and capitalized by the assessee. The Assessing Officer found that the assessee made the payment of ₹ 49,42,300 for purchase of software ITA No.715/Bang/2017 from Cadence Systems Ireland Limited (in short 'Cadence'). The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of royalty and therefore the provisions of section 195 are applicable on such payment for deduction of tax at source. He has further submitted that it is also not in dispute that the assessee has not deducted the TDS in respect of the payment in question and therefore the assessee has violated the provisions of section 195 of the Act and consequently, the provisions of section 40(a)(i) of the Act are applicable in the case under consideration. The learned Departmental Representative has contended that there is an intricable link between the provisions of sections 40, 195 201 of the Act. Once the assessee has failed to comply with the provisions of section 195, the provisions of section 40(a)(i) of the Act are applicable. Has relied on the orders of the authorities below. 6. We have considered the rival submissions as well as relevant the material on record. The issue before us is limited only with respect to the disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act. There is no dispute that the assessee has made the payment in question to a non-resident for purchase of software and the said payment has been capitalized by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sum chargeable under this Act, which is payable outside India; or in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under subsection (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.--For the purposes of this sub-clause,-- royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 16.2 It is manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the payments made for technical know-how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under: 3. Ground no. 4 is against deletion of an addition of ₹ 6,88,1751- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred, expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance under Section 40(a)(i) does not arise. The only remedy which might have been resorted to by the Assessing Officer is the action under Section 201 and 201A of the Act. A similar view has been taken by the Delhi Bench of the Tribunal in the case of SMS Demang (P) Ltd. (supra) in para 8 as under :- 8. As regards the claim of assessee for depreciation on assets capitalized, depreciation cannot be disallowed on the ground that at the time of remittance, no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction under section 32 of the Act. Accordingly, in our considered opinion, the AO was not justified in disallowing 50 percent of depreciation on the ground that provisions of section 40(a)(i) were applicable. However, the AO will verify the fact whether the assets in respect of which expenditure has been capitalized have been used in business for period more than 180 days. If the assets have been used for more than 180 days, the AO will allow full depreciation, as claimed by the assessee. The AO is directed accordingly . 6.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces India Pvt. Ltd. (2017)(51 CCH 0083) and identical disallowance made was deleted by the co-ordinate bench on the reasoning that the TDS liability cannot be fastened upon the assessee retrospectively. For the sake of convenience, we extract below the operating portion of the order passed by the co-ordinate bench:- 4. Ground Nos.2 to 5 are regarding disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 (in short 'the Act') of payment towards software licenses treated by the Assessing Officer as royalty for want of TDS. The assessee has also raised additional grounds which are as under : Corporate tax matters 21. Without prejudice to the grounds 2 to 4, the Learned CIT(A) has failed to appreciate that during the Financial Year 2008-09 relevant to the Assessment Year 2009-10, the Appellant was not liable to withhold tax on the payments made as there was no provision under the Act mandating the deduction of tax at source on the payments made on purchase of computer software and there were many favorable judicial precedence including the jurisdictional tribunal rulings. 22. Without prejudice to the grounds 2 to 4, the learned CIT(A) erred in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies below. 7. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the transaction in question regarding payment of purchase of software was completed in the F.Y.2008- 09 whereas the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) was passed on 15.10.2011 much later than the time of transaction carried out by the assessee. It is also not in dispute that this issue of considering the payment for purchase of software as royalty is a highly debatable issue and various High Courts have taken divergent views on this issue. The co-ordinate Bench of this Tribunal in the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd. (supra) has considered an identical issue in paras 3 to 5 as under : 03. We heard the rival submissions and gone through the relevant orders. The assessee resubmitted the plea taken before the lower authorities and placed on the ruling of the Hon'ble Bangalore ITAT in Sonata Information Technology Ltd v. ACIT (103 ITD 324) which had held that payments for software licenses do not constitute royalty under the provisions of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., whereas the liability to deduct tax for the appellant was the F.Y. 2010-11. The appellant has relied on the judgment of Cochin Tribunal in the case of Kerala Vision Ltd and Agra Tribunal in the case of Virola International, wherein it was held that - The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to have clairvoyance of knowing how the law will change in future. Further, software payment was included in definition of royalty only vide Explanation to section 9(1)(vi)inserted retrospectively vide Finance Act, 2012 and when the purchase was made, the appellant did not have the benefit of clarification brought by the retrospective amendment. It is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability for deducting tax at source retrospectively. 5.4 In view of the above decisions, it is correct to say that it is not possible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of t h e clarification brought about by the retrospective amendment. The contention of the appellant is correct that the software payment disallowed by the AO did not warrant withholding of the tax u/s 40(a)(ia) and 40(a)(ia) (by an order of corrigendum dt 20.11.2015) of the Ac t. Therefore disallowance made by the AO on account of software payment want of withholding of tax is hereby deleted. 05. The CIT(A) followed the decision of this Tribunal in M/s WS Atkins India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises Ltd in ITA 115/HYD/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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