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TMI Blog2021 (8) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses claimed by the assessee treating the same as contingent liability - HELD THAT:- With regard to the question whether the Provision for software is a contingent liability or not, we notice the same has been decided in favour of the assessee by this bench of Tribunal in the assessee s own case in AY 2011-12 [ 2020 (12) TMI 470 - ITAT BANGALORE] . As assessee has furnished break-up details of Provision for software expenses identifying the provision so made with the vendors, who had supplied software. CIT(A) has extracted the relevant details in paragraph 6.0 of his order passed for both the years under consideration. Hence the reasoning given by the Tribunal in AY 2011-12 for allowing the identical claim is applicable to these two years also. Accordingly, we hold that the Provision for software expenses cannot be considered as contingent liability. Accordingly, we set aside the orders passed by Ld CIT(A) on this aspect in both the years under consideration. Disallowance u/s 40(a)(i) for non-deduction of tax at source on provision for software expenses - HELD THAT:- The issue relating to disallowance u/s 40(a)(i) requires to be set aside to the file of the AO for deciding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Karnataka High Court in the case of Wipro Ltd and also the direction given by Ld CIT(A) with regard to the accounting year, claim of state tax. Disallowance u/s 14A - HELD THAT:- It is imperative that the AO should examine the claim of the assessee having regard to the accounts of the assessee and if he is not satisfied with the said workings, then only the AO can have resort to the provisions of Rule 8D of I T Rules. The Mumbai bench of Tribunal has also expressed identical view in the case of Tata Projects Ltd vs. ACIT [ 2021 (1) TMI 393 - ITAT MUMBAI] . In the instant case, admittedly the AO did not examine the correctness of the workings furnished by the assessee by having regard to the accounts of the assessee. Hence the AO could not have resorted to apply provisions of Rule 8D for computing disallowance as required u/s 14A of the Act. For the above said reason, the Ld CIT(A) was not justified in confirming the working made by the AO. We set aside the order passed by Ld CIT(A) on this issue in AY 2013-14 and direct the AO to delete the addition made by him u/s 14A of the Act. X X X X Extracts X X X X X X X X Extracts X X X X ..... nataka High Court. 6. We heard the parties on this issue. The Ld. A.R. submitted that the decision rendered by Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) has since been upheld by Hon'ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. (2018) 93 Taxmann.com 33. We notice that the decision rendered by Hon'ble Karnataka High Court has been upheld by Hon'ble Supreme Court in the case of HCL Technologies Ltd (supra) with the following observations: "17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT V. Tata Elxsi Ltd. (2012) 204 Taxman 321/17/taxmann.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under section 10A of the I.T. Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the provision for software expenses is a contingent liability or not. 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. Paragraph (4)(i) of Accounting Standard - 1 provides as under: "Prudence: 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 the available information." Further, the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) has explained the nature of provision for expenses created by the assessee as under: "A provision is a liability which can be measured by using a substantial degree of estimation. A provision is recognised when; (a) an enterprise has a present obligation as a result o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. 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. Accordingly, we set aside the orders passed by tax authorities in this regard." 10.2 In both the years under consideration also, the assessee has furnished break-up details of "Provision for software expenses" identifying the provision so made with the vendors, who had supplied software. The Ld CIT(A) has extracted the relevant details in paragraph 6.0 of his order passed for both the years under consideration. Hence the reasoning given by the Tribunal in AY 2011-12 for allowing the identical claim is applicable to these two years also. Accordingly, following the decision rendered by the Tribunal in the assessee's own case for AY 2011-12, we hold that the "Provision for software expenses" cannot be considered as contingent liability. Accordingly, we set aside the orders passed by Ld CIT(A) on this aspect in both the years under consideration. 10.3 The Ld CIT(A) has also expressed the view that, if the provision for software expenses is h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the aforesaid distribution agreement would show that what is granted to the distributor is only a non-exclusive, nontransferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sublicense or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all. 46. When it comes to an end-user who is directly sold the computer programme, such end-user ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circulars issued by CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court concluded as under:- "CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has stated that the disallowance is made u/s 40 of the Act. The assessee has also not mentioned, whether the disallowance was made u/s 40(a)(i) or 40(a)(ia) of the Act. 11.1 During the year relevant to AY 2012-13, the AO disallowed a sum of ₹ 2,79,199/-, being cost of purchase of software invoking the provisions of sec.40 for non-deduction of tax at source. The AO followed the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra). The Ld CIT(A) also confirmed the same. 11.2 During the year relevant to AY 2013-14, the AO disallowed a sum of ₹ 11,91,455/- on identical reasoning as given in AY 2012- 13. The Ld CIT(A) confirmed the disallowance in this year also. 11.3 We heard the parties on this issue. Before us, the Ld A.R placed his reliance on the decision rendered by Hon'ble Supreme court in the case of Engineering Analysis Centre of Excellence (P) Ltd (supra) and contended that there is no necessity to deduct tax at source from the payments made for software purchases. As noticed earlier, the details relating to this disallowance made in both the years are not forthcoming from the assessment record or from the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture has been included in section 32 of the I T Act and accordingly depreciation at the rate of 60% per year has been allowed. The assessee has not given dates of purchases of these licenses. Hence the depreciation is being allowed at the rate of 30% of ₹ 5,91,56,534/- and the balance amount of ₹ 13,80,31,912/- is disallowed. The assessee would be eligible for claiming depreciation on the balance portion in the future years." 22. Before Ld CIT(A), the assessee placed its reliance on the decision rendered by Hon'ble jurisdictional Karnataka High Court in the case of CIT vs. Toyota Kirlosakar Motors (P) Ltd (ITA No.176 of 2009), wherein the Hon'ble High Court had held that the software licence fee paid for use of software for a limited duration upto two years is allowable as revenue expenditure. Hence the Ld CIT(A) asked the assessee to furnish the details of software purchases along with their period of validity. The assessee furnished the details as per which a sum of ₹ 17.95 crores was related to software licenses valid up to 1 year and the balance amount of ₹ 1.77 crores was related to software implementation, maintenance services, support s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld A.R submitted that the Hon'ble jurisdictional Karnataka High Court, in a subsequent decision rendered in the case of CIT vs. IBM India Ltd (2013)(357 ITR 88)(Kar), has held that software expenses is revenue in nature. Accordingly he submitted that the entire expenses should be allowed as deduction. On the contrary, the Ld D.R submitted that the assessee has to show that the validity of software licenses is less than two years. He submitted that the Ld CIT(A) should have decided the issue himself instead of restoring the same to the file of AO, since the Ld CIT(A) does not have power to remand the matters. 26. We heard the parties on this issue and perused the record. We notice that the Hon'ble Karnataka High Court has held in the case of Toyota Kirloskar Motors (P) Ltd (supra) has held that, when the life of a computer or software is less than two years and the right to use it is for a limited period, the fee paid for acquisition of right is allowable as revenue expenditure and if the software is licensed for a particular period, fresh license fee is to be paid for utilizing it for subsequent years. In the case of IBM India Ltd (supra), it was decided by the Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and therefore, it has to be treated as revenue expenditure. In that view of the matter, the finding recorded by the Tribunal is in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue." 27. We notice that the Hon'ble High Court has held in the case of Toyota Kirloskar Motors P Ltd (supra) that the software expenses are allowable as revenue expenses, if the validity of licenses is less than two years. The High Court has also laid down the tests that should be conducted to determine the nature of software expenses in the case of IBM India Ltd (supra). Accordingly, we are of the view that the nature of software expenses, i.e., whether it is capital or revenue in nature, has to be determined by following the two decisions of Hon'ble Karnataka High Court referred above. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome attributable to that year in America. In other words, the income tax paid in the same calendar year in United States of America is to be accounted for in two financial years in India. 10.6 In relation to credit for the State taxes, if the appellant gets tax credit for the State taxes, the corresponding amount claimed as deduction in the P&L account would be required to be disallowed. 10.7 Considering above the grounds of appeal 9 and 10 of the appellant are partly allowed for statistical purposes." 13.1 We notice that the Ld CIT(A) has taken the view that the decision rendered by Hon'ble Karnataka High Court in the case of Wipro Ltd (supra) is distinguishable in view of the decision rendered by Hon'ble Supreme Court in the case of Yokogawa India Ltd, wherein it was held that the provision of sec. 10A of the Act is in the nature of deduction. The Ld CIT(A) has expressed the view that the decision in the case of Wipro Ltd (supra) was rendered by considering the provision of sec.10A as exemption provision. Accordingly, the Ld CIT(A) has taken the view that the said decision cannot be applied in these years, since the provisions of sec.10AA is now a deduction provision. 13.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Accordingly, he computed disallowance by applying provisions of Rule 8D(2)(iii) at ₹ 42,85,269/- and accordingly added the difference amount of ₹ 32,03,288/-. The Ld CIT(A) also confirmed the same. 14.2 We heard the parties and perused the record. We notice that the assessee, in the tax audit report, has furnished the basis of computing disallowance u/s 14A of the Act as under:- 1. 5% of the salary cost of Chief Financial Officer. 2. 10% of the salary cost of Chief Financial controller 3. 50% of the salary cost of treasury department employees, who are handling the treasury functions of the company. Accordingly, the assessee has computed the disallowance of ₹ 10,81,981/-. However, a perusal of the assessment order would show that the AO did not examine the above said computation of the assessee and did not find any fault or error in the above said computation. The AO simply observes that section 14A provides that the expenditure has to be computed as per Rule 8D. 14.3 The provisions of sec.14A(2) read as under:- "The assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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