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TMI Blog2021 (10) TMI 1108X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of Rule 8D of I.T. Rules and compute the disallowance accordingly. Disallowance of software expenses - AO took the view that software purchases are in the nature of capital expenditure - AO disallowed the claim of the assessee and allowed depreciation @ 60%/30% depending upon the date of purchase of software - HELD THAT:- We direct the A.O. to examine the issue afresh as per the directions given by the Tribunal in assessment year 2011-12 [ 2020 (12) TMI 470 - ITAT BANGALORE] with regard to treating of software purchases as capital in nature. The AO should also examine the issue with regard to other directions issued by Ld CIT(A). Disallowance of brand building expenses - Revenue or capital expenditure - HELD THAT:- We hold that the brand building expenditure is allowable as revenue expenditure. We notice that the Ld. CIT(A) has observed that some of the invoices produced by the assessee do not relate to the year under consideration and further some of the expenditure is liable for tax deduction at source. Accordingly, we restore this issue to the file of the A.O. for examining the above said two observations made by CIT(A) and to take appropriate decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same as deferred revenue income and hence did not offer it during the year under consideration. According to the assessee, the correct amount of deferred income was ₹ 10.70 crores. However, the A.O. has made disallowance of ₹ 11.47 crores. Hence, the assessee brought to the notice of Ld CIT(A) this difference and accordingly, the Ld CIT(A) directed the A.O. to adopt correct figure of ₹ 10.70 crores. Hence, the disputed amount with regard to this issue is only ₹ 10.70 crores. 3.1 The A.O. asked for explanation from the assessee for not recognizing the above said income. The Ld A.R explained the explanations furnished by the assessee before the AO. It was submitted that the assessee is following an accounting policy of recognizing that revenue, only after signing of statement of work/task orders. According to the assessee that, without finalizing the statement of work/task orders, the assessee would not be able to collect the revenue for the services rendered. However, before finalization of the Statement of work/task order, the assessee would have started rendering service to its clients as per negotiations. Irrespective of finalization of the Statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.5 At the time of hearing before us, the Ld. A.R. brought to our notice the decision rendered by the coordinate bench in the assessee s own case in assessment year 2007-08. He submitted that this issue has been examined by the coordinate bench in ITA No.1333/Bang/2014 dated 27.9.2019, wherein we notice that the Tribunal has upheld the view taken by the Ld. CIT(A) and also upheld the alternative direction given by Ld. CIT(A) to the A.O. to verify the assessment record of 2008-09 and exclude the income that has been offered by the assessee in that year. 3.6 We heard Ld. D.R. and perused the record. We notice that the coordinate bench has upheld the view taken by Ld. CIT(A) on an identical issue in assessment year 2007-08 including the view taken by Ld CIT(A) on alternative contention of the assessee. Following the same, we uphold the view taken by the Ld. CIT(A) on this issue in this year also. The alternative direction given by Ld. CIT(A) to A.O. is also upheld. 4. The next issue relates to disallowance made u/s 14A of the Act. The A.O. noticed that the assessee has earned a dividend income of ₹ 4.80 crores during the year under consideration. However, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the direction given by Ld. CIT(A) and direct the A.O. to exclude all investments which did not yield any exempt income while computing average value of investments for the purpose of Rule 8D of I.T. Rules and compute the disallowance accordingly. 5. The next issue relates to disallowance of software expenses. The A.O. noticed that the assessee has incurred a sum of ₹ 10.33 crores on purchase of software and claimed the same as revenue expenditure. The A.O. took the view that software purchases are in the nature of capital expenditure. Accordingly, he disallowed the claim of the assessee and allowed depreciation @ 60%/30% depending upon the date of purchase of software. 5.1 Before Ld. CIT(A), the assessee placed reliance on the decision rendered by Hon ble Karnataka High Court in the case of CIT Vs. Toyota Kirloskar Motors Pvt. Ltd. (ITA 176 of 2009) and submitted that the software license fee paid for use of software for limited duration of up to 2 years is held as revenue expenditure by Hon ble High Court. Accordingly, the Ld. CIT(A) directed the A.O. to allow the purchase of software which are valid for a period of up to 2 years as revenue expenditure. The Ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 trea ted 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and same was decided in favour of the assessee as under:- 25. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that the expenditure incurred towards advertisements sales and marketing, holding various seminars and exhibitions are in relation to ongoing business of assessee. As held by Hon ble Bombay High Court in case of CIT Vs. Jeoffrey Manners Co. Ltd. reported in (2009) 180 Taxmann 87 that corrected test to be applied in respect of expenditure incurred for making advertisement films was that when the same was incurred in respect of an ongoing business of assessee, it is revenue. On the other hand, when expenditures incurred in respect of a brand which is to be used in a business which is yet to be commenced, it is capital expenditure. Further, as held by Hon ble Supreme Court in case of Empire Jute Co. Ltd. Vs. CIT reported in (1980) 3 Taxmann 69, it is not appropriate to hold that test of enduring benefit is a conclusive test in all cases and to hold such expenditure to be always capital expenditure. In the present facts of case, assessee incurred such expenses in the process of an ongoing business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in providing technical services outside India. He submitted that the assessee has not provided any technical service outside India as contemplated in the definition of export turnover given in sec.10A 10AA and hence these expenses need not be reduced from Export turnover at all. If it is not reduced from export turnover, then the question of reducing the same from total turnover does not arise. He submitted that the Tribunal, in AY 2007-08, has extracted the nature of expenses incurred by the assessee in foreign currency, which clearly show that they have not been incurred for Providing technical service . Still the Tribunal has decided this issue against the assessee. He submitted that the contention of the assessee is supported by the decision of jurisdictional Karnataka High Court rendered in the case of CIT vs. Mphasis Ltd (2016) (74 taxmann.com 274 (Kar). 7.3 We heard Ld D.R on this issue and perused the record. Admittedly, the Ld CIT(A) has not adjudicated this issue, i.e., whether the expenditure incurred by the assessee in foreign currency is towards providing technical service outside India or not. The contention of Ld A.R is that assessee is providing BPO se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said export turnover the following amounts have to be deducted; a. freight b. telecommunication charges c. insurance attributable to the delivery of computer software outside India; d. expenses, if any, incurred in foreign exchange in providing technical services outside India; 19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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