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TMI Blog2024 (11) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... has received assets free of cost from AEs located outside India to whom the assessee is providing software development services - HELD THAT:- From the plain reading of the section 28(iv) it is clear that if a benefit in the nature of income is arising from business the same shall be taxable under the head profits and gains from business or profession. Therefore the limited question before us is whether import of assets free of cost for testing purposes is a benefit in the nature of income arising from the business of software development to the assessee. In the present case assessee received certain equipments free of cost for the purpose of testing the compatibility of the software developed by the assessee in those equipments. It is an undisputed fact that these equipments are either returned or destroyed once the testing is completed (refer relevant observations of the CIT(A) in this regard). Accordingly there is no dispute that the impugned assets are not made available to the assessee permanently to give any benefit of enduring nature as the assets are either returned or destroyed. Further considering the nature of asset and the purpose for which it is imported, there is merit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear (AY) 2015-16. 2. The assessee is a wholly owned subsidiary of Samsung Electronics Company Ltd. Korea (SECL) and is engaged in providing software development services to SECL and other subsidiaries. The assessee is compensated on cost plus mark up basis for the services provided. The software development services carried out by the assessee are based on specific requirements of SECL and its subsidiaries (AEs) in relation to specific Samsung projects such as telecom systems, home and office appliances, computer systems, mobile devices and networking and other similar products. The assessee filed the return of income for AY 2015-16 on 30.11.2015 declaring a total income of Rs. 238,85,10,090/-. Since the assessee had international transactions with its AEs, a reference was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) to determine the arm s length price of the international transactions the assessee had with its AEs. The TPO passed an order u/s. 92CA of the Income Tax Act, 1961 (the Act) on 26.10.2018 proposing a TP adjustment of Rs. 1,86,94,215/- towards software development services rendered by the assessee to its AEs and the AO passed the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputer software. ii) Addition made u/s. 28(iv) of the Act. Disallowance u/s. 40(a)(i) of the Act 7. We have heard the rival contentions and perused the material on record. It is brought to our notice that the CIT(A) has upheld the disallowance made by the AO by relying on his decision in assessee s own case for AY 2014-15 and that the said order of the CIT(A) for AY 2014-15 was reversed by the coordinate bench of the Tribunal. In this regard we noticed that the coordinate bench in assessee s own case for AYs 2011-12 to 2014-15 vide order dated 30.05.2024 has considered the issue of disallowance u/s. 40(a)(i) towards depreciation on computer software for the reason that the assessee has not deducted tax at source on computer software and held that : - 13. Under section 40(a)( i) any interest (not being interest on loan issued for public before 1/4/1938), royalty fee for technical services or sum chargeable under this Act which is payable outside India or inside India to a non-resident not being a company or to a foreign company on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year or in the subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore, provisions of Section 40(a)(i) and (ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under Section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax (Appeals) has held that the payment has been made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only if some right to use, without the right to commercially exploit the intellectual property in respect of a patent, invention, model, design, secret formula, process, copyright, literary or scientific work, are transferred, it cannot be regarded as royalty. There is nothing on record brought by the revenue in support of this argument. We therefore do not find any force in the argument advanced by the Ld.DR on this issue and the same stands rejected. Accordingly, the issues raised in the grounds 3-6 for A.Ys. 2011-12 to 2013-14 and ground nos. 3-5 for A.Y. 2014-15 of assessee s appeal stands allowed. 8. For the year under consideration also the AO has made disallowance of the depreciation claimed by the assessee u/s. 40(a)(i) for the reason that the assessee has failed to deduct tax at source on the capitalised software. These facts being identical to the facts pertaining to AY 2014-15 we are of the considered view that the ratio laid down in the above decision of the coordinate bench is applicable for the year under consideration also. Accordingly, respectfully following the said decision of the coordinate bench we hold that no disallowance u/s. 40(a)(i) can be made towards dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smt Priyanka Chopra was a capital asset; yet it was a benefit to her arising from her profession. 4.6.1 In the case of Servall Engineering Works, the Chennai bench of Hon'ble ITAT held that where assessee could not furnish any details regarding so-called advance said to be received from various parties against supplies made to them nor could produce any material regarding expenditure incurred in executing any such order, addition was to be made. In the instant case, the assessee failed to furnish relevant material/documents to demonstrate the actual nature of assets received free of cost. 4.7 Consequently, the goods received free of cost from clients (who are also Associated Enterprises) are being adjudged as benefit arising from business and added u/s. 28(iv) of IT Act. 10. On further appeal the CIT(A) upheld the addition made by the AO by holding that: - 17.1 Having considered the submissions, and on perusal of the details filed, it is noted that various computer hardware assets have been received free of cost during the Financial Year 2014-15. Though it was claimed that the assets have been received on free of cost basis from its AEs, the Appellant failed to submit any docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Assessee and if there is no perquisite arising to the Assessee, the provisions of Section 28(iv) of the Act cannot be invoked. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon'ble Tribunal in the case of David Dhawan v. Deputy Commissioner of Income-tax (Reported in [2005] 2 SOT 311 (Mum.)) (para 9 at pages 4-5) . It is submitted that there is no perquisite arising to the Assessee from the AEs providing the equipments. (iii) It is undisputed that the Assessee is a captive service provider and the only customers of the Assessee are its AEs (please see pages 2-3 of the assessment order). That being the case, there can be no allegation of the Assessee benefitting from the equipments by utilizing it in its business otherwise. (iv) Moreover, it is submitted that the Assessing Officer has not specifically pointed out as to what benefit is being derived by the Assessee. In para 4.4 of the order, the Assessing Officer has only made out a vague allegation that the purpose of giving the assets free of cost is for the Assessee to avoid income tax/customs cost, which is wholly erroneous and baseless. The equipments being brought in for rendering se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents demonstrating the same. (x) Further reliance is placed on the Circular No. 12/2022 dated 16.02.2022 issued by the Central Board of Direct Taxes, providing guidelines for removal of difficulties under Section 194R(2) of the Act. In the context of whether tax at source under Section 194R is required to be deducted (i.e., on benefit / perquisite arising to an assessee) in a case where a product of a manufacturing company is given to a social media influencer for promotion of the product on social media, the CBDT has inter alia clarified that if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act. 12. The ld DR on other hand vehemently argued that the assessee has derived indirect benefit from the import of assets free of cost and hence the provisions of section 28(iv) would get attracted. The ld DR further submitted that considering that the assessee is billing the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of income is arising from business the same shall be taxable under the head profits and gains from business or profession. Therefore the limited question before us is whether import of assets free of cost for testing purposes is a benefit in the nature of income arising from the business of software development to the assessee. It is relevant to note here the following observations of the Mumbai Bench of the Tribunal in the case of Helios Food Improvers (P.) Ltd. vs DCIT (ITA No.1748/Mum/2003 dated 28.02.2007 16. ****** Further, the words benefit or perquisite have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term perquisite denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word benefit has also to be interpreted in the same manner i.e. at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit in the nature of income to the assessee, it is relevant to check if the impugned transaction would have otherwise resulted in a benefit in the nature of income to the assessee. The assessee is in the business of providing software development services to its AEs only. The arm's length pricing of the said services have already been tested by the TPO and the dispute on the pricing is resolved through MAP with the competent authorities of India and Korea wherein the cost of indirect benefits received by the assessee should have been embedded while arriving at the margin. Therefore it cannot be alleged that the price charged towards the software development services is reduced/adjusted by the assessee against the benefit of assets imported free of cost to justify addition under section 28(iv) and that the revenue has not brought anything on record to substantiate such a contention. Even assuming that there is nexus between the price charged towards rendering of services and import of assets free of cost the addition in our view could be done through a TP adjustment towards price charged for software development and in assessee's case the price is already agreed under MAP. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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