ACIT, CHENNAI vs. M/S. PENTASOFT TECHNOLOGIES LTD., CHENNAI

3.2 The ld.Sr.DR/Dr.S.Palanikumar, for the Revenue, on the other hand, supporting the order of the Ld.CIT(A) submitted that this issue is covered against the assessee by the decision of the ITAT Chennai Benches, in assessee’s own case, for the AY 1996-97 in & 1598/Mds/2008, wherein, the Tribunal after considering the nature of receipt, held that income from sale of course material, is assessable under the head ‘income from other sources’.

3.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee is in the business of software development & services and derived income from export of software and services from Software Technology Park Units (in short “STP Units"). The assessee also derived income from training and related course materials. The assessee had declared income from course & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 4 :: material under the head ‘other income’ in the P & L A/c. Further, from the details filed by the assessee, it is undoubtedly clear that income from course material, is not at all related to the business of export of software products & services. Therefore, we are of the considered view that there is no error in the reasons given by the AO and the Ld.CIT(A) to assess income from course material under the head ‘income from other sources’, because, it is nothing to do with main business activity of the assessee i.e. export of software products & services from STP Units and thus, we confirm the action of the AO in assessing income from course material under the head ‘income from other sources’ and also denial of deduction u/s.10A of the Act. Further, this issue is also covered against the assessee by the decision of ITAT Chennai Benches, in the assessee’s own case, for the AY 1996-97 in & 1598/Mds/2008, where the Tribunal after considering relevant facts has rightly held that income derived from training fee and related course material, is not entitled for deduction u/s.10B of the Act. Therefore, consistent with view taken by the co-ordinate bench, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the assessee. As regards alternate claim of the assessee, the AO is directed to verify the claim and if found correct, the assessed net income under the head ‘income from other sources’.

‘income from other sources’. The AO has assessed rental income under the head ‘income from other sources’ on the ground that said income is not in the nature of profits & gains derived from export unit and thus, denied deduction claimed u/s.10A of the Act. The Ld.CIT(A) assessed rental income under the head ‘income from business’ and also allowed consequent expenses like depreciation on building, rates & taxes, insurance, and repairs & maintenance. However, affirmed the findings of the AO in not allowing deduction u/s.10A of the Act.

4.1 The Ld.Counsel for the assessee submitted that rental income derived by the assessee is assessable under the head ‘income from house property’ as held by the jurisdictional Hon’ble High Court of Madras in the case of Indian Overseas Bank Ltd. v. CIT reported in 246 ITR 206, 208 (Mad).

Therefore, the Ld.CIT(A) is erred in not deciding the issue in light of above decision.

4.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that there is no clarity on income derived by the assessee, whether it is from leasing of land & building or any other equipment.

Therefore, the AO has rightly assessed said receipt under the head ‘income from other sources’ and their orders should be upheld. & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 6 ::

4.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. It is an admitted fact that the assessee has declared rental income under other income in the P & L A/c. Further, there is no details as regards whether rental income is derived from leasing of land & building or any plant & machinery or equipment. Further, even in the assessment order there is no details about nature of rental receipt. Although, the Ld.CIT(A) directed the AO to assess rental receipt under the head ‘income from business & profession’ and also allow consequent expenses, but there is no discussion on nature of rent received by the assessee. Therefore, we are of the considered view that the issue needs to be set aside to the file of the AO for further verification.

In case, the assessee derived rental income from lease of land & building, then definitely said income is assessable under the head ‘income from house property’ and consequent action needs to be followed. But, in case, rental income is derived from lease of plant & machinery or equipment, then same needs to be assessed under the head ‘income from other sources’ and consequent action needs to be followed. Further, if at all the assessee is in the business of letting out properties or plant & machinery, then same needs to be assessed under the head ‘income from business or profession’ as considered by the Ld.CIT(A) and consequent action needs to be followed like allowing expenses relatable to said income. Since, facts are not clear, we set aside the issue to the file of the AO and direct the AO to re-consider the issue in light of our discussion given hereinabove and decide the issue in accordance with law. & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 7 ::

5.1 The Ld.Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Hon’ble Madras High Court in the case of Pentasoft Technology Ltd. v. DCIT reported in [2014] 264 CTR 0187 (Mad), where the Hon’ble Madras High Court allowed depreciation on non-compete fee as an intangible asset in terms of sec.32(1) of the Act.

5.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that non-compete fee is not an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act. However, fairly agreed that the issue is covered in favour of the assessee by the decision of the Hon’ble Madras High Court. & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 8 ::

5.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Depreciation on non-compete fee whether it is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act, is no longer res integra. The Ld.CIT(A) allowed depreciation on non-compete fee by following the decision of ITAT in the assessee’s own case for the AYs 2001-02 & 2002-03, where the Tribunal held that non-compete fee is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act. The matter reached to the Hon’ble Madras High Court and the jurisdictional High Court of Madras had considered an identical issue in the case of Pentasoft Technology Ltd. (supra) and held that non-compete fee is in the nature of intangible asset in terms of sec. u/s.32(1)(ii) of the Act, and would be a capital asset entitled for depreciation. The relevant findings of the Hon’ble Madras High Court are as under:

that may be developed by them in future. The other rights owned by PMGL with regard to the development and training also stood approval under the said agreement. Further in the agreement, the assessee had agreed that the consideration for transfer of the Intellectual property and agreeing to non-compete shall be Rs.544.21 crores. It is to be pointed out that in the agreement there was no break-up details given as to how much of the above amount is allocable towards the transfer of IPR and how much towards non-compete fee. Nevertheless, such details has been furnished by the assessee before the Authorities below. The Assessing Officer, after taking note of the opinion of the Chartered Accountant of the assessee held that the opinion was not based on any scientific valuation and it is not a proper professional approach and accordingly, the capitalization of the goodwill, i.e. Intellectual Property Rights and non-compete fee was rejected and the claim for depreciation was disallowed.

13. The First Appellate Authority, on appeal by the assessee against the said finding of the Assessing Officer, observed that the assessee has not only acquired trade mark but also licence to sell 25 different types of products acquired from PMGL, which it had sold to India and abroad after acquisition i.e. on 1.4.1999 and that the assessee also acquired commercial right to conduct training programmes with the use of trade mark ‘pentasoft’ and engaged in software development and export in the line of various software products acquired from PMGL exclusively. Further it took note of the fact that PMGL has been restrained to engage in the two activities by virtue of the non-competition agreement between them for which the assessee paid Rs.180 crores to PMGL. Therefore, after taking note of the AS26 issued by ICAI, that IPRs and non-compete fee are classifiable as intangible assets as in the assessees case it satisfies the criteria, viz., it was identifiable; it was controllable and economic benefits flowed out to the enterprise. Since the three criteria were satisfied and the assets were unconditionally transferred by PMGL, the First Appellate Authority held that the assessee had acquired absolute rights to enjoy, utilize and exploit such exclusive rights.

14. After referring to the decision of the Hon’ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh reported in 271 ITR 401 (SC), the First Appellate Authority held that the assessee has acquired trademarks and licence to use the trade mark ‘pentasoft’ exclusively and also to carry on business and software development export and training by restraining PMGL from carrying out the same activities. Hence, such trade mark licence and the commercial rights acquired by payment of non-compete fee are intangible assets entitled to depreciation under Section 32(1)(ii) of the Act.

32(1)(ii) of the Act, it would first be relevant to refer to the said provision, which reads as under:

"Depreciation: 32(1) [in respect of depreciation of (i)...........

(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed -] Therefore, in terms of the above provision, deduction is allowable in respect of depreciation of patents, copy rights, trade marks, licence, franchise, etc or any other business or commercial rights of similar nature. There is no difficulty insofar as the trade mark and copy rights, which have been transferred in favour of the assessee.

........."that the right of nomination is conferred on the member of the exchange; that, the said right shall cease and vest in the exchange when his membership gets forfeited to the exchange; that on such forfeiture the right of membership gets vested in the exchange and on such vesting the exchange has the right to deal with & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 11 :: it as it may think fit. That, on forfeiture even the right of nomination vests in the exchange. Thus, a non-defaulting continuing member owns the right of nomination with respect to the membership of the exchange till his right of membership is forfeited to the exchange."

However, the Hon’ble Supreme Court observed that the right of membership including the right of nomination gets vested in the exchange on the demise/default committed by the member; that on such forfeiture and vesting in the exchange, the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/defaulting member to the exchange or clearing house.

5.4 In this view of the matter and by respectfully following the decision of the jurisdictional High Court of Madras in Pentasoft Technology Ltd. (supra), we are of the considered view that the assessee is entitled for depreciation on non-compete fee and thus, we direct the AO to allow depreciation on non-compete fee as claimed by the assessee.

exchange fluctuation loss from export turnover but not from total turnover.

The AO while re-computing deduction u/s.10A of the Act, excluded expenditure incurred towards software development expenses as per Explanation (2) to sec.10A of the Act, and exchange fluctuation loss, but does not exclude same from total turnover.

7.1 The Ld.Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. v. CIT reported in 165 DTR 305 (SC), where it has been held that expenses deducted from export turnover also needs to be deducted from the total turnover.

7.2 The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that as per law, export turnover and total turnover has been defined and further, while computing deduction u/s.10A/10B of the Act, expenses incurred in foreign currency needs to be excluded from export turnover. However, same need not be excluded from total turnover. But, he fairly agreed that the issue is covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra).

7.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The issue of computation of deduction u/s.10A of the Act, in light of definition of export turnover and total turnover, has been resolved by the Hon’ble Supreme & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 13 ::

Court in the case of HCL Technologies Ltd., where it was held that expenses deducted from export turnover needs to be deducted from total turnover.

Therefore, we are of the considered view that the AO & the Ld.CIT(A) is erred in not excluded expenses deducted from export turnover from total turnover and thus, we direct the AO to exclude expenditure incurred towards software development and foreign exchange loss from total turnover also.

8.1 The Ld.DR, on the other hand, supporting the order of the AO, submitted that the issue is covered in favour of the assessee by the decision of ITAT in the assessee’s own case for the earlier assessment years.

8.2 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in the assessee’s own case for the AY 2002-03 in where the Tribunal after considering relevant facts held that IPR is eligible for depreciation u/s.32(1)(i) of the Act. Therefore, consistent with view taken by the co- & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 14 :: ordinate Bench, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to delete additions made towards disallowance of depreciation on IPR and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.

The Ld.CIT(A) by following the decision of CIT v. Southern Roadways Ltd. reported in 288 ITR 15, allowed relief and held that expenditure incurred for purchase of software is Revenue in nature.

9.1 The Ld.Counsel for the assessee submitted that the assessee has incurred expenditure for accreditation of software for improving the efficiency of existing system with a view to keep business pace with latest technology. Therefore, the same does not give any enduring benefit to the assessee and thus, cannot be considered as capital expenditure.

9.2 The Ld.DR, supporting the order of the AO, submitted that expenditure incurred by the assessee for purchase of software is capital in nature, because it gives enduring benefit and thus, the Ld.CIT(A) is erred in deleting additions made towards capital expenditure. & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 15 ::

9.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Although, the assessee has purchased software to replace with existing software in a computer system, but same does not give any enduring benefit, because the life of software is very short. Therefore, the same cannot be considered as capital in nature. We find that the jurisdictional high Court of Madras in the case of Southern Roadways Ltd., (supra) has considered an identical issue and held that there is an enduring benefit, it does not result in acquisition of any capital asset and merely enhanced the productivity or efficiency of the system and thus, it cannot be considered as capital in nature. The Ld.CIT(A) after considering relevant facts and also by following the decision in the case of Southern Roadways Ltd., (supra) has rightly deleted the additions made by the AO and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.

10.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Admittedly, the assessee could not file any evidences including confirmations from the party before the AO to justify credit in the name of M/s.Penta Media Graphics Ltd. Before the Ld.CIT(A), the assessee claims to have filed reconciliation along with ledger account of M/s.Penta Media Graphics Ltd., in the books of accounts of the assessee and vice-versa. The assessee further claimed that it has reconciled difference between ledger account of M/s.Penta Media Graphics Ltd., in their books of accounts with creditors books and explained the difference of Rs.3 lakhs. The Ld.CIT(A) after considering relevant facts deleted the additions made by the AO. We find that although, the assessee has filed reconciliation and further evidences first time before the Ld.CIT(A), the Ld.CIT(A) has allowed relief to the assessee without confronting those evidences to the AO for his rebuttal. No doubt, the assessee has filed details of ledger account along with confirmation from the party and explained the credit. But, the Ld.CIT(A) should have confronted those evidences to the AO for his comments before allowing the relief to the assessee. Therefore, we are of the considered view that the issue needs to go back to the file of the AO to verify additional evidences filed by the assessee including confirmations from the party and reconciliation of difference between the ledger account of party in the books of accounts of the assessee and in the books of creditors. In case, the assessee is able to explain credit with necessary evidences, then the AO is & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 17 :: directed to delete additions made towards credits in the name of M/s.Penta

11. The next issue that came up for our consideration from Ground No.5 of the Revenue’s appeal is additions towards credits in respect of M/s.RS & Co. Inc. and M/s.Pentafour Software Solution Inc. The AO has made additions towards creditors in absence of confirmation form the party. The Ld.CIT(A) deleted the additions made by the AO on the basis of subsequent payment made by the assessee to the creditors.

11.1 We have heard both the parties, and perused the materials available on record and we find that the assessee has filed details of ledger account along with payment to creditors in subsequent FY before the Ld.CIT(A) and the Ld.CIT(A) has forwarded additional evidences filed by the assessee to the AO and the AO could not rebut the details filed by the assessee in the Remand Report, except saying that letter sent have not been served or replied by the parties. We find that confirmation of settlement of credit subsequently from creditors were already produced before the Ld.CIT(A).

Notices by the AO being returned/unserved cannot be the reason to hold the credit, is not genuine. Creditors are carried over from FY 2001-02 and are not credits/appearing for the first time during the year. Therefore, we are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to delete the additions towards credits in the name of M/s.RS & Co. Inc. and M/s.Pentafour Software Solution Inc., and thus, we are & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 18 :: inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.

12. The next issue that came up for our consideration from Ground No.6 of the Revenue’s appeal is allocation of disallowance of expenses among STP Units and non-STP Units in the ratio of 90% and 10% on the basis of income of the assessee. The AO has disallowed certain liabilities amounting to Rs.6,64,02,188/- u/s.43B of the Act, as per Tax Audit Report and allocated said disallowances to STP Units and non-STP Units on the basis of income derived by the assessee. The Ld.CIT(A) directed the AO to allocate sec.43B disallowance in the ratio of 90% under STP Units and 10% under non-STP units on the basis of turnover of STP Units & non-STP Units.

12.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO has allocated disallowance of certain liabilities u/s.43B of the Act, to STP Units & non-STP Units, on the basis of income, whereas, the Ld.CIT(A) has directed the AO to allocate said disallowance on the basis of export turnover and domestic turnover. The short dispute between the assessee and the Revenue on allocation of disallowance on said expenses is whether it should be on the basis of income or turnover. In our considered view, turnover would be the appropriate ratio for allocation of expenses to STP Units & non-STP Units instead of income. Because, income of STP Units & non-STP Units may depend upon various factors including fixed overhead expenses and other parameters. Therefore, we are of the considered view that there & 449/Chny/2011 M/s.Pentasoft Technologies Ltd. :: 19 :: is no error in the reasons given by the Ld.CIT(A) to allocate disallowance of expenses u/s.43B of the Act, to STP Units & non-STP Units on the basis of export turnover and domestic turnover and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.

Order pronounced on the 11th day of November, 2022, in Chennai.