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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI A. K. GARODIA & SHRI VIJAY PAL RAO
This appeal by the assessee is directed against the order dated 01.03.2016 of CIT(A) for the assessment year 2010-11. The assessee has raised the following grounds:
“1. The order of the learned CIT(A) in so far as sustaining the order of the AO in respect of disallowance of depreciation of Rs. 10,35,657 on computer software is against law, facts of the case and weight of evidence. 2. The CIT(A) has erred in sustaining disallowance of depreciation of Rs.10,35,657 on the ground that amount paid to obtain computer software has been held by the jurisdictional High Court as in the nature of royalty and hence cannot be added to block of assets of computer.
The learned CIT(A) has erred in not following the decisions of the jurisdictional High Court in - CIT vs. Wipro Ltd and followed in Wipro Ltd vs. DCIT, Central Circle 1(3) reported in 236 Taxmann 209 and decisions of other High Courts which apply to the facts of the case that amounts paid for purchase of packaged software cannot be royalty.
4. The learned CIT(A) has erred in relying upon the decision of the jurisdictional High Court in Samsung Electronics Ltd (2011) 345 ITR 494 to hold that payment made to the software vendor as royalty, when the said case is not applicable to the facts of this case.
5. The learned CIT (A) erred in holding that appellant was obliged to deduct tax at source in the previous Year 2007-08 and 2008-09 on the payment made to the vendor for acquisition of license, increase in users and extension of license when such payment was held not to be royalty by the jurisdictional tribunal.
6. The learned CIT (A) erred in concluding that amount in the nature of royalty cannot be capitalised.
The CIT (A) has erred in including professional fees of Rs. 7,17,744 for implementation, interest paid to bank and other expenses connected with implementation Rs. 5,81,618 capitalised under software of Rs. 34,52,190 as royalty to be disallowed by the AO.
The appellant be permitted to adduce further evidence at the time of hearing.”
The only issue raised in the appeal of the assessee is regarding disallowance of depreciation made by the AO by invoking of section 40(a)(ia) in respect of ERP system software purchased by the assessee and capitalized the same. The assessee has incurred an expenditure of Rs.34,52,190/- on ERP system. The license of the software named as “Navision” is owned by Microsoft Corporation. This total expenditure of Rs.34,52,190/- comprising of a sum of Rs.21,52,826/- towards the cost of license and the balance amount was towards the cost of extension of license for three years as well as for implementation expenditure incurred by the assessee was capitalized and claimed depreciation. The AO held that this payment made by the assessee is in the nature of royalty as per explanation 2 to section 9(i)(vi) of the Income Tax Act. Since the assessee has not deducted tax at source on this amount, therefore the AO disallowed the claim of depreciation by invoking the provisions of section 40(i)(a) of the Act. The assessee challenged the action of the AO before the CIT(A) but could not succeed.
3. Before us, the learned AR of the assessee has submitted that once the assessee has capitalized this expenditure and claimed only depreciation under section 32 of the Act, then the provisions of section 40(a)(ia) cannot be invoked for disallowance of the claim of depreciation. He has relied upon the decision dated 26.06.2015 in the case of M/s. Kavasaki Microelectronics Inc., DDIT (International Taxation) in IT(TP) A No. 1512/2010. On the hand, the learned DR relied upon the orders of the authorities below.
Having considered the rival submissions as well as relevant material on record, at the outset we note that an identical issue has been considered and decided by the coordinate bench of this Tribunal in the case of M/s. Kavasaki Microelectronics Inc., (supra) in para 6 to 8 as under:
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 assessee i n the block of computer asset. Once the assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation which is a statutory deduction as per the section 32 of the Act can be disallowed by invoking the provisions of section 40(a)(i) of the Act. At the outset, it is to be noted that on the similar set of facts anidentical issue has been dealt by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under :- “ 16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)(ii); therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(a)(i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand 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, the amount of interest, royalty, fee for technical services and other sum shall not be deducted in computing the income chargeable under the head "profits & gains of business or profession". This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with non-obstante clause; therefore, it is an overriding effect t the provisions of sec. 30 to 38 of the I T Act. The question arises is whether any amount paid outside India or to the Non Resident without deduction of tax at source and the assessee has capitalized the same in the fixed assets and claimed only depreciation is subjected to the provisions of sec. 40(a)(i) or not ?. We quote the provisions of sec. 40(a)(i) as under:
Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— in the case of any assessee— [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other 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 sub-section (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, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure.
16.3 The deduction u/s 32 is 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 deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of sec. 40(a)(i) of the Act are not attracted on such deduction. This view has been fortified by the decision of the Hon'ble Punjab & Haryana High Court in the case of Mark Auto Industries Ltd.(supra) in pars 5 & 6 as under:
"5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act 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 Rs.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 he 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 that the expenditure by way of technical know-how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed."
6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee."
16.4 In view of the above discussion as well as following the decision of the Hon'ble Punjab & Haryana High Court, we decide this issue in favour of the assessee and against the revenue.”
7. As it is clear from the above decision that the Tribunal has discussed and analysed the provisions of section 40(a)(i) in detail in the context of disallowance of depreciation. The learned D.R. has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) are applicable for disallowance of depreciation on such capitalized expenditure. We do not agree with the contention of the learned D.R, because a remedy for violation of provisions of section 195 is available with the Assessing Officer under Section 201 & 201A of the Act. The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter XVIIB of the Act, by disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under Section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB of the Act, 1961. In the case on hand, when the assessee has not claimed, the said payment as an expenditure then the question of disallowance 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 12 IT(I.T)A No.1512/Bang/2010 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”.
8. Therefore, in the facts and circumstances of the case as well as by following the decisions of the co-ordinate benches of the ITAT, we are of the opinion that once the assessee has capitalized the payment in question though the assessee has not deducted the tax at source on such payment, Section 40(a)(i) cannot be invoked for disallowance of depreciation. Accordingly, we set aside the orders of the authorities below and the addition made by the Assessing Officer is deleted.
Following the earlier orders of this Tribunal, we are of the considered opinion that once the assessee has capitalized the payment in question, then even the assessee has not deducted tax at source on such payment, the provisions of section 40(ia) cannot be invoked for disallowance of the claim of depreciation. Accordingly, we set aside the orders of the authorities below and allow the claim of the assessee.
In the result, the appeal of the assessee is allowed.
Pronounced in the open court on this 13th day of April, 2017.