M/S. SAMSUNG R & D INSTITUTE INDIA BANGALORE PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME- TAX, CIRCLE - 6(1)(1), BANGALORE

The Ld.AR submitted that pursuant to the MAP entered into between the competent authorities of India and Korea with respect to the transfer pricing adjustment made in the hands of assessee, the transfer pricing issues contested in the respective grounds for the years under consideration as tabulated hereinabove, in the assessee’s appeal stands withdrawn. The Page 4 ITA/IT(TP)A Nos. 1008, 1092, 1166, 484, 958, 1045, 1046 & 978/Bang/2019 assessee accordingly filed revised grounds of appeal pursuant to the MAP proceedings having culminated. Accordingly, the respective grounds mentioned hereinabove becomes infructuous in both assessee’s as well as departmental appeals. Accordingly, ground no. 2 in assessee’s appeal for all years under consideration; Ground nos. 2-4 for A.Y. 2011-12, ground no. 2 for A.Ys. 2012-13 & 2013-14; and Ground nos. 2-10 for A.Y. 2014-15 in revenue’s appeal stands dismissed as infructuous. The only issue that remains to be adjudicated is regarding the disallowance of depreciation claimed on purchases of software u/s. 40(a)(i) / (ia) of the act.

Brief facts of the case leading to this issue are as under: 4.1 Assessee purchased certain software from resident and non- resident vendors during the years under consideration amounting to Rs.4,45,30,207/- that was capitalised in the books of accounts and depreciation at 60% was claimed u/s. 32 of the act. During the course of the assessment proceedings, the Ld.AO disallowed the depreciation of software by invoking the provisions of section 40(a)(i)/(ia) of the act for non-deduction of tax at source. The Ld.AO was of the opinion that the software purchased by the assessee were copyrights and therefore the payments were in the nature of royalty.

At the outset, the Ld.AR submitted that, the issue stands squarely covered in favour of the assessee by the decision of Hon’ble Jurisdictional High Court in case of PCIT vs. Tally Solutions Pvt. Ltd. reported in (2021) 123 taxmann.com 21.

The Ld.AR submitted that assessee is engaged in the business of development and sale of software project licenses, software maintenance as the profile of the assessee in the TP study captures itself to be a captive service provider and all the research and development carried out by the assessee are owned by the AE. The Ld.AR submitted that assessee had purchased software which was a “copyrighted article”, and therefore it was not liable to deduct TDS. She submitted that the Ld.CIT(A) categorically recorded in para 4.11.2 that identical payments made by assessee during Assessment Year 2009-10 was allowed by the first appellate authority by relying on the decisions of this Tribunal in case of SKOL Breweries Ltd. vs. ACIT reported in (2013) 29 taxmann.com 111, SMS Demag Pvt. Ltd. vs. DCIT reported in (2010) 38 SOT 496 and held that provisions of section 40(a)(i)/(ia) referred to outgoing expenditure and not capital expenditure and hence depreciation cannot be disallowed.

We have perused the submissions advanced by both sides in the light of records placed before us.

Admittedly, assessee purchased software from residents as well as non residents on which TDS was not effectuated. The assessee capitalised the cost and depreciation was claimed @60%. The Ld.AO proceeded to disallow the depreciation claimed by the assessee u/s.40(a)(i)/(ia) of the act by holding that, the payment made was towards the ‘use of copyright’ and therefore, is taxable as royalty under section 9(1)(vi) of the act. It is an admitted fact that the assessee capitalised the software purchased and the expenditure was not claimed as revenue by the assessee in its books of account. Therefore, principally the depreciation could not be disallowed by invoking the provisions of section 40(a)(i)/(ia) of the act. Section 40(a)(i)/(ia) of the act deals

On preferring appeal before the Ld.CIT(A), the first appellate authority relied on the decision of Hon’ble Karnataka High Court

We also note that the Ld.CIT(A) relied on the decision of Hon’ble Karnataka High Court in case of CIT vs.IBM reported in (2014) 43 taxmann.com 470. We have perused the said decision and note that the facts of IBM are distinguishable. The Hon’ble Court was dealing with an issue wherein the revenue had challenged the view taken by Tribunal that amount utilised by IBM towards software projects are revenue expenditure. Hon’ble High Court upheld Tribunal’s view, and has been reproduced by the Ld.CIT(A). In our opinion the decision of IBM does not have even an iota of similarity on the issue under consideration with respect to the present appeals.

In the present facts of the case the assessee capitalised the software as asset in the block of asset, it is eligible to claim

Now 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. The provisions of sec. 40(a)(i) reads as under: “40. 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",— (a) 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,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company,

On the contrary, 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.

The above view was expressed by Hon’ble Mumbai Tribunal in case of SKOL Breweries Ltd. Vs. ACIT reported in (2013) 29 taxmann.com 111.

Hon'ble Karnataka High Court while determining identical issue in case of PCIT vs. Tally Solutions Pvt. Ltd. (supra) has analysed this aspect in great detail as under: “10. Thus, from close scrutiny of Section 40(a)(i) of the Act, it is axiomatic 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 Page 13 ITA/IT(TP)A Nos. 1008, 1092, 1166, 484, 958, 1045, 1046 & 978/Bang/2019 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 At and subject to TDS under Chapter XVII-B. The deduction under Section 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 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 assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore, the provision of Section 40(a)(ia) of the Act is not attracted in respect of a claim for depreciation. The aforesaid finding has rightly been affirmed by the tribunal. The findings recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal cannot be termed as perverse. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered against the revenue and in favour of the assessee.”

We note that identical is the situation in the present case of assessee, wherein, provisions of section 9(1)(vi) Explanation 2 was invoked in respect of the payment made towards purchase of Page 14 ITA/IT(TP)A Nos. 1008, 1092, 1166, 484, 958, 1045, 1046 & 978/Bang/2019 software that was capitalised on which depreciation u/s. 32 was claimed.

We therefore note that the objections of the Ld.DR that the facts in case of PCIT vs. Tally Solutions Pvt. Ltd. (supra) is distinguishable and stands rejected.

Coming to the argument of the Ld.DR that the nature of software purchased by the assessee needs to be analysed. We note that on this issue, Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT reported in (2021) 125 taxmann.com 42 wherein Hon’ble Court in para 100 held as under: “100. Also, any ruling on the more expansive language contained in the explanations to Section 9(1)(vi) of the Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA. Further, the expression "copyright" has to be understood in the context of the statute which deals with it, it being accepted that municipal laws which apply in the Contracting States must be applied unless there is any repugnancy to the terms of the DTAA.”

We shall also refer to section 90(2) of the Act that reads as under: “90(2) where the Central Government has entered into an Agreement with the Government of any other country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation then in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee.”

In respect of the depreciation claimed on server / network equipment, both assessee as well as revenue are in appeal. The relevant grounds of assessee and revenue have been indicated in the table reproduced hereinabove.

The Ld.AR submitted that assessee is eligible for higher claim for depreciation on server / network equipment, as they form integral part of the computer. The Ld.AR submitted that in assessee’s own case for A.Y. 2009-10, this Tribunal has allowed the claim in respect of depreciation on server / network equipment by following the decisions of Hon’ble Madras High Court in case of Dinamalar vs. CIT reported in (2016) 74 taxmann.com 14 and the decision of Hon’ble Hyderabad Tribunal in case of ACIT vs. Ushodaya Enterprises Ltd. reported in (2013) 33 taxmann.com 381.

We note that identical issue has been considered in assessee’s own case for A.Y. 2009-10 wherein by following decision of Hon’ble Madras High Court in case of Dinamalar vs. CIT (supra), this Tribunal has allowed the claim of assessee by granting the depreciation on peripherals at 60%. Nothing contrary to the above has been brought on record by the Ld. DR. Accordingly, the ground no. 5 for A.Y. 2011-12, ground no. 3 for A.Ys. 2012-13 to 2013-14 and ground no. 11 for A.Y. 2014-15 raised by revenue on this issue stands dismissed. In the result, the appeals filed by the assessee as per revised grounds stands allowed and the appeals filed by the revenue stands dismissed for the years under consideration. Order pronounced in the open court on 30th May, 2024.