THE COMMISSIONER OF INCOME-TAX vs. M/S MIND TREE LTD

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ITA/251/2013HC KarnatakaKAHC01020839201325 August 2020Bench: ALOK ARADHE,H.T. NARENDRA PRASAD9 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that expenditure in foreign currency reduced from export turnover must also be reduced from total turnover for Section 10B deduction. It further held that brought forward losses and unabsorbed depreciation cannot be set off against profits for Section 10B computation. The expenditure on software was held to be revenue expenditure.

What were the facts?

The assessee, engaged in software development, claimed deduction under Section 10B. The Assessing Officer recomputed the deduction by excluding foreign exchange expenditure from export turnover and setting off brought forward losses. The Commissioner (Appeals) and ITAT partly allowed the assessee's appeal, treating software expenditure as revenue. The revenue appealed to the High Court.

What were the issues?

The key issues were the correct computation of deduction under Section 10B, specifically regarding the reduction of foreign exchange expenditure from turnover and the set-off of brought forward losses/depreciation. Another issue was whether software acquisition expenditure was capital or revenue.

Which sections of the Income-tax Act were involved?

Section 10B

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 25TH DAY OF AUGUST 2020

PRESENT

THE HON’BLE MR. JUSTICE ALOK ARADHE

AND

THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD

I.T.A. NO.251 OF 2013 BETWEEN:

1.

THE COMMISSIONER OF INCOME-TAX

C.R. BUILDING, QUEENS ROAD

BANGALORE.

2.

THE ASST. COMMISSIONER OF INCOME-TAX

CIRCLE-12(1), RASHTROTHANA BHAVAN

NRUPATHUNGA ROAD

BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,)

AND:

M/S. MIND TREE LTD., (FORMERLY MIND TREE CONSULTING PRIVATE LTD.,) GLOBAL VILLAGE, RVCE POST MYLASANDRA, MYSORE ROAD BANGALORE. ... RESPONDENT (BY SRI. CHYTHANYA K.K. ADV.) - - -

THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 11.01.2013 PASSED IN ITA NO.407/BANG/2012 FOR THE ASSESSMENT YEAR 2007-08, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO:

(I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (I) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT, BANGALORE IN ITA NO.407/BANG/2012 DATED 11-01-2013 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE.

THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:

JUDGMENT

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court vide order dated 03.07.2013 on the following substantial question of law: (i) Whether the appellate authorities were correct in holding that he expenditure incurred in foreign currency reduced from export turnover has to be reduced from

total turnover for computing deduction under Section 10B of the Act in the absence of any provisions in Section 10B of the Act which requires the concerned expenses to be reduced from total turnover also?

(ii) Whether the Tribunal was correct in holding that the deduction under Section 10B of the Act, is to be computed without setting off of brought forward business loss and unabsorbed depreciation without taking into consideration the amendment to Section 10B91) w.e.f. 01.04.2001 and recorded perverse finding?

(iii) Whether the Tribunal was correct in holding that the expenditure incurred towards acquisition of software is only a right to use for a limited period and no property or right of permanent character is being acquired and hence expenditure incurred is capital in nature, without taking into consideration that by acquiring licence the assessee has a benefit of enduring nature for number of years and the same constitutes tool in the trade and liable to be

treated as capital asset and consequential depreciation is allowable?

2.

Facts leading to filing of this appeal briefly stated are that assessee is engaged in the business of software development and consultancy services. The assessee filed the return of income for the Assessment year 2007-08 claiming deduction under Section 10B of the Act. The Assessing Officer by an order dated 23.12.2009 recomputed the deduction by excluding expenditure in foreign exchange from export turnover and recomputed the deduction claimed under Section 10B of the Act by set off of brought forward losses and unabsorbed depreciation. It was further held that on purchase of software the assessee has acquired an asset and has an enduring benefit. Therefore, the same was treated as capital and depreciation was allowed. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) vide order dated

09.01.2012 inter alia held that expenditure in foreign exchange reduced from export turnover has to be reduced from total turnover and unabsorbed depreciation and brought forward losses cannot be set off while computing deduction under Section 10B of the Act. It was further held that expenditure on software is revenue expenditure. Accordingly, the appeal preferred by the assessee was partly allowed. Being aggrieved, the assessee as well as revenue filed an appeal before Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’, for short). The Tribunal by an order dated 11.01.2013 inter alia held that expenditure in foreign exchange reduced from export turnover has to be reduced from total turnover also. The Tribunal also held that brought forward losses and unabsorbed depreciation cannot be set off against the profits for computing deduction under Section 10B of the Act. It was also held that the assessee has incurred expenditure only towards acquiring the right to use the

software for a limited period and no property of right of permanent character is being acquired and the same was allowed as revenue expenditure. Being aggrieved, the revenue is in appeal before us.

3.

At the outset, learned counsel for the revenue fairly submitted that first substantial question of law has been answered against the revenue in ‘COMMISSIONER OF INCOME-TAX VS. HCL TECHNOLOGIES LTD.’, (2018) 404 ITR 719 (SC), whereas the second substantial question of law has also been answered against the revenue by Supreme Court in ‘COMMISSIONER OF INCOME-TAX VS. YOKOGAWA INDIA LTD.’, (2017) 391 ITR 274 (SC). However, with reference to third substantial question of law, it is submitted that neither the Commissioner of Income Tax (Appeals) nor the Tribunal has recorded a finding that the expenditure was incurred for application of software and not system software. Therefore, the matter deserves to be remitted.

However, it was fairly submitted that in case, the expenses are incurred for application of software, the third substantial question of law is also answered against the revenue by a division bench of this court in ‘COMMISSIONER OF INCOME-TAX, BANGALORE VS. ROBERT BOSCH INDIA LTD.’, (2014) 50 TAXMANN.COM 275(KARNATAKA).

4.

On the other hand, learned counsel for the assessee while inviting the attention of this court to para 6.3 of the order passed by the Commissioner of Income Tax (Appeals) has submitted that the Commissioner of Income Tax (Appeals) has recorded a finding that the software purchased is in the nature of application software, the licences for which enable the holder to exercise the right to use the software. In view of the aforesaid finding, the third substantial question of law also deserves to be answered against the revenue.

5.

We have considered the submissions made by learned counsel on both the sides and have perused the record. In para 6.3 of the order dated 09.01.2012 passed by the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax (Appeals) has recorded a finding that the software purchased is in the nature of application software, the licences for which enable the holder to exercise the right to use the software. In view of the aforesaid finding of fact recorded by the Commissioner of Income Tax (Appeals), it is not necessary to remit the matter. The substantial questions of law framed in this appeal are no longer res integra. In view of decisions of the Supreme Court in Hcl Technologies Ltd. and Yokogawa India Ltd. supra as well as in view of decision of this court in Robert Bosch India Ltd., the substantial questions of law framed in this appeal are answered against the revenue and in favour of the assessee.

In the result, we do not find any merit in this appeal. The same fails and is hereby dismissed.

Sd/- JUDGE

Sd/- JUDGE ss

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