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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
Per Asha Vijayaraghavan, Judicial Member
The appeal is by the Revenue and the Cross Objection is by the assessee directed against the order dated 28.03.2014 of the CIT(Appeals)-I, Bangalore relating to assessment year 2006-07.
The assessee is a public limited company engaged in outsourcing of business process and technology process. For the AY 2006-07, the assessee filed its return of income on 29/11/2006, declaring an income of Rs.2,21,60,408. The return was processed u/s 143(1) and the case was selected for scrutiny followed by issue of a notice u/s 143(2) on 15/10/2007 and duly served on the assessee. The AO had called for various details and, after considering those details, completed the assessment u/s 143(3) on 31/12/2008, arriving at the total income of Rs.8,44,77,662. While completing the assessment, the AO disallowed expenses as follows:-
Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(Appeals), who by order dated 13.10.2010 dismissed the assessee’s appeal ex parte for non-prosecution. On further appeal, the ITAT, Bangalore in ITA.No.1520 & 1521/Bang/2010 by order dated
CO No.92/Bang/2015 Page 3 of 15 6/9/2011 set aside the ex parte order of the CIT(A) and remitted the appeal back to the CIT(A) for fresh disposal on merits in accordance with law after providing adequate opportunity of being heard to the assessee.
The CIT(Appeals) passed the order dated 28.03.2014 discussing the following issues.
Disallowance of software expenses – Rs.6,41,60,974 5. The Assessing Officer observed that the assessee company has two STP units, one in Bangalore and the other at Pune, and provides business process management services to organisations that outsourced their business process. During the previous year relevant to the assessment year under consideration, the assessee had debited a sum of Rs.6,41,60,974 as software expenses to profit and loss account. During the course of assessment proceedings, the ld. AR for the assessee submitted that the computer software expenditure is revenue in nature and not capital in nature. However, according to’ the AO, the ld. AR could not explain that the computer software cannot be used beyond a period of one year. According to the AO, the computer software is akin to plant and machinery and the same is used to provide business process management services to its various customers. This issue has been discussed in the assessment for the assessment year 2003-04 and the cost of software was held to be capital in nature by the AO and, therefore, the software expenses amounting to Rs.6,41,60,974 was disallowed and brought to tax. However, depreciation on the same was allowed at 60%.
CO No.92/Bang/2015 Page 4 of 15
Before the CIT(Appeals), the assessee submitted that it secured a licence to use the software, which was available for a limited period; the licence was only renewable by payment of fees at pre-defined intervals; that the licence was for a period of one year; that it secured a limited right to use the software; that it was prohibited from modifying or duplicating the software or from decompiling or disassembling; and that it becomes obsolete within a short period of time due to fast changes taking place in the area of software development and cannot be used with efficacy thereafter.
The CIT(Appeals) observed that the AO disallowed software expenses of Rs..6,41,60,974 based on the reasons given in the assessment order for the assessment year 2003-04. In the assessment for the assessment year 2003-04, the AO has disallowed a sum of Rs.1,04,11,829 and the CIT(A) had upheld the same. In the second appeal, in ITA.No.1385/Bang/2010 dated 26/8/2011, the issue came back to the file of the AO with a direction from the Tribunal to look into the length of period of each software acquired during the assessment year in question with the observation as follows:-
“6. We have heard rival submissions and considered the facts of the case on record. It is true that the Hon’ble High Court of Karnataka has held that if the period of license for which the software is acquired is for a short period, the same is to be treated as revenue expenditure. The Special Bench (Delhi) of this Tribunal, in the case of Amway India Enterprises (supra), has observed as under:
CO No.92/Bang/2015 Page 5 of 15
‘For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure.’ Though we are bound by the decision of the Hon’ble jurisdictional High Court and that of the special Bench, as rightly pointed out by the learned Departmental Representative, neither the assessment order nor the appellate order consists of any discussion regarding the length of the period for which software was acquired against the payment of license fee. In such facts and circumstances, we deem it fit and proper to look into the length of periods of each software acquired during the assessment year under question and then to apply the principles laid down by the Hon’ble High Court and the Special Bench cited supra. In other words, in principle, the A0 has to follow the decision of the Hon’ble High Court and Special Bench cited supra but after verification of the length of the period of each software acquired by the assessee”.
Before the CIT(Appeals), the assessee relied on the decision of the Hon’ble High Court of Karnataka in the case of M/s Toyota Kirloskar Motors Pvt. Ltd. in ITA.No.174/2009 dated 23/3/2011. The relevant part of the judgement is reproduced below:-
“3. As rightly pointed out by the authorities, when the life of a computer or software is less than two years and as such, the right to use it is for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licenced for a particular period, for utilising the same for the subsequent years fresh licence or without paying the fee on such renewal, it is not possible to use those softwares. In those circumstances, the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure do not call for interference by this Court.”
CO No.92/Bang/2015 Page 6 of 15 9. The assessee submitted before the CIT(A) that assessee has furnished the break-up of the software expenses and contended that validity of licence and its usage of the licensed software would be one year only. The CIT(A) asked the AO to examine the assessee’s contention on this aspect, however, no reply was received from the AO.
The CIT(A) directed the AO to allow software expenses of Rs.6,41,60,974 as revenue expenditure, since the duration of software licences were not more than two years and in light of the decision of ITAT, Bangalore in the assessee’s own case cited above as also the decision of the jurisdictional High Court wherein it was held that software licence up to two years would constitute revenue expenditure and accordingly allowable as a deduction against business income.
Aggrieved, the department is in appeal before us on the following grounds:-
“2. The CIT(A) erred in directing the AO to allow a sum of Rs 6,41,60,974 as revenue expenditure by relying on the decision of the jurisdictional High Court in the case of Toyota Kirloskar Motors Pvt Ltd in dated 23/3/2011 without appreciating that the decision was accepted on account of low tax effect though not in principle.
3. The CIT(A) erred in allowing the assessee’s appeal on the issue of disallowance of software expenses amounting to Rs.6,41,60,974/- without appreciating that the assessee is deriving long term enduring benefit in respect of the same and that the assessee was unable to prove that the software could not be used beyond a year.”
CO No.92/Bang/2015 Page 7 of 15 12. We have heard both the parties. We find that the issue is covered by the decision of the Hon’ble jurisdictional High Court in the case of M/s Toyota Kirloskar Motors Pvt. Ltd. in ITA.No.174/2009 by judgment dated 23/3/2011 and hence we find no infirmity in the order of CIT(Appeals). Grounds No. 2 & 3 of the revenue are dismissed. The relevant extract of aforesaid judgment is reproduced below:-
“3. As rightly pointed out by the authorities, when the life of a computer or software is less than two years and as such, the right to use it is for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licenced for a particular period, for utilising the same for the subsequent fresh years fresh licence fee is to be paid. Therefore, without renewing the licence or without paying the fee on such renewal, it is not possible to use those softwares. In those circumstances, the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure do not call for interference by this court.”
Grounds No.4 & 5 read as follows:-
“4. The CIT(A) erred in following the ratio laid down by the Hon’ble Court in the case of Tata Elxsi Limited 349 ITR 98 and in directing the AO to exclude telecommunication expenses from the total turnover also while computing the deduction u/s 10A of the I.T. Act without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover.
The CIT(A) erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of Tata Elxsi
CO No.92/Bang/2015 Page 8 of 15 Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon’ble Supreme Court.”
This issue is covered by the decision of the Hon’ble jurisdictional High Court in the case of Tata Elxsi Limited, 349 ITR 98 and the CIT(Appeals) has rightly directed the AO to reduce telecommunication expenses from the total turnover as well as export turnover while computing the eligible deduction u/s. 10A of the Act. Therefore, ground Nos.4 & 5 are dismissed.
Ground Nos. 6 to 10 raised by the Revenue can be summarised as follows:-
“ The CIT(A) erred in directing the AO to allow the claim of the assessee of the deduction u/s section 10A without setting off the brought forward unabsorbed depreciation and unabsorbed lossess by relying on the decision of the jurisdictional High Court in the case of Yokogawa India Limited without appreciating the fact that the relief allowed is a deduction and not an exclusion from the total income which is also clarified by the Board’s Circular No. 7/DV/2013.”
The assessee claimed deduction u/s. 10A in respect of two STPI units before setting off losses of 3rd STPI unit, brought forward business losses and unabsorbed depreciation. The Assessing Officer relying on the decision of the Hon’ble High Court of Karnataka in the case of Himatasingke Seide Ltd. v. CIT, 286 ITR 255 (Kar), allowed the claim u/s. CO No.92/Bang/2015 Page 9 of 15 10A of the Act after setting off the current year losses of third STPI unit, brought forward business losses and unabsorbed deprecation.
Before the CIT(Appeals), the assessee contended that deduction u/s. 10A has to be allowed as claimed by it and relied on the decision of CIT v. Yokogawa India Ltd., 341 ITR 385 wherein it was held that deduction u/s. 10A has to be allowed before setting off brought forward business loss and unabsorbed depreciation. The CIT(Appeals) relying on the Hon’ble jurisdictional High Court decision in CIT v. Yokogawa India Ltd. (supra) directed to the AO to allow the assessee’s claim. Aggrieved, the department is in appeal before us.
We have heard both the parties. In the decision rendered by Hon'ble Supreme Court in the case of Himatasingike Seide Ltd Vs. CIT (Civil Appeal No.1501 of 2008 dated September 19, 2013), the Hon'ble Apex Court has dismissed the appeal filed by the assessee challenging the order passed by Hon'ble Karnataka High Court in the case of CIT Vs. Himatasingike Seide Ltd. (286 ITR 255). In the above said case, the Hon'ble Karnataka High Court had held that the unabsorbed depreciation should be taken into consideration while computing the deduction u/s 10B of the Act and the same has been upheld by the Hon'ble Supreme Court.
The Ld D.R submitted that there is a difference between "unabsorbed loss" and "unabsorbed depreciation". He submitted that, as per the provisions of sec. 32(2) of the Act, the unabsorbed depreciation shall be added to the CO No.92/Bang/2015 Page 10 of 15 amount of depreciation allowable for the following year and shall be deemed to be part of that allowance. Accordingly, the Ld D.R submitted that the deduction u/s 10A shall be allowed after setting off unabsorbed depreciation.
The decision rendered by Hon'ble Supreme Court in the case of Himatasingike Seide Ltd. (supra) approves the decision rendered by Hon'ble Karnataka High Court, wherein the Hon'ble Karnataka High Court had held that the unabsorbed depreciation should be taken into consideration while computing the deduction u/s 10B of the Act.
Accordingly, in terms of the decision of Hon'ble Supreme Court we hold that the unabsorbed depreciation shall form part of current year depreciation and the same is required to be deducted before allowing deduction u/s 10A of the Act. However, the unabsorbed business loss has to be deducted only from the profit available after allowing deduction u/s 10A of the Act. Accordingly, we modify the order of Ld. CIT(A) and direct the AO to compute the total income in terms of the above said discussion.
In the result, the appeal of the Revenue is partly allowed for statistical purposes.
CO No.92/2015
The assessee has raised the following ground of appeal in its cross objection:-
CO No.92/Bang/2015 Page 11 of 15
“The ld. CIT(A) has erred in confirming the disallowance under section 14A amounting to Rs.15,76,611/- on facts and in the circumstances of the case and law applicable, disallowance under section 14A amounting to Rs.15,76,611/- is to be deleted in entirety.”
The AO noted that the assessee company has received income by way of dividend of Rs.3,55,88,866 and claimed it as exempt u/s 10(33) of the Act. During the course of assessment proceedings, the AO called for details of expenditure incurred in making investments for earning the exempt income. However, the total cost involved in earning the divided income was worked out at Rs.2,02,833. The disallowance made by the assessee was not accepted by the AO on the ground that only AVF Finance spent 5% and Executive Finance spent 50% on managing the investment not attributable in earning of exempt income. Since the basis of disallowance was not explained, the AO estimated the expenses attributable at 5% on exempt income and, hence, a sum of Rs.17,79,449 was disallowed by the AO and brought to tax.
Before the CIT(Appeals), the assessee submitted that during the year, assessee earned dividends amounting to Rs.3,55,88,866. The dividend income was earned from investments in units of mutual funds. During the assessment, the assessee submitted that the AVP – Finance and Executive – Finance spends 5% and 50% of their time respectively on managing the investments in mutual funds. It was therefore submitted that CO No.92/Bang/2015 Page 12 of 15 5% and 50% of salary paid to AVP – Finance and Executive –Finance amounting to Rs.1,42,912 and Rs.59,921 respectively, totally amounting to Rs.2,02,833 could be considered as the expenditure incurred to earn the exempt income.
It was submitted that the AO has considered Rs.17,79,444 being 5% of dividends received as the amount of disallowance under section 14A.
The Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010)
328 ITR 81 has held that disallowance under section 14A, prior to AY 2008- 09, may be made on reasonable basis on the basis of facts and circumstances of the case. The sum of Rs.2,02,833 specified by the assessee for disallowance u/s 14A is computed on the basis of salary paid to employees engaged in treasury functions. The said basis of computation of disallowance u/s 14A was therefore reasonable and disallowance of Rs.17,79,444/- should therefore be deleted in entirety. Without prejudice and in the alternative, it was submitted that disallowance under section 14A should be restricted to Rs.2,02,833 as computed by the assessee.
The CIT(Appeals) observed that since the investment decisions are very complex in nature, requiring substantial market research, day-to-day analysis of market trends, etc., some expenditure is required to earn tax- free income. The AO, therefore, disallowed 5% of the dividend income as being attributable to earning exempt income. The CIT(A) relying on the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce
CO No.92/Bang/2015 Page 13 of 15 Mfg. Co. Ltd. (supra) concurred by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd., held that computation of disallowance u/s 14A as determined by the AO was reasonable and hence confirmed the disallowance of Rs.15,76,611/- [Rs.17,79,444 — Rs.2,02,833].
Aggrieved, the assessee has filed cross objection before us. 26.
The ld. counsel for the assessee pointed out that the assessee is earning only dividend from mutual funds from the investments made by them and the assessee itself has taken as expenditure 5% of the amount of the salary of the senior officer and 50% of junior officer and hence there was no need for disallowance of further expenditure towards administering the investment.
The ld. DR relied on the decision of Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. and contended that the disallowance u/s. as determined by the AO and confirmed by the CIT(Appeals) is reasonable.
We have heard both the sides. On a perusal of the assessment order it would be evident that disallowance under section 14A is made on account tax free dividends earned by the assessee company. The dividends are exempt under section 10(34) of the Act. The dividend income was earned from investments in units of mutual funds. The assessee company is debt free. The assessee Company has not incurred / paid any interest during the year. These debt free funds of the company are invested
CO No.92/Bang/2015 Page 14 of 15 in units of mutual fund. The act of investment and divestment is infrequent. There is no continuous involvement or expending of time and labour, for such investment or divestment activity. The assessee does not have any dedicated team or department to monitor, maintain or advise on investments. This job is handled by one person in the finance team, who partially devotes his time to this aspect. The investment decisions are approved by the SVP- Finance. Further, no expenditure was directly or indirectly incurred to earn the dividend. Hence, the CO by the assessee is allowed.
In the result, the appeal by the Revenue is partly allowed and the CO by the assessee is allowed.
Pronounced in the open court on this 9th day of December, 2015.