M/s Open Sillicon Research Pvt Ltd, Bengaluru V. Assistant Commissioner of Income Tax Circle-5(1)(2), Bengaluru

ITA 2716/BANG/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1391 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 14-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SWAPNA DAS J
• Assessee Lawyers: PRASHANTH G S
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure; Set aside
• Section: 143(3); 142(1); 37(1); 250; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA NO.2716/BANG/2017 (ASSESSMENT YEAR:2014-15) M/S. OPEN SILICON RESEARCH PVT. LTD. 139/26, GROUND FLOOR, AMAR JYOTHI LAYOUT, DOMLUR INTERMEDIATE RING ROAD, BENGALURU-560071. PAN: AAACO 5915 B VS. APPELLANT ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 5(1)(2), BENGALURU. RESPONDENT APPELLANT BY : SHRI PRASHANTH G.S., C.A. RESPONDENT BY : SWAPNA DAS, JCIT(DR) DATE OF HEARING: 06/05/2019 DATE OF PRONOUNCEMENT: 12/06/2019 O R D E R PER PAVAN KUMAR GADALE, JM : THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ORDER OF THE CIT(A), BANGALORE PASSED U/S 143(3) AND 250 OF THE INCOME- TAX ACT,1961 ['THE ACT' FOR SHORT]. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDERS OF THE AUTHORITIES BELOW IN SO FAR AS THESE ARE AGAINST THE APPELLANT IS OPPOSED TO LAW, WEIGHT OF EVIDENCE, PROBABILITIES, FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE. 2. THE APPELLANT DENIES ITSELF LIABLE TO BE ASSESSED ON A TOTAL INCOME OF RS.8,00,60,260/- AS AGAINST INCOME OF ITA NO.2716/BANG/2017 PAGE 2 OF 7 RS.6,57,43,570/- RETURNED BY THE APPELLANT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE AUTHORITIES BELOW FAILED TO APPRECIATE THE FACT THAT THE PAYMENT OF RS.3,34,84,484/-MADE TOWARDS 'TERM- LICENSED SOFTWARE' TO M/S. MENTOR GRAPHICS SALES AND SERVICES PVT. LTD. DOES NOT CONSTITUTE CAPITAL ASSET UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 4. THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN TREATING THE PAYMENT TOWARDS LICENSE FEES AS CAPITAL EXPENDITURE AND CONSEQUENTLY THE DISALLOWANCE OF RS.1,33,93,793/- IS NOT WARRANTED UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. THE AUTHORITIES BELOW ERRED IN TREATING THE PAYMENT MADE TOWARDS 'DEVELOPMENTAL STUDIO SOFTWARE' TO ARM LTD., PUNE OF RS.64,531/- AS CAPITAL EXPENDITURE AND THUS THE DISALLOWANCE OF RS.25,813/- IS LIABLE TO BE DELETED UNDER THE FACTS AND CIRCUMSTANCES O THE CASE. 6. THE ACTION OF THE AUTHORITIES BELOW IN DISALLOWING THE EXPENDITURE BY RELYING ONLY ON FEW CLAUSES OF THE AGREEMENT SUCH AS 'TERM' AND 'FEES AND PAYMENT' IS INCORRECT AND UNACCEPTABLE ON THE FACTS OF THE CASE. 7. THE AUTHORITIES BELOW FAILED TO APPRECIATE THE FACT THAT THE EXPENSES WERE NOT INCURRED TOWARDS PURCHASE OF SOFTWARE BUT FOR ACCESSING AND USING THE SOFTWARE AND FAILED TO COMPREHEND THAT THERE WAS NO TRANSFER OF OWNERSHIP RIGHT TO THE APPELLANT UNDER THE FACTS OF THE CASE. 8. THE AUTHORITIES BELOW FURTHER FAILED TO APPRECIATE THAT THE PAYMENT OF SOFTWARE LICENSE FEES DID NOT RESULT IN ENDURING BENEFIT TO QUALIFY AS CAPITAL EXPENDITURE AND THUS THE ADDITION MADE NEEDS TO BE DELETED UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. THE AUTHORITIES BELOW ERRED IN NOT APPRECIATING THE FACT THAT THE TERM OF LICENSE WAS FOR 2 YEARS AND 10 MONTHS AND THUS THE EXPENDITURE INCURRED OUGHT TO HAVE BEEN APPORTIONED OVER THE PERIOD OF TERM OF LICENSE BASED ON THE THEORY OF APPORTIONMENT. RELIANCE IS PLACED ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS BEST & CO PVT. LTD. REPORTED IN 60 ITR 11. ITA NO.2716/BANG/2017 PAGE 3 OF 7 10. WITHOUT PREJUDICE, THE TERM-LICENSED SOFTWARE FEES NEEDS TO BE ALLOWED AS REVENUE EXPENSES FOR THE IMPUGNED ASSESSMENT YEAR BASED ON THE PRINCIPLES OF CONSISTENCY. RELIANCE IS PLACED ON THE DECISION OF SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT REPORTED IN 193 ITR 321. 11. WITHOUT PREJUDICE, THE OFFICER OUGHT TO HAVE ALLOWED THE DEPRECIATION AT 60% ON PREPAID SOFTWARE LICENSE FEES UNDER SECTION 32 OF THE ACT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 12. THE ACTION OF THE LEARNED CIT(A) IN NOT FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IS OPPOSED TO THE PRINCIPLES OF JUDICIAL DISCIPLINE AND THUS THE ORDER NEEDS TO BE SET ASIDE ON THIS COUNT ALONE. 13. THE AUTHORITIES BELOW GROSSLY ERRED IN DISALLOWING THE SUM OF RS.8,97,082/- BEING FOREIGN EXCHANGE LOSS UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 14. THE LEARNED CIT(A) ERRED IN NOT CONSIDERING THE MODIFIED GROUNDS FILED BY THE APPELLANT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 15. THE APPELLANT DENIES ITSELF LIABLE TO BE LEVIED TO INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE ACT AND FURTHER THE COMPUTATION OF INTEREST UNDER SECTIONS 234B, 234C AND 234D WAS NOT PROVIDED TO THE APPELLANT AS REGARD TO THE RATE, PERIOD AND METHOD OF CALCULATION OF INTEREST UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 16. THE INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE ACT IS NOT LEVIABLE AND OUGHT TO HAVE BEEN WAIVED OFF ON THE FACTS OF THE CASE. 17. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, DELETE, AND MODIFY ANY OF THE GROUNDS WHICH ARE URGED ABOVE. 18. FOR THE ABOVE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS YOUR HONOUR TO CONSIDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND JUSTICE BE RENDERED. ITA NO.2716/BANG/2017 PAGE 4 OF 7 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT AND SUPPORT SERVICES VIZ., DESIGN OF CHIPS, MICROPROCESSORS, SEMI-CONDUCTORS, FILED THE RETURN OF INCOME FOR ASSESSMENT YEAR 2004-05 ON 15/7/2014 WITH TOTAL INCOME OF RS.1,38,00,690/-. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) AND 142(1) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] WERE ISSUED. IN COMPLIANCE, THE LEARNED AR APPEARED FROM TIME TO TIME AND FURNISHED DETAILS. THE AO, ON VERIFICATION OF THE FINANCIAL STATEMENTS AND THE STATEMENTS FILED FOUND THAT THE ASSESSEE HAS CLAIMED FOREIGN EXCHANGE LOSS OF RS.23,18,972/-. THE AO IS OF THE OPINION THAT THE ASSESSEE HAS CLAIMED FOREIGN EXCHANGE LOSS IS IN THE NATURE OF CAPITAL ASSET AND HENCE, ALLOWED DEPRECIATION 60% ON THE FOREIGN EXCHANGE LOSS IN RESPECT OF COMPUTERS AND DISALLOWED EXCESS CLAIM OF RS.89,708/-. SIMILARLY, THE AO FOUND THAT THE ASSESSEE HAS DEBITED UNDER OTHER EXPENSES RS.3,39,18,331/- TOWARDS SOFTWARE LICENSE FEE. THE ASSESSEE HAS SUBMITTED THE LEDGER ACCOUNTS, BREAK-UP OF SOFTWARE ORDERS AND COPY OF AGREEMENT BETWEEN MENTOR GRAPHICS AND THE ASSESSEE. AO FOUND THAT THE VALIDITY OF SOFTWARE LICENSE TOOLS FALLS IN TWO DIFFERENT FINANCIAL YEARS, AND REFERRED TO THE NATURE OF SOFTWARE AND ANALYZED ALL PAYMENTS TO MENTOR GRAPHICS AND FINALLY AO TREATED THE CLAIM ITA NO.2716/BANG/2017 PAGE 5 OF 7 AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION AT 60% AND THE BALANCE OF RS.1,34,19,606/- DISALLOWED AND ASSESSED THE TOTAL INCOME OF RS.86,00,026 VIDE ORDER U/S 143(3) OF THE ACT DATED 6/12/2016. 4. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL WITH THE CIT(A), WHEREAS THE CIT(A) CONFIRMED THE ACTION OF THE AO AND DISMISSED THE ASSESSEES APPEAL. 5. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FILED AN APPEAL WITH THE TRIBUNAL. THE LEARNED AR SUBMITTED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE ADDITION MADE BY THE AO TREATING SOFTWARE LICENSE EXPENSES AS CAPITAL IN NATURE AND THE LEARNED AR ALSO SUBMITTED THAT THE AO HAS NOT CONSIDERED THE CLAIM OF SOFTWARE LICENSE FEE SPREAD IN TWO YEARS AND APPLICATION SOFTWARE HAS TO BE ALLOWED AS REVENUE EXPENDITURE AND SUPPORTED WITH JUDICIAL DECISIONS. SIMILARLY, IN RESPECT OF FOREIGN EXCHANGE LOSS THE AO TREATED AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION WHEREAS THE ASSESSEE IS ELIGIBLE TO CLAIM U/S 37(1) OF THE ACT. THE LEARNED AR ARGUED ONLY THESE TWO GROUNDS OF APPEAL AND FURTHER SUBMITTED THAT THE CIT(A) HAS NOT ADJUDICATED THE GROUNDS OF APPEAL FILED BY THE ASSESSEE AND PRAYED FOR ALLOWING THE APPEAL. CONTRA, THE LEARNED DR RELIED ON THE ORDERS OF THE CIT(A). ITA NO.2716/BANG/2017 PAGE 6 OF 7 6. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. ON THE FIRST DISPUTED ISSUE OF LICENSE FEE IS IN THE NATURE OF SUBSCRIPTION FEE AND SUCH PAYMENTS ARE MADE YEARLY/MONTHLY IN US DOLLARS AND THE LICENSE FEE EFFECTIVE FROM 2011 TO 2014 SPREAD OVER YEARS AND NO RENEWAL OF LICENSE FEE. THE LEARNED AR RELIED ON THE DECISION OF THE JURISDICTIONAL HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. ROBERT BOSCH INDIA LTD. (50 TAXMANN.COM 275). THE LEARNED AR EMPHASIZED THAT SUCH FEE IS A REVENUE EXPENDITURE. WHEN A QUERY WAS RAISED TO AR TO ELABORATE THE NATURE OF SOFTWARE LICENSE FEE WHETHER IT IS APPLICATION SOFTWARE OR OTHERWISE THERE IS NO CLARITY ON DISPUTED MATTERS. EVEN THE REVENUE COULD NOT SUPPORT WITH EXPLANATIONS AND REASONS EXCEPT MENTIONING THAT IT IS CAPITAL EXPENDITURE. THEREFORE, WE ARE OF THE SUBSTANTIVE OPINION THAT THERE IS A NEED FOR EXAMINATION AND VERIFICATION OF USAGE OF SOFTWARE, ACCORDINGLY, WE REMIT THE ENTIRE DISPUTED ISSUE FOR LIMITED PURPOSE TO THE FILE OF THE AO TO CHECK USAGE AND THE NATURE OF PAYMENT OF LICENSE FEE AND TO CONSIDER THE EVIDENCES FILED SUPPORTING THE CLAIM. ACCORDINGLY, THE GROUND OF APPEAL OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 7. SIMILARLY IN THE CASE OF FOREIGN EXCHANGE LOSS ON COMPUTERS WHERE THE ASSESSEE HAS TREATED AS REVENUE EXPENSE, BUT THE REVENUE HAS TREATED AS CAPITAL EXPENDITURE ITA NO.2716/BANG/2017 PAGE 7 OF 7 AND ALLOWED DEPRECIATION. SINCE THE SOFTWARE LICENSE FEE PAID AND LOSS ON COMPUTER PURCHASE ARE INTERCONNECTED CONSIDERING THE PAYMENTS AND TERMS, WE RESTORE THE DISPUTED ISSUE TO THE FILE OF THE AO TO EXAMINE AND PASS A SPEAKING ORDER AND THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE, 2019. SD/- SD/- (B.R. BASKARAN) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : BENGALURU D A T E : 12/06/2019 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)- 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE