M/s Infosys BPM Lmited , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(1), , Bangalore

ITA 492/BANG/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7999 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-02-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 20-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: P C KHINCHA
• Keywords: Capital asset; Depreciation; Double taxation relief; Earning of tax free income; Question of law; Non-deduction of tax; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside
• Section: 10AA; 14A; 40(a)(ia); 195; 201; 13; 22; 32; 10

Judgement Text

ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL CBENCH: BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NOS.492 & 493/BANG/2018 ASSESSMENT YEARS: 2012-13& 2013-14 M/S. INFOSYS BPM LIMITED ELECTRONIC CITY HOSUR ROAD BANGALORE 560 100 PAN NO :AACCP4478N VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1)(1) BANGALORE APPELLANT RESPONDENT ITA NOS.1151 & 1157/BANG/2018 ASSESSMENT YEARS : 2012-13 & 2013-14 DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1)(1) BANGALORE VS. M/S. INFOSYS BPM LIMITED ELECTRONIC CITY HOSUR ROAD BANGALORE 560 100 APPELLANT RESPONDENT APPELLANT BY : SHRI P.C. KHINCHA, A.R. RESPONDENT BY : SHRI PRADEEP KUMAR, D.R. DATE OF HEARING : 22.07.2021 DATE OF PRONOUNCEMENT : 23.08.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER S PASSED BY LD CIT(A)-3, BENGALURU AND THEY RELATE TO THE ASSES SMENT YEARS 2012-13 & 2013-14. SINCE MOST OF THE ISSUES URGED IN THESE ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 2 OF 22 APPEALS ARE IDENTICAL IN NATURE, THEY WERE HEARD TO GETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAK E OF CONVENIENCE. 2. THE GROUNDS OF APPEAL URGED BY THE ASSESSEE IN BOTH THE YEARS GIVE RISE TO THE FOLLOWING ISSUES:- (A) COMMON ISSUES URGED IN BOTH THE YEARS:- (I) DISALLOWANCE OF PROVISION FOR SOFTWARE EXPENS ES. (II) DISALLOWANCE OF SOFTWARE EXPENSES U/S 40(A) (III) DISALLOWANCE OF SOFTWARE EXPENSES TREATING IT AS CAPITAL EXP. INDIVIDUAL ISSUES:- (B) GRANTING OF FOREIGN TAX CREDIT IS URGED IN AY 2012-13. (C) DISALLOWANCE MADE U/S 14A IS URGED IN AY 201 3-14. 3. FOLLOWING ISSUES ARE URGED BY THE REVENUE IN BOTH THE YEARS. (I) COMPUTATION OF DEDUCTION U/S 10AA BY REDUCING E XPENSES FROM BOTH EXPORT TURNOVER AND TOTAL TURNOVER. (II) WHETHER LD CIT(A) HAS GOT POWER TO REMIT THE ISSUE RELATING TO DISALLOWANCE OF SOFTWARE EXPENSES TREAT ING IT AS CAPITAL IN NATURE. 4. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PR OVIDING BUSINESS PROCESS OUTSOURCING SERVICES. 5. WE SHALL TAKE UP THE APPEALS FILED THE REVEN UE FIRST. IN BOTH THE APPEALS, THE FIRST ISSUE CONTESTED BY THE REVEN UE RELATES TO DEDUCTION CLAIMED U/S 10 AA OF THE ACT ,I.E. WHETHER EXPENSES THAT WERE REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE RE DUCED FROM THE TOTAL TURNOVER OR NOT. THE ASSESSEE CLAIMED DEDUCTI ON U/S 10 AA OF THE ACT . WHILE COMPUTING DEDUCTION, THE ASSESSEE REDUCED COMMUNICATION EXPENSES FROM BOTH EXPORT TURNOVER AN D TOTAL ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 3 OF 22 TURNOVER AND ACCORDINGLY COMPUTED QUANTUM OF DEDUCT ION. THE A.O. WAS OF THE VIEW THAT THE COMMUNICATION EXPENSE S SHOULD BE DEDUCTED FROM ONLY EXPORT TURNOVER AND NOT FROM TOT AL TURNOVER. ACCORDINGLY, HE RECOMPUTED THE DEDUCTION U/S 10 AA OF THE ACT . THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE IN BOT H THE YEARS BY FOLLOWING THE DECISION RENDERED BY HON'BLE KARNATAK A HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. (2012) 349 ITR 98. THE REVENUE HAS CHALLENGED THE SAID DECISION OF CIT(A) BY SUBMI TTING THAT THE REVENUE HAS FILED A SLP IN THE HON'BLE SUPREME COUR T CHALLENGING THE ABOVE SAID DECISION OF THE HON'BLE KARNATAKA HI GH COURT. 6. WE HEARD THE PARTIES ON THIS ISSUE. THE LD. A.R. SUBMITTED THAT THE DECISION RENDERED BY HON'BLE KARNATAKA HIGH COU RT IN THE CASE OF TATA ELXSI LTD. (SUPRA) HAS SINCE BEEN UPHELD BY HON'BLE SUPREME COURT IN THE CASE OF CIT VS. HCL TECHNOLOGI ES LTD. (2018) 93 TAXMANN.COM 33. WE NOTICE THAT THE DECISION REND ERED BY HON'BLE KARNATAKA HIGH COURT HAS BEEN UPHELD BY HON 'BLE SUPREME COURT IN THE CASE OF HCL TECHNOLOGIES LTD ( SUPRA) WITH THE FOLLOWING OBSERVATIONS: 17. THE SIMILAR NATURE OF CONTROVERSY, AKIN THIS C ASE, AROSE BEFORE THE KARNATAKA HIGH COURT IN CIT V. TATA ELXSI LTD . (2012) 204 TAXMAN 321/17/TAXMANN.COM 100/349 ITR 98. THE ISSUE BEFORE THE KARNATAKA HIGH COURT WAS WHETHER THE TRIBUNAL WAS CORRECT IN HOLDI NG THAT WHILE COMPUTING RELIEF UNDER SECTION 10A OF THE I.T. ACT, THE AMOUNT OF COMMUNICATION EXPENSES SHOULD BE EXCLUDED FROM THE TOTAL TURNOVER IF THE SAME ARE REDUCED FROM THE EXPORT TURNOVER? WHILE GI VING THE ANSWER TO THE ISSUE, THE HIGH COURT, INTER-ALIA, HELD THAT WHEN A PARTICULAR WORD IS NOT DEFINED BY THE LEGISLATURE AND AN ORDINARY MEANING IS TO BE ATTRIBUTED TO IT, THE SAID ORDINARY MEANING IS TO BE IN CONFORMITY WI TH THE CONTEXT IN WHICH IT IS USED. HENCE, WHAT IS EXCLUDED FROM 'EXPORT TURNO VER' MUST ALSO BE EXCLUDED FROM TOTAL TURNOVER', SINCE ONE OF THE COM PONENTS OF 'TOTAL TURNOVER' IS EXPORT TURNOVER. ANY OTHER INTERPRETAT ION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND WOULD BE IMPERMISSIBLE. 7. SINCE THE DECISION RENDERED BY LD CIT(A) IS IN C ONFORMITY WITH THE DECISION RENDERED BY HON'BLE SUPREME COURT, WE DO N OT FIND ANY ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 4 OF 22 REASON TO INTERFERE WITH THE DECISION RENDERED BY L D. CIT(A) ON THIS ISSUE IN BOTH THE YEARS. 8. THE NEXT ISSUE CONTESTED BY THE REVENUE IN BOTH THE YEARS IS LINKED TO THE ISSUE BEING CONTESTED BY THE ASSESSEE , I.E., THE ISSUE OF DISALLOWANCE OF SOFTWARE EXPENSES BY TREATING THE S AME AS CAPITAL IN NATURE. HENCE THE RELEVANT GROUNDS OF BOTH THE P ARTIES SHALL BE ADJUDICATED TOGETHER IN THE LATER PART OF THIS ORDE R. 9. WE SHALL NOW TAKE UP THE APPEAL OF THE ASSESS EE. THE FIRST COMMON ISSUE URGED BY THE ASSESSEE RELATES TO DISAL LOWANCE OF PROVISION FOR SOFTWARE EXPENSES. THE ASSESSEE HA D CLAIMED SOFTWARE EXPENSES AS DEDUCTION TREATING THE SAME AS REVENUE EXPENSES IN BOTH THE YEARS. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE PARTIALLY UNDER THREE DIFFERENT HEADS AS G IVEN BELOW:- (A) PROVISION FOR SOFTWARE EXPENSES CONTINGENT LIABILITY (B) DISALLOWANCE OF SOFTWARE EXPENSES U/S 40(A) (C) DISALLOWANCE OF REMAINING SOFTWARE EXPENSES TR EATING THE SAME AS CAPITAL IN NATURE. HOWEVER, THE AO ALLOWED DEPRECIATION THERE ON AND DISALLOWED ONLY NET AMOUN T. 10. THE FIRST TYPE OF DISALLOWANCE IS THE DISALLO WANCE OF PROVISION FOR SOFTWARE EXPENSES CLAIMED BY THE ASSESSEE TREA TING THE SAME AS CONTINGENT LIABILITY. THE LD CIT(A) CONCURRED WITH THE VIEW TAKEN BY HIM. HOWEVER, HE OBSERVED THAT, IF THE ABOVE SAID CLAIM IS TREATED AS ASCERTAINED LIABILITY, THEN THE DISALLOWANCE OF THE SAID CLAIM IS WARRANTED U/S 40(A)(I) OF THE ACT FOR NON-DEDUCTION OF TAX AT SOURCE. 10.1 WITH REGARD TO THE QUESTION WHETHER THE P ROVISION FOR SOFTWARE IS A CONTINGENT LIABILITY OR NOT, WE NOTI CE THE SAME HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THIS BENC H OF TRIBUNAL IN ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 5 OF 22 THE ASSESSEES OWN CASE IN AY 2011-12 IN ITA NO.491 /BANG/2018 DATED 11.12.2020. THE DECISION RENDERED IN ASSESSM ENT YEAR 2011- 12 ON AN IDENTICAL ISSUE IS EXTRACTED BELOW:- 14. WE HEARD THE RIVAL CONTENTIONS ON THIS ISSUE A ND PERUSED THE RECORD. THE FIRST QUESTION IS WHETHER THE PROVISION FOR SOF TWARE EXPENSES IS A CONTINGENT LIABILITY OR NOT. THERE IS NO DISPUTE WI TH REGARD TO THE FACT THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING. THE ASSESSEE BEING A COMPANY, IT IS REQUIRED TO FOLLOW ACCOUNTIN G STANDARDS PRESCRIBED BY ICAI AND ALSO BY THE CENTRAL GOVERNMENT UNDER TH E INCOME TAX ACT . AS PER ACCOUNTING STANDARD-1 PRESCRIBED BY THE CENTRAL GOVERNMENT, THE ASSESSEE IS REQUIRED TO MAKE PROVISION FOR ALL KNOW N LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CE RTAINTY. PARAGRAPH (4)(I) OF ACCOUNTING STANDARD - 1 PROVIDES AS UNDER : 'PRUDENCE: PROVISION SHOULD BE MADE FOR ALL KNOWN L IABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BEST ESTIMATE IN THE LIGHT OF THE AVAILABLE INFORMATION.' FURTHER, THE HON'BLE SUPREME COURT IN THE CASE OF R OTORK CONTROLS INDIA (P) LTD. (SUPRA) HAS EXPLAINED THE NATURE OF PROVIS ION FOR EXPENSES CREATED BY THE ASSESSEE AS UNDER: 'A PROVISION IS A LIABILITY WHICH CAN BE MEASURED B Y USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RE COGNISED WHEN; (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RES ULT OF A PAST EVENT; (B) A RELIABLE ESTIMATE CAN BE MADE OF THE A MOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PRO VISION CAN BE RECOGNISED.' 15. WE NOTICE THAT THE ASSESSEE HAS FURNISHED BREAK UP DETAILS OF PROVISION FOR SOFTWARE EXPENSES CREATED BY THE ASSESSEE AND A LSO THE BASIS FOR ESTIMATING THE SAID EXPENSES. THE LD. CIT(A) HAS EX TRACTED THE SAME IN PARAGRAPH 6 & 6.1 OF HIS ORDER AS UNDER: 'DURING APPELLATE PROCEEDINGS THE APPELLANT WAS ASK ED TO PROVIDE THE BASIS OF ESTIMATING THE PROVISION AND WHETHER T AX AT SOURCE WAS DEDUCTED ON THE SAME (ORDER SHEET ENTRY DT. 8.11.20 17). IN RESPONSE TO THE SAME THE APPELLANT MADE SUBMISSIONS VIDE LET TER SUBMITTED ON 4.12.2017. THE BREAKUP OF THE VENDORS TO WHOM PAYME NT WAS TO BE MADE AND FOR WHICH PROVISION WAS CREATED IS AS FOLL OWS: ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 6 OF 22 SL.NO. PARTICULARS AMOUN T IN (RS.) 1. CA (INDIA)TECHNOLOGIES P. LTD. 98,12,314 2. WIPRO LIMITED 9,34,510 3. SONATA INFORMATION 79,92,715 TECHNOLOGIES LTD. 4. SELECT SOFTWARES (I) P LTD. 6,000 5. MICROSOFT CORPORATION 15,94,890 6. SKELTA SOFTWARE PRIVATE LTD. 1,52,070 7. ARIBA INDIA PRIVATE LTD. 12,50,000 8. THOMSON FINANCIAL 1,33,424 9. BIQ LLC 5,52,000 10. HEWLETT PACKARD SINGAPORE 32,790 11. ORACLE CORPORATION 45,57,088 12. EMC INFORMATION SYSTEMS 1,08,810 13. TUNGSTEN NETWORK 1,18,03,850 TOTAL 3,89,30,461 6.1 THE APPELLANT ALSO MADE FOLLOWING SUBMISSIONS: 2. PROVISION FOR SOFTWARE EXPENSES AMOU NTING TORS.3,89,30,461 WAS MADE IN RESPECT OF SOFTWARE LI CENSES USED, LICENSE UPDATES, SUPPORT SERVICES, SOFTWARE IMPLEME NTATION SERVICES, SOFTWARE AMC CHARGES ETC AVAILED/UTILIZED DURING TH E YEAR FROM VARIOUS VENDORS. IN THE ABSENCE OF INVOICES RECEIVE D FROM VENDORS FOR THESE SERVICES, AT YEAR END, THE RESPECTIVE USE R DEPT'S PROVIDE THE LIKELY PAYMENTS TO BE MADE FOR THE SOFTWARE LICENSE S/SERVICES UTILIZED DURING THE YEAR. THE APPELLANT MADE PROVIS ION FOR THE SAID EXPENDITURE AND INCLUDED THE SAME UNDER THE HEAD 'S OFTWARE EXPENSES' FOR THE YEAR ENDING 31ST MARCH, 2011.' 16. WE NOTICE THAT THE ASSESSEE HAS EXPLAINED THE B ASIS FOR CREATING THE PROVISION FOR EXPENSES. THE LD. A.R. ALSO SUBMITTED THAT THE ACCOUNTS OF THE ASSESSEE HAVE BEEN AUDITED BY THE STATUTORY AUDITOR S AND THEY DID NOT FIND ANY FAULT WITH THE QUANTUM OF PROVISION FOR SOFTWAR E EXPENSES CREATED BY THE ASSESSEE. HENCE IT IS NOT A CASE THAT THERE WAS NO BASIS FOR CREATING THE PROVISION FOR SOFTWARE PURCHASES. ACCORDINGLY, WE A RE OF THE VIEW THAT THE ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 7 OF 22 PROVISION FOR SOFTWARE EXPENSES CREATED BY THE ASSE SSEE CANNOT BE CONSIDERED AS CONTINGENT LIABILITY. ACCORDINGLY, WE SET ASIDE THE ORDERS PASSED BY TAX AUTHORITIES IN THIS REGARD. 10.2 IN BOTH THE YEARS UNDER CONSIDERATION ALSO, THE ASSESSEE HAS FURNISHED BREAK-UP DETAILS OF PROVISION FOR SOFTWA RE EXPENSES IDENTIFYING THE PROVISION SO MADE WITH THE VENDORS, WHO HAD SUPPLIED SOFTWARE. THE LD CIT(A) HAS EXTRACTED THE RELEVANT DETAILS IN PARAGRAPH 6.0 OF HIS ORDER PASSED FOR BOTH THE Y EARS UNDER CONSIDERATION. HENCE THE REASONING GIVEN BY THE TR IBUNAL IN AY 2011-12 FOR ALLOWING THE IDENTICAL CLAIM IS APPLICA BLE TO THESE TWO YEARS ALSO. ACCORDINGLY, FOLLOWING THE DECISION R ENDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR AY 2011-12, WE HOLD THAT THE PROVISION FOR SOFTWARE EXPENSES CANNOT BE CON SIDERED AS CONTINGENT LIABILITY. ACCORDINGLY, WE SET ASIDE TH E ORDERS PASSED BY LD CIT(A) ON THIS ASPECT IN BOTH THE YEARS UNDER CO NSIDERATION. 10.3 THE LD CIT(A) HAS ALSO EXPRESSED THE VIEW TH AT, IF THE PROVISION FOR SOFTWARE EXPENSES IS HELD TO BE ASCER TAINED LIABILITY, THEN THE SAME IS LIABLE TO DISALLOWED U/S 40(A)(I) FOR NON-DEDUCTION OF TAX AT SOURCE, APPARENTLY FOLLOWING THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO LTD (2011)(203 TAXMAN 477). 10.4 THE LD A.R, BY PLACING RELIANCE ON THE DEC ISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF ENGINEERING AN ALYSIS CENTRE OF EXCELLENCE (P) LTD (2021)(432 ITR 471)(SC), CONT ENDED THAT THERE IS NO INCOME CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT SUPPLIERS OF SOFTWARE AND HENCE THERE IS NO REQUIRE MENT OF DEDUCTING TAX AT SOURCE U/S 195 OF THE ACT. ACCORD INGLY HE CONTENDED THAT THE DISALLOWANCE U/S 40(A)(I) COULD NOT BE MADE. 10.5 WE HEARD LD D.R AND PERUSED THE RECORD. THE CLAIM OF THE ASSESSEE IS THAT THE SOFTWARE HAS BEEN PURCHASED FR OM FOREIGN ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 8 OF 22 SUPPLIERS OR THROUGH THEIR DISTRIBUTORS. THE HON'B LE SUPREME COURT, IN THE CASE OF ENGINEERING ANALYSIS CENTRE O F EXCELLENCE (P) LTD (SUPRA), HAS EXAMINED THE QUESTION WHETHER THE PAYMENTS MADE TO NON-RESIDENT SOFTWARE SUPPLIERS IS ROYALTY AND HENCE TDS U/S 195 OF THE ACT WAS REQUIRED TO BE DEDUCTED ON THOSE PAYMENTS OR NOT. THE HON'BLE SUPREME COURT EXAMINED THIS QUEST ION CONSIDERING FOUR TYPES OF SITUATIONS, WHICH HAS BEE N NARRATED AS UNDER:- 4. THE APPEALS BEFORE US MAY BE GROUPED INTO FOUR CAT EGORIES: (I) THE FIRST CATEGORY DEALS WITH CASES IN WHICH COMPUT ER SOFTWARE IS PURCHASED DIRECTLY BY AN END-USER, RESIDENT IN INDIA, FROM A FOREIGN, NON- RESIDENT SUPPLIER OR MANUFACTURER. (II) THE SECOND CATEGORY OF CASES DEALS WITH RESIDENT IN DIAN COMPANIES THAT ACT AS DISTRIBUTORS OR RESELLERS, BY PURCHASING COMPUTE R SOFTWARE FROM FOREIGN, NON-RESIDENT SUPPLIERS OR MANUFACTURERS AND THEN RESELLING THE S AME TO RESIDENT INDIAN END-USERS. (III) THE THIRD CATEGORY CONCERNS CASES WHEREIN THE DISTR IBUTOR HAPPENS TO BE A FOREIGN, NON - RESIDENT VENDOR, WHO, AFTER PURCHASING SOFTWARE FRO M A FOREIGN, NON-RESIDENT SELLER, RESELLS THE SAME TO RESIDENT I NDIAN DISTRIBUTORS OR END- USERS. (IV) THE FOURTH CATEGORY INCLUDES CASES WHEREIN COMPUTER SOFTWARE IS AFFIXED ONTO HARDWARE AND IS SOLD AS AN INTEGRATED UNIT/EQUIPMEN T BY FOREIGN, NON- RESIDENT SUPPLIERS TO RESIDENT INDIAN DISTRIBUTORS OR END-USERS. 10.6 THE HON'BLE SUPREME COURT ANALYSED SAMPLE AGREEMENTS IN RESPECT OF ALL THE FOUR CATEGORIES AN D GAVE THE FOLLOWING FINDING:- ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 9 OF 22 45. A READING OF THE AFORESAID DISTRIBUTION AGREEMENT W OULD SHOW THAT WHAT IS GRANTED TO THE DISTRIBUTOR IS ONLY A N ON-EXCLUSIVE, NON- TRANSFERABLE LICENCE TO RESELL COMPUTER SOFTWARE, I T BEING EXPRESSLY STIPULATED THAT NO COPYRIGHT IN THE COMPUTER PROGRA MME I S TRANSFERRED EITHER TO THE DISTRIBUTOR OR TO THE ULTIMATE END- USER. THIS IS FURTHER AMPLIFIED BY STATING THAT APART FROM A RIGHT TO USE THE COMPUTER PROGRAMME BY THE END-USER HIMSELF, THERE IS NO FURT HER RIGHT TO SUB- LICENSE OR TRANSFER, NOR IS THERE ANY RIGHT TO REVE RSE- ENGINEER, MODIFY, REPRODUCE IN ANY MANNER OTHERWISE THAN PERMITTED BY THE LICENCE TO THE END- USER. WHAT IS PAID BY WAY OF CONSIDERATION, THEREFO RE, BY THE DISTRIBUTOR IN INDIA TO THE FOREIGN, NON- RESIDENT MANUFACTURER OR SUPPLIER, IS THE P RICE OF THE COMPUTER PROGRAMME AS GOODS, EITHER IN A MEDIUM WHICH STORES THE SOFTWARE OR IN A MEDIUM BY WHICH SOFTWARE IS EMBEDDED IN HARDWARE, WHICH MAY BE THEN FURTHER RESOLD BY THE DISTRIBUTOR TO THE END-USER IN INDIA, THE DISTRIBUT OR MAKING A PROFIT ON SUCH RESALE. IMPORTANTLY, THE DISTRIBUTOR DOES NOT GET THE RIGHT TO USE THE PRODUCT AT ALL . 46. WHEN IT COMES TO AN END- USER WHO IS DIRECTLY SOLD THE COMPUTER PROGRAMME, SUCH END- USER CAN ONLY USE IT BY INSTALLING IT IN THE COMPUTER HARDWARE OWNED BY THE END- USER AND CANNOT IN ANY MANNER REPRODUCE THE SAME FOR SALE OR TRANSFER, CON TRARY TO THE TERMS IMPOSED BY THE EULA. 47. IN ALL THESE CASES, THE 'LICENCE' THAT IS GRANTED VIDE THE EULA, IS NOT A LICENCE IN TERMS OF SECTION 30 OF THE COPYRIG HT ACT, WHICH TRANSFERS AN INTEREST IN ALL OR ANY OF THE RIGHTS C ONTAINED IN SECTIONS 14(A) AND 14(B) OF THE COPYRIGHT ACT, BUT IS A 'LIC ENCE' WHICH IMPOSES RESTRICTIONS OR CONDITIONS FOR THE USE OF COMPUTER SOFTWARE. THUS, IT CANNOT BE SAID THAT ANY OF THE EULAS THAT WE ARE CONCERNED WITH ARE REFERABLE TO SECTION 30 OF THE COPYRIGHT ACT, INASM UCH AS SECTION 30 OF ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 10 OF 22 THE COPYRIGHT ACT SPEAKS OF GRANTING AN INTEREST IN ANY OF THE RIGHTS MENTIONED IN SECTIONS 14(A) AND 14(B) OF THE COPYRI GHT ACT. THE EULAS IN ALL THE APPEALS BEFORE US DO NOT GRANT ANY SUCH RIGHT OR INTEREST, LEAST OF ALL, A RIGHT OR INTEREST TO REPR ODUCE THE COMPUTER SOFTWARE. IN POINT OF FACT, SUCH REPRODUCTION IS EX PRESSLY INTERDICTED, AND IT IS ALSO EXPRESSLY STATED THAT NO VESTIGE OF COPYRIGHT IS AT ALL TRANSFERRED, EITHER TO THE DISTRIBUTOR OR TO THE EN D- USER. A SIMPLE ILLUSTRATION TO EXPLAIN THE AFORESAID POSITION WILL SUFFICE. IF AN ENGLISH PUBLISHER SELLS 2000 COPIES OF A PARTICULAR BOOK TO AN INDIAN DISTRIBUTOR, WHO THEN RESELLS THE SAME AT A PROFIT, NO COPYRIGHT IN THE AFORESAID BOOK IS TRANSFERRED TO THE INDIAN DISTRIB UTOR, EITHER BY WAY OF LICENCE OR OTHERWISE, INASMUCH AS THE INDIAN DIS TRIBUTOR ONLY MAKES A PROFIT ON THE SALE OF EACH BOOK. IMPORTANTLY, THE RE IS NO RIGHT IN THE INDIAN DISTRIBUTOR TO REPRODUCE THE AFORESAID BOOK AND THEN SELL COPIES OF THE SAME. ON THE OTHER HAND, IF AN ENGLIS H PUBLISHER WERE TO SELL THE SAME BOOK TO AN INDIAN PUBLISHER, THIS TIM E WITH THE RIGHT TO REPRODUCE AND MAKE COPIES OF THE AFORESAID BOOK WIT H THE PERMISSION OF THE AUTHOR, IT CAN BE SAID THAT COPYRIGHT IN THE BO OK HAS BEEN TRANSFERRED BY WAY OF LICENCE OR OTHERWISE, AND WHA T THE INDIAN PUBLISHER WILL PAY FOR, IS THE RIGHT TO REPRODUCE T HE BOOK, WHICH CAN THEN BE CHARACTERISED AS ROYALTY FOR THE EXCLUSIVE RIGHT T O REPRODUCE THE BOOK IN THE TERRITORY MENTIONED BY THE LICENCE. 10.7 AFTER ANALYSING THE PROVISIONS OF INCOME T AX ACT, PROVISIONS OF DTAA, THE RELEVANT AGREEMENTS ENTERED BY THE ASS ESSEES WITH NON-RESIDENT SOFTWARE SUPPLIERS, PROVISIONS OF COPY RIGHT ACTS, THE CIRCULARS ISSUED BY CBDT, VARIOUS CASE LAWS RELIED UPON BY THE PARTIES, THE HON'BLE SUPREME COURT CONCLUDED AS UND ER:- CONCLUSION 168 . GIVEN THE DEFINITION OF ROYALTIES CONTAINED IN AR TICLE 12 OF THE DTAAS MENTIONED IN PARAGRAPH 41 OF THIS JUDGMENT, IT IS C LEAR THAT THERE IS NO ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 11 OF 22 OBLIGATION ON THE PERSONS MENTIONED IN SECTION 195 OF THE INCOME-TAX ACT TO DEDUCT TAX AT SOURCE, AS THE DISTRIBUTION AGREEMENT S/EULAS IN THE FACTS OF THESE CASES DO NOT CREATE ANY INTEREST OR RIGHT IN SUCH DISTRIB UTORS/END-USERS, WHICH WOULD AMOUNT TO THE USE OF OR RIGHT TO USE AN Y COPYRIGHT. THE PROVISIONS CONTAINED IN THE INCOME-TAX ACT (SECTION 9(1)(VI), ALONG WITH EXPLANATIONS 2 AND 4 THEREOF), WHICH DEAL WITH ROYA LTY, NOT BEING MORE BENEFICIAL TO THE ASSESSEES, HAVE NO APPLICATION IN THE FACTS OF THESE CASES. 169 . OUR ANSWER TO THE QUESTION POSED BEFORE US, IS TH AT THE AMOUNTS PAID BY RESIDENT INDIAN END-USERS/DISTRIBUTORS TO NON-RE SIDENT COMPUTER SOFTWARE MANUFACTURERS/SUPPLIERS, AS CONSIDERATION FOR THE R ESALE/USE OF THE COMPUTER SOFTWARE THROUGH EULAS/DISTRIBUTION AGREEM ENTS, IS NOT THE PAYMENT OF ROYALTY FOR THE USE OF COPYRIGHT IN THE COMPUTER SOFTWARE, AND THAT THE SAME DOES NOT GIVE RISE TO ANY INCOME TAXA BLE IN INDIA, AS A RESULT OF WHICH THE PERSONS REFERRED TO IN SECTION 195 OF THE INCOME-TAX ACT WERE NOT LIABLE TO DEDUCT ANY TDS UNDER SECTION 195 OF T HE INCOME-TAX ACT. THE ANSWER TO THIS QUESTION WILL APPLY TO ALL FOUR CATE GORIES OF CASES ENUMERATED BY US IN PARAGRAPH 4 OF THIS JUDGMENT. IT IS PERTINENT TO NOTE THAT THE HONBLE SUPREME CO URT HAS REVERSED THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COU RT IN THE CASE OF SAMSUNG ELECTRONICS CO LTD (SUPRA). 10.8 A PERUSAL OF THE DECISION RENDERED BY HONBLE SUPREME COURT WOULD BRING OUT FOLLOWING PRINCIPLES: - (A) RELEVANT DTAA PROVISIONS ARE REQUIRED TO BE CON SIDERED FOR DETERMINING THE QUESTION WHETHER THE PAYMENTS MADE BY THE ASSESSEE TO NON-RESIDENT COMPANIES FOR PURCHASE OF SOFTWARE ARE IN THE NATURE OF ROYALTY OR NOT. (B) WHERE EVER INDIA HAS ENTERED DOUBLE TAXATION A VOIDANCE AGREEMENT WITH THE COUNTRY OF NON-RESIDENT SUPPLIER, THERE IS NO NECESSITY TO REFER TO ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 12 OF 22 THE PROVISIONS OF SEC. 9(1)(VI) OF THE ACT FOR THE PAYMENTS MADE TO THE NON- RESIDENT PERSONS, UNLESS THE DOMESTIC PROVISIONS AR E BENEFICIAL TO THOSE PERSONS. (C) THE AGREEMENTS ENTERED BY THE ASSESSEE WITH TH E NON-RESIDENT SOFTWARE SUPPLIERS ARE REQUIRED TO BE EXAMINED TO FIND OUT W HETHER THE 'LICENCE' THAT IS GRANTED VIDE THE EULA, IS NOT A LICENCE IN TERMS OF SECTION 30 OF THE COPYRIGHT ACT, WHICH TRANSFERS AN INTEREST IN ALL O R ANY OF THE RIGHTS CONTAINED IN SECTIONS 14(A) AND 14(B) OF THE COPYRI GHT ACT, BUT IS A 'LICENCE' WHICH IMPOSES RESTRICTIONS OR CONDITIONS FOR THE USE OF COMPUTER SOFTWARE. 10.9 IN THE INSTANT CASES, THE RELEVANT AGREEMEN TS HAVE NOT BEEN EXAMINED BY THE TAX AUTHORITIES. IN FACT, THE ASSE SSEE HAS ALSO APPEARS TO HAVE NOT PRODUCED THE AGREEMENTS BEFORE THE AO. ACCORDINGLY, WE ARE OF THE VIEW THAT THE ISSUE RELA TING TO DISALLOWANCE U/S 40(A)(I) REQUIRES TO BE SET ASIDE TO THE FILE OF THE AO FOR DECIDING THIS ISSUE IN ACCORDANCE WITH THE DECI SION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF ENGINEERING AN ALYSIS CENTRE OF EXCELLENCE (P) LTD (SUPRA), AFTER DULY EXAMINING THE RELEVANT AGREEMENTS. ACCORDINGLY, WE SET ASIDE THE ORDER PA SSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FI LE OF AO. 11. THE NEXT COMMON ISSUE URGED BY THE ASSESSEE RELATES TO THE DISALLOWANCE MADE U/S 40(A) OF THE ACT IN RESPECT O F SOFTWARE PURCHASES. IT IS PERTINENT TO NOTE THAT THE AO HAS STATED THAT THE DISALLOWANCE IS MADE U/S 40 OF THE ACT. THE ASSESS EE HAS ALSO NOT MENTIONED, WHETHER THE DISALLOWANCE WAS MADE U/S 40 (A)(I) OR 40(A)(IA) OF THE ACT. 11.1 DURING THE YEAR RELEVANT TO AY 2012-13, THE AO DISALLOWED A SUM OF RS.2,79,199/-, BEING COST OF PURCHASE OF SOF TWARE INVOKING ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 13 OF 22 THE PROVISIONS OF SEC.40 FOR NON-DEDUCTION OF TAX A T SOURCE. THE AO FOLLOWED THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO LTD (SUPRA). TH E LD CIT(A) ALSO CONFIRMED THE SAME. 11.2 DURING THE YEAR RELEVANT TO AY 2013-14, THE AO DISALLOWED A SUM OF RS.11,91,455/- ON IDENTICAL REASONING AS GIV EN IN AY 2012- 13. THE LD CIT(A) CONFIRMED THE DISALLOWANCE IN TH IS YEAR ALSO. 11.3 WE HEARD THE PARTIES ON THIS ISSUE. BEFOR E US, THE LD A.R PLACED HIS RELIANCE ON THE DECISION RENDERED BY HON BLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE OF EXCELLENCE (P) LTD (SUPRA) AND CONTENDED THAT THERE IS NO NECESSIT Y TO DEDUCT TAX AT SOURCE FROM THE PAYMENTS MADE FOR SOFTWARE PURCH ASES. AS NOTICED EARLIER, THE DETAILS RELATING TO THIS DISAL LOWANCE MADE IN BOTH THE YEARS ARE NOT FORTHCOMING FROM THE ASSESSM ENT RECORD OR FROM THE SUBMISSION MADE BY THE ASSESSEE. THE DECI SION RENDERED BY HONBLE SUPREME COURT SHALL APPLY ONLY TO THE PA YMENTS MADE FOR NON-RESIDENT SUPPLIERS OF SOFTWARE OR THROUGH T HEIR DISTRIBUTORS (INDIAN OR FOREIGN), SINCE THE PROVISIONS OF SEC. 1 95 IS APPLICABLE ON SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT, SUBJECT TO THE PRINCIPLES DISCUSSED IN AN EARLIER PARAGRAPH. IF T HE ASSESSEE HAS PURCHASED THE SOFTWARE FROM THE DOMESTIC SUPPLIER, THEN THE DECISION RENDERED BY THE HONBLE SUPREME COURT WILL NOT APPLY. IN THAT CASE, THE NATURE OF PAYMENTS NEEDS TO BE EXAMI NED IN ACCORDANCE WITH THE PROVISIONS OF SEC. 9(1)(VI) OF THE ACT. IN THE ABSENCE OF RELEVANT DETAILS, WE ARE UNABLE TO DECID E THIS ISSUE. ACCORDINGLY, WE RESTORE THIS ISSUE ALSO TO THE FILE OF THE AO FOR EXAMINING IT AFRESH IN THE LIGHT OF DISCUSSIONS MAD E SUPRA. ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 14 OF 22 12. THE NEXT ISSUE CONTESTED IN BOTH THE YEARS RELATES TO THE DISALLOWANCE OF SOFTWARE EXPENSES TREATING THE SAME AS CAPITAL IN NATURE. SINCE THE LD CIT(A) HAS REMANDED THIS ISSUE TO THE FILE OF THE AO WITH CERTAIN DIRECTIONS, THE REVENUE IS QUES TIONING THE AUTHORITY OF LD CIT(A) TO DO SO. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THIS BENCH OF TRIBUNAL IN THE A SSESSEES OWN CASE RELATING TO AY 2011-12 IN ITA NO.491/BANG/2018 DATED 11-12- 2020. THE RELEVANT OBSERVATIONS MADE AND THE DECIS ION TAKEN BY THE TRIBUNAL ARE EXTRACTED BELOW:- 20. THE NEXT ISSUE CONTESTED BY THE ASSESSEE RELAT ES TO DISALLOWANCE OF SOFTWARE EXPENSES TREATING THE SAME AS CAPITAL IN N ATURE. SINCE THE LD CIT(A) HAS REMANDED THIS ISSUE TO THE FILE OF THE A O WITH CERTAIN DIRECTIONS, THE REVENUE IS QUESTIONING THE AUTHORITY OF LD CIT( A) TO DO SO. 21. THE FACTS RELATING TO THIS ISSUE ARE DISCUSSED IN BRIEF. WE NOTICED EARLIER THAT THE ASSESSEE HAD CLAIMED EXPENSES TOWARDS SOFT WARE PURCHASES AS DEDUCTION TO THE TUNE OF RS.24,97,00,999/-. THE AO DISALLOWED FOLLOWING ITEMS OUT OF THE ABOVE SAID CLAIM:- PROVISION FOR SOFTWARE PURCHASES - RS.3,89,30,461 DISALLOWANCE U/S 40(A)(I)/(IA) - RS.1,35,82,093 THE BALANCE AMOUNT WAS RS.19,71,88,445/-. THE AO TR EATED THIS AMOUNT AS CAPITAL IN NATURE. THE OBSERVATIONS MADE BY THE AO ARE EXTRACTED BELOW:- '6.3 FOR THE BALANCE AMOUNT OF RS.19,71,88,445/- IT IS SEEN THAT THE COMPANY HAS TREATED IT AS REVENUE EXPENDITURE. IT I S TO BE STATED THAT CONSIDERING THE LIFE OF SOFTWARE, THIS EXPENDITURE HAS BEEN INCLUDED IN SECTION 32 OF THE I T ACT AND ACCORDINGLY DEPREC IATION AT THE RATE OF 60% PER YEAR HAS BEEN ALLOWED. THE ASSESSEE HAS NOT GIVEN DATES OF PURCHASES OF THESE LICENSES. HENCE THE DEPRECIAT ION IS BEING ALLOWED AT THE RATE OF 30% OF RS.5,91,56,534/- AND THE BALANCE AMOUNT OF RS.13,80,31,912/- IS DISALLOWED. THE ASSE SSEE WOULD BE ELIGIBLE FOR CLAIMING DEPRECIATION ON THE BALANCE P ORTION IN THE FUTURE YEARS.' 22. BEFORE LD CIT(A), THE ASSESSEE PLACED ITS RELIA NCE ON THE DECISION RENDERED BY HON'BLE JURISDICTIONAL KARNATAKA HIGH C OURT IN THE CASE OF CIT VS. TOYOTA KIRLOSAKAR MOTORS (P) LTD (ITA NO .176 OF 2009), WHEREIN THE HON'BLE HIGH COURT HAD HELD THAT THE SOFTWARE L ICENCE FEE PAID FOR USE OF SOFTWARE FOR A LIMITED DURATION UPTO TWO YEARS I S ALLOWABLE AS REVENUE EXPENDITURE. HENCE THE LD CIT(A) ASKED THE ASSESSEE TO FURNISH THE DETAILS ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 15 OF 22 OF SOFTWARE PURCHASES ALONG WITH THEIR PERIOD OF VA LIDITY. THE ASSESSEE FURNISHED THE DETAILS AS PER WHICH A SUM OF RS.17.9 5 CRORES WAS RELATED TO SOFTWARE LICENSES VALID UP TO 1 YEAR AND THE BALANC E AMOUNT OF RS.1.77 CRORES WAS RELATED TO SOFTWARE IMPLEMENTATION, MAIN TENANCE SERVICES, SUPPORT SERVICES, SOFTWARE LICENSES HAVING VALIDITY OF 1 YEAR OR MORE, SOFTWARE AMC CHARGES, FEE FOR INCLUDED SERVICES, CO NSUMABLES, ETC. THE ASSESSEE ALSO FURNISHED SAMPLE COPIES OF PURCHASE I NVOICES. 23. THE LD. CIT (A) NOTICED THAT SOME OF THE INVOIC ES WERE RELATED TO FINANCIAL YEAR 2009-10 AND NOT TO THE YEAR UNDER CO NSIDERATION. ACCORDINGLY, THE LD. CIT(A) RESTORED THE MATTER TO THE FILE OF THE A.O. WITH THE FOLLOWING DIRECTIONS. 'ALL PURCHASE OF SOFTWARE LICENSES, FOR WHICH DETAI L OF LICENSE PERIOD IS AVAILABLE ON THE INVOICES OR IS PRODUCED BY THE APPELLANT AND IF THE SAME IS FOR A PERIOD UP TO TWO YEARS, TH E SAME SHOULD BE ALLOWED AS REVENUE EXPENDITURE, PROVIDED THE INVOIC E RELATES TO THE FY 2010-11 AND TAX AT SOURCE HAS BEEN DEDUCTED ON T HE SAME. IN CASE THE INVOICE RELATES TO SOME EARLIER YEAR, THE EXPENDITURE NEEDS TO BE DISALLOWED AS PRIOR PERIOD EXPENDITURE. IN CASE RELEVANT INVOICE IS NOT PROD UCED, THE AMOUNT NEEDS TO BE DISALLOWED AS BEING NOT VERIFIAB LE. IN RELATION TO EXPENDITURE INCURRED FOR SOFTWARE IMPLEMENTATION, MAINTENANCE SERVICES, SOFTWARE AMC CHARGES AND FEES FOR INCLUDED SERVICES, THE SAME NE EDS TO BE TREATED AS REVENUE EXPENDITURE AND ALLOWED AS SUCH PROVIDED TAX AT SOURCE HAS BEEN DEDUCTED ON THE SAM E. IN CASE OF NON DEDUCTION OF TAX AT SOURCE THE SAME NEE DS TO BE DISALLOWED UNDER SECTION 40(A) OF THE ACT. IN RELATION TO EXPENDITURE INCURRED FOR IT CONSUM ABLES E.G. CDS, PRINTER CARTRIDGES ETC., THE SAME NEEDS TO BE TREATED AS REVENUE EXPENDITURE. IN CASE OF SOFTWARE WHERE THE SAME CAN BE USED PERPETUALLY E.G.OPERATION SYSTEM SOFTWARE LIKE WIND OWS, APPLICATION SOFTWARE LIKE MS OFFICE ETC., THE SAME NEEDS TO BE TREATED AS CAPITAL IN NATURE. THIS IS FOR THE RE ASON THAT IN CASE OF SUCH SOFTWARE THERE IS NO RESTRICTION OR LI MITATION ON ITS PERIOD OF USE. NEW VERSIONS OF THESE SOFTWARE K EEP ON BECOMING AVAILABLE IN THE MARKET HOWEVER THERE IS N O RESTRICTION ON THE USE OF THE EARLIER VERSION AND A PERSON CAN ALWAYS CHOOSE NOT TO BUY THE NEW VERSION AND CONTIN UE WITH THE VERSION. A HIGH RATE OF DEPRECIATION, WHICH IS 60% TAKES CARE OF OBSOLESCENCE OF SUCH SOFTWARE.' ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 16 OF 22 24. THE REVENUE IS QUESTIONING THE AUTHORITY OF LD. CIT(A) IN RESTORING THE MATTER TO THE FILE OF A.O. THE ASSESSEE IS CONTENDI NG THAT THE ENTIRE AMOUNT OF RS.19.71 CRORES SHOULD BE ALLOWED AS REVENUE EXP ENDITURE. 25. THE LD A.R SUBMITTED THAT THE HON'BLE JURISDICT IONAL KARNATAKA HIGH COURT, IN A SUBSEQUENT DECISION RENDERED IN THE CAS E OF CIT VS. IBM INDIA LTD (2013)(357 ITR 88)(KAR), HAS HELD THAT SOFTWARE EX PENSES IS REVENUE IN NATURE. ACCORDINGLY HE SUBMITTED THAT THE ENTIRE EX PENSES SHOULD BE ALLOWED AS DEDUCTION. ON THE CONTRARY, THE LD D.R S UBMITTED THAT THE ASSESSEE HAS TO SHOW THAT THE VALIDITY OF SOFTWARE LICENSES IS LESS THAN TWO YEARS. HE SUBMITTED THAT THE LD CIT(A) SHOULD HAVE DECIDED THE ISSUE HIMSELF INSTEAD OF RESTORING THE SAME TO THE FILE O F AO, SINCE THE LD CIT(A) DOES NOT HAVE POWER TO REMAND THE MATTERS. 26. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT THE HON'BLE KARNATAKA HIGH COURT HAS HELD IN T HE CASE OF TOYOTA KIRLOSKAR MOTORS (P) LTD (SUPRA) HAS HELD THAT, WHE N THE LIFE OF A COMPUTER OR SOFTWARE IS LESS THAN TWO YEARS AND THE RIGHT TO USE IT IS FOR A LIMITED PERIOD, THE FEE PAID FOR ACQUISITION OF RIGHT IS AL LOWABLE AS REVENUE EXPENDITURE AND IF THE SOFTWARE IS LICENSED FOR A P ARTICULAR PERIOD, FRESH LICENSE FEE IS TO BE PAID FOR UTILIZING IT FOR SUBS EQUENT YEARS. IN THE CASE OF IBM INDIA LTD (SUPRA), IT WAS DECIDED BY THE HON'BL E JURISDICTIONAL HIGH COURT AS UNDER:- '9. THE SECOND SUBSTANTIAL QUESTION OF LAW RELATES TO APPLICATION OF THE AMOUNT UTILIZED FOR PROJECTS OF SOFTWARE IN A S UM OF RS.33,14,298/-. THE TRIBUNAL ON CONSIDERATION OF THE MATERIAL ON RE CORD AND THE RIVAL CONTENTIONS HELD, WHEN THE EXPENDITURE IS MADE NOT ONLY ONCE AND FOR ALL BUT ALSO WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT, THE SAME CAN BE PROPERLY CLAS SIFIED AS CAPITAL EXPENDITURE. AT THE SAME TIME, EVEN THOUGH THE EXPE NSES ARE ONCE AND FOR ALL AND MAY GIVE AN ADVANTAGE FOR ENDURING BENEFIT BUT IS NOT WITH A VIEW TO BRINGING INTO EXISTENCE ANY ASSET, THE SAME CANNOT BE ALWAYS CLASSIFIED AS CAPITAL EXPENDITURE. THE TEST TO BE APPLIED IS, IS IT A PART OF COMPANY'S WORKING EXPENSES OR IS IT EXPENDITURE LAID OUT AS A PART OF PROCESS OF PROFIT EARNING. IS IT ON THE CAPITAL LAYOUT OR IS IT AN EX PENDITURE NECESSARY FOR ACQUISITION OF PROPERTY OR OF RIGHTS OF A PERMANENT CHARACTER, POSSESSION OF WHICH IS CONDITION ON CARRYING ON TRADE AT ALL. THE ASSESSEE IN THE COURSE OF ITS BUSINESS ACQUIRED CERTAIN APPLICATION SOFTWARE. THE AMOUNT IS PAID FOR APPLICATION OF SOFTWARE AND NOT SYSTEM SOFTWARE. TH E APPLICATION SOFTWARE ENABLES THE ASSESSEE TO CARRY OUT HIS BUSINESS OPER ATION EFFICIENTLY AND SMOOTHLY. HOWEVER, SUCH SOFTWARE ITSELF DOES NOT WO RK ON STAND ALONE BASIS. THE SAME HAS TO BE FITTED TO A COMPUTER SYST EM TO WORK. SUCH SOFTWARE ENHANCES THE EFFICIENCY OF THE ITA NO.491/ BANG/2018 INFOSYS BPM LTD., BENGALURU OPERATION. IT IS AN AID IN MANU FACTURING PROCESS RATHER THAN THE TOOL ITSELF. THUS, FOR PAYMENT OF S UCH APPLICATION SOFTWARE, ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 17 OF 22 THOUGH THERE IS AN ENDURING BENEFIT, IT DOES NOT RE SULT INTO ACQUISITION OF ANY CAPITAL ASSET. THE SAME MERELY ENHANCES THE PRO DUCTIVITY OR EFFICIENCY AND HENCE TO BE TREATED AS REVENUE EXPENDITURE. INF ACT, THIS COURT HAD AN OCCASION TO CONSIDER WHETHER THE SOFTWARE EXPENSES IS ALLOWABLE AS REVENUE EXPENSES OR NOT AND HELD, WHEN THE LIFE OF A COMPUT ER OR SOFTWARE IS LESS THAN TWO YEARS AND AS SUCH, THE RIGHT TO USE IT FOR A LIMITED PERIOD, THE FEE PAID FOR ACQUISITION OF THE SAID RIGHT IS ALLOWABLE AS REVENUE EXPENDITURE AND THESE SOFTWARES IF THEY ARE LICENSED FOR A PART ICULAR PERIOD, FOR UTILIZING THE SAME FOR THE SUBSEQUENT YEARS FRESH LICENCE FEE IS TO BE PAID. THEREFORE, WHEN THE SOFTWARE IS FITTED TO A COMPUTER SYSTEM TO WORK, IT ENHANCES THE EFFICIENCY OF THE OPERATION. IT IS AN AID IN MANUFA CTURING PROCESS RATHER THAN THE TOOL ITSELF. THOUGH CERTAIN APPLICATION IS AN ENDURING BENEFIT, IT DOES NOT RESULT INTO ACQUISITION OF ANY CAPITAL ASS ET. IT MERELY ENHANCES THE PRODUCTIVITY OR EFFICIENCY AND THEREFORE, IT HAS TO BE TREATED AS REVENUE EXPENDITURE. IN THAT VIEW OF THE MATTER, THE FINDIN G RECORDED BY THE TRIBUNAL IS IN ACCORDANCE WITH LAW AND DO NOT CALL FOR ANY I NTERFERENCE. ACCORDINGLY, THE SECOND SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE.' 27. WE NOTICE THAT THE HON'BLE HIGH COURT HAS HELD IN THE CASE OF TOYOTA KIRLOSKAR MOTORS P LTD (SUPRA) THAT THE SOFTWARE EX PENSES ARE ALLOWABLE AS REVENUE EXPENSES, IF THE VALIDITY OF LICENSES IS LE SS THAN TWO YEARS. THE HIGH COURT HAS ALSO LAID DOWN THE TESTS THAT SHOULD BE C ONDUCTED TO DETERMINE THE NATURE OF SOFTWARE EXPENSES IN THE CASE OF IBM INDIA LTD (SUPRA). ACCORDINGLY, WE ARE OF THE VIEW THAT THE NATURE OF SOFTWARE EXPENSES, I.E., WHETHER IT IS CAPITAL OR REVENUE IN NATURE, HAS TO BE DETERMINED BY FOLLOWING THE TWO DECISIONS OF HON'BLE KARNATAKA HI GH COURT REFERRED ABOVE. WE NOTICE THAT THE TAX AUTHORITIES HAVE NOT EXAMINED THIS ISSUE ON THE ABOVE SAID LINES. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FI LE OF THE AO FOR EXAMINING IT AFRESH IN THE LIGHT OF DISCUSSIONS MAD E SUPRA. 12.1 THE FACTS RELATING TO THIS ISSUE ARE IDENTI CAL IN BOTH THE YEARS UNDER CONSIDERATION. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE IN BOTH THE YEARS AND RESTO RE THE SAME TO THE FILE OF THE AO FOR EXAMINING IT AFRESH IN THE L IGHT OF DISCUSSIONS MADE SUPRA. 13. IN AY 2012-13, THE ASSESSEE HAS RAISED A GR OUND RELATING TO REJECTION OF CLAIM FOR CREDIT OF FOREIGN TAX CREDI T. THE ASSESSEE HAS RAISED THIS ISSUE BEFORE LD CIT(A). WE NOTICE THAT THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION RENDERED BY HON BLE JURISDICTIONAL KARNATAKA HIGH COURT IN THE CASE OF WIPRO LTD ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 18 OF 22 (2016)(382 ITR 179) IN SUPPORT OF ITS CLAIM. HOWEV ER, THE LD CIT(A) REJECTED THE CLAIM OF THE ASSESSEE WITH THE FOLLOWI NG OBSERVATIONS:- 10.4 HOWEVER, IT IS IMPORTANT TO NOTE THAT ISSUE O F BENEFIT UNDER SECTION 10A WHICH IS PARIMATERIA TO SECTION 10AA OF THE ACT WAS RECENTLY DECIDED BY THE HONBLE SUPREME COURT IN TH E CASE OF YOKOGAWA INDIA LTD. (SUPRA) AND THE SC HELD THAT TH E PROVISION OF SECTION 10A OF THE ACT IS IN NATURE OF DEDUCTION. THE CONCLUSION WHICH CAN BE DRAWN FROM A COMBINED READING OF THE D ECISION IN CASE OF WIPRO LIMITED (SUPRA) AND YOKOGAWA INDIA LT D. (SUPRA) WILL THUS BE THAT APPELLANT WOULD BE ELIGIBLE TO CL AIM BENEFIT OF SECTION 90/91 OF THE ACT IN RELATION TO FOREIGN TAX CREDIT/STATE TAXES PAID IN FOREIGN COUNTRY INCLUDING THE TAX CRE DIT FOR WHICH CLAIM WAS MADE DURING ASSESSMENT PROCEEDINGS EXCEPT IN RELATION TO SUCH TAXES PAID IN FOREIGN COUNTRY ON AN INCOME ON WHICH BENEFIT OF SECTION 10AA IS AVAILABLE TO THE APPELLA NT AS THE BENEFIT UNDER 10AA IS IN NATURE OF A DEDUCTION AND NOT EXEM PTION. 10.5 FURTHER THE ACCOUNTING YEAR IN INDIA STARTS FR OM 1 ST OF APRIL AND CLOSES ON 31 ST OF MARCH OF THE SUCCEEDING YEAR AND ENDS ON 31 ST OF DECEMBER OF THE SAME YEAR. THEREFORE, THE INCO ME DERIVED BY AN INDIAN RESIDENT, WHICH FALLS WITHIN THE TOTAL INCOME OF A PARTICULAR FINANCIAL YEAR WHEN IT IS TAXED IN UNITE D STATES, FALLS WITHIN TWO YEARS IN INDIA. SO WHILE CLAIMING CREDI T IN INDIA, THE APPELLANT WOULD BE ENTITLED TO ONLY THE TAX PAID FO R THAT RELEVANT FINANCIAL YEAR IN USA I.E., THE INCOME ATTRIBUTABLE TO THAT YEAR IN AMERICA. IN OTHER WORDS, THE INCOME TAX PAID IN TH E SAME CALENDAR YEAR IN UNITED STATES OF AMERICA IS TO BE ACCOUNTED FOR IN TWO FINANCIAL YEARS IN INDIA. 10.6 IN RELATION TO CREDIT FOR THE STATE TAXES, IF THE APPELLANT GETS TAX CREDIT FOR THE STATE TAXES, THE CORRESPONDING A MOUNT CLAIMED AS DEDUCTION IN THE P&L ACCOUNT WOULD BE REQUIRED TO B E DISALLOWED. 10.7 CONSIDERING ABOVE THE GROUNDS OF APPEAL 9 AND 10 OF THE APPELLANT ARE PARTLY ALLOWED FOR STATISTICAL PURPOS ES. 13.1 WE NOTICE THAT THE LD CIT(A) HAS TAKEN THE VIEW THAT THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT I N THE CASE OF WIPRO LTD (SUPRA) IS DISTINGUISHABLE IN VIEW OF THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF YOKOGAWA IN DIA LTD, WHEREIN IT WAS HELD THAT THE PROVISION OF SEC. 10A OF THE ACT IS IN THE NATURE OF DEDUCTION. THE LD CIT(A) HAS EXPRESS ED THE VIEW THAT ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 19 OF 22 THE DECISION IN THE CASE OF WIPRO LTD (SUPRA) WAS R ENDERED BY CONSIDERING THE PROVISION OF SEC.10A AS EXEMPTION P ROVISION. ACCORDINGLY, THE LD CIT(A) HAS TAKEN THE VIEW THAT THE SAID DECISION CANNOT BE APPLIED IN THESE YEARS, SINCE THE PROVISI ONS OF SEC.10AA IS NOW A DEDUCTION PROVISION. 13.2 WE ARE UNABLE TO AGREE WITH THE ABOVE SAI D VIEW EXPRESSED BY LD CIT(A). THE HONBLE KARNATAKA HIGH COURT HAS GIVEN FOLLOWING REASON FOR ALLOWING FOREIGN TAX CREDIT IN THE CASE OF WIPRO LTD (SUPRA):- 56. THEREFORE, IT FOLLOWS THAT THE INCOME UNDER S ECTION 10A IS CHARGEABLE TO TAX UNDER SECTION 4 AND IS INCLUDIBLE IN THE TOT AL INCOME UNDER SECTION 5, BUT NO TAX IS CHARGED BECAUSE OF THE EXEMPTION GIVE N UNDER SECTION 10A ONLY FOR A PERIOD OF 10 YEARS. MERELY BECAUSE THE EXEMPTION HAS BEEN GRANTED IN RESPECT OF THE TAXABILITY OF THE SAID SO URCE OF INCOME, IT CANNOT BE POSTULATED THAT THE ASSESSEE IS NOT LIABLE TO TA X. THE SAID EXEMPTION GRANTED UNDER THE STATUTE HAS THE EFFECT OF SUSPEND ING THE COLLECTION OF INCOME TAX FOR A PERIOD OF 10 YEARS. IT DOES NOT M AKE THE SAID INCOME NOT LEVIABLE TO INCOME TAX. THE SAID EXEMPTION GRANTED UNDER THE STATUTE STANDS REVOKED AFTER A PERIOD OF 10 YEARS. THEREFO RE, THE CASE FALLS UNDER SECTION 90(1)(A)(II). 13.3 ON A CAREFUL PERUSAL OF THE DECISION RENDER ED BY HONBLE KARNATAKA HIGH COURT, WE ARE OF THE VIEW THAT, WHAT IS REQUIRED TO BE SEEN IS WHETHER THE INCOME U/S 10AA IS CHARGEABL E TO TAX U/S 4 AND IS INCLUDIBLE IN THE TOTAL INCOME U/S 5. THE F ACT THAT THE ASSESSEE IS NOT PAYING TAX DUE TO EXEMPTION OR DEDU CTION GRANTED UNDER THE ACT IS NOT RELEVANT. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) IN SO FAR AS IT IS CONTRARY TO THE DECISI ON RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF WIPRO L TD (SUPRA). THE OTHER DIRECTIONS GIVEN BY LD CIT(A) WITH REGARD TO THE ACCOUNTING YEAR, CLAIM OF STATE TAX , DO NOT REQUIRE ANY DISTU RBANCE. 13.4 ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FI LE OF AO TO DETERMINE THE FOREIGN TAX CREDIT IN THE LIGHT OF DE CISION RENDERED BY ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 20 OF 22 HONBLE KARNATAKA HIGH COURT IN THE CASE OF WIPRO L TD AND ALSO THE DIRECTION GIVEN BY LD CIT(A) WITH REGARD TO THE ACC OUNTING YEAR, CLAIM OF STATE TAX. 14. IN AY 2013-14, THE ASSESSEE IS URGING THE ISS UE RELATING TO DISALLOWANCE MADE U/S 14A OF THE ACT. 14.1 THE AO NOTICED THAT THE ASSESSEE HAS DECLAR ED EXEMPT INCOME OF RS.6,79,42,191/-. IT DISALLOWED A SUM OF RS.10,81,981/- U/S 14A OF THE ACT. THE ASSESSEE HAS ALLOCATED A P ORTION OF ADMINISTRATIVE EXPENSES ON SOME BASIS AND ACCORDING LY ARRIVED AT THE DISALLOWANCE OF RS.10,81,981/-. HOWEVER, THE A O APPLIED THE PROVISIONS OF RULE 8D WITHOUT FINDING FAULT WITH TH E WORKINGS MADE BY THE ASSESSEE. ACCORDINGLY, HE COMPUTED DISALLOW ANCE BY APPLYING PROVISIONS OF RULE 8D(2)(III) AT RS.42,85, 269/- AND ACCORDINGLY ADDED THE DIFFERENCE AMOUNT OF RS.32,03 ,288/-. THE LD CIT(A) ALSO CONFIRMED THE SAME. 14.2 WE HEARD THE PARTIES AND PERUSED THE RECOR D. WE NOTICE THAT THE ASSESSEE, IN THE TAX AUDIT REPORT, HAS FURNISHE D THE BASIS OF COMPUTING DISALLOWANCE U/S 14A OF THE ACT AS UNDER: - 1. 5% OF THE SALARY COST OF CHIEF FINANCIAL OFFICE R. 2. 10% OF THE SALARY COST OF CHIEF FINANCIAL CONTR OLLER 3. 50% OF THE SALARY COST OF TREASURY DEPARTMENT E MPLOYEES, WHO ARE HANDLING THE TREASURY FUNCTIONS OF THE COMP ANY. ACCORDINGLY, THE ASSESSEE HAS COMPUTED THE DISALLOW ANCE OF RS.10,81,981/-. HOWEVER, A PERUSAL OF THE ASSESSME NT ORDER WOULD SHOW THAT THE AO DID NOT EXAMINE THE ABOVE SAID COM PUTATION OF THE ASSESSEE AND DID NOT FIND ANY FAULT OR ERROR IN THE ABOVE SAID COMPUTATION. THE AO SIMPLY OBSERVES THAT SECTION 1 4A PROVIDES THAT THE EXPENDITURE HAS TO BE COMPUTED AS PER RULE 8D. ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 21 OF 22 14.3 THE PROVISIONS OF SEC.14A(2) READ AS UNDER:- THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MA Y BE PRESCRIBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THIS ACT. HENCE IT IS IMPERATIVE THAT THE AO SHOULD EXAMINE T HE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE AND IF HE IS NOT SATISFIED WITH THE SAID WORKINGS, THEN ONLY THE AO CAN HAVE RESORT TO THE PROVISIONS OF RULE 8D OF I T RULES. THE MUMBAI BENCH OF TRIBUNAL HAS ALSO EXPRESSED IDENTICAL VIEW IN TH E CASE OF TATA PROJECTS LTD VS. ACIT (ITA NO.459/MUM/2019 DATED 22 .10.2020). IN THE INSTANT CASE, ADMITTEDLY THE AO DID NOT EXAM INE THE CORRECTNESS OF THE WORKINGS FURNISHED BY THE ASSESS EE BY HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE THE AO COULD NOT HAVE RESORTED TO APPLY PROVISIONS OF RULE 8D FOR CO MPUTING DISALLOWANCE AS REQUIRED U/S 14A OF THE ACT. FOR T HE ABOVE SAID REASON, THE LD CIT(A) WAS NOT JUSTIFIED IN CONFIRMI NG THE WORKING MADE BY THE AO. 14.4 IN VIEW OF THE ABOVE, WE SET ASIDE THE ORD ER PASSED BY LD CIT(A) ON THIS ISSUE IN AY 2013-14 AND DIRECT THE A O TO DELETE THE ADDITION OF RS.32,03,288/- MADE BY HIM U/S 14A OF T HE ACT. ITA NOS.492, 493, 1151 & 1157/BANG/2018 M/S. INFOSYS BPM LTD., BANGALORE PAGE 22 OF 22 15. IN THE RESULT, BOTH THE APPEALS OF THE ASS ESSEE ARE TREATED AS ALLOWED AND BOTH THE APPEALS OF THE REVENUE ARE TRE ATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD AUG, 2021. SD/- (N.V. VASUDEVAN) VICE PRESIDENT SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 23 RD AUG, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.