NAUVATA ENGINEERING PRIVATE LTD V. PRINCIPAL COMMISSIONER OF INCOME TAX-5

WP/6171/2020

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The case involves Nauvata Engineering Private Ltd., which challenged the orders issued by the Principal Commissioner of Income Tax-5 and the Assistant Commissioner of Income Tax, directing the payment of 20% of the total demand raised for the Assessment Year 2017-2018. The petitioner argued that the software licensing fees paid should be treated as revenue expenditure, referencing previous judgments that supported this view. The Revenue contended that the matter was still pending and referred to guidelines for decision-making at the First Appellate stage. The court found that the authorities did not adequately consider the precedents set in earlier cases where similar expenditures were classified as revenue expenditures.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 697771 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-03-2020
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax and another v. Toyota Kirloskar Motors Pvt. Ltd, Commissioner of Income-Tax and another v. IBM India Ltd.
• Laws Referred To: Income Tax Act, 1961, Articles 226 & 227 of the Constitution of India
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: E I SANMATHI
• Assessee Lawyers: NARENDRA KUMAR J JAIN
• Keywords: Income Tax; Revenue expenditure; Stay of demand; Writ petition; Software Licensing Fee
• Section: 143(3)

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 17TH DAY OF MARCH 2020 BEFORE THE HON'BLE MR.JUSTICE S. SUNIL DUTT YADAV WRIT PETITION No.6171/2020 (T-IT) Between: Nauvata Engineering Private Ltd., 42, 6th Cross, Block A, Brigade Software Park, 27th Cross, Banashankari 2nd Stage, Bangalore – 560 070, Karnataka, India. (Represented by Mr. Ranjana Raikar Digambar, Aged about 73 years, S/o Ganapat Krishna Revankar). … Petitioner (By Sri Narendra Kumar J. Jain, Advocate) And: 1. Principal Commissioner of Income Tax-5, Kormangala, Bangalore – 560 095. 2. The Assistant Commissioner of Income Tax, Circle 5(1)(1), Kormangala, Bangalore – 560 095. … Respondents (By Sri E.I. Sanmathi, Advocate) 2 This Writ Petition is filed under Articles 226 & 227 of the Constitution of India, praying to quash as far as the petitioner is concerned by an appropriate writ or order in the nature of certiorari or otherwise the impugned letter dated 11.03.2020 issued by the learned first respondent directing to pay 20 percent of the total demand raised for the Assessment Year 2017-2018 enclosed in Annexure-A and quash as far as the petitioner is concerned by an appropriate writ or order in the nature of certiorari or otherwise the impugned letter dated 04.02.2020 issued by the learned second respondent to the petitioner directing to pay 20 percent of the total demand raised for the Assessment Year 2017-2018 enclosed in Annexure-B and etc. This Writ Petition coming on for orders this day, the Court made the following: ORDER Mr. E.I.Sanmathi, learned counsel accepts notice for the respondents. 2. The petitioner is stated to be engaged in the business of providing Engineering Procurement and Construction Management services to Oil and Gas Companies worldwide both onshore and offshore installations. 3 3. The petitioner has sought to challenge the order at Annexure-A dated 11.03.2020 whereby the Principal Commissioner of Income Tax while considering the application for stay filed in an appeal preferred before the Commissioner of Income Tax by the petitioner has disposed of the application with a direction to the assessee to pay 10% of the disputed amount by 16.03.2020 and the remaining amount to be paid in two equal installments in April 2020 and May 2020. 4. It is submitted that pursuant to the scrutiny assessment under Section 143(3) of the Income Tax Act, 1961 as completed by the Assistant Commissioner of Income Tax, total income of Rs.8,38,67,334/- was determined and demand of Rs.2,31,79,894/- was raised. An appeal has been filed and assessee had sought for stay of the demand. The same having been disposed off as noticed above, the said order is challenged before this Court. 4 5. The petitioner contends that while considering the application for stay, the Revenue is to consider the notifications which are in the form of Guidelines which are not however exhaustive and discretion is to be exercised by noticing the strength of the case made out challenging the assessment order. 6. The petitioner contends that in the present case, the question is as to “whether the software licencing fee that has been paid by the assessee is to be treated and allowed as a revenue expenditure?” 7. Learned counsel for the petitioner contends that the tenure of software licencing is as per the terms of the commercial agreement, the effective start date for the contract is 21.11.2016 and the end date is 31.03.2017. 8. It is further submitted that on expiry of the end date, unless fresh licence fee is paid, the benefits 5 under the licencing agreement would not be extended to the assessee. It is further contended that the question of treating as expenditure the software licencing fee paid was a subject matter in issue before this Court in the case of Commissioner of Income-Tax and another v. Toyota Kirloskar Motors Pvt. Ltd reported in (2012) 349 ITR 65 (Karn) wherein, this Court at para-3 of its decision has observed that where the benefits of a software by way of licencing is for limited period, the expenditure incurred for acquisition of such use of software is allowable as revenue expenditure. The reliance is also placed on the decision of this Court in the case of Commissioner of Income-Tax and another v. IBM India Ltd. reported in (2013) 357 ITR 88 (Karn) and specific reliance is placed on para-10 wherein this Court has considered the said aspect and also the aspect as to whether the expenditure incurred for such software licencing could be classified as capital expenditure and has held that the expenditure incurred 6 towards obtaining the benefits by way of software licencing agreement is to be treated as revenue expenditure. 9. Learned counsel appearing for the Revenue submits that a similar issue is pending before this Court and further draws the attention to the Guidelines dated 29.02.2016 to the officers while considering the said judgment at the First Appellate stage and contends that the Assessing Officer at appropriate circumstances as is referred to at Clause B(b) of the Guidelines could refer the matter to Principal Commissioner of Income Tax, who is to take appropriate decision. 10. It is to be noticed that as contended by learned counsel for the assessee that the question of treating the software licencing fee payable as revenue expenditure is a matter that has been considered and dealt with by this Court in the two judgments referred 7 to above wherein such expenditure has been treated to be revenue expenditure. 11. In light of the discussion as above, the Authority while deciding on the application for stay was required to take note of the judgments passed in an appropriate manner. It is also to be noted that the Guidelines are not exhaustive and discretion that is available to the Assessing Officer or the Authority considering the application for stay could be exercised taking note of the facts made out and the strength of the case made out in the appeal. 12. In light of the discussion made above including the reliance placed by the assessee on the above judgments, it would be appropriate to modify the order. The submission of learned counsel for the assessee that partial modification of the order of stay would be acceptable, the impugned orders are modified 8 making it clear that the observations made herein are not to be treated as findings on merits. 13. Accordingly, the orders at Annexure-A dated 11.03.2020 and at Annexure-B dated 04.02.2020 are set aside. 14. There would be a stay of demand of Rs.2,31,79,894/- for the Assessment Year 2017 – 2018 during the pendency of the appeal filed challenging the order of assessment of the year 2017 -2018, subject to the assessee paying 10% of the demand out of which 5% would be paid within 31.03.2020 and the remaining 5% would be paid in two equal installments in the months of April 2020 and May 2020. Petition is accordingly disposed off. Sd/- JUDGE VGR "