SECTION 35

SCIENTIFIC RESEARCH EXPENDITURE

Where assessee-company, apart from rendering technical services to its clients, did research in field of development of wind power at its own, which was used for benefit of public, scientific research expenditure was to be allowed - Assistant Commissioner of Income-tax -1(1) v. Consolidated Energy Consultants Ltd. (2014) 41 taxmann.com 379 (Indore - Trib.)     SECTION 37(1) BUSINESS EXPENDITURE - ALLOWABILITY OF Software : Where assessee-company purchased application software, expenditure incurred towards purchase of software could not be treated as revenue expenditure - Srinivasa Resorts v. Assistant Commissioner of Income-tax (2014) 41 taxmann.com 350 (Hyderabad - Trib.)       SECTION 54F CAPITAL GAINS - EXEMPTION OF, IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE Construction : In terms of section 54F, when assessee invests sale consideration in purchase of a residential property within prescribed time period, he is entitled to claim deduction and, in such a case, extent of construction of residential building and facilities provided in such building are not relevant - Commissioner of Income-tax v. Dr. R. Balaji (2014) 41 taxmann.com 411 (Karnataka)     SECTION 158BG BLOCK ASSESSMENT IN SEARCH CASES Where Assessing Officer as a result of search conducted under section 132 upon assessee passed a block assessment order on him, no opportunity of hearing was required to be given to assessee by Commissioner while granting approval under section 158BG - Commissioner of Income-taxv.Dr. K.P. Singh (2014) 41 taxmann.com 406 (Allahabad)       SECTION 194C DEDUCTION OF TAX AT SOURCE - CONTRACTORS/SUB-CONTRACTORS PAYMENT TO Lounging and Catering service : Where consolidated payment was made towards lounging and catering services as a part of single arrangement, it was not permissible to artificially bifurcate payment so made towards two limbs or component services in view of two attracting differential tax and same would fall under generalized contractual category under section 194C - Assistant Commissioner of Income-tax (TDS) -2(2) v. Qantas Airways Ltd. (2014) 41 taxmann.com 383 (Mumbai - Trib.) Cargo handling charges : Where assessee was engaged in business of clearing and forwarding of cargo, etc. and it made payments towards cargo handling charges to two parties and work involved was mainly labour oriented work with help of various machineries and equipments, TDS provisions of section 194C would be applicable with respect to said payments - Commissioner of Income-tax (TDS)v.Aditya Marine Ltd. (2014) 41 taxmann.com 381 (Gujarat)       SECTION 254 APPELLATE TRIBUNAL - ORDER OF Duties of Tribunal : Whenever any decision has been relied upon and/or cited by assessee and/or any party, Tribunal is bound to consider and/or deal with same and opine whether in facts and circumstances of particular case, same will be applicable or not - Dattani And Co. v. Income Tax Officer (2014) 41 taxmann.com 360 (Gujarat)     DIRECT TAX LAWS Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Clarification on disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year - CIRCULAR NO.5/2014 (F.NO.225/182/2013-ITA.II), DATED 11-2-2014 Section 119, read with section 115R of the Income-tax Act, 1961 - Income-tax Authorities - Instructions to subordinate authorities - Tax on distributed income to unit holders - Clarification on scope of additional income-tax on distributed income under section 115R - CIRCULAR NO.6/2014 (F.NO.225/182/2013-ITA.II), DATED 11-2-2014       Source : Taxmann

Sec. 37(1): Expenditure on acquiring master copy of software subject to obsolescence is deductible as revenue expenditure

Oracle India Pvt. Ltd vs. CIT (Delhi High Court)

The assessee entered into a license agreement with Oracle Corp under which it acquired a non-exclusive & non-assignable right to duplicate software products which were owned by Oracle Corp and to sub-license the same to parties in India. The assessee paid recurring royalty of 30% for the said right. In addition to the royalty, the assessee periodically paid an amount towards “*expenditure on import of software master copy*”. The said master copy was used to replicate the software. The assessee claimed that the said master copies were versions of Oracle’s new product offerings which had very accelerated obsolescence and that at any point of time it was not possible to say whether the version will be current for one day or one month. The AO allowed a deduction for the recurring royalty but held that the expenditure for acquiring the software master copy was capital
expenditure. On appeal, the CIT(A) reversed the AO on the ground that owing to obsolescence, there was no enduring benefit as there were frequent corrections and up-gradation of the software. On appeal by the department, the Tribunal reversed the CIT(A) and held that the expenditure was capital
in nature on the ground that the master copy was an asset of enduring benefit. On appeal by the assessee, HELD reversing the Tribunal:

The assessee’s claim that the master copies had high accelerated obsolescence and that even at the point of time of import it was difficult to say whether the version would be replaced by a new or updated version after one day or a month had not been disproved. Also the facts showed that there were periodical imports of the master copies and that the average price per copy was minimal. This was not a case where the master copies contained operating or system software, which normally did not require frequent up-gradation or changes. It is also not the case of an assessee which is the end user of software. It is a case where the assessee is required to repeatedly pay for the master copy media in view of frequent newer or updated versions of the application software from time to time.
Once newer or better version of the application software is available, the earlier version is not saleable and does not have any market value for the seller i.e. the assessee. Also, as per the “*matching concept*” in accountancy, while determining whether expenditure is capital or revenue in
nature, the question whether the expenditure would create an asset which is of value in further assessment periods and should be amortised (i.e. depreciated) as long as it has value (subject to the statutory provisions) requires to be considered. If the expenditure does lead to creation of an asset but of a limited or short life, it has to be treated as a liability and not as a fixed asset. The said expenditure cannot be valued for price for future financial years (*Oracle Software
<http://itatonline.org/archives/index.php/cit-vs-oracle-software-india-supreme-court-copying-software-onto-blank-discs-is-manufacture-for-s-80-ia/>*320 ITR 546 (SC), *Ashahi India Safety Glass <http://itatonline.org/archives/index.php/cit-vs-asahi-india-safety-glass-ltd-delhi-high-court-expenditure-on-application-software-is-revenue-in-nature/>*346 ITR 329 (Del), *G.E. Capital Services* 300 ITR 420 (Del), *O.K. Play* 346 ITR 57 (P&H), *IAEC Pumps* 232 ITR 316 (SC) referred)
 

No ‘royalty’ from sale of software, HC ignores amended Sec. 9 as DTAA more beneficial; Samsung’s case distinguished

The Delhi High Court upheld the order of the Tribunal that amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA.

The Delhi High Court held as under:

1) What was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transferred was the right to use the copyrighted material or article which was distinguishable from the rights in a copyright;

2) It further held that the right that was transferred was not a right to use the copyright but was only limited to the right to use the copyrighted material and the same would not give rise to any royalty income and would be business income;

3) The Delhi High Court expressed its disagreement with the decision of the High Court in the case of CIT v. Samsung Electronics Co. Ltd. (2011) 203 Taxman 477 (Kar.) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup would amount to copyright work – DIT v. Infrasoft Ltd. (2013) 39 taxmann.com 88 (Delhi)

Software license for one year doesn’t confer any enduring benefit; licensing fee held as revenue expenditure

In the instant case the assessee had incurred expenses towards software license and claimed the same as revenue expenditure. The AO disallowed the claim of the assessee. On appeal, the CIT (A) reversed the order of AO. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) When the assessee had acquired the license to use the software and the license was valid only for one year, it might be useful to the assessee for various functions like sales, finance, logistics operations and use of ERP system and it might confer certain benefits to the assessee but it couldn’t be said that there was enduring benefit to the assessee;

2) Thus, respectfully following the decision of the Bombay High Court in the case of CIT v. Raychem RPG Ltd. (2012) 21 taxmann.com 507 and taking into consideration the facts of the case, it was to be held that the expense incurred by the assessee to acquire the software license was revenue expense – DY. CIT V. DANFOSS INDUSTRIES (P.) LTD. (2013) 37 taxmann.com 240 (Chennai - Trib.)

Mumbai ITAT explains distinction between Software supplied with Hardware and otherwise

DDIT vs. Reliance Infocom Ltd/ Lucent Technologies (ITAT Mumbai)

Consideration for supply of software which is not embedded in equipment is taxable as “royalty”

The assessee, Reliance Infocomm Ltd, wanting to establish a wireless telecommunications network in India, entered into a contract with Lucent Technologies for supply of software required for the telecom network. The assessee claimed, relying on Tata Consultancy Services 271 ITR 401 (SC), Ericson AB 343 ITR 370 (Del), Nokia Networks OY 25 taxmann.com 225 & Motorola 270 ITR (AT) (SB) 62, that the amount paid by it to Lucent for acquiring the software was for purchase of a “copyrighted article” and “goods” and that it was not assessable to tax as “royalty” u/s 9(1)(vi) or Article 12(3) of the India-USA DTAA. The claim was upheld by the CIT(A). On appeal by the department to the Tribunal HELD allowing the appeal:

There is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. Where the software is an integral part of the supply of equipment, the consideration for that is not assessable as “royalty”. However, in a case where the software is sold separately, the consideration for it is assessable as “royalty”. On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident. The non-resident supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was “for the use of or the right to use copyright” and constituted “royalty” under s. 9(1)(vi) and Article 12(3) of the India-USA DTAA.