No Depreciation disallowance due to Non-Deduction of TDS on Software Expenses capitalized in books: ITAT

The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly-owned subsidiary of e-Gain Communication Corporation Inc. USA. It is engaged in the business of captive software development support services to its parent company. The return of income for the assessment year 2013-14 was filed on disclosing a total income of Rs. 3,67,24,573 after claiming exemption u/s 10A of the Income Tax Act, 1961.

On noticing the international transactions, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for the purpose of benchmarking the above international transactions. On the TPO’s order passed u/s 92CA(3) AO passed final assessment after draft assessment u/s 143(3) r.w.s. 144C(13) of the Act after making the addition of Rs. 2,45,13,781 on account of TP adjustments and disallowing the payment of Rs. 41,70,849 the payment made towards the software license fee to Sharda Integrated Systems Pvt. Ltd. on the ground of non-TDS was deducted.

Appeal before CIT(A): Being aggrieved by the above disallowances, an appeal was filed before the ld. CIT(A) partly allowed the appeal of the assessee by confirming the exclusion of the comparables. The ld. CIT(A) also confirmed the addition made u/s 40(a)(ia) of Rs. 41,70,849. However, the ld. CIT(A) deleted the addition on account of interest received from MSEDCL of Rs. 3,449.

Appeal before ITAT: Being aggrieved by the decision of the ld. CIT(A), the appellant is in appeal before the tribunal. The tribunal found that the issue in the present ground of appeal is covered in favour of the assessee by the decision in PCIT vs. Tally Solutions (P.) Ltd., (Karnataka) held that Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore, provisions of Section 40(a)(1) and (ia) of the Act are not applicable. Keeping in view the above the tribunal held that the provisions of section 40(a)(ia) are not applicable in the case of a claim for allowance of depreciation, which is a statutory deduction available to the assessee. The Tribunal held that the AO is not justified in invoking the provisions of section 40(a)(ia) in respect of the payment made for the purchase of software license in respect of which claim of depreciation was made.

With regards to the issue of the short credit for TDS, it was restored to the file of the AO with the direction to allow the credit for TDS made by MSEDCL on the interest income after due verification of Form 26AS and subject to the provisions of section 199 of the Act. Thus, this ground stands allowed for statistical purposes. Hence, the appeal filed by the assessee stands partly allowed for statistical purposes.