The Income Tax Appellate Tribunal (ITAT), Bangalore Bench while deleting the disallowance against Infosys BPM Ltd. held that payments made to non-resident for acquiring off-the-shelf software are not royalty and no obligation to deduct TDS.
The revenue has appealed on the following issues in respect of deduction allowed under section 10A of the Act and whether CIT(A) has the power to remit the issue of disallowance of software expenses treating it as Capital expenditure to the file of AO.
While computing the deduction under section 10A, the assessee reduced communication expenses from both export turnover and total turnover and accordingly computed the amount of deduction. The AO was of the view that the communication expenses should be deducted from only export turnover and not from Total turnover. Accordingly, he recomputed the deduction under section 10A of the Act.
The Coram consisting of George George K. and B.R. Baskaran held that what is excluded from ‘export turnover’ must also be excluded from total turnover’ since one of the components of ‘total turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.
The ITAT while ruling on the issue of disallowance of software expenses by treating the same as capital in nature, being contested by the assessee held that the payment would be in the nature of business profits in the hands of non-resident and since admittedly the non-resident does not have a Permanent Establishment in India, the sum in question is not chargeable to tax in the hands of the non-resident.
Therefore, the Tribunal directed the AO to delete the disallowance of software expenses.
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