ITAT Chennai Allows 60% Depreciation on Software and Deletes Section 40(a)(i) Disallowance — Software Purchase Treated as Copyrighted Article, Not Royalty
Case Overview
Case: Plintron Mobility Solutions Pvt. Ltd. Vs ITO (ITAT Chennai)
Assessment Year: 2014-15
Pronounced: 27th October, 2021
The Chennai Bench of the Income Tax Appellate Tribunal delivered a significant ruling in favour of an assessee engaged in providing software solutions, resolving two critical disputes — the applicable rate of depreciation on purchased computer software, and the validity of a disallowance made under Section 40(a)(i) of the Income Tax Act, 1961 for alleged non-deduction of TDS on payments to a non-resident software supplier.
Condonation of Delay in Filing Appeal
Before proceeding to the substantive issues, the Tribunal addressed a preliminary objection regarding a delay of 12 days in filing the appeal before it. The assessee's representative explained that the delay arose from administrative activities connected with ongoing merger-related work, which caused a disruption in preparing the appeal papers, and that the delay was entirely unintentional without any strategic benefit derived therefrom.
The Departmental Representative opposed the condonation. However, the Tribunal, after hearing both sides, found that the explanation offered by the assessee constituted reasonable cause within the meaning of the relevant provisions of the Act. Accordingly, the delay was condoned and the appeal was admitted for adjudication on merits.
Background and Facts of the Case
The assessee company, operating in the business of software solutions, filed its return of income for Assessment Year 2014-15 on 29.11.2014, declaring a total income of ₹79,54,530. The case was selected for scrutiny, and assessment was completed under Section 143(3) of the Income Tax Act, 1961 on 21.12.2016. The Assessing Officer (AO) determined the total income at ₹2,09,01,140, making significant additions that included:
- Disallowance of excess depreciation claimed on computer software amounting to ₹69,14,390
- Disallowance under
Section 40(a)(i)for payments made to a non-resident USA-based supplier for purchase of software, on the ground that TDS was not deducted underSection 195of the Act
The assessee challenged both additions before the Commissioner of Income Tax (Appeals)-3, Chennai. The CIT(A), vide order dated 30.08.2017, confirmed both the additions. Aggrieved by the CIT(A)'s order, the assessee preferred a further appeal before the ITAT Chennai.
Issue 1: Rate of Depreciation on Computer Software — 60% or 25%?
Facts and Rival Contentions
The assessee had purchased software comprising Windows operating systems, MS Office, Solaris, and other operating systems aggregating to ₹1,92,79,450. Depreciation was claimed at 60% as applicable to computers and computer software under Rule 5 of the Income-tax Rules, 1962.