Karnataka High Court Upholds 60% Depreciation on Switches & Routers and Allows Forex Forward Contract Losses as Business Deduction — PCIT-4 Vs Mphasis Ltd.
Case Overview
Court: Karnataka High Court
Case: PCIT-4 Vs Mphasis Ltd.
**Appeal No.😗* ITA No. 62/2018
Assessment Year: 2009-10
Date of Order: 24/02/2021
TaxCorp Citation: 2026 taxguru.in 15296
The Karnataka High Court, in this ruling, dismissed the Revenue's appeal and ruled entirely in favour of the assessee on both substantial questions of law that had been admitted for consideration. The two issues before the Court were: (i) the admissibility of depreciation at 60% on switches and routers, and (ii) the deductibility of foreign exchange losses arising from forward contracts. Both questions were answered against the Revenue, and the appeal was dismissed without any order as to costs.
Background and Factual Matrix
Mphasis Ltd., a company incorporated under the Companies Act, 1956 and operating as a subsidiary within the Mphasis group, is engaged in providing software development services to its group companies. For the assessment year 2009-10, the assessee filed its return of income on 30.9.2009, declaring a total income of Rs.45,78,65,652/-.
The case was taken up for scrutiny, during which the Assessing Officer proposed several disallowances through a draft assessment order dated 28.3.2013. These included:
- Denial of deduction under
Section 10BandSection 10AAof the Income Tax Act, 1961 on profits attributable to onsite software development work subcontracted to Associated Enterprises (AEs); - Exclusion of foreign currency expenditure from export turnover for the purpose of computing the
Section 10Bdeduction; - Disallowance of depreciation claimed at 60% on switches and routers amounting to Rs.98,11,575/-, on the ground that such equipment does not qualify as parts or accessories of computers;
- Disallowance of foreign exchange loss of Rs.26,31,35,000/- arising from forward contracts, characterised by the Revenue as speculative or notional losses under
Section 43(5)of the Income Tax Act, 1961.
The Dispute Resolution Panel (DRP) confirmed the proposed disallowances vide its directions dated 30.12.2013. Following this, the Assessing Officer passed the final assessment order on 30.3.2014 incorporating the DRP's directions.
The assessee challenged the final assessment order before the Income Tax Appellate Tribunal (ITAT), 'A' Bench, Bengaluru. The Tribunal, after examining the applicable judicial precedents, allowed the appeal in part and set aside the disallowances by its order dated 9.8.2017. The Revenue thereafter filed the present appeal before the Karnataka High Court under Section 260-A of the Income Tax Act, 1961.
Substantial Questions of Law Admitted
The Karnataka High Court admitted the Revenue's appeal on the following two substantial questions of law:
Question 1: Whether the Tribunal on the facts and circumstances of the case, the Tribunal is right in law in setting aside the disallowance of depreciation @ 60% on switches and routers amounting to Rs.98,11,575/- by following the decision of Delhi High Court?
Question 2: Whether the Tribunal on the facts and circumstances of the case, the Tribunal is right in law in setting aside the disallowance of foreign exchange loss on forward contracts of Rs.26,31,35,000/- by following the decision of Bombay High Court in the case of CIT vs. D.Chetan and Co., in ITA No.278 of 2014 dated 01.10.2016, by allowing the foreign exchange loss as business loss even when the assessee camouflaged the forward contract loss i.e., marked to market loss as well as hedge loss, in the guise of exchange rate fluctuation and the loss is required to be treated as speculative as per the provisions of Section 43(5) of the Act?
Issue I — Depreciation at 60% on Switches and Routers
Revenue's Contention
The Revenue contended that switches and routers are not parts or accessories of computers and, therefore, cannot attract the higher depreciation rate of 60% applicable to computers and their peripherals. The disallowance covered an amount of Rs.98,11,575/-.