Applicability of section 40(a)(i) to overseas payments and provision for expenses

Facts:

• The assessee is a public limited company. It is engaged in the business of software development. During the year, the assessee claimed the following deductions:

-Bandwidth charges paid to foreign companies for data communication.

-Subscription charges to foreign companies

-Provision for warranty for post sales customer support

•The AO disallowed the above on the grounds that they were covered u/s 40(a)(i) and the assessee was liable to deduct tax on the same.

•The CIT(A) upheld the action of the AO.

Issues: The contention of the assessee before the AO. was that the abovementioned payments made are not in the nature of royalty, fees for technical service so relate to any item of expenditure covered u/s 40(a)(i).

Decision:

•        The payments towards bandwidth charges are not in the nature of managerial, consultancy or technical services nor is it for the use of or right to use industrial, commercial or scientific equipment. The service provides only ensure that the sufficient bandwidth is available on an ongoing basis to the ultimate users to uplink and downlink the signals

•        As regards the subscription charges, the Tribunal relied on its own decision in the assessee’s own case where it was held that the information was available on subscription to anyone willing to pay .It was copyrighted information and could not be passed on to anyone else. There was no license granted to the assessee to use in any manner or quote to anyone else. The access was restricted to specific individuals named by the assessee. The recipient did not have any PE in India. Further such an access to data base could not fall within the scope of Article 12(3)(a), as found in the DTAA with USA.

•        As regards the provisions for warranties, the Tribunal relied on its own decision in the assessee’s own case where it was held that the assessee is required to render post sales customer services in the nature of claims within the warranty period. Though no precise base is indicated by the assessee, yet it can be considered to be reasonable having regard to the claim made in the part.

•        Provision made for the warranty liability was an ascertained liability and that it could not be treated as a contingent liability.

Infosys Technologies Ltd. v. DCIT (10 taxmann.com 1) (Bang ITAT)

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