ATMs are Computers for Depreciation Purposes, ITAT Chennai Upholds 40% Rate in Favour of Financial Software and Systems Pvt. Ltd. - 2025-06-03

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ITAT Chennai Grants Major Relief to Financial Software and Systems; Upholds 40% Depreciation on ATMs and Deletes Key Adjustments

CHENNAI – In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Chennai Bench, has provided substantial relief to M/s. Financial Software and Systems Private Ltd. (FSS), overturning several high-value additions made by the tax authorities for the Assessment Year 2021-22. The tribunal, comprising Judicial Member Shri Manu Kumar Giri and Accountant Member Shri S. R. Raghunatha, allowed the assessee's appeal on multiple grounds, notably affirming the classification of ATMs as computers eligible for a higher depreciation rate of 40%.

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Case Background

The case stemmed from a final assessment order where the Assessing Officer (AO), following directions from the Dispute Resolution Panel (DRP), made several large-scale additions to FSS's income. These included a Transfer Pricing (TP) adjustment of ₹47.46 crores and corporate tax disallowances amounting to ₹101.63 crores. FSS, a company engaged in setting up and maintaining ATMs for banks, contested these additions before the ITAT.

The key disputes involved:

1. Transfer Pricing: A downward adjustment of ₹45.28 crores on marketing service fees paid to Associated Enterprises (AEs).

2. Corporate Tax: Disallowance of depreciation claimed at 40% on ATMs, restricting it to 15%.

3. Other Issues: Adjustments for interest on trade receivables, corporate guarantee fees, bad debts, and rejection of additional loss claims made by the assessee.

Key Arguments and Tribunal Findings

1. Depreciation on ATMs: Upholding Precedent

The tax authorities had argued that ATMs are merely electronic devices and not computers, thereby restricting the depreciation claim to 15% (applicable to 'Plant & machinery') instead of the 40% claimed by FSS (applicable to 'computers').

• Assessee's Argument: FSS contended that ATMs are computerized telecommunication devices integral to a computer network, allowing complex functions beyond simple cash withdrawal. They cited consistent rulings in their own case for previous assessment years (2013-14 to 2017-18 and 2020-21) by the same tribunal, which had allowed the higher depreciation rate.
• Tribunal's Ruling: Upholding the "rule of consistency," the ITAT sided with FSS. The bench noted that the issue had been decided in the assessee's favour in multiple prior years. It directed the AO to allow depreciation on ATMs at 40%, stating, "Therefore, following the rule of consistency, we are inclined to set aside the order of the AO/DRP on this issue and direct the AO to allow the deprecation on ATM Machines @ 40%."

2. Marketing Service Fees: Matter Remanded for Verification

The Transfer Pricing Officer (TPO) had determined the Arm's Length Price (ALP) of marketing fees paid to AEs as 'NIL', alleging no services were rendered.

• Assessee's Argument: FSS argued that it had appropriately benchmarked the transaction using the Transactional Net Margin Method (TNMM) with its foreign AEs as the 'tested party', which is a permissible approach. They submitted additional evidence, including invoices and email correspondence, to prove the rendition of services.
• Tribunal's Ruling: Citing the jurisdictional Madras High Court's decision in Virtusa Consulting Services (P.) Ltd. , the ITAT remanded the issue back to the TPO. It directed the TPO to accept the TNMM approach and consider the foreign AEs as the tested party, but only after verifying the additional evidence submitted by FSS to establish the actual receipt of services.

3. Interest on Trade Receivables: Adjustment Deleted

The AO had made an upward adjustment of ₹1.64 crores for notional interest on outstanding receivables from AEs.

• Assessee's Argument: FSS submitted that delayed payment is incidental to the main transaction and not a separate international transaction. Crucially, they pointed out that they followed a uniform practice of not charging interest on delayed payments from both AEs and non-AE customers.
• Tribunal's Ruling: The tribunal agreed with the assessee, finding that since the company did not charge interest to any of its customers, no adjustment was warranted. Relying on several precedents, the bench deleted the entire addition.

4. Corporate Guarantee Fees: Relief Granted

An adjustment of ₹53.58 lakhs was made for a corporate guarantee provided by FSS.

• Tribunal's Ruling: While acknowledging that a fee is chargeable, the tribunal provided significant relief. It directed the TPO to recompute the fee by restricting it to 0.5% (as against the TPO's 2.58%) and applying it only to the utilized loan amount of AED 3.1 million, not the sanctioned amount of AED 11 million.

5. Bad Debts and Additional Loss Claims

• Bad Debts: The tribunal deleted the disallowance of ₹7.16 crores for bad debts, finding that FSS had provided sufficient evidence that the corresponding income was offered to tax in previous years.
• Additional Claims: The tribunal also remitted the assessee's additional claims for a loss of ₹19.45 crores and a deduction of ₹4.02 crores, which were missed in the original return filed using unaudited financials. The bench directed the AO to verify these claims based on the audited financials and decide accordingly, setting aside the AO's reliance on the Goetz (India) Limited judgment.

Final Decision and Implications

The ITAT's order resulted in a "partly-allowed" appeal for Financial Software and Systems Pvt. Ltd. The ruling reinforces several key principles, including the importance of judicial consistency, the permissibility of using foreign AEs as tested parties in TP analysis (subject to evidence), and the non-applicability of notional interest adjustments where a uniform commercial policy exists for both related and unrelated parties. The decision on ATM depreciation, in particular, provides continued certainty for the assessee and the industry on this long-standing issue.