2016 (11) TMI 1484 - AT - Income Tax

High Court Decision: Specific Directions on Tax Issues

The appeal was partly allowed with specific directions given for each issue raised in the judgment. The tribunal dismissed transfer pricing adjustments in ... Disallowance under section 40(a)(i) for failure to deduct tax at source - application of a higher court ruling and remand for fresh decision in consonance with that judgment - deduction under section 10A - computation and treatment of export turnover and total turnover - apportionment of interest income for computation of deduction under section 10A - verification and credit of advance tax - transfer pricing adjustments not pressed and dismissedTransfer pricing adjustments not pressed and dismissed - Transfer pricing adjustments in the Software development service segment and I.T. enabled service segment which were not pressed by the assessee - HELD THAT: - The assessee did not press the grounds relating to transfer pricing adjustments of Rs. 29.90 crore and Rs. 9.30 crore in the respective service segments. Having not been pursued before the Tribunal, those grounds were dismissed. [Paras 3]Dismissed as not pressed by the assessee.Disallowance under section 40(a)(i) for failure to deduct tax at source - application of a higher court ruling and remand for fresh decision in consonance with that judgment - Disallowance of management service fees under section 40(a)(i) on the ground that tax was not withheld in view of the AAR ruling - HELD THAT: - The Assessing Officer disallowed management service fees paid to Groupe Steria SCA under section 40(a)(i) relying on an AAR ruling that such payments constituted 'fees for technical services' attracting withholding under section 195. The Tribunal noted that the assessee successfully challenged the AAR ruling before the Hon'ble Delhi High Court, which held that the payments were not taxable as fees for technical services and were not liable to withholding under section 195. In view of that higher court judgment, the Tribunal set aside the impugned order on this issue and directed the AO to decide the matter afresh in conformity with the Delhi High Court's judgment. [Paras 6]Impugned disallowance set aside and matter remanded to the AO for fresh decision in consonance with the Hon'ble Delhi High Court's judgment.Deduction under section 10A - computation and treatment of export turnover and total turnover - Whether telecommunication charges, subsistence for onsite employees and standby and callout charges excluded from 'export turnover' must also be excluded from 'total turnover' when computing deduction under section 10A - HELD THAT: - The AO excluded the three specified items from 'export turnover' but did not correspondingly exclude them from 'total turnover' in the section 10A deduction formula. The Tribunal held that excluding an item from the numerator ('export turnover') necessarily requires its exclusion from the denominator ('total turnover') because total turnover includes export turnover; an item not part of export turnover cannot constitute part of total turnover for the purpose of the deduction. The Tribunal followed precedent to direct simultaneous exclusion of those items from total turnover. [Paras 9]Directed that the three specified expenses be excluded from 'total turnover' as well when recomputing deduction under section 10A.Apportionment of interest income for computation of deduction under section 10A - Whether interest income apportioned by the AO to the eligible unit should be further reduced from the business profits used to compute deduction under section 10A - HELD THAT: - The assessee's audited P&L and computations showed that the large quantum of interest income was excluded from 'Profit before tax' and offered under 'Income from other sources', with only a small amount reflected against the eligible unit. The AO nonetheless apportioned total interest across units by turnover and reduced the business profits of the eligible unit by the apportioned interest. The Tribunal found that the apportioned interest did not form part of the book business profits used by the assessee to compute the section 10A deduction, and that the assessee had already excluded interest to arrive at profits eligible for section 10A. Accordingly, the AO could not again reduce the eligible business profits by the apportioned interest amount. [Paras 11, 12, 13]Overturned the AO's reduction; directed that the apportioned interest not be separately reduced from the business profits eligible for section 10A.Verification and credit of advance tax - Allowance of credit for advance tax claimed by the assessee - HELD THAT: - The assessee contended that the AO allowed a lesser advance tax credit than that claimed. The Tribunal did not decide the quantum on merits but directed the AO to verify the assessee's contentions and allow the proper amount of advance tax credit after verification. [Paras 15]AO directed to verify the records and allow the proper amount of advance tax credit claimed by the assessee.Verification and credit of advance tax - Computation of interest under sections 234B and 234C as consequential to advance tax credit and tax computation challenges - HELD THAT: - Interest issues under sections 234B and 234C were treated as consequential. The Tribunal referred specific alleged erroneous computation of interest chargeable (discrepancy in figures) back to the AO for verification and appropriate decision in accordance with its directions on advance tax credit and tax computation. [Paras 16, 17]AO directed to verify the assessee's contentions regarding interest computation and decide accordingly; the interest levy issue is consequential.Final Conclusion: The appeal is partly allowed: transfer pricing grounds not pressed were dismissed; the disallowance under section 40(a)(i) is set aside and remanded to the AO for fresh decision in conformity with the Delhi High Court; deduction under section 10A is corrected by excluding specified expenses from total turnover and by disallowing a further reduction for apportioned interest already excluded from business profits; the AO is directed to verify and allow proper advance tax credit and to reconsider interest computations consequentially. Issues Involved:1. Transfer pricing adjustments in 'Software development service segment' and 'I.T. enabled service segment'2. Disallowance under section 40(a)(i) for Management services fees3. Exclusion of certain expenses from 'Export turnover' for deduction under section 10A4. Allocation of interest income for deduction under section 10A5. Computation of book profit under section 115JB6. Credit for advance tax7. Levy of interest under sections 234B and 234C8. Computation of total tax liabilityTransfer Pricing Adjustments:The appeal addressed transfer pricing adjustments in two segments, which were not pressed by the assessee's representative. Consequently, these grounds were dismissed by the tribunal.Disallowance under Section 40(a)(i):The AO disallowed the expenditure on Management services fees due to non-deduction of tax at source. However, the High Court ruled in favor of the assessee, vacating the AAR's decision. The tribunal set aside the order and directed the AO to reconsider the issue in line with the High Court's judgment.Exclusion of Expenses for Deduction under Section 10A:The tribunal found that expenses excluded from 'Export turnover' should also be excluded from 'Total turnover' for computing deduction under section 10A, following legal precedents. The tribunal directed the exclusion of specified expenses from 'Total turnover' accordingly.Allocation of Interest Income for Deduction under Section 10A:The tribunal analyzed the treatment of interest income for deduction under section 10A. It concluded that interest income allocated by the AO did not form part of the profits eligible for deduction. Therefore, the tribunal overturned the order to prevent further reduction of allocated interest from eligible business profits.Computation of Book Profit under Section 115JB:The ground regarding the computation of book profit under section 115JB was not pressed and stood dismissed.Credit for Advance Tax and Levy of Interest:The tribunal directed the AO to verify and allow the proper amount of credit for advance tax. The issues related to the levy of interest under sections 234B and 234C were deemed consequential and required verification by the AO.Computation of Total Tax Liability:An issue was raised concerning the computation of total tax liability, specifically regarding the interest chargeable under sections 234B and 234C. The AO was directed to verify the contentions and decide accordingly.In conclusion, the appeal was partly allowed, with specific directions given for each issue raised in the judgment.