2014 (6) TMI 707 - AT - Income Tax

Tax Tribunal: Royalty, Export Turnover, Tax Deduction, Interest, Loss Set-Off, Professional Fee Disallowance

Income Tax Officer (TDS) Versus M/s. Cognizant Technology Solutions India Pvt. Ltd. And Others

The Tribunal held that payments to M/s. Sprint USA for IPLC services constituted 'Royalty'. Foreign currency and telecommunication expenses were included ... Royalty u/s 9(1)(vi) - TDS u/s 195 – hiring of International Private Leased Circuits [IPLC] - Nature of Remittance made to Non-resident Company – Whether the services provided by the overseas company constitutes ‘Royalty’ or not - Held that:- Following Verizon Communications Singapore Pte Ltd. (formerly MCI Worldcom Asia Pte Ltd.) Versus The Income Tax Officer International Taxation – I [2013 (11) TMI 1058 - MADRAS HIGH COURT] - even if the payments were treated as non-relating to the use of equipment, they should be considered as payment for the use of the process provided by the assessee, whereby through the assured bandwidth, the customer is guaranteed the transmission of data and the voice - the bandwidth is shared with others, but it has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty - the consideration being for the use and right to use of the process, it is ‘Royalty’, within the meaning of Clause-(iii) of Explanation-2 to section 9(1)(vi) of the Act – Decided in favor of Revenue. Computation of deduction u/s 10A of the Act - Exclusion of foreign currency expenditure from export turnover and total turnover – Exclusion of telecommunication expenses - Held that:- Following Patni Telecom P. Ltd., Vs. ITO [2008 (1) TMI 452 - ITAT HYDERABAD-A ] - expenses incurred in foreign exchange, as part of the export carried out by the assessee, cannot be excluded from the export turnover – thus, the AO is directed to include foreign currency expenditure to form part of export turnover of the assessee in computing deduction u/s.10A of the Act - Decided against Revenue. Disallowance u/s 14A of the Act – Held that:- Following GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2010 (8) TMI 77 - BOMBAY HIGH COURT] - the provisions of Rule 8D are applicable w.e.f. AY.2008-09 - The newly introduced provisions of Rule 8D have no retrospective applicability, the authorities below have erred in applying the same - The Tribunal in assessee’s own case for the AY.2005-06 has upheld the action of the Assessing Officer in making the dis-allowance @2% of the exempt income - the profit for the purpose of section 10A will be enhanced to the extent of dis-allowance - proportionate enhancement will be in the amount of deduction available u/s.10A – thus, the AO is directed to dis-allow 2% of the exempt income u/s.14A and further make proportionate enhancement in the amount of deduction available u/s.10A – Decided partly in favour of Assesseee. Deletion of dis-allowance of various expenses – Held that:- Following Bharat Earth Movers Vs. CIT [2000 (8) TMI 4 - SUPREME Court] - assessee is providing provision for expenditure incurred in the previous year itself - The amount was not paid by the end of the year and in certain cases bills were not received by the end of the year and in such cases the assessee is making a provision for such expenditure already incurred during the relevant previous year. In the course of the next previous year the assessee is making the payment and the differential amount, if any, is adjusted in its profit and loss account - This is a consistent practice followed by the assessee - The provision for unpaid expenses is not in the nature of contingent expenditure - It is a provision made against actual expenditure – Decided against Revenue. Issues Involved:1. Whether the payments made to M/s. Sprint USA for IPLC services constitute 'Royalty' under the Income Tax Act.2. Exclusion of foreign currency expenditure from export turnover and total turnover while computing deduction u/s.10A.3. Exclusion of telecommunication expenses from export turnover and total turnover while computing deduction u/s.10A.4. Disallowance u/s.40(a)(i) for non-deduction of tax at source on payments made to M/s. Sprint USA.5. Levy of interest u/s.234D.6. Set-off of current year's losses of eligible units against the profits of other units eligible for deduction u/s.10A.7. Disallowance u/s.14A for expenses incurred to earn tax-free income.8. Disallowance u/s.40(a)(i) in respect of professional/technical fee paid to non-resident entities.9. Disallowance of provisions for expenses.10. Rectification of order u/s.154 for not adjudicating a ground regarding enhanced deduction due to disallowance of expenses.Detailed Analysis:1. Payments to M/s. Sprint USA as 'Royalty':The Tribunal examined whether the payments made by the assessee to M/s. Sprint USA for IPLC services constituted 'Royalty' under the Income Tax Act. The Revenue argued that these payments were for the use of telecommunication equipment and thus should be considered 'Royalty'. The Tribunal referred to the Madras High Court judgment in the case of M/s. Verizon Communications Singapore PTE Ltd., which dealt with a similar issue and concluded that such payments are indeed 'Royalty'. Consequently, the Tribunal allowed the Revenue's appeals in ITA No.1535/Mds/2009 and ITA No.1536/Mds/2009, overturning the CIT(Appeals)' decision.2. Exclusion of Foreign Currency Expenditure:The Tribunal upheld the CIT(Appeals)' decision to include foreign currency expenditure in the export turnover while computing deduction u/s.10A, following the precedent set by the Hyderabad Bench in the case of Patni Telecom P. Ltd. The Tribunal dismissed the Revenue's appeal on this ground in ITA No.460/Mds/2010 and allowed the assessee's appeal in ITA No.751/Mds/2010.3. Exclusion of Telecommunication Expenses:Similar to the foreign currency expenditure, the Tribunal decided that telecommunication expenses should also be included in the export turnover for computing deduction u/s.10A. This decision was consistent with the Special Bench ruling in CIT Vs. Saksoft Limited. The Tribunal dismissed the Revenue's appeal on this ground in ITA No.460/Mds/2010 and ITA No.864/Mds/2010, and allowed the assessee's appeal in ITA No.751/Mds/2010.4. Disallowance u/s.40(a)(i):The Tribunal allowed the Revenue's appeal regarding the disallowance u/s.40(a)(i) for non-deduction of tax at source on payments made to M/s. Sprint USA, as the CIT(Appeals)' earlier order was overturned. This decision was reflected in ITA No.460/Mds/2010 and the cross-objections of the assessee were dismissed.5. Levy of Interest u/s.234D:The Tribunal dismissed the Revenue's appeal regarding the levy of interest u/s.234D, noting that the provisions were applicable only from AY 2004-05 onwards, as per the Special Bench ruling in ITO Vs. Ekta Promoters P. Ltd.6. Set-off of Current Year's Losses:The Tribunal allowed the assessee's appeal on the issue of set-off of current year's losses of eligible units against the profits of other units eligible for deduction u/s.10A, following the Karnataka High Court judgment in CIT Vs. Yokogawa India Ltd. and the Tribunal's own decision in the assessee's case for AY 2005-06.7. Disallowance u/s.14A:The Tribunal directed the Assessing Officer to disallow 2% of the exempt income u/s.14A and make proportionate enhancement in the amount of deduction available u/s.10A, following its earlier decision in the assessee's case for AY 2005-06.8. Disallowance u/s.40(a)(i) for Professional/Technical Fee:The Tribunal dismissed the assessee's appeal on this issue, as the assessee could not substantiate its claim that tax was not required to be deducted on payments made to non-resident entities for professional/technical services.9. Disallowance of Provisions for Expenses:The Tribunal dismissed the Revenue's appeal on this issue, following the Supreme Court ruling in Bharat Earth Movers Vs. CIT, which held that provisions for expenses already incurred are not contingent expenditures.10. Rectification u/s.154:The Tribunal dismissed the Revenue's appeal against the CIT(Appeals)' rectification order u/s.154, which allowed enhanced deduction due to disallowance of expenses, as the issue was already adjudicated in the assessee's favor in ITA No.751/Mds/2010.Conclusion:The appeals of the Revenue in ITA Nos. 1535/Mds/2009 and 1536/Mds/2009 were allowed. ITA No.460/Mds/2010 of the Revenue was partly allowed, and C.O.No.27/Mds/2010 of the assessee was dismissed. The appeal of the assessee in ITA No.751/Mds/2010 was partly allowed. The appeals of the Revenue in ITA Nos.864/Mds/2010 and 1922/Mds/2010 were dismissed.