Tribunal Decision on Income Assessment & TDS for AY 2003-07

The tribunal upheld the reassessments for AY 2003-04 to 2006-07, determining that income had escaped assessment. Payments made to non-resident companies were classified as non-royalty, not subject to TDS. The assessee was not considered a Permanent Establishment for the non-resident companies. 100% depreciation on interior facilities was denied, and TDS credit discrepancies for various years were addressed. Partial disallowances under sec.10A/10B were adjusted, with some expenses being allowed and others disallowed. The tribunal provided relief on certain issues while upholding the AO's decisions on others.

---

---

Issues Involved:
1. Validity of income escaping assessments for AY 2003-04 to 2006-07.
2. Nature of payments made to non-resident companies - whether Royalty or not.
3. Permanent Establishment (PE) status of non-resident companies in India.
4. Denial of 100% depreciation on interior facilities for AY 2004-05.
5. Shortfall in TDS credits for AY 2004-05, 2009-10, and 2010-11.
6. Partial disallowance in computing relief under sec.10A/10B.

Detailed Analysis:

1. Validity of Income Escaping Assessments for AY 2003-04 to 2006-07:
The assessee argued that reopening of assessments without fresh material is invalid. They contended that the Tax Audit reports were already available during original assessments, and thus, reopening assessments based on TDS issues raised in AY 2007-08 constitutes a change of opinion. The tribunal held that as the original returns for AY 2003-04 and 2005-06 were processed under sec.143(1), there was no change of opinion. The Assessing Officer (AO) had reasons to believe that income had escaped assessment, thus validating the reassessments. The tribunal rejected the assessee's grounds and upheld the reassessments.

2. Nature of Payments Made to Non-Resident Companies - Whether Royalty or Not:
The assessee made payments to ACI Singapore and IRPL Australia for software products, arguing these were not royalties but payments for copyrighted articles, thus not subject to TDS under sec.195. The tribunal examined the agreements and concluded that the software products were standard and the assessee had no rights to modify or reproduce them. The tribunal referenced several judicial precedents, including Dassault Systems K.K., Dynamic Vertical Software India (P) Ltd., and Infrasoft Ltd., concluding that the payments were not royalties but purchase considerations for copyrighted articles. The tribunal also noted the retrospective amendment by Finance Act, 2012, but held that the assessee could not foresee this change, thus disallowing the sec.40(a)(i) disallowance.

3. Permanent Establishment (PE) Status of Non-Resident Companies in India:
The AO argued that the assessee acted as a PE for ACI Singapore and IRPL Australia. The tribunal, however, found that the assessee operated on a principal-to-principal basis, bore the entrepreneurial risk, and had no authority to conclude contracts on behalf of the non-resident companies. Thus, the tribunal held that the assessee did not constitute a PE for the non-resident companies in India.

4. Denial of 100% Depreciation on Interior Facilities for AY 2004-05:
The assessee claimed 100% depreciation on interior furnishing expenses, which the AO allowed at 10%, considering them capital in nature. During the hearing, the assessee did not press this issue further. Consequently, the tribunal decided this issue against the assessee.

5. Shortfall in TDS Credits for AY 2004-05, 2009-10, and 2010-11:
The assessee claimed discrepancies in TDS credits granted by the AO. For AY 2004-05, the AO withdrew TDS credit on amounts written off by the assessee. For AY 2009-10 and 2010-11, the AO restricted TDS credits based on Form 26AS. The tribunal directed the AO to verify and grant appropriate TDS credits based on withholding tax certificates and CBDT instructions.

6. Partial Disallowance in Computing Relief Under Sec.10A/10B:
The AO made partial disallowances of deductions under sec.10A/10B for various expenses. The tribunal directed the AO to reduce travel and communication expenses from both export turnover and total turnover, in line with the ITAT Special Bench decision in Sak Soft Ltd. However, the tribunal upheld the disallowance of foreign exchange loss from export turnover. Regarding unrealized foreign exchange, the tribunal directed corresponding deductions from total turnover.

Conclusion:
The tribunal partly allowed the appeals, providing relief on several issues while upholding the AO's stance on others. The key findings included validating the reassessments, classifying the payments to non-resident companies as non-royalty, and directing appropriate TDS credits and adjustments in sec.10A/10B deductions.

---