2015 (3) TMI 850 - HC - Income Tax

High Court Decision: Deductibility of Charges, Exchange Rate Expenditure, Business Profit Classification

The High Court upheld the tribunal's decision favoring the assessee on various issues including the deductibility of downlinking charges without TDS, ... Allowability of expenditure despite non-deduction of tax at source - treatment of payment as royalty for purposes of TDS and section 40(a)(i) - deductibility and exclusion of foreign-currency expenses from export/total turnover for benefit under section 10A and deduction under section 80HHE - treatment of exchange rate variation (EEFC) in computing export-related deductions - remand for determination of nature of foreign expenses (pre sales v. post sales / technical services) and consequential computation - classification of receipt as business income or capital gain for deduction under section 10A - revenue v. capital characterisation of club membership fee - conditions for allowance of provision for post sales customer supportAllowability of expenditure despite non-deduction of tax at source - treatment of payment as royalty for purposes of TDS and section 40(a)(i) - Deductibility of down linking payments to AT&T and MCI in view of earlier Tribunal finding that the payments were not royalty and there was no TDS liability. - HELD THAT: - The Tribunal in related Section 201 proceedings had held the assessee was not in default because the down linking payments could not be characterised as royalty. The High Court noted that, having regard to that tribunal finding (and the fact that the revenue had challenged it before the Supreme Court), there was no justification to disallow the expenditure in the assessment appeals. Accordingly the tribunal's allowance of the expenditure is not interfered with.Upheld the tribunal's allowance of the down linking payments; no substantial question of law is entertained in respect of this point.Allowability of expenditure despite non-deduction of tax at source - treatment of payment as royalty for purposes of TDS and section 40(a)(i) - Deductibility of subscription payments to Gartner (non resident) where TDS was not deducted. - HELD THAT: - The Court recalled that in a prior order it set aside the Tribunal's decision which had held such payments were not royalty, concluding the assessee was liable to deduct tax. Consequently the tribunal findings in these appeals that relied on its earlier decision had to be set aside. The Court directed that consequential action be taken by the assessing authority, taking note of any supreme court result in pending proceedings.Tribunal's favourable finding set aside; substantial question answered for the revenue and against the assessee (liability to deduct TDS upheld).Treatment of exchange rate variation (EEFC) in computing export-related deductions - Deductibility of exchange rate variation (EEFC) for computation of deduction under section 80HHE. - HELD THAT: - The Court followed its earlier decision in the assessee's case, holding that currency fluctuation losses which have nexus with export of software are not income from other sources and the concurrent authorities' findings in favour of the assessee did not warrant interference. Hence the tribunal order allowing exclusion stands.Tribunal's allowance of exchange rate variation is upheld in favour of the assessee.Deductibility and exclusion of foreign-currency expenses from export/total turnover for benefit under section 10A and deduction under section 80HHE - remand for determination of nature of foreign expenses (pre sales v. post sales / technical services) and consequential computation - Allowability/exclusion of foreign currency travel, professional charges, maintenance and other foreign expenses for computing deduction under section 80HHE and/or section 10A. - HELD THAT: - This Court recalled its prior directions that the assessing officer must examine material produced by the assessee and record findings on the nature of activities to determine whether particular foreign expenses relate to export of computer software (freight/telecom/insurance) or to technical services rendered outside India; where technical services are involved, only actual expenditure incurred in rendering such services outside India may be excluded. The tribunal's blanket disallowance was set aside and the matter remitted for enquiry and fresh determination in light of the Court's observations and applicable legal principles.Tribunal's order set aside and matter remanded to the assessing authority for fresh enquiry and computation.Deductibility and exclusion of foreign-currency expenses from export/total turnover for benefit under section 10A and deduction under section 80HHE - Exclusion of down linking charges from export turnover and total turnover for computation under section 10A. - HELD THAT: - The assessing officer's computation for section 10A (as reproduced in the record) already deducted the down linking charges from both export turnover and total turnover. Therefore there was no error in the appellate authorities' treatment and no interference was necessary.Issue resolved in favour of the assessee - the down linking payments were already excluded in computing section 10A benefit.Deductibility and exclusion of foreign-currency expenses from export/total turnover for benefit under section 10A and deduction under section 80HHE - Whether 'total turnover' for computation under section 80HHE means the entire business turnover of the assessee or only turnover of the section 80HHE business (software). - HELD THAT: - Relying on this Court's decision in Sasken Communication Technologies Ltd., the Court held that 'total turnover of the business' in section 80HHE refers only to the business carried on under section 80HHE (i.e., the software business). Turnover of separate units qualifying under section 10A need not be included in computing total turnover for section 80HHE purposes except as may be relevant to compute profit from export of computer software.Answered against the revenue and in favour of the assessee: only turnover of the 80HHE business is to be taken as 'total turnover' for section 80HHE.Conditions for allowance of provision for post sales customer support - remand for determination of claim in light of Supreme Court principles - Allowability of provision for post sales customer support where particulars and method of computation were not furnished. - HELD THAT: - The Court referred to its earlier judgment applying the Supreme Court's decision in Rotork Controls, noting the Tribunal had not considered the necessary conditions and factors for allowing post sales support claims. Given those omissions, the Tribunal's allowance could not be sustained. The Court refrained from expressing on merits and remitted the matter to the Tribunal to decide afresh in accordance with the principles laid down by the Supreme Court.Tribunal's finding allowing the provision is set aside and the matter is remanded for fresh consideration in accordance with law.Revenue v. capital characterisation of club membership fee - Whether club membership fee paid by the assessee is a revenue or capital expenditure. - HELD THAT: - Following the Court's earlier decision and settled principles (including Empire Jute), the appellate authorities and the Tribunal correctly held that expenditure on acquisition of club membership confers benefits that are not of such an enduring capital nature as to render the payment capital; commercially the expenditure facilitates business operations and is revenue in character. The concurrent findings were not perverse.Answered in favour of the assessee: club membership fee is revenue expenditure.Classification of receipt as business income or capital gain for deduction under section 10A - Tax characterisation of consideration received on sale of 'Onscan International Notification System' - capital gain or business profit. - HELD THAT: - Relying on this Court's prior decision in the assessee's case, the consideration was held to constitute business income (not capital gain). Consequently the amount was rightly treated as business profit and eligible for deduction under section 10A as applied by the Tribunal.Held in favour of the assessee: the receipt is business income, not capital gain, and the section 10A treatment was correct.Final Conclusion: The appeals were disposed of by selectively upholding several tribunal findings in favour of the assessee (down linking charges, exchange rate variation, exclusion under section 10A for the down linking amount, club membership treated as revenue, and sale proceeds treated as business income) while setting aside the tribunal on subscription payments to Gartner (liability to deduct TDS) and remitting specified issues (foreign currency expenses requiring factual determination and the provision for post sales support) for fresh consideration in accordance with the Court's directions and applicable precedents. Issues Involved:1. Allowable deduction of downlinking charges without TDS under Section 195.2. Allowable deduction of subscription charges without TDS under Section 195.3. Deductibility of exchange rate variation expenditure under Section 80HHE.4. Deductibility of foreign currency expenses under Section 80HHE.5. Exclusion of downlinking charges from export and total turnover under Section 10A.6. Computation of total turnover for deduction under Section 80HHE.7. Allowable deduction for provision for post-sales customer support service.8. Allowable deduction for club membership fee.9. Classification of sale proceeds from 'Onscan International Notification System' as revenue expense or capital asset.10. Not pressed.Detailed Analysis:Issue 1: Allowable Deduction of Downlinking Charges Without TDSThe tribunal held that the assessee was not in default for non-deduction of tax on downlinking charges, as these payments were not treated as royalty under Section 9(1)(vii) of the Income Tax Act. The High Court found no substantial question of law arising from this issue and upheld the tribunal's decision.Issue 2: Allowable Deduction of Subscription Charges Without TDSThe tribunal's decision, based on an earlier case, was set aside by the High Court. The High Court ruled that the payment to M/s Gartner, a non-resident company, amounted to royalty and thus required TDS under Section 195. The matter was remanded to the assessing authority to consider the Apex Court's judgment on the issue.Issue 3: Deductibility of Exchange Rate Variation ExpenditureThe High Court referenced its previous judgment, which held that fluctuations in currency valuation directly related to the export of software should not be included as income from other sources. The High Court upheld the tribunal's decision favoring the assessee.Issue 4: Deductibility of Foreign Currency ExpensesThe High Court referred to its earlier judgment, which required the assessing officer to examine the nature of the expenses and their relation to the export of computer software. The matter was remanded back to the assessing authority for further examination.Issue 5: Exclusion of Downlinking Charges from Export and Total TurnoverThe High Court noted that the assessing officer had already deducted the downlinking charges from both export and total turnover. Therefore, this issue was found to have no merit.Issue 6: Computation of Total Turnover for Deduction Under Section 80HHEThe High Court referenced its previous judgment, which held that the total turnover for Section 80HHE should include only the business of software and not other units under Section 10A. The High Court upheld the tribunal's decision favoring the assessee.Issue 7: Allowable Deduction for Provision for Post-Sales Customer Support ServiceThe High Court referred to its earlier judgment, which remanded the matter to the tribunal for fresh consideration in light of the Supreme Court's guidelines in Rotork Controls India (P.) Ltd.'s case. The tribunal's findings were set aside for reconsideration.Issue 8: Allowable Deduction for Club Membership FeeThe High Court upheld its previous judgment, which classified club membership fees as revenue expenditure and not capital expenditure. The tribunal's decision favoring the assessee was upheld.Issue 9: Classification of Sale Proceeds from 'Onscan International Notification System'The High Court referenced its earlier judgment, which classified such proceeds as business profit rather than capital gain. The tribunal's decision treating the proceeds as business profit and allowing deduction under Section 10A was upheld.Issue 10: Not PressedThe High Court noted that this issue was not pressed and did not require consideration.Additional Issue in ITA Nos. 192 and 194 of 2008: Deductibility of Foreign Currency Expenses Under Section 10AThe High Court remanded the matter back to the assessing authority to determine whether the technical services rendered were post-sales or pre-sales and to decide on the exclusion of expenses in light of the relevant statutory provisions and judicial decisions.Conclusion:The appeals were disposed of with specific directions for remand and reconsideration on certain issues, while other issues were resolved in favor of the assessee based on previous judgments and legal principles.