2015 (4) TMI 794 - AT - Income Tax

Tribunal rules on internet charges and tax exemptions, directs reassessment.

The Tribunal dismissed the Revenue's appeals on the disallowance of internet charges and partly allowed the appeal regarding the Section 10B exemption. ... Dis-allowance u/s section 40(a)(i) of Income Tax Act, 1961 - Non deduction of TDS on Internet charges paid to non-resident - DTAA between USA and India - Deduction under section 10B available to 100% EOU - Held that:- As per order of CIT(A),the amount paid to the non-resident is towards hiring of storage space. The payment has been made to a person whose business is to make available storage space to various parties. Therefore.the payments made to the non-resident only constitutes its business income. The business income earned by a non resident who does not have a Permanent Establishment (PE) in India cannot be taxed in India as per DTAA between USA and India. On going through the CIT(A) order, we do not find any good reason to interfere with the findings of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under section 40(a)(i) of the Act. The findings of the Commissioner of Income Tax (Appeals) have not been rebutted with any evidence by the Revenue. We have also gone through the assessment order and find that the Assessing Officer has not given any finding as to how data storage charges paid by the assessee are falling either under royalty or fees for technical services so as to deduct TDS on such payments made to non-resident outside India. In the circumstances, we uphold the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance and reject the grounds raised in all the appeals of the Revenue on this issue. Deduction u/s 10B of Income Tax Act, 1961 - As could be seen from the definition of 100% EOU, in order to be 100% export-oriented undertaking and claim exemption under section 10B, an undertaking must have been approved by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 and the rules made under that Act. In this case, the assessee is a unit recognized by the STPI. Nothing is placed on record to suggest that this is a hundred percent export oriented undertaking approved by the Board appointed by the Central Government under section 14 of the Industries (Development and Regulation) Act, 1951. An identical situation arose in the case of CIT Vs. Regency Creations Ltd. [2012 (9) TMI 627 - DELHI HIGH COURT] that units set up under STP scheme are different from those that govern units set up as hundred percent export oriented undertaking and so approved by the Board. The Hon’ble High Court held that a unit which is not approved by the Board appointed by the Central Govt. in exercise of powers conferred under section 14 of the Industries (Development and Regulation) Act, 1951 is not entitled for exemption under section 10B of the Act. The Hon’ble High Court held that assessee holding approval under Software Technology Park Scheme is not entitled to exemption under section 10B of the Act. This decision squarely applies to the assessee in the absence of any approval placed on record by the assessee from the Board appointed by the Central Govt. Neither the Assessing Officer nor the Commissioner of Income Tax (Appeals) considered whether the assessee is entitled for deduction under section 10A of the Act in the proceedings before them. In view of our above findings, we set aside the order of the Commissioner of Income Tax (Appeals) and remit the matter back to the file of the Assessing Officer to examine the claim of the assessee under section 10B of the Act in the light of the decision of the Hon’ble Delhi High Court in the case of Regency Creations Ltd. (supra) after providing adequate opportunity to the assessee. The alternative plea made by the assessee may also be examined by the Assessing Officer in case the assessee is not entitled for exemption under section 10B of the Act. - Decided partly in favour of revenue. Issues Involved:1. Condonation of delay in filing cross objection.2. Disallowance of internet charges under Section 40(a)(i) of the Income Tax Act.3. Eligibility for exemption under Section 10B of the Income Tax Act.4. Alternative claim for exemption under Section 10A of the Income Tax Act.Issue-wise Detailed Analysis:1. Condonation of Delay in Filing Cross Objection:The assessee filed a cross objection for the assessment year 2004-05, which was delayed by 1101 days. The assessee explained that the delay was due to the department filing additional grounds of appeal on 11.3.2013 and the assessee becoming aware of a Delhi High Court decision review only in August 2013. The Tribunal found the reasons satisfactory and condoned the delay, admitting the cross objection in the interest of justice.2. Disallowance of Internet Charges under Section 40(a)(i):The common issue in all appeals was the disallowance of internet charges paid to INetU, a non-resident, under Section 40(a)(i) due to non-deduction of TDS. The Assessing Officer disallowed the charges, considering them as fees for technical services. However, the Commissioner of Income Tax (Appeals) allowed the claim, stating that the payments were not taxable in India as per the DTAA between the USA and India, and hence, no TDS was required. The Tribunal upheld this finding, noting that the payments were for data storage services and not for the use of any industrial, commercial, or scientific equipment. The Tribunal also noted that the Assessing Officer did not provide any evidence to classify the payments as royalty or fees for technical services.3. Eligibility for Exemption under Section 10B:For the assessment year 2004-05, the Revenue challenged the eligibility of the assessee for exemption under Section 10B, arguing that the assessee was not a 100% export-oriented undertaking as per Explanation 2(iv) to Section 10B. The Assessing Officer had denied the exemption, claiming that the STPI unit did not have new computers and used the DTI unit's resources. However, the Commissioner of Income Tax (Appeals) allowed the exemption, noting that the STPI unit had new computers and was located on a separate floor. The Tribunal referred to the Delhi High Court's decision in CIT Vs. Regency Creations Ltd., which held that STPI units are different from 100% export-oriented undertakings approved by the Board under the Industries (Development & Regulation) Act, 1951. The Tribunal remitted the matter back to the Assessing Officer to re-examine the claim in light of this decision.4. Alternative Claim for Exemption under Section 10A:The assessee's cross objection included an alternative claim for exemption under Section 10A if Section 10B exemption was denied. The Tribunal noted that neither the Assessing Officer nor the Commissioner of Income Tax (Appeals) had considered this claim. The Tribunal directed the Assessing Officer to examine the alternative claim under Section 10A, considering the assessee's submissions that it met the requirements for this exemption.Conclusion:The Tribunal dismissed the Revenue's appeals related to the disallowance of internet charges and partly allowed the appeal concerning the Section 10B exemption for statistical purposes. The cross objection filed by the assessee was also partly allowed for statistical purposes. The Tribunal directed the Assessing Officer to re-examine the Section 10B exemption claim and consider the alternative claim under Section 10A.