Tribunal dismisses Department's appeal, partially allows appeal on software expenses, directs AO to allow depreciation

The Tribunal dismissed the Department's appeal on various grounds, except for partially allowing the appeal related to software expenses by directing the AO to allow depreciation. The cross-objections filed by the assessee were dismissed as not pressed. The final order was pronounced on November 4, 2015.

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Issues Involved:

1. Deduction of Overseas Taxes Paid
2. Penal Interest Paid in the USA
3. Software Expenses and Non-Deduction of TDS
4. Claim under Section 10A on Units with Previous Section 80HHE Deductions
5. Transfer Pricing Adjustments with Associated Enterprises

Detailed Analysis:

1. Deduction of Overseas Taxes Paid:

The issue revolves around whether the overseas taxes paid by the assessee amounting to Rs. 216,27,28,177/- can be allowed as a deduction. The Assessing Officer (AO) disallowed this deduction under section 40(a)(ii) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction for state taxes but not for federal taxes, stating that the amended provisions of section 40(a)(ii) are retrospective and federal tax is eligible for relief under section 90. The Tribunal upheld the decision against the assessee based on the precedent set in the case of "Tata Sons Ltd."

2. Penal Interest Paid in the USA:

This issue is related to the first one, where the CIT(A) allowed the penal interest paid towards late payment of taxes in the USA amounting to Rs. 4,61,683/-. The Tribunal rejected this ground as well, following the same reasoning as in the first issue.

3. Software Expenses and Non-Deduction of TDS:

The assessee claimed a deduction for software expenses amounting to Rs. 25,11,88,831/-, which was disallowed by the AO under section 40(a)(i) due to non-deduction of TDS. The CIT(A) allowed the claim, agreeing with the assessee that the payment for software is for copyrighted articles and not royalty, hence not chargeable to tax in India in the absence of a permanent establishment. The Tribunal directed the AO to allow depreciation on the imported software, accepting the assessee's alternative plea.

4. Claim under Section 10A on Units with Previous Section 80HHE Deductions:

The AO did not allow the deduction under section 10A for units that had previously claimed deductions under section 80HHE, citing section 80HHC(5). The CIT(A) allowed the claim, following appellate orders from previous years. The Tribunal upheld the CIT(A)'s decision, referencing several case laws that support the claim of deduction under section 10A for the residual years within the block of 10 years, even if section 80HHE was claimed earlier.

5. Transfer Pricing Adjustments with Associated Enterprises:

The AO made a reference to the Transfer Pricing Officer (TPO) without independently examining the transfer pricing report submitted by the assessee. The CIT(A) deleted the additions made on account of transfer pricing adjustments. The Tribunal upheld the CIT(A)'s order, emphasizing that the AO and CIT(A) failed to discharge their judicial functions by not applying their minds to the transfer pricing report or other relevant materials. The Tribunal also noted that no TP adjustment can be made where the assessee enjoys benefits under sections 10A or 80HHE, or where the tax rate in the country of the associated enterprise is higher than in India.

Conclusion:

The Tribunal dismissed the Department's appeal on most grounds, except for partially allowing the appeal concerning software expenses by directing the AO to allow depreciation. The cross-objections filed by the assessee were dismissed as not pressed. The final order was pronounced on November 4, 2015.

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