2014 (3) TMI 1138 - AT - Income Tax

Tribunal Grants Relief on Various Tax Grounds, Upholds CIT(A) Decisions

M/s Cognizant Technology Solutions India Pvt. Ltd. Versus The Dy. CIT Large Taxpayer Unit Chennai And Vice-Versa.

The Tribunal partially allowed the assessee's appeal by granting relief on various grounds, including disallowance under Section 14A, eligibility for ... Disallowance u/s 14A r.w. rule 8D - whether rule 8D has been rightly invoked in the impugned assessment year 2008-09 or not? - Held that:- Hon'ble Delhi high court in Maxopp Investment Ltd vs CIT [2011 (11) TMI 267 - DELHI HIGH COURT] has held in clear terms that rule 8D cannot be invoked for the accounting period preceding 24.3.2008 i.e date of its notification and any such disallowance pertaining to exempt income can be made only by following ‘reasonable’ computation method. Drawing support therefrom, we hold that instead of computing disallowance by following rule 8D, ‘reasonable’ method has to be adopted. In our considered opinion, computation of ‘reasonable’ expenditure @ 50% of the disallowance of ₹ 74,41,489/- already made would serve the ends of justice. Eligibility of deduction u/s 10A in respect of income derived from on-site and off-shore software application maintenance - Held that:- Section 10A is a deduction provision which has to be liberally construed. In course of arguments, the assessee has highlighted the fact that in preceding assessment years, it has been getting benefit of deduction qua the same on-site application maintenance operations. Apart from this, the Revenue’s argument only turns out to be a hyper technical approach since in the circular dated 17.1.2013 whose contents have already been reproduced hereinabove, it is nowhere necessary that the software in question has to be mandatorily deployed at the holding company or the agreement should be between the ultimate client and assessee. The latter argument of the Revenue that there was no subsisting contract already stand repelled in our findings hereinabove that indeed there existed agreements between the assessee and its clients/associated entities. No merit in the ground raised by the Revenue that assessee’s income of ₹ 20.43 crores is not eligible for deduction u/s 10A of the Act since it had arisen from on-site and offshore software application maintenance activity. Not to exclude the foreign currency expenditure from the export turnover - Held that:- As decided in M/S. PENTASOFT TECHNOLOGIES LTD. [2010 (7) TMI 75 - MADRAS HIGH COURT] holding therein that such gains have to be treated as part of income ‘derived’ from export for the purpose of deduction u/s 10A of the Act. On being granted opportunity to rebut, the Revenue only reiterates the pleadings in the grounds. In our view, once the hon'ble jurisdictional high court has decided the very question of law which has also been echoed in the assessee’s own case, there is hardly any reason to adopt a different approach in the impugned assessment year. Consequently, this ground is rejected. Disallowance of expenditure incurred by the SEZ units which had not commenced operation - Held that:- DRP had given a clear finding that losses of 10AA unit which had not commenced commercial operations were in the nature of pre-operative expenses not to be set off against taxable profits of other units and the 'tribunal' had overlooked the said aspect. In our view, once on merits the issue has been decided in assessee’s favour, the order in question does not lose its significance on a mere technical ground. Moreover, on a query being put up to the bench to point out any distinction on facts, the Revenue has failed to draw any. We follow the order of the 'tribunal' and affirm the findings of the CIT(A). TDS u/s 195 - Disallowance u/s 40(a)(ia) qua annual maintenance contract paid by the assessee to overseas entities - Held that:- The annual maintenance charges amount to ‘technical services’ within the meaning of section 9(1)(vii), go against the case law of GE India Technology Centre Pvt. Ltd vs CIT [2010 (9) TMI 7 - SUPREME COURT OF INDIA] holding that section 195 applies only when the payment is taxable in India in the hands of non-resident payee which is not the case in hand as the concerned payees have carried out maintenance contracts outside India without ‘making available’ any technology. There is also no element of any technology changing hands as stipulated in the DTAA (supra). Thus, we agree with the findings of the CIT(A) that the assessee was not under any obligation to deduct TDS in question and section 9 r.w.s 195 is not applicable. In these circumstances, we reject the relevant grounds raised in the appeal Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.2. Eligibility for deduction under Section 10A for income derived from on-site and off-shore software application maintenance.3. Exclusion of foreign currency expenditure from export turnover.4. Exclusion of telecommunication expenditure from export turnover.5. Set-off of losses of eligible units against other taxable profits.6. Disallowance of expenditure incurred by SEZ units that had not commenced operation.7. Disallowance under Section 40(a)(ia) for annual maintenance contract payments to overseas entities.Issue-wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The sole substantive ground in the assessee's appeal was the disallowance of Rs. 74,41,489/- under Section 14A read with Rule 8D. The assessee argued that no expenditure was incurred for earning exempt income and that Rule 8D was not applicable retrospectively. The Tribunal held that Rule 8D could not be applied for the period preceding its notification on 24.3.2008, as per the Delhi High Court's decision in Maxopp Investment Ltd vs CIT. Instead, a 'reasonable' method should be adopted. The Tribunal granted partial relief by computing a reasonable expenditure at 50% of the disallowance.2. Eligibility for deduction under Section 10A:The Revenue challenged the CIT(A)'s decision allowing deduction under Section 10A for Rs. 20.43 crores earned from on-site and off-shore software maintenance. The Revenue argued that the assessee did not meet the necessary conditions, lacked a direct nexus with the eligible units in India, and had not signed proper contracts. The Tribunal found that the CIT(A) correctly applied Section 10A Explanation 3 and relevant Board Circulars, which deemed on-site software development as export. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had valid agreements with its clients and the Revenue's arguments were unsubstantiated.3. Exclusion of foreign currency expenditure from export turnover:The Revenue contested the CIT(A)'s direction to not exclude foreign currency expenditure from export turnover. The Tribunal referred to the jurisdictional High Court's decision in CIT vs Pentasoft Technologies Ltd and the Tribunal's own decision in the assessee's case for the previous year, which treated such gains as part of income derived from export. The Tribunal upheld the CIT(A)'s decision.4. Exclusion of telecommunication expenditure from export turnover:Both parties agreed that the issue was already decided in the assessee's favor by the Tribunal's order for the previous year. The Tribunal maintained consistency and rejected the Revenue's plea.5. Set-off of losses of eligible units against other taxable profits:The Revenue's grievance regarding the set-off of losses of eligible units was addressed by the CIT(A) based on the Tribunal's order for the previous year. The Tribunal upheld the CIT(A)'s decision, maintaining consistency.6. Disallowance of expenditure incurred by SEZ units that had not commenced operation:The CIT(A) relied on the Tribunal's order for the previous year to delete the disallowance. The Revenue argued that the Tribunal had overlooked the DRP's finding that such losses were pre-operative expenses. The Tribunal found no distinction on facts and upheld the CIT(A)'s decision.7. Disallowance under Section 40(a)(ia) for annual maintenance contract payments:The Assessing Officer disallowed Rs. 24,65,655/- under Section 40(a)(ia) for payments to overseas entities, arguing that TDS was required under Section 195. The CIT(A) held that the payments did not constitute 'fee for technical services' and were not taxable in India. The Tribunal agreed, noting that the payments were not taxable in India as per the GE India Technology Centre Pvt. Ltd vs CIT case and relevant DTAA provisions. The Tribunal upheld the CIT(A)'s decision.Conclusion:The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided detailed reasoning for each issue, maintaining consistency with previous decisions and relevant legal provisions.