2017 (5) TMI 9 - AT - Income Tax

Appeal partly allowed on Section 40(a)(ia) for software purchases & income estimation. Remand for unexplained cash credits.

The appeal of the assessee is partly allowed, affirming the CIT(A)'s decision on the non-applicability of Section 40(a)(ia) for software purchases and ... Deduction under section 10A - Disallowance under section 40(a)(ia) for failure to deduct tax at source - Royalties and taxability of cross border software transactions - Permanent establishment and taxation of overseas branch profits - Estimation of income on rejection of books of account - Unexplained cash credits as income from other sourcesDisallowance under section 40(a)(ia) for failure to deduct tax at source - Royalties and taxability of cross border software transactions - Permanent establishment and taxation of overseas branch profits - Validity of the disallowance made by the AO under section 40(a)(ia) in respect of software purchases and whether TDS was required on transactions effected by the overseas permanent establishment - HELD THAT: - Tribunal held that the transactions in question were effected by the assessee's permanent establishment in the USA and the sales and purchases occurred outside India; accordingly those overseas transactions were not taxable in India for that year. Applying the principle that where no part of the payment is chargeable to tax in India there is no obligation to deduct TDS under section 195, and having regard to the Special Bench authority relied upon, the Tribunal found that section 40(a)(ia) was not attracted since there were no outstanding payables at the end of the year which could be disallowed. The CIT(A)'s deletion of the addition was affirmed to the extent that branch accounted purchases and overseas turnover are outside the scope of Indian TDS obligations. [Paras 5, 8]Addition under section 40(a)(ia) in respect of overseas software purchases deleted and CIT(A) order affirmed on this pointDeduction under section 10A - Estimation of income on rejection of books of account - Whether deduction under section 10A was properly denied by the CIT(A) and the correctness and scope of estimation of profits after rejection of books - HELD THAT: - The Tribunal found that the assessee was prima facie eligible for deduction under section 10A and there was no basis for the CIT(A)'s categorical denial of 10A; accordingly the CIT(A)'s order refusing the deduction was modified in favour of the assessee. As to estimation, the Tribunal noted that the CIT(A) rejected the books and estimated profit at 10% but the assessee had earlier accepted estimation up to 6%. The Tribunal observed that whatever rate (3%, 6% or 10%) is adopted, the entire income (as estimated) relating to the overseas branch profits would in any event be outside Indian tax. The Tribunal therefore directed that estimation at 10% (as fixed by CIT(A)) is to be applied only to the software exports from India (export turnover shown as Rs. 20,80,35,745/- in the record) and that the AO must verify factual aspects including whether sale proceeds have been received into India in accordance with Explanation 2 to section 10A before finalising computation. If the income so determined is less than the income offered under MAT, the AO is directed to accept the MAT income offered by the assessee. [Paras 9, 10, 11]CIT(A)'s denial of deduction under section 10A set aside; estimation of income to be applied only on export turnover from India and AO directed to verify receipt of export proceeds and allow section 10A as applicableUnexplained cash credits as income from other sources - Estimation of income on rejection of books of account - Treatment of unexplained cash credits added by the AO and whether they are extinguished by the estimation applied by CIT(A) - HELD THAT: - The Tribunal recognised the settled principle that unexplained cash credits can be assessed as income from other sources where not connected with business, and held that the CIT(A)'s conclusion that such credits were covered by the general estimation was not sustainable on principle in view of Supreme Court authority. However, since the assessee asserted that documentary evidence was furnished before the AO to explain the credits, the Tribunal restored the matter to the file of the AO for fresh examination. The AO was directed to examine the evidence and determine whether the cash credits are explained or unexplained; the assessee was directed to furnish necessary evidence and cooperate with enquiries. [Paras 14]Issue of unexplained cash credits remanded to AO for fresh factual examination; Revenue's grounds allowed for statistical purposesFinal Conclusion: Assessee's appeal is partly allowed and Revenue's appeal is partly allowed for statistical purposes: disallowance under section 40(a)(ia) deleted in respect of overseas branch transactions; denial of deduction under section 10A set aside and AO directed to estimate income (at 10% as fixed by CIT(A)) only on export turnover from India after verifying receipt of proceeds and to allow section 10A as applicable; issue of unexplained cash credits remanded to the AO for fresh verification. Issues Involved:1. Disallowance of software purchases under Section 40(a)(ia).2. Re-computation of exemption under Section 10A.3. Unexplained cash credits treated as income from other sources.4. Estimation of income and rejection of books of account.Detailed Analysis:1. Disallowance of Software Purchases under Section 40(a)(ia):The Assessing Officer (AO) disallowed the software purchases amounting to Rs. 64,09,69,696/- under Section 40(a)(ia) due to non-deduction of TDS. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the transactions were conducted by the Permanent Establishment (PE) in the USA and the sale took place in the USA, thus not taxable in India. CIT(A) cited judicial pronouncements, including the ITAT Hyderabad case of AP Power Generation Corporation Ltd and ITAT Delhi case of Royal Airways Ltd, to support the conclusion that no TDS was required as the transactions were not taxable in India. The ITAT affirmed the CIT(A)'s decision, noting there were no outstanding payables at the end of the year, hence Section 40(a)(ia) was not applicable.2. Re-computation of Exemption under Section 10A:The AO restricted the deduction under Section 10A and reworked the profit, allowing a deduction of Rs. 4,05,17,110/-. CIT(A) found that the AO erroneously treated the entire turnover as revenue derived from exports from India, ignoring the PE in the USA. CIT(A) rejected the books of account due to lack of verifiable details and estimated the net profit at 10% of the turnover, denying any further deduction under Section 10A. ITAT modified this, affirming the CIT(A)'s decision that overseas profits are not taxable in India and directing the AO to estimate income at 10% of the Indian export turnover, allowing the deduction under Section 10A as applicable.3. Unexplained Cash Credits Treated as Income from Other Sources:The AO added Rs. 1,55,25,000/- as unexplained cash credits under 'income from other sources'. CIT(A) included these in the estimation of profit, but ITAT disagreed, citing the Supreme Court's judgment in Kale Khan Mohammad Hanif Vs. CIT, which allows unexplained cash credits to be taxed separately. ITAT remanded the issue to the AO to verify the genuineness of the credits with the evidence provided by the assessee.4. Estimation of Income and Rejection of Books of Account:CIT(A) rejected the books of account due to discrepancies and estimated the net profit at 10% of the turnover. The assessee contended that the estimation should be limited to the Indian export turnover and not the entire turnover. ITAT agreed, directing the AO to estimate the income at 10% of the Indian export turnover and allow the deduction under Section 10A. The ITAT noted that since the entire income would be exempt under Section 10A, the exact percentage of estimation was less critical.Conclusion:- The appeal of the assessee is partly allowed, affirming the CIT(A)'s decision on the non-applicability of Section 40(a)(ia) for software purchases and modifying the estimation of income to apply only to the Indian export turnover.- The appeal of the Revenue is partly allowed for statistical purposes, remanding the issue of unexplained cash credits to the AO for verification.