TaxTMI 
TaxTMI 
2015 (10) TMI 826
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....8, 209/2009,210/2009,211/2009 and 363/2009. 2. The assessee-company is a public limited company, listed in India and US engaged in the business of software exports, computer peripherals, IT enabled services, manufacture and sale of vegetable oils, soaps, leather products, hydraulic cylinders and tippers, and manufacture of reagents as well as marketing and support of medical equipment and other related businesses. The business of the company is carried on through the various business units or divisions of the company. It is the case of the assessee that it runs each business unit as an independent profit center. Accordingly separate accounts are maintained for each business unit. The accounts of the assessee are compiled on the basis of consolidation of all accounts maintained at the business unit levels. 3. The facts of the case for each assessment year are set out in brief as under: Assessment Year 2001-02 - ITA Nos. 879 & 882/2008; 907 & 909/2008 The appellant filed its" return of income for the assessment year 2001-02 on 30.10.2001 disclosing a total income of Rs. 135,51,15,000/- after claiming deduction under Section, 10A of the Income Tax Act (for short, hereinaft....
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....quantified at Rs. 261,66,03,694/- for AY 2002-03. 7. Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] which was disposed-off by the CIT(A) vide order dated 20.03.2006. Aggrieved by the said order, both the assessee and the Department preferred separate appeals before the ITAT. The ITAT, vide common order dated 30.05.2008 disposed of the appeals. Assessment Year 2003 04 - ITA Nos. 108 & 109/2009; 210 & 211/2009 8. The assessee-company filed its return of income for the assessment year 2003-04 on 27.11.2003 disclosing a total income of Rs. 164,86,92,630/- after claiming deduction u/s 10A of the Act to the extent of Rs. 763,34,75,604/-. The assessee had claimed relief under Double Taxation Avoidance Agreement u/s 90 in the return amounting to Rs. 20,99,63,631/-. The assessee also claimed TDS of Rs. 9,55,12,095/- and advance tax payment of Rs. 69,40,50,000/-. The assessee claimed refund of Rs. 39,36,31,184/-. The return of income was processed u/s 143(1) on 15.07.2004 and the case was selected for scrutiny and notice u/s 143(2) was issued on 15.07.2004. A questionnaire was issued on 16.8.2005 calling for certain details and the compliance w....
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....s. The ITAT, vide order dated 30.01.2009 disposed of the appeal and the Cross objections. Assessment Year 2003-04 - ITA No. 209/2009; 12. There are two more substantial questions of law arising out of the order dated 26.09.2007 passed by the Commissioner u/s 263 of the Act. Assessee filed an appeal to the ITAT in ITA No. 1178/2007 and ITAT disposed-off the appeal vide order dated 31.10.2008. Against the order of the ITAT, department has filed an appeal in this Hon'ble Court u/s 260A of the Act. Substantial questions raised therein are connected with this batch of appeals. 13. Several substantial questions of law do arise for consideration in these batch of appeals. Some of the substantial questions of law are already answered either in favour of the revenue or in favour of the assessee in the very assessee's case. Some of the substantial questions of law are already answered by the Apex Court. However, some of the substantial questions of law do arise for consideration for the first time in these appeals. They are now first taken up for consideration. Substantial question of law No. 1 [Question of law No. (e) in ITA No. 879/2008, 880/2008 and 334/2009; Questi....
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....h 50% deduction of the eligible income under Section 80-O of the Act was allowed. The said relief was granted by the CIT(A) which the Department has accepted. Since the claim for foreign tax credit is an entitlement like any other pre-paid tax, no revised return as contemplated under Section 139(5) was required. The limitations of the domestic tax law, if any, would also not apply where relief is to be allowed as per the provisions of DTAA. 16. By a letter dated 10.02.2004, request was made to allow tax credit of Rs. 24,94,67,448/- at the fag end of the assessment proceedings which was erroneously not claimed earlier. . Therefore, the assessee raised a claim for tax credit for the tax paid in foreign countries. The assessing authority relying on Section 139(5) of the Act held that the claim is not admissible at this juncture. Section 139(5) of the Act defines the mandatory requirements and the time limit for rectification and the assessee has not filed any revised return for claim of tax credit with reference to income computed under Section 10A. 17. Thereafter, the Assessing Authority proceeded to decide the claim on merits also. Insofar as assessment year 2001-02 is concern....
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....allowed the claim of the assessee for all the years, setting aside the order passed by the assessing authority. 19. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal taking note of Section 90(1)(a) prior to its amendment held the word "paid" has been defined under Section 43(2) of the Act. The said definition is for the purpose of Section 28 to 41. But the said meaning of the word can be imported for Section 90(1)(a). As per Section 43(2) "paid" means actually paid or incurred according to the method of computing upon the basis on which the profit or gains are computed under the head profit and gains of business or profession. In respect of the income of the unit qualifying for deduction under Section 10-A, income tax is neither paid nor incurred. The Apex Court in the case of CIT v. Williamson Financial Services & Ors. (297 ITR 17) dealing with computation of deduction under Section 80HHC in respect of profits from export of tea held that Section 10 groups in one place various incomes which are exempt from tax. In respect of incomes on which deductions under Chapter VI-A are allowed, such incomes are wholly or partly tax free incomes. Se....
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....at country to promote mutual economic relations, trade and investment. Section 10A income is chargeable to tax in view of Section 4 of the Act. However, subject to the assessee satisfying the conditions prescribed income under Section 10-A is exempted from making such payment. Once the assessee is made to pay tax on such exempted income in the other contracting State then Section 90(1)(a) (ii) enables him to claim credit of the tax paid in the contracting country. Though this provision 90(1)(a)(ii) came on the statute book from 01.04.2004, it is clarificatory in nature. As per Section 90(2) of the Act, the assessee-company was always entitled to the said benefit as the provisions of the agreement was more beneficial than the statutory provisions. India has entered into DTAA with various countries. The expression used in some of the agreements is "subjected to tax". The other expression used is "chargeable to tax". Therefore, the benefit to which the assessee is entitled to is dependant on the expressions used in these contracts in the background of Section 90(1)(a)(ii). He further submitted that in cases where income is subjected to tax, there is no difficulty. The entire amount su....
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.... with reference to tax relief/credit for prepaid taxes. 24. Per contra, Sri Indra Kumar, the learned Senior Counsel appearing for the revenue supported the impugned order. He contended that, admittedly the assessee is not liable to pay any tax in respect of the income which falls under Section 10A. Therefore, it is not a case of assessee having paid tax or assessee is liable to pay tax under the Act. When that being so, he is not entitled to credit of any tax paid in the contracting country. He submits that the idea behind the foreign tax credit is that the same income should not suffer taxation twice. When an income suffers taxation in both source and resident jurisdiction, tax paid in first jurisdiction needs to be allowed as tax credit in other jurisdiction. Consequently, if a source of income is taxed only in one jurisdiction, no tax credit or relief is required for other jurisdiction. The assessee's contention is that the entire profit under Section 10A is not exempted as only that part of profit which pertains to export turnover is exempted under the Act. The foreign tax credit cannot be permitted on profit pertaining to domestic turnover because the domestic profit of....
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....ent may enter into agreement with the Government of any country outside India for granting of relief in respect of income on which have been paid both income-tax under the Income Tax Act and income-tax in that country, or for the avoidance of double taxation of income under that Act and under the corresponding law in force in that country, etc. It is proposed to substitute clause (a) of sub-section (1) of the said section to provide that the Central Government may enter into an agreement with the Government of any country outside India for the granting of relief inter alia, in respect of income-tax chargeable under the Income-tax Act or under the corresponding law in force in that country to promote mutual economic relations, trade and investment." 29. The memorandum explaining provisions in the Finance Bill 2003 reads as follows: "Double Taxation Avoidance Agreements-extending the scope to include agreements for developing mutual trade and investment Under the existing section 90, the Central Government may enter into an agreement with the Government of any country outside India for granting of relief in respect of income on which have been paid both income-tax under t....
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....ey are more beneficial to that assessee. (2A) Notwithstanding anything contained in subsection (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent -with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf" 30. Sub-section (1) lays down that the Central Government may enter into an agreement with the Government of another country. Clause (a) (i) contemplates situation when tax is already paid on the same income in both the countries and it empowers the Central Government to grant relief in respect of such double taxation. Clause (b) which is wider than clause (a) provides that any agreement may be made for the avoidance of the double taxation of income under the Act and under the corresponding law in force in that country. Clauses (c) and (d) essentially deals with the agreements made for the exchange of information, i....
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.... the Indian Income Tax payable by him in a sum computed on such doubly taxed income, at the Indian rate of tax or the rate of tax of the said country, whichever is lower or the Indian rate of tax, if both the rates are equal. 34. In fact, the circular No.333 dated April 2, 1982 clarifies the legal position. The said circular reads as under:- "The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income Tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income Tax Act, 1961, also provide that the laws in force in. either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the. agreement. Thus where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income Tax Act. Where there is no specific provision in the agreement, it is the basic law i.e., Inc....
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....der the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under entries 10 and 14 of List I of the Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of the citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty. When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United States such a treaty becomes a part of municipal law "upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act." 37. It is in this background, when we notice Section 90 of the Act - relief from double taxation is granted in the....
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...., if the contracting country is not agreeable to extend the said benefits, then in terms of the agreement and probably in terms of the exemption granted, the assessee would be entitled to benefit only in this country on account of the exemption and the benefit in the other country is not extended. Thus when exemption is granted in respect of the income chargeable to tax. under this Act in respect of which no benefit is granted in the corresponding country the assessee gets no benefit. However, if the benefit is extended to a portion of the income say for example 90% and 10% is subjected to tax then to that extent the assessee would be entitled to benefit of tax credit as he has paid tax in the foreign jurisdiction as per Section 90 (1)(a)(i) of the Act. 41. In this connection, it is contended on behalf of the Revenue that if the income is chargeable to tax in India, then only the assessee can have the benefit of tax credit in respect of the tax paid in foreign jurisdiction. In respect of exemption under Section 10A, the income derived is not included in the total income. It is not charged to income tax. Therefore, Section 90 of the Act has no application at all. 42. Section 4....
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.... and 5 of the Act. Therefore, when an assessee is having several undertakings, one of which falls under Section 10A, the assessee's entire income from all the undertakings is computed to arrive at the total income. However, the income from such undertaking falling under Section 10A has to be deducted from the total income. 45. Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. It reads as under :- "Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the heads of income". 46. The Apex Court in the case of AZADI BACHAO ANDOLAN's case at page 724 and 725 clarifying the legal position regarding the effect of Section 90 vis-à-vis Sections 4 and 5 held as under:- "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementati....
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....al income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as Section 10A is covered in Chapter III, the phrase "total income" used in S.10A cannot be understood in the same sense as in S.2(45). 14. The phrase "Total income" has been used in the IT Act in several places with different connotations and shades. The phrase "total income" used in S.10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in S.10A(4) is also with reference to the undertaking. A business might have several undertakings and S.28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "profits and gains of business or profession", as under the above head, the income from bu....
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....e relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the undertaking. A business might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession". Under the above head, the income from business as a whole has to be computed. The phrase "total income" used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total-in-come of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instea....
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....n 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 52. Section 10A (1) speaks of "deduction". The deduction is of profits and gains for a period of ten consecutive assessment years. The said deduction is from the total income of the assessee. Therefore, the total income before allowing the said deduction includes the profits and gains from the business referred to in Section 10A(1). Section 5 of the Act explains the scope of total income to mean all income from whatsoever source derived. Section 4 of the Act charges this total income. However, Section 10A (1) provides that, subject to the provisions of the said Section, profits and gains derived by an undertaking referred to in that Section shall be allowed as deduction from the total income of the assessee. Therefore, by virtue of the aforesaid statutory provision namely Section 10A of the Act, the income of the assessee from exports in respect of the said unit is exempted from payment of income tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under Section 10A is in the nature of exemption although termed as ....
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.... levy of customs duty etc. as items not leviable to such duty. It only suspends the levy and collection of customs duty, etc. wholly or partially and subject to such conditions as may be laid down in the notification by the Government in "public interest". Such an exemption by its very ;nature is susceptible of being revoked or modified or subjected to other conditions. The supersession or revocation of an exemption notification in the "public interest" is an exercise of the statutory power of the State under the law itself as is obvious from the language of Section 25 of the Act." 55. Similarly, the Apex Court in the case of Wallace Flour Mills Co. Ltd., v. Collector of Central Excise, Bombai, Division III reported in 44 ELT 598 at para 4 has held as under: "Excise is a duty on manufacture or production. But the realization of the duty may be postponed for administrative convenience to the date of removal of goods from the factory. Rule 9A of the said Rules merely does that. That is the scheme of the Act. It does not, in our opinion, make removal the taxable event. The taxable event is the manufacture. But the liability to pay the duty is postponed till the time of removal u....
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....d States of America, whether directly or by deduction. The conditions mandated in the treaty is that if any "income derived" and "tax paid in United States of America on such income", then tax relief/credit shall be granted in India on such tax paid in United States of America. The said provision does not speak of any income tax being paid by the resident Indian under the Income-tax Act as a condition precedent for claiming the said benefit. Where the Indian resident pays no tax on such income derived, whereas the said income is taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States. Therefore, this provision is in conformity with Section 90(1) (a) (ii) of the Act i.e., the income tax chargeable under the income-tax Act and in the corresponding law in force in United States of America. "V Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo - US convention or under this provision of Act should pay tax in India on such income. However, the said provision makes it clear that such deduction shall not, however, exceed that part o....
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....an assessee in India only in respect of the income from sources within Canada, which has been subjected to tax both in India and Canada, which forms part of the total income of the assessee and has suffered tax in India under the Income tax Act and has suffered tax in Canada also i.e., assessee has paid tax both in India as well as in Canada on the same income. Then the agreement provides the tax paid in Canada shall be allowed as a credit against the Indian tax payable in respect of such income. However, the said benefit is confined only to the extent of an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax. In other words if the income tax paid in India is less than the income tax paid in Canada, the assessee would be entitled to relief only to the extent of tax paid in India and not to the extent of tax paid in Canada. Therefore, this clause is in conformity with Section 90(1)(a)(i) of the Act. As a corollary if the assessee is exempted from payment of tax in India, then if the same income is subjected to tax in Canada, according to the treaty, there is no double taxation. Therefore, the benefit of this treat....
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.... are equal. (2)..... (3)....." Explanation (i) .... .... (ii) .... .... (iii) .... .... (iv) the expression 'income tax' in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. 66. The said provision provides for deduction of the tax paid in any country from the Indian Income tax payable by him of a sum calculated on such doubly taxed income even though there is no agreement under Section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression income tax in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Therefore the intention of the Parliament is very clear. The Income Tax in relation to any Country includes Income Tax paid in any part of the country or. a local authority. It applies to cases where in a Federal structure a citizen is made to pay Federal Income tax and also the State Income Tax. The Income tax in....
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....o the assessee as compared to the terms in the agreement by India with the Government of any country outside India then, notwithstanding such agreement, the provisions of the Act to the extent they are beneficial to that assessee apply. The benefit claimed by the assessee is by virtue of the terms of the agreement. The agreement came into existence in 1990. The amended provision came into existence from 1.4.2004. In fact, the amendment is giving effect to the terms of agreement of 1990. In other words, the terms of agreement was more beneficial than the provision of the Act prior to amendment. After amendment, the amended provision is in conformity with the benefit agreed to be given under the agreement. In fact, the Apex Court (in Azadi Bachao Andolan) dealing with the aforesaid amended provisions has held as under: "........... said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTAs which would automatically over-ride the provisions of Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC". ....
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.... without recourse to the assessing officer in any way. Once such a revised return is filed under Section 139(5), the effective return for the purpose of the assessment is thus the return which is ultimately filed by the assessee on the basis of which he wants his income to be assessed. In this context one should notice the issue on hand is not with regard to a claim that would vary the income of the assessee. The issue is with regard to allowing a credit on account of tax paid outside India in respect of which particulars were furnished to the assessing authority during the course of assessment proceedings before the assessment is passed. It is bound to be entertained and dealt with on merits. Once the return is filed and the income tax officer commences the assessment proceedings, the assessing authority is not the tax payer's opponent, in the strictly procedural sense of the term. The assessment functioning involves the adjustment of the tax ... liability of the assessee in accordance with the facts on record and in accordance with the law laid down by the legislature. The assessment is nothing but another name for adjustment of the tax liability to accord with the taxable ev....
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....e Taxation Avoidance Agreement. Therefore, the assessing authority was not justified in rejecting the said claim on the ground that no revised return is filed under Section 139(5) of the Act. In fact, probably the assessing authority was conscious that it is not a valid ground to reject the claim, he proceeded to consider the claim of the assessee on merits and has rejected the claim on merits also. 74. In view of the aforesaid discussions, the said substantial question of law is answered in favour of the assessee and against the revenue and the assessee is entitled to the tax benefit to the extent set out above. Substantial question No.2 "Whether the Tribunal was right in directing that only that part of the MODVAT credit that is availed of prior to the due date for filing the return of income is deductible under Section 43B when it is apparent that MODVAT credit availed on goods purchased by the appellant is not a sum payable by the appellant and accordingly Section 43B itself is not applicable to the MODVAT credit?" [Question of law No. (c) in ITA Nos. 879/2008, 880/2008 and 108/2009; Question of law No. (d) in ITA 334/2009 - (assessee's appeal)) 75. The case ....
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....nal, relying on the judgment of the Special Bench in DCIT v. Glaxo Simthkline Consumer Healthcare Limited reported in 299 ITR(1) ITAT (CHA) held that the unavailed MODVAT credit cannot be allowed as deduction under Section 43B. It further held that if the excise duty paid by the assessee is to be included in the closing stock, then the same is to be considered in purchase as the closing stock is a figure to balance the item of purchase left at the end of the year. If MODVAT credit available on closing stock is set-off before the due date of filing of return, then such amount is available for deduction and not restricted under Section 43B of the Act. It means the unavailed MODVAT credit of Rs. 1,32,50,765/- is availed before the due date of filing of returns, then there will be no addition. Therefore for re-computation, the matter was restored back to the assessing officer. Aggrieved by the said order, the assessee is in appeal. 76. The learned Senior counsel appearing for the assessee submitted that if excise duty is included in the cost of raw- materials and as such reflected in the opening balance, then the same is to be reflected in the closing balance as well as in the openi....
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....purchase and sale of goods and inventory for the purpose of determining the income chargeable under head "profit and loss account" from business or profession should be in accordance with the method of accounting regularly adopted by the assessee. In such accounting, the assessee should include the amount of any tax duty, cess or fee incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Therefore, prior to this introduction of the provision, if the assessee has followed a particular accounting practice where the cost of raw-material is taken into consideration as net value, even while determining the value of the finished products that net value could have been adopted. There was no obligation to include any tax, duty, cess or fee in the cost of raw-material. Having regard to the confusion on the conflicting views expressed by various Courts, the Parliament thought it fit to amend the law and introduce Section 145A taking away the decision which was in favour of the assessee. Now it is made clear that whatever may be the accounting practice adopted by the assessee, the cost price of the raw-material should include tax, d....
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....n the services rendered on the basis of percentage of profit earned. The commission paid to its directors was allocated by the assessee to the units which these directors, are heading as whole time directors. The assessing authority was of the view that allocation of this commission" should be on the basis of the profits earned by each unit. Therefore the assessing authority re-allocated the said commission on the basis of profits earned by each unit. The following table shows the allocation made by the assessee and re-allocation made by the assessing authority. Name Commission Payment (Rs.) Unit allocated to Allocation to Wipro Technologies (Rs.) Remark/Bas is Azim H. Premji 3,16,74,625 Corporate 259,73,500 82% Vivek Paul 2,37,61,102 Wipro Technologies 1,9484,103 18% reduced from Wipro Technologies Arun Thyagarajan 52,33,294 Wipro Infotech 4291301.08 82% P.S. Pai 79,18,656 Wipro Consumer Care 6493297.9 82% 81. Aggrieved by the said re-allocation of the commission, the assessee preferred an appeal to the Commissioner of Income-tax appeals. 82. The appellate authority declined interference wit....
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.... and function as independent profit centres. The accounts of the assessee are consolidation of units accounts. Each unit has separate profit and loss account and balance-sheet. There are four directors in the assessee company. Each one of the directors are full time directors who are managing these units. The salary is paid by the assessee and the salary so paid admittedly is allocated to each unit which they are heading. Section 198 of the Companies Act 1956 deals with overall maximum managerial remuneration payable to the directors which reads as under: "[198. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. (1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its managing agent, secretaries and treasurers or manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in sections 349, 350 and 351, except that the remuneration of the directors shall not be deducted from the gross profits: Provided that nothing ....
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....he directors should be eligible for payment of commission to the extent of 11% of the net profits of the company. 88. Section 17(1) of the Income-tax Act, 1961 defines what is salary for the purposes of Sections 15 and 16 of the Act, which reads as under: "17(1) "Salary" includes (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received by an employee in respect of any period of leave not availed of by him; (vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule(2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule(4) thereof; and (viii) the contribution made by the Central Government (or any other employer) in the previous year....
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....t in concluding that purchase and sales of monitors constituted a trading activity and thus excludable from the profits of the Pondicherry units for the purposes of computing deduction under Section 80-IB of the Act, when such monitors were part of the computers manufactured and sold by the units?" [Question of law No. 'b' in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 - (assessee's appeal)] 92. In substance, the question for consideration is, whether profits derived from AMC and profits derived from sale of monitors are eligible for exemption under Section 80IB of the Act? 93. The assessee is manufacturing computers. For the purpose of sale of these computers manufactured they have two schemes. The first scheme is, on the payment of a certain discounted amount, the assessee affords a three year warranty against sales of computers. The second scheme is, the warranty period is restricted to one year and the customer is permitted to take out an annual maintenance contract (AMC) for the balance of two years. The assessee claims that AMC charges are also derived from the sale of computers and eligible for deduction under Section 80IB. The assessing authority was of....
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....rred to in sub-sections (3) to(11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. 97. Sub-section (2) of Section 80IB deals with the conditions to be fulfilled by an industrial undertaking for being eligible for the benefit conferred under Section 80-IB. Sub-section (3) provides for the percentage of deduction such an industrial undertaking is entitled to out of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years. Sub-section (4) provides for the benefit being extended to an industrially backward State specified in the Eighth Schedule. 98. A reading of the aforesaid provision makes it clear that, the benefit is granted on profits and gains derived from such eligible business. The "Apex Court in the case of Liberty India v. Commissioner of Income Tax [(2009) 317 ITR 218] explaining the meaning of....
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....ration is, whether blending of different qualities of tea constitute manufacture and production. It was held that, it does not constitute manufacture and production and Section 80-IB is not attracted. 103. In the instant case, the business which is carried on by the assessee consists of manufacturing of computers and servicing those computers either under a warranty arrangement or by virtue of AMC In fact, the assessee is also in the business of entering into AMC in respect of computers which are not manufactured by them. In respect of the profits derived from AMC contract for computers which are not manufactured by them, they are not claiming any benefit under Section 80IB as it has no direct nexus with the manufacturing activity. The department has given the benefit of profits derived from one year warranty and three year warranty. In respect of computers for which one year warranty is fixed, the assessee is also giving two years AMC contract. The amount received under that AMC contract is for the purpose of servicing the computers which they have manufactured and sold to the customer with one year warranty. Though the said amount does not form part of the sale consideration o....
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..... Learned senior Counsel assailing the said finding contended that, the sales of only monitors are not allowable for deduction under Section 80IB. However, when a monitor is sold as part of a computer and is liable to excise duty, the assessee is eligible for the benefit under Section 80IB. In fact, when the assessee was asked to furnish details of monitors sold and to show cause why the claim under Section 80IB should not be modified since monitors are only a traded commodity, the assessee has furnished the particulars in a tabular column which reads as under : - Quantitative details of Monitors (for assessment year 2002-2003) Industrial undertaking Opening Stock Purchases Sales of only monitors Sales along with computers Closing Stock Industrial undertaking at Thirubuvanai, Pondicherry 2451 54114 25681 27736 3148 Value - 257082167 194693,285 Note - Industrial undertaking at Thattanchavady, Pondicherry 363 50 - 413 - Value 337500 - - - - Total Note: Breakup cannot be given as they form part of composite value of computers. ....
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....t entitled to the benefit of deduction under Section 80IB in respect of the monitors which form part of the computer is hereby set aside. Both the substantial questions are answered in favour of the assessee and against the revenue. Substantial Question of law No.5 : "Whether the Tribunal was right in excluding VAT/GST from export turnover and total turnover for the purpose of computing deduction under Sec. 10A of the Act ?" [Question of Law No.'d' in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 - (assessee's appeal)] 107. VAT/ GST is payable in certain foreign jurisdiction where the company supplies computer software to its customers in the jurisdiction. It is inexplicable that it is part of turnover and an integral 'part of the export turnover. Therefore the assessee contended there is no requirement to eliminate VAT/GST from export turnover as defined in clause (4) of Explanation 2 under Sec. 10A. However, the assessing officer was of the view, the tax paid and collected does not have profit element and therefore does not form part of turnover. The said stand of the assessing authority is confirmed both by the Commissioner of Income tax (Appeal) as wel....
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....over under the Act in respect of other provisions or under any other statutes would be of no assistance in determining what the export turnover is in clause (iv) of Explanation 2 of Sec.10A. A reading of the said provision makes it clear that export turnover means, the consideration in respect of export by the undertaking of articles or things or computer software received in or brought into India by the assessee in convertible foreign exchange in accordance with sub-Sec.(3). Therefore, in order to appreciate the said definition it is necessary to look into sub-Sec.(3) which reads as under: "(3) This section applies to the undertaking, if the sale proceeds or articles or things or computer software exported out of India are received in, or brought into India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf" 112. Therefore, in view of the aforesaid two definitions, to be eligible for benefit under Sec. 10A, an assessee should receive the sale proceeds in, or bring into India in convertible foreign exchange. It is that foreign exchan....
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.... 115. The authorities have declined to grant the said benefit by relying on a judgment of the Apex Court in CIT v. Laxmi Machine Works reported in [2007] 290 ITR 667. The question which arose for consideration in the said judgment was, whether excise duty and sales tax were includible in the total turnover which was the denominator in the formula contained in Sec. 80 HHC as it stood at the material time. In answering the said question, the Apex Court held as under : "We have to read the words 'total turnover' in Sec. 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula, the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover which constitutes 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under Section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover", but also to the words "ex....
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....ion authorizing the dealer to pass on the tax to the purchaser, such tax does form part of the consideration when he includes it in the price and realizes the same from the purchaser. The essential factor which distinguishes the former class of cases from the latter class is the existence of a statutory provision authorizing a dealer to recover the tax payable on the transaction of sale from the purchaser." 118. That was the case where the question for consideration was, whether purchase tax to be levied on turnover which includes sales tax paid. That is not the contention in this case. In this case, we are dealing with granting of exemption to the assessee as an incentive under Sec. 10A of the Act. As such, the said judgment has no application. 119. Reliance was also placed on the judgment of the Apex Court in the case of State of Punjab and others v. Guranditta Mal Shauti Prakash reported in 2004 STC Vol 136 pg. 12. The Apex Court held that: "under the Punjab Agricultural Produce Markets Act, 1961, there is no obligation on the part of the seller to pay the market fee. It is duty of the buyer to pay the market fee and the seller can realize it from the buyer. The market ....
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....or whether the seller has included tax or not." 124. The Constitution Bench of the Apex Court in the case of M/s George Oakes (P) Ltd., v. State of Madras reported in [1961] 12 STC 476, 484 ( SC ), observed as under : "We think that these observations are apposite even in the context of the provisions of the Acts we are considering now, and there is nothing in those provisions which would indicate that when the dealer collects any amount by way of tax, that cannot be part of the sale price. So far as the purchaser is concerned, he pays for the goods what the seller demands, viz., price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover." 125. Following the said judgment, the Apex Court in the case of Sinclair Murray and Co. Pvt. Ltd., v. CIT reported in 97 ITR 615 held that : sales tax should not be treated to be a part of the price realized by the assessee from the purchaser .is not well founded. Sales tax should be treated as a part of 'the price realized by the assessee from ....
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....If the sale proceeds are credited to a separate account maintained for the purpose by the assessee with any Bank outside India with the approval of the Reserve Bank of India, though the said proceeds are not actually received in India or brought into India, it is deemed to have been received in India and forms part of the export turnover. 129. In that view of the matter, the finding recorded by the authorities is contrary to law. They have not taken into consideration explanation 2 to sub-sec. (3) of Sec. 10A and thus committed an error. Hence, the said finding requires to be set aside. Accordingly, it is set aside. The substantial question of law is answered in favour of the assessee against the Revenue. Substantial question of law No.6: "Whether the Tribunal was right in holding that the transfer of stock took place during the year ended 31.03.2001 and not during the years when the execution and registration of the sale deeds took place?" [Question of Law No.(h) in ITA Nos.879/2008 -(assessee's appeal)] 130. The assessee acquired immovable property at Brunton Road, Bangalore, with a land bearing area 43,979 square feet for a cost of Rs. 1.97 crores in the asses....
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....clared in the return of income for assessment year 2004-05. In the subsequent year, i.e., assessment year 2005-06, the remaining extent of 35,635 square feet of land was transferred by way of a deed of conveyance in favour of buyers identified by the power of attorney holder. A sum of Rs. 33,89,40,021 computed as per Section 48 read with Section 45(2) was declared in the return of income. Accordingly, the assessee filed his return declaring the capital gains of the aforesaid amount for the assessment years 2004-05 and 2005-06, respectively. However, the assessing authority taxed the capital gain of Rs. 41,83,08,696/- in the assessment year 2001-02 itself on the basis that general power of attorney was issued to contractors and entries were recorded in books of accounts as a sale. In appeal, the Commissioner of Income Tax (Appeals) held that there is no transfer within the meaning of Section 45(2) of the Act and the capital gains of conversion of the property into stock in trade cannot be taxed in the assessment year 2001-02 and that it has to be taxed on the date of execution of the deed of conveyance, i.e., in 2004-05 and 2005-06. Aggrieved by the said order, the revenue preferred....
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....entire sale consideration and to dispose of the property in the manner he liked and therefore, on the day the said power of attorney was executed, the transfer otherwise took place and that is the assessment year which is to be reckoned for levying tax and the Tribunal as well as the assessing authority were justified in levying tax in the assessment year 2001-02. He further submits Section 2(47) includes transfer of a stock in trade. 134. Therefore, in the light of the aforesaid facts and the rival contentions, the point that arises for our consideration is: "By execution of a power of attorney by the assessee, is there a transfer of stock in trade so as to attract capital gains under Section 45(2) of the Act on the date of execution of the power of attorney, i.e., in the assessment year 2001-02?" 135. The facts are not in dispute. The assessee acquired immovable property at Brunton Road to an extent of 43,979 square feet at a cost of Rs. 1.97 crores. This falls within the definition of a capital asset. Section 2(47) defines transfer in relation to a capital asset. Sub-clause (4) declares that in a case where the asset is converted by the owner thereof into or is treated ....
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....ble to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of Section 10 of the Depositories Act, 1996, and for the purposes of - (i) section 48; and (ii) proviso to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method. 136. Section 45(1) deals with profits ....
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....the previous year in which such stock-in-trade is sold. The word used is sold, not transferred. However, if the stock-in-trade is not sold, but is transferred otherwise, which has the effect of a sale, then the capital gains is chargeable to income tax in the previous year in which such stock-in-trade is otherwise transferred. Having regard to the scheme of the entire section and the express words-,used in sub-section (2) of Sec. 45, the case of considering stock-in-trade otherwise transferred, would arise-only if-stock-in-trade is not sold. If stock-in-trade is sold, the question of considering whether the stock-in-trade is otherwise transferred would not arise for consideration. The object of using the words 'otherwise transferred' as it is in the other provisions in the same section is to prevent avoidance of payment of capital gains by the owners thereof by resorting to modes which are not recognized in law, but which in substance has the same effect. In other words, if the owner by such transfer ceases to have any interest in the property and transfers all his interest in the property to the transferee and earns profits and gains, but declines to pay the capital gain, ....
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....making construction. The legal ownership in such case continues to be with the transferor. Therefore, with that object and in respect of such persons, clause (vi) was inserted which reads as under : "2(47)(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company of other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever which has the effect of transferring, or enabling the enjoyment of any immovable property." 140. Therefore, any transaction which has the effect of transferring or enabling the enjoyment of any immovable property is deemed to be a transfer under Sec.2(47). The Apex Court in the case of Suraj Lamp & Industries Pvt. Ltd., v. State of Haryana reported in Special Leave Petition No.13917/2009 explaining the scope of power of attorney has held as under : "a power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. A power of attorney is creation of an agency whereby the grantor authorises the grantee to do the acts specified therein, on behalf of grantor, which when executed will be binding on....
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.... power of attorney, the intention of the assessee was not a transfer of the right in a schedule property in favour of his agent nor was he permitted to enjoy. the immovable property. Therefore the case would not fall under Sec. 2(47)(vi). The assessee though executed a power of attorney, received the entire consideration under the agreement and acknowledged the same in the books of account and showed it in the balance sheet, that by itself did not confer the power of transferring the stock-in-trade in favour of the power of attorney holder or in favour of the purchasers unless he has executed the sale deed on behalf of the purchasers. Therefore, in view of sec. 45(2) of the Act, the capital gains is not chargeable on receipt of the consideration in the year in which that consideration was received under Sec. 45(2). The income tax is charged in the previous year in which such stock-in trade is sold. Sale took place in the assessment year 2004-05 and 2005-06. The power of attorney had been executed in assessment year 2001-02. When stock-in-trade is sold by executing a deed for conveyance and duly registered, the question of the said stock-in-trade being otherwise transferred would no....
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....f 6 months, foreign exchange remittances are received and credited to the assessee's account through the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact there is no express order granting approval by the Reserve Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee and against the revenue. Substantial Question No.8: "Whether the Tribunal was right in excluding the computer software sales made to STP units in India from "export turnover" for the purpose of computing deduction under section 10A of the Act?" [Question of law No. 'c' in ITA No....
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....ture and the same has been confirmed by the CIT (A). Therefore, the Tribunal felt that the allocation at the rate of 20% of common expenses is in order. Thus the ITAT upheld the order of the Appellate Authority. Aggrieved by the said order the revenue is in appeal. 149. Learned Senior Counsel appearing for the revenue submits that, when 57% of the revenue is generated by the 10A units and 82% is the profit earned by the said units allocating 20% of the common expenditure to such 10A units is not proper when in fact, on an earlier occasion 57% was allocated to the 10A units and therefore he submits that the orders passed by the Appellate Authority requires to be set aside. 150. Per contra, learned senior counsel appearing for the assessee submitted the said issue is covered by the judgment of this Court in assessee's case ITA No.507/2002 disposed on 25.08.2010. Based on the aforesaid facts it is clear that the assessee. wanted allocation of actual expenditure incurred by each unit. When the Assessing Authority did not agree, they came forward and agreed that each of the units could be allocated 20% of the total expenditure incurred by corporate division. However, the Asses....
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....he well considered order of the Tribunal. Accordingly, this question of law is answered in favour of the assessee and against the Revenue" 151. We do not find any justification to differ from the said view taken by this Court and the question is answered in favour of the assessee and against the revenue. Substantial question No. 10 "Whether the Appellate Authorities were correct in reversing the finding of the Assessing Officer that the selling, administrative and general expenses and loss in respect of some units having not been correctly arrived at was allocated on proportion of sales and worked out the loss when computing deduction u/s.80IB of the Act?" . [Question of law No. 15 in ITA No.363/2009 -(Department's appeal)] "Whether the Appellate Authorities were correct in holding that the allocation made in the assessment order of allocation of expenditure under the head 'selling and general administration' of Wipro Infotech Division and lighting factory to the eligible undertaking claiming deduction under Section 80-1B of the Act was to be deleted?" [Question of Law No. 17 in ITA Nos.210 & 211/2009 (Department's appeal)] 152. In fact, this Co....
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.... company. Though the proximity of the date between the sale of shares and purchase of shares and disinvestment alone cannot be a criteria to hold the transaction is a sham transaction and the profit earned from sale of shares in Wipro Net Limited is real and loss incurred by the sale of shares is also real and though there was no bar for sale of shares at throw away price and sometimes, the businessman act in undue exercise and hasty and without any rationale any one of them is not sufficient to hold a transaction as sham transaction. But the cumulative effect of all these instances unequivocally points out the real intention behind this transaction and leads to a irresistible conclusion that this tax planning is done with the intention to avoid payment of tax on capital gains and it is not a case of legitimate tax planning but a devise to avoid payment of tax. Therefore, the Tribunal was not justified in characterizing this transaction as a legitimate tax planning. The observation of the Tribunal that the shares transactions of Wipro Finance Limited had happened at different times in the past is not factually correct. It is not a case where the assessing authority came to such a c....
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....33,56,54,499 (c) Equity shares of WFL allotted to the assessee (out of Rs. 95,00,00,000 infused on 31.12.1999) 45,00,00,000 46,96,65,810 (d) Conversion to equity shares of Convertible Preference Shares allotted to the assessee and sale thereafter* (out of Rs. 95,00,00,000 infused on 31.12.1999) 20,00,00,000 20,00,00,000 Total 99,13,18,970 102,59,01,03 3 * Short-term capital loss 160. In the aforesaid judgment referred to supra, in an identical situation we have held as under : - "55. We find force in the said submission. It is only when we held that the purchase of shares at a premium is a genuine transaction and infusion of capital of Rs. 95 crores is a genuine transaction, the sale made by the assessee for a throwaway price to its ex-employees was held to be sham. Now whether those transactions were for the market price or the shares had no value but purchased on account of the previous contract and thereby the assessee incurred any loss in the business, is a matter to be gone into by the Tribunal. 161. The Tribunal had not gone into the said question and, therefore, the matter is remanded back to the Tribunal to de....
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.... the loss of the STP units should be carried forward at the end of the 10 years, tax holiday period u/s 10A of the Act and should be set off against profits in respect of Madivala R&D unit by treating the cost of development of shrink wrap computer software as work in progress and therefore cannot set off the loss?" [Question of law No. 16 in ITA Nos.210 & 211/2009 - (Department's Appeal)]. 163. The said substantial questions of law was considered by the Apex Court in the case of CIT vs. Canara Workshops reported in 161 ITR 320 in favour of the assessee and against the revenue. 164. Following the said Judgment in the assessee's case itself in ITA 1395/06 connected with ITA 1394/06, this Court by its order dated 5.11.2013 following the Judgment of the Supreme Court answered the said substantial question of law in favour of the assessee and against, the revenue. Therefore, aforesaid questions of law are answered in favour of assessee and against the revenue. Substantial Question of Law No. 15: ''Whether the Appellate Authorities were correct in holding that the items like difference in foreign exchange, royalty, provision for doubtful 'debts written....
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....fluctuation is concerned, it was subject matter of ITA 3202/05 which was decided on 28.2.2012 in the assessee's case itself, where the said question was answered in favour of the assessee and against the revenue. 168. In so far as income earned from interest is concerned that was subject matter of this Court in the case of CIT v. Motorola India Electronics (P) Ltd., in ITA No.428/2007 decided on 11.12.2013 while dealing with exemption under Section 10B. It is in pari materia with Section 10A and has answered the said question in favour of the assessee and against the revenue. 169. As all these questions are decided and answered in favour of assessee in the aforesaid case, this question of law is answered in favour of the assessee and against the revenue. Substantial Question No. 17: "Whether the Appellate Authorities were correct in holding that the provision for warranty claim is an allowable deduction despite the same having not been expended during the current assessment year and the assessee not following actuarial method of accounting?" [Question of law No.25 in ITA Nos.907 & 909/2008; Question of law No.21 in ITA Nos.904 & 905/2008; Question of law No. 11 i....
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....ion of law No. 12 in ITA Nos.210 & 211/2009 and Question of law No. 14 in ITA No.363/2009 - (Department's appeal)] 172. The said question also arose for consideration before this Court in the assessee's case in ITA No.507/2002 which was decided by Judgment dated 25.8.2010, the said question of law was answered in favour of assessee and against the revenue. 173. Accordingly, the said question of law is answered in favour of assessee and against the revenue. Substantial Question No.20 : "Whether the tribunal was right in referring to another decision and fixing an exclusion of 80% of uplinking charges when the appellant and the respondent has agreed upon an exclusion of 5% of telecommunication expenses or attributable to delivery of computer software outside India for the later assessment years?'' [Question of law No. 'f' in ITA Nos.879/2008, 880/2008; Question of law No. 'a' in ITA No. 1 08/2009 and Question of law No. 'b' in ITA No.334/2009 - (Assessee's appeal)] 174. Learned Counsel appearing for both the parties did not dispute the fact except for the relevant year, the assessee has been allowed exclusion of 5% of tele....
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....ld meet the ends of justice. Substantial Question No.23: "Whether the Tribunal was correct in holding that expenditure towards termination of rent agreement with BSNL (A communication link provider) Rs. 3 crores, termination of internet band width agreement with Local Cyberstar Rs. 2.07 crores and termination of purchase commitment of Rs. 5.6 crores, is an allowable deduction when no details about the transactions were furnished by the assessee nor examined by the Tribunal and consequently recorded a perverse finding?" [Question of law No.1 in ITA Nos.210 & 211 /2009 - (Department's appeal)] "Whether the Tribunal was correct in reversing the finding of the Commissioner exercising jurisdiction u/s 263 of the Act that the expenses of Rs. 18.15 crores had been explained by the assessee under a letter dated 11.11.2005 which did not reflect the correct details to consider the expenses and therefore the details sought in the subsequent letters by the department dated 13.12.2005 and 25.01.2006 were not considered by the Tribunal and consequently recorded a perverse finding? [Question of law No.1 in ITA No.209/2009 -(Department's appeal)] "Whether the Tribunal was....