TaxTMI 
TaxTMI 
2005 (7) TMI 667
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....ent of software, and that the appellant's activities were confined to export of software under the normal understanding of the term as also under the beneficial interpretation extended by the circulars of the CBDT of including software developed at on-site i.e. client's place. The appellant was not engaged in provision of technical services in connection with the development of software, as the said activity should only refer to a situation where the responsibility of creating the software is of the recipient of the technical services (and not the provider of such services). The learned CIT(A)-I has erred in concluding that the appellant is engaged in the business of providing technical services although the entire profit has been held (in para 22.4) as having been derived from software exports and hence eligible for computation as per the formula under s. 80HHE which formula is applicable only to export of computer software. The learned CIT(A)-I has thus erred in concluding that the figures of export turnover and total turnover should be reduced by the expenditures incurred in foreign currency. On the facts and in the circumstances of the case, the reduction of the figures....
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....of which the assessee claimed exemption under s. 10A of the Act. The following chart will reveal the diverse calculation and the basis/reasons adopted by each of them. Computation of relief from Double Taxation : As done by the Appellant As done by the AO As done by the CIT( A) Step-I: Step-I: Tax payable x Royalty income taxed in Canada/gross total income in India. * Technical services income represents the gross turnover in Canada. Compute the profit on the said Canadian turnover. For this purpose the net profit as a percentage on the total turnover is adopted. The calculation at this stage is-Net profit in India x Canadian turnover/total turnover. Total turnover less net profit = Expenses for earning the said income. This formula is to be applied for all units including 10A units. Step-II: Tax payable x Canadian NP (arrived in Step-I)/total income. The above would give one of the limbs of tax relief that the appellant is entitled to. Step-II: Net profit x Canadian turnover/gross business income. This step is to arrive at income from Canadian turnover that remains in income computed under the head "Profits and gains of business". Step-III: Pr....
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....id in India (e x d/c) : 2,858,624 Tax credit available on Canadian income (i or ii whichever is less) 2,858,624 Annexure 'C Rs. I. Total turnover 139 crores Less : Net profit 40 crores Expenditure incurred for earning the income 99 crores II. To arrive at the income from Canadian turnover included in gross business income : 3,06,81,657 (Canadian turnover) x 40,00,36,950 (NP)/ 139,21,46,634 (Total turnover) = 88,16,454 III. To arrive at profits from business (including in total income) : Profits of business 16,80,568,379 Less : (i) 80HHE 10,95,05,016 (ii) Proportionate 80G 48,048 10,95,53,064 Termed as 'X' as per CIT(A) 5,85,05,315 IV. 88,16,454/16,80,58,379 x 5,85,05,315 = 30,69,228 [Termed as 'Y' as per CIT(A).] Double taxation relied would be lower of: (a) Appropriate Canadian tax on Canadian income forming part of total income or i.e. 30,69,228 x 43% = 13,19,769 or (b) Tax payable x Figure in Step IV/Total income 3,97,46,960 x 30,69,228/9,24,34,790 = 13,19,768 Relief = Rs. 13,19,768. 3.2 Learned couns....
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....income". The condition prescribed for grant of relief under DTAA is that the same income should have suffered tax in both the countries. The assessee should have paid tax on the same income in both the countries. He relied upon the decision of Madras High Court in the case of CIT v. O.VR.SV.VR. Arunachalam Chettiar [1963] 49 ITR 574 (Mad) wherein it was held thus : "the expression such doubly taxed income in s. 49D indicates that it is only that portion of the income on which tax has in fact been imposed and been paid by the assessee that is eligible for the double tax relief." Shri Korde further submitted that in following judgments given on income subjected to deduction under s. 80RRA, it was held that the assessee would not qualify for benefit under the provisions of DTAA to the extent income qualifying for exemption under s. 80RRA. It was held thus : "in other words that part of foreign income on which deduction is given under s. 80RRA 'in computing the total income of the individual' for the purpose of determining the Indian income-tax payable cannot be said to be taxed once again in India in order to qualify for the relief from double taxation." [CIT v. Dr. R.N. Jh....
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....f under DTAA is "ordinary credit method". For giving tax credit as per such method, the AO has to first determine the tax payable to ensure that tax credit is not to exceed proportionate to Indian tax and income on Canada based on the entire income chargeable to Indian tax. Hence, if need be, the matter may be restored to the AO to compute the quantum of credit according to the provisions of art. 23 of DTAA with Canada. At any rate, the entire receipt by way of royalties from Canada cannot be considered as income doubly taxed in India also, as the assessee has claimed various exemption and deduction under s. 10A/80HHE of the Act in respect of such receipts. 3.5 In reply, Shri Khincha submitted that the method adopted by the CIT(A) in calculating the relief from double taxation is long-drawn and complex. The principles adopted by the CIT(A) are not capable of universal application. It is not possible to identify and track income (from any activity) from its origin to the end. Once the income under different sources falling under the same head, and that under different heads of income are aggregated, the individual streams of income lose their identity. Such an effect is more pronou....
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.... the domestic legislation should provide for solutions for all the difficult areas/issues. There are no rules in the domestic statute in India dealing with the manner of granting relief from double taxation. Relief from double taxation is thus to be calculated on the basis of the provisions of the treaty read with the domestic legislations in India. 3.7 As per s. 90[2] where the treaty exists for granting relief of tax in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Thus, though the chargeable provision of the IT Act is applicable to the assessee for its global income, yet as per s. 90, if the income is taxed both in India and Canada, the assessee is entitled to relief as per art. 23 of the DTAA with Canada. Relevant provisions of art. 23 of the DTAA with Canada are extracted below : "1. The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this agreement. 3. In the case of India, double taxation shall be avoided as follows : (a) The amount....
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....e been allowed as deduction. On the balance profit, deduction has been allowed under s. 80HHE. Thus, the receipt taxed in Canada is not equal to the income taxed in India. It is settled law that relief under DTAA is available only when same income has suffered tax in both the countries. To this extent, as per the decision relied by learned Departmental Representative will not entitle the assessee to claim the credit the way he desires. At the same time, from the details furnished by the assessee, it is clear that the royalty receipt from Canada is not part of units claiming exemption under s. 10A of the Act but only that of units eligible for deduction under S.80HHE. The AO has rightly computed the tax payable on the income attributable to Canadian turnover. Learned CIT(A) is not correct in adopting the total turnover and the net profit including the profit and turnover of units eligible for exemption under s. 10A. Since the royalty income from Canada is forming part of total turnover of units eligible for deduction under s. 80HHE only, the AO has rightly arrived at such doubly taxed income. 3.8 We are not fully agreeable with the submission by learned counsel for assessee for th....
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....income-tax shall be charged at the rates specified in Part I of the First Schedule to the Finance Act, as reduced by the rebate of income-tax calculated under Chapter XIII-A, and further increase by a surcharge for the purpose of union. Thus, while computing surcharge, the credit for double taxation is not to be first reduced, as the credit is provided under Chapter IX of the Act and not under Chapter VIII-A of the Act. At the same time, it is made clear that while computing tax on the doubly taxed income, such tax should also included surcharge, as that is also part of tax levied under the provision of the Act. This ground is accordingly to be dismissed. 5. We now take up the appeal of Revenue and the cross-objection by assessee. 5.1 The first ground of appeal by Revenue is against deletion of disallowance of expenditure by way of initial payment to club. The AO held that the expenditures are capital in nature and not allowable. Learned CIT(A), following his earlier order for asst. yrs. 1994-95 and 1995-96, deleted the disallowance. 5.2 The order of learned CIT(A) for asst. yrs. 1994-95 and 1995-96 was further challenged by Revenue before this Tribunal wherein the deletion of d....