TaxTMI 
TaxTMI 
2020 (11) TMI 741
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....hat the payment of "State Taxes" cannot be allowed under the provisions of section 40(a)(ii) of the Act. 1.2 Without prejudice to the above, the Ld. CIT(A) failed to consider "State Taxes" paid in the USA and Canada, as eligible for the double taxation relief under the provisions of section 90 or 91 of the Act if it is held that the payment of State Taxes is not allowable as deduction. 3. The assessee-company, engaged in the business of computer software and management consultancy, filed its return of income for the assessment year (AY) 2007-08 on 29.10.2007 declaring total income of Rs. 305,52,02,180/-. The return was revised on 10.02.2009 declaring total income of Rs. 313,12,64,074/-. Now we turn to the above ground of appeal. Briefly stated, the facts are that the assessee had claimed deduction of state taxes paid overseas of Rs. 13,22,52,218/- in the return of income. The break-up of it is as under: Country Amount (in Rs.) USA 12,27,39,648/- Canada 95,12,570/- Total 13,22,52,218/- Tata Consultancy Services Ltd. The Assessing Officer (AO) by relying on the decision in the case of S. Inder Singh Gill, 471 ITR 284 (Bom) and Kirloskar....
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....unal in assessee's own case for AY 2005-06 and has decided the issue against the assessee. 6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. In Reliance Infrastructure Ltd. (supra), the assessee executed projects in Saudi Arabia. The income earned in Saudi Arabia had been subjected to tax in Saudi Arabia. Therefore, while determining the tax payable under the Indian law, the applicant assessee sought benefit of section 91, which gives relief from double taxation on the same income. During the assessment proceedings in India, the assessee claimed the benefit of double taxation relief also on the sums of Rs. 47.30 lakhs being the amount deducted under section 80HHB and Rs. 5.59 lakhs being the amount on which weighted deduction was claimed under section 35B. The Assessing Officer negatived the applicant's claim for relief under section 91 on the ground that it would only apply / be available when the amount of tax paid under foreign income is again included in the taxable income earned in India i.e. the same income must be taxed in both the countries. On appeal, the Commissioner (Appeals), dis....
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....d on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains. [Explanation 1. - For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under Section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2. - For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under Section 90A.]" (i) We have considered the rival submissions. So far as the question relating to the Tribunal not following its order in the case of the applicant itself for A.Y. 1979-80, we find that there is a justification for the same. This is so as the decision of this Court in S. Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following ....
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....n. Therefore, such expenditure is allowable as a deduction to determine the profits of the business. It is only after deducting all expenses incurred for the purpose of business from the total receipts that profits and/or gains of business/ profession are determined. It is this determined profits or gains of business/profession which are subject to tax as income tax under the Act. The main part of Section 40(a)(ii) of the Act does not allow deduction in computing the income i.e. profits and gains of business chargeable to tax to the extent, the tax is levied/ paid on the profits/ gains of business. Therefore, it was on the aforesaid general principle, universally accepted, that this Court answered the question posed to it in S. Inder Singh Gill (supra) in favour of the Revenue. (l) We would have answered the question posed for our consideration by following the decision of this Court in S. Inder Singh Gill (supra). However, we notice that the decision of this Court in S. Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit a....
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....ad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expenditure on account of not being covered by Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India under Sections 90 or 91 of the Act, were also claiming deduction of the tax paid abroad as it was not tax under the Act. In view of the above, Explanation inserted in 2006 to Section 40(a)(ii) of the Act, would require in the context thereof that the definition of the word "tax" under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from the meaning of the word "tax" as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word "tax" as defined in the Act to include all taxes on income/profits paid abroad. (o) Therefore, on the Explanation being ....
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.... arose before the ITAT "J" Bench, Mumbai in assessee's own case for AY 2009-10 in ITA No.5713/Mum/2016. The Tribunal held as under:- "6. We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term "tax", as defined undersection 2(43) of the Act would only include taxes chargeable under the Indian Income Tax Act. It is the further case of the assessee that since in respect of the State taxes paid overseas, the assessee is not eligible to claim relief under section 90 or 91 of the Act, it will not be covered under section 40(a)(ii)of the Act. On a perusal of provisions of subsection (43) of section 2 of the Act, it becomes clear that the term "tax" has been defined to mean any tax paid under the provisions of the Act. Section 40(a)(ii)of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of th....
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....Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required." 6.2 In Reliance Infrastructure Ltd. (supra), Hon'ble Bombay High Court has held that the assessee was entitled to deduction for foreign taxes paid on income accrued or arisen in India in computing its income, to the extent that such tax was not entitled to the benefit of section 91 of the Act. Facts being identical, we follow the said judgement and also the above order of the Co-ordinate Bench and direct the AO to verify whether the State taxes paid by the assessee overseas are eligible for any relief u/s 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. 7. The 2nd ground of appeal 2.1 The Ld. CIT(A) erred in law and on facts in disallowing under section 40(a)(ia) of the Act, the business expenditure of an amount of Rs. 73,84,168/- being deduction towards interest, which is compensatory in nature, paid on account....
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....t vendors for purchasing standard software products and consequently disallowing the said expenditure as per the provisions of section 40(a)(ia) of the Act. 3.2 On facts and in circumstances of the case and in law, the Ld. CIT(A) erred in applying the provisions of section 40(a)(ia) read with section 195 of the Act to disallow the payment made by the appellant to various non-resident vendors towards import of software as a reseller by treating such payment as "royalty". 3.3 Without prejudice to the above, the Ld. CIT(A) in circumstances of the case failed to consider the expenses incurred towards purchase of software for trading purposes amounting to Rs. 17,48,99,176/- as revenue in nature. 13. The assessee had imported software products during the course of its business. The AO observed that these purchases were in the nature of software for internal use as well as for trading purposes. The break up is given below: Software for internal use Rs. 15,43,05,676/- Software for trading purposes Rs. 17,48,99,176/- Total Rs. 32,92,04,852/- The AO treated the software utilized for internal use as being in the nature of capital expenditure, drawing ....
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....' under clause (v) of Explanation 2 to Section 9(1)(vi) of the Act and therefore, it is not taxable and hence, the provisions of section 195 of the Act do not apply and no disallowance can be made u/s 40(a)(i) of the Act. Further, it is explained by him that the amendment carried out by the Finance Act, 2012 will not have any retrospective effect based on the principle of "impossibility of performance", since the assessee cannot be expected to deduct tax at source in respect of transactions effected years back. Further, it is argued that even under the applicable DTAA, the payment for purchase of software cannot be regarded as royalty, since the definition of royalty under the DTAA is narrower than the definition in the Act. Without prejudice to the above, it is stated that in respect of purchase of software for trading purpose, the assessee does not obtain any license from the seller and only earns margin on trading or reselling of such software and accordingly, it can be treated as royalty and no disallowance u/s 40(a)(i) can be made in respect of the same. Without prejudice to the above, it is further submitted that provisions of section 40(a)(i) should not apply to allowa....
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....essee would be entitled for depreciation on the cost of such assets. The Tribunal while deciding identical issue in assessee's own case for the assessment year 2005-06 in ITA no.7513/Mum./2010, dated 4th November 2015, it has expressed similar view. Thus, following the aforesaid view of the Tribunal in assessee's own case, we uphold the decision of learned Commissioner (Appeals) on the issue. Insofar as the disallowance of expenditure incurred on acquiring software products for re-sale / trading purpose, it is noted that the Assessing Officer has not at all deliberated on the factual aspect of the issue. Simply relying upon certain judicial precedents and the statutory provisions, he has concluded that the payment made by the assessee for acquiring these software is in the nature of royalty as per section 9(1)(vi) of the Act, hence, assessee is liable to deduct tax at source under section 195(2) of the Act. Whereas, learned Commissioner (Appeals) has improved upon the reasoning of the Assessing Officer by observing that the software acquired by the assessee for trading purpose were not sold as it is by the assessee but have been utilized in programs developed by it for its ....
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.... has transferred any right in the copyright. However, the learned Commissioner (Appeals) has recorded a categorical finding that the software products acquired by the assessee cannot be sold independently and can be sold by utilising in the package developed by it. In the aforesaid factual context, it requires examination whether the software products acquired by the assessee for trading purpose was sold as a chattel qua chattel or the assessee has made some value addition to it or has transferred the copyright relating to the software product along with the software product. No doubt, in assessee's own case for assessment year 2005-06, the Tribunal in ITA no.7513/Mum./2010, dated 23 rd March 2017 (after recall of the original appeal order) while dealing with similar issue has held that the payment made by the assessee towards acquiring the software products is not royalty as the assessee has sold a copyrighted article and has not transferred any license or copyright. However, in the facts of the present case, in our considered opinion, further enquiry is required to be made by the Assessing Officer to factually verify the nature of transaction relating to acquisition ....
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....nces of the case and in law, the Ld. CIT(A) erred in not allowing foreign tax relief as per the provisions of section 90(1)(a)(ii) of the Act read with provisions of the applicable Double Tax Avoidance Agreements, for income taxes paid in overseas jurisdiction in relation to income eligible for deduction under section 10A/10AA of the Act in India. 19. The Ld. counsel for the assessee submits that (i) foreign tax credit should also be provided for taxes paid in overseas jurisdiction, in respect of section 10A/10AA eligible income in India, as per the provisions of respective DTAA, (ii) even under MAT computation, the assessee should be allowed full credit of taxes paid overseas in respect of 10A/10AA income, (iii) since the correct legal position is that where a specific provision is made in DTAA, such provision will prevail over the general provision contained in the Income Tax Act, 1961. It is thus stated by him that in view of the amendment by Finance Act, 2000, effective 01.04.2001, 10A/10AA is a deduction in respect of undertakings established in Software Technology Park (STP)/Special Economic Zone (SEZ). It is stated that herein the countries involved are USA, Denmark....
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....ian Income tax Act and after giving the assessee deduction u/s 10A/10B and charging interest at Indian rates. Thus, the Ld. DR supports the order passed by the Ld. CIT(A). 21. We have heard the rival submissions and perused the relevant material available on record. Similar issue arose before the Tribunal in assessee's own case for AY 2009-10, wherein it is held:- "31. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As could be seen, while the Assessing Officer has disallowed assessee's claim of foreign tax credit in respect of income exempt under section 10A/10AA of the Act on the reasoning that only such income which is subjected to tax in both the countries would qualify for tax credit, learned Commissioner (Appeals) has restricted the relief of foreign tax credit only in respect of tax paid in USA even in respect of income which is exempt under section 10A/10AA of the Act. The learned Commissioner (Appeals) has come to such conclusion by following the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra). The reasoning of the learned Commissioner (Appea....
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....ndo- Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly." 21.1 Facts being identical, we follow the above order of the Co-ordinate bench and hold that foreign tax credit would be available to the assessee in view of treaties India is having with USA, Denmark, Hungary, Norway, Oman, Saudi Arabia and Taiwan. The assessee is directed to file before the AO the relevant provisions of India- South Africa Treaty. 22. The 5th ground of appeal 5.1 The assessment of income made by the AO in relation to the transfer pricing adjustments / additions / variations based on the transfer pricing order is bad in law and illegal as the transfer pricing order is passed by the Additional Commissioner of Income Tax without the authority of law as prescribed by the provisions o....
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....s under dispute Amount of Adjustment (Rs.in Crores) 1 Provision of software, technical & consultancy services to AEs 466.79 2 Provision of interest bearing and interest free loans to AEs 29.74 3 Provision of guarantee in respect of AEs 55.58 4 Providing undertaking in respect of AEs 4.32 Total adjustment 556.43 The AO completed the assessment u/s 143(3) r.w.s.144C, incorporated the proposed addition of Rs. 556.43 crores to the income returned by the assessee. 24. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld.CIT(A). At para 13.16.6, the Ld.CIT(A) has mentioned that the assessee submitted before him a summary chart of ALP gross margin (as computed by it) vis-a-vis gross margins earned by the AEs, which is reproduced is below:- Sr.No Name of the Entity Entity revenue for offshore segment (A) Paid to TCS (3CEB) (B) Gross Profit- Offshore segment (C=A+B) Gross Margin (C/A) Comparable profit-Offshore margin (as per region Whether at ALP? 1 Tata America International Corp. 8,155.15 7,345.81 809.34 9.92% 9.62% Yes (after +/-5% working) 2 Tata co....
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....een looked into by the TPO at the time of TP proceedings. The TPO/AO will allow the appellant benefit of proviso to section 92C(2) if admissible. The various grounds taken by the appellant on this issue are decided accordingly. 13.16.9 At ground No.8.12, the appellant has also raised the issue of use of multiple year data. The issue of multiple year data is no longer res integra. The issue stands concluded in favour of Revenue through a number of judgments from High court and Tribunals. The language of the Rules are also specific on this issue. Only the data relating to the year under benchmarking can be adopted for computation of ALP unless the assessee is able to demonstrate that the earlier year data has impacted the current year PLI. In absence of any such evidence, the issue is decided against the appellant. 13.16.10 At ground No.8.13, the appellant has sought benefit of the second proviso to section 92C(2) of the Act. The benefit of this provision will be available to the appellant if the value of adjustment is within the range specified under the section. If the adjustment exceeds the range, the benefit of the proviso will not be available. It is held accor....
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....ord. Similar issue arose before the ITAT in assessee's own case for AY 2009-10. The Tribunal, at para 20(page 59-62) held as under:- "20. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. From the grounds raised by the Revenue, the following three issues arise for consideration - (i) what should be the appropriate PLI; (ii) whether cost of outsourcing / subcontracting to the TCS should be considered for computing the margin; and (iii) whether the alternative benchmarking furnished by the assessee by treating the AEs as tested party with comparables in the same geographical locations is acceptable. On a careful perusal of the facts on record as well as submissions of the learned Counsel for the parties in the course of hearing as well as in the written note, we are of the view that the decision of learned Commissioner (Appeals) on the aforesaid issues are unassailable. As regards the issue of appropriate PLI, we are of the view that considering the nature of activity performed by the assessee as well as the AEs, it cannot be said that the A.Es are not bearing any risk. Rather the fac....
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....puted on similar lines by the Transfer Pricing Officer, hence, comparability condition fails. It is further relevant to observe, the alternative benchmarking furnished by the assessee before the Transfer Pricing Officer by considering the AEs in different geographic locations as tested parties with the comparables selected on the basis of the respective geographic locations furnished before the Transfer Pricing Officer were not properly considered. However, in course of appeal proceedings, the learned Commissioner (Appeals) examined them in detail and after a detailed analysis approved some comparables selected by the assessee and also added some new comparables. Whereas, the comparable selected by the Transfer Pricing Officer were not on the basis of any detailed search process. At least, no such analysis is either forthcoming from the order of the Transfer Pricing Officer or could be brought to our notice by learned Departmental Representative. On the contrary, on a thorough and careful reading of the impugned order of learned Commissioner (Appeals), we are of the view that learned Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking d....
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....capital. Money advanced to TCS FNS Pty. Ltd., Australia, was purely for acquisition of downstream subsidiary. Similarly, advance to TCS Asia Pacific Pty. Ltd., is for acquisition of downstream subsidiary. Only the advance made to TCS Morocco is for working capital requirement. It is further noted, major part of advances made to TCS Ibero America, TCS FNS Pty. Ltd. and TCS Morocco have been converted to equity subsequently. It is also a fact on record that before learned Commissioner (Appeals), the assessee has filed a detailed written submission on 27th March 2014, elaborately discussing the nature of advance made to the AEs and the purpose for which such advances were made. It was submitted by the assessee that the advances made to the AEs were as a part of business strategy and not simply to help the AEs with capital infusion. The assessee has advanced detailed argument stating that advances made to the AEs is a shareholder activity and not advancement of loan. In this context, the assessee has referred to OECD Transfer Pricing Guidelines as well as UK and Australian Regulations. It is evident from the impugned order of the learned Commissioner (Appeals), though, he sketchily ref....
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....upward adjustment in this regard. 8.2 The Ld. CIT(A) erred in law and on facts, in not appreciating the fact that provision of guarantee is a shares holder activity and no income is generated from the same. 8.3 Without prejudice to the above, the Ld. CIT(A) erred in law and on facts in disregarding the appellant's contention that the guarantee fee should be charged based on the effective rate of insurance premium paid by the appellant as a percentage of group revenue. 8.4 Without prejudice to above, the Ld. CIT(A) erred in law and on facts in not considering guarantee fees to be charged on actual rent, for which the guarantee was provided. 33. The Ld. Counsel submits that part of the activity was performed by the assessee itself, while the remaining services are rendered by the AE; thus, if the performance guarantee is treated as chargeable services, the charges should be levied only on the component of services performed by the AE. With respective lease guarantee, it is submitted by him that part of the premises (i.e, 40% during the year under consideration) was occupied by the assessee and therefore, if lease guarantee is treated as chargeable servic....
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.....e. 40% during the year under consideration was occupied by the assessee and thus, if lease guarantee is treated as chargeable services, the charge should be levied only for the balance i.e. 60% during the year under consideration. We direct the assessee to file the relevant documents/evidence on the above contentions before the AO. 36. The 9th ground of appeal:- 9.1 The Ld. CIT(A) erred in law and on facts in holding that the provision of undertaking by the appellant on behalf of its AE - Financial Network Services Pty. Ltd. Australia is an international transaction and making an upward adjustment in this regard. 9.2 The Ld. CIT(A) erred in law and on facts, in holding that the provision of undertaking by the appellant is similar to the provision of corporate guarantee, without appreciating the underlying facts. 37. The Ld. Counsel submits that the guarantee fee rate determined in case of performance guarantee, is found to be at arm's length charge in case of the undertaking. On the other hand, the Ld. DR supports the order passed by the CIT(A). 38. As mentioned earlier, the Tribunal in assessee's own case has directed the AO to charge guarantee co....
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....e judgment of Supreme Court in the case of Commissioner of Income Tax vs. HCL Technologies, reported in 404 ITR 719, in which the Court held that the total turnover for the purpose of section 10 of the Act cannot be understood as defined for the purpose of section 80HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover." Following the above decision, the second ground of appeal is dismissed. 46. The 3rd & 4th ground of appeal 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in not upholding the order of the AO on the method of computation of deduction u/s 10A of IT Act. 4. On the facts and circumstances of the case in law, the Ld.CIT(A) has erred in not appreciating the fact that 30% of the expenses incurred in foreign currency on account of software development expenditure incurred abroad is in the nature of providing technical services and hence it is rightly reduced from export turnover computed u/s 10A. 47. In view of the order of the Tribunal, dated 04/11/2015 in assessee's own case for AY 2005-06 (I....