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2021 (10) TMI 1358
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....sfer Pricing Officer - 2, Hyderabad (hereinafter referred to as 'the Ld.TPO') and the Ld.AO under the directions issued by Hon'ble DRP, erred in making an addition to the Appellant's total income of INR 26,07,96,022 (based on the provisions of Chapter X of the Income-tax Act, ('the Act') and the said additions [i.e Rs. 13,18,72,422 being the adjustment qua the software development service, Rs 3,89,08,530 being the adjustment qua the ITES Segment, Rs. 40,487,821 being additions in respect of Interest on AE receivables and Rs. 3,95,25,970 & Rs. 1,00,0 1,279 being additions in respect of Management fees/ Consultancy Fee paid/reimbursed by the Appellant] being wholly unjustified are liable to be deleted. 2. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in rejecting the transfer pricing analysis/ study prepared by the Appellant and conducting fresh benchmarking, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. SOFTWARE DEVELOPMENT SERVICES (SDS) SE....
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....he said companies were not comparable/ functionally dissimilar to the Appellant, which ought to have been excluded from the final set of com parables: i) Infosys BPO ii) Eclerx Services Limited iii) Cross Domain iv) Tech Mahindra v) SPI Technologies India Private Limited vi) MPS Limited 6. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in incorrectly rejecting the following companies while benchmarking the ITES Services (ITeS) of the Appellant which ought to have been included as a com parables as they were engaged in the ITES Services (ITeS), without appreciating that the said companies were comparable to the Appellant: i) Informed Technologies Limited ii) Ace BPO Services Limited iii) Jindal Intellicom Limited iv) Allsec Technologies Limited v) Tata Business Support Services Limited vi) Karvy Data Mangement Services vii) Suprawin Technologies Limited viii) Sundaram Business Services Pvt Limited ix) Tata Consulting ....
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....n the receivables from AE without appreciating that the said adjustment is unwarranted and unjustified in view of the following grounds which are independent of and without prejudice to one and another viz (i) the appellant is a debt free company (ii) the international transactions (i.e. AE sales) resulting in the said outstandings is at ALP. 13. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld TPO in (i) considering the credit period of 30 days as against the credit period mutually agreed between the Appellant and its AE's (ii) considering the State Bank of India's ('SBI') short term de 0 it rates as the Comparable Uncontrolled Price (CUP) to benchmark the impugned interest on delay in receipt of outstanding receivables instead of LIBOR rate. Management Fees 14. On the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in computing the ALP of the Management Fee of Rs.3,95,25,970 ....
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....of Rs. 27,04,000 paid by Infor(Bangalore) Private Limited and Rs. 36,42,600 paid by Approva Systems Private Limited ('transferor companies') which were amalgamated with Appellant w.e.f April 2015. 19. On the facts and in the circumstances of the case and in law, the Ld AO erred in computing higher books profits under Section 115JB of the Act by Rs. 86,95,802(net) consequent to double disallowance of deferred tax amounting to INR 89,50,830 and non-consideration of interest on delayed payment of TDS/Advance tax amounting to INR 2,55,028. 20. On the facts and in the circumstances of the case and in law, the Ld AO erred in erroneously levying interest of Rs.19,60,250 under Section 234A of the Act on the alleged delay in filing of Income tax return without appreciating that the Appellant had furnished the original ITR on 30 November 2016 and revised ITR on 03 october 2017 for the relevant AY which was within the statutory timelines provided under Section 139(1) and Section 139(5) of the Act respectively. 21. On the facts and in the circumstances of the case and in law, the Appellant prays for consequential relief in the interest levied under Section 23....
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....embers to decide this appeal according to law". 3. Learned counsel states at the outset that the assessee's 1st, 2nd, 24th and 25th substantive grounds are general/consequential in nature. Rejected accordingly. 4. We come to the assessee's 3rd substantive ground alleging that the learned lower authorities have erred in law and on facts whilst selecting No.(i) to (xii) companies as comparables in software development services (SDS) segment. Coming to the assessee's ground Nos.3(i) to 3(vi), we note that this tribunal's co-ordinate bench's order(s) in its cases for AYs.2014-15 and 2016-17; as the case may be, have already decided the issue(s) whilst directing exclusion of M/s.Infosys Limited, M/s.Larsen & Toubro Infotech Limited on the ground that they had been having huge turnovers. The factual position is stated to be no different in the impugned assessment year as well. We therefore adopt judicial consistency in absence of any distinction on facts herein as well. These twin entities - Infosys Limited and Larsen & Toubro Infotech Limited shall stand excluded by the Transfer Pricing Officer (TPO) therefore. 4.1. Coming to M/s.Tata Elxsi Limited, we note that the tribunal's ....
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....ble, the corresponding PLI of the very filed only would be taken in necessary computation. This ground No.3(x) is partly accepted for statistical purposes. 4.7. Next entity before us is, M/s.Infobeans Technologies Limited which already stands included in tribunal's order for AY.2014-15. The assessee's plea before is that this entity is engaged in diversified activities. We follow our reasoning in the preceding paragraph to remit the instant issue back to the TPO for his afresh adjudication in very terms. 4.8. The assessee's next substantive grievance seeks to exclude M/s.Cigniti Technologies Limited from the array of comparables on the ground that this entity is engaged in software testing segment. Learned departmental representative strongly opposes assessee's stand on the ground that it had itself included the instant company in the list of comparables and therefore it is estopped from contesting M/s.Cignity Technologies Limited's inclusion herein. We find no merit in either parties' submissions in entirety at this stage. This is primarily for the reason that we are dealing with Chapter-X of the Act in the nature of a "Special Provision" so as to determine Arm's Length Pric....
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....s arguments since Chapter-X is a "Special Provision" wherein there is no scope for any kind of "grace marketing" and more particularly when other segmental companies are already there. We further quote hon'ble apex court's decision in Commissioner of Customs Vs. Dilip Kumar (2018) 9 SCC 1 (FB)(SC) that provisions of the Act have to be strictly interpreted only. The assessee fails in its instant ground No.4(v). This ground No.4 (with all sub-grounds) is partly accepted in foregoing terms. 6. We now advert to the assessee's 5th substantive ground involving sub-ground Nos.(i) to (vi) seeking to exclude the allegedly improperly selected comparables in the lower proceedings. It transpires during the course of hearing that this tribunal's earlier orders; right from AYs.2011-12 to 2015- 16, have excluded M/s.Infosys BPO, Eclerx Services Limited and M/s.Cross Domain Solutions Private Limited inter alia on the ground that the same had been having diversified activities with huge broad value and turnover in former first and KPO services providers, in latter twin entities cases; respectively. These sub-grounds stand accepted therefore. 6.1. The assessee's sub-grounds No.5(iv) to (v)....
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....l Limited and M/s.BNR Udyog Limited; respectively on the ground that the corresponding export filter limit of 75% ought not to be applied to reject functionally comparable companies in light of a catena of case law, are found to be carrying no substance as per "stricter interpretation (supra)" in preceding paragraphs. These subgrounds are rejected therefore. 8.3. Learned counsel does not press for the assessee's subground No.6(vi) during the course of hearing. 8.4. Coming to the assessee's sub-ground Nos.6(vii), (ix) and (x) alleging cherry picking at the lower authorities' behest qua M/s.Suprawin Technologies Limited, M/s.Tata Consulting Engineers Limited and M/s.Tata Elxsi Limited, learned counsel first of all submitted that the corresponding data is very much available now. We therefore restore all these sub-grounds back to the TPO regarding these remaining comparables. We also make it clear that the learned counsel had made a submission before us that in case we accept the assessee's ground Nos.(i), (ii), (vii) and (viii), all the remaining eight comparables entities would be rendered academic. We therefore direct the TPO to consider the assessee's instant concession as w....
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....25,970/- and Rs.1,00,01,279/-; respectively. Learned counsel vehement contended before us that the lower authorities have erred in law and on facts in making both the impugned adjustments thereby taking "NIL" price as their market rate(s) in issue. And also that they have wrongly applied benefit test as well which is not sustainable in light of CIT Vs. Cushman & Wakefield (India) Pvt. Ltd., [269 CTR 16] (Del) and CIT Vs. EKL Appliances Ltd. (2012) [345 ITR 241] (Del) that it is not within the TPO's domain to ascertain or apply the "benefit" test since the same has to be ascertained from the point of view of an assessee than questioning its wisdom by departmental authorities. His next argument is that it is the assessee's AE had in fact made the impugned payments to M/s.KPMG on "cost to cost basis" only without involving any profit element therein. Learned counsel has quoted a catena of case law that such cost to cost arrangement itself forms a valid market comparable which could not be dis-regarded whilst adding the entire price as ALP adjustment. The Revenue in turn has strongly supported both the impugned adjustment. 11.1. We have given our thoughtful consideration to ri....
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....(2017) 390 ITR 271 (Bom) wherein their lordships hold in very clear terms that Section 40(a)(ii) does not cover the same. We find in this factual backdrop that this tribunal's coordinate bench decision in DCIT Vs. Elitecore Technologies Private Ltd. (2017) 165 ITD 153 (Ahd) has distinguished the foregoing judicial precedent to conclude that the same is not a binding precedent since coming from the hon'ble nonjurisdictional high court as under: "27. In ground no. 3, the assessee has raised the following grievance 3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in not allowing entire foreign tax credit amounting to Rs.55,61,306. 3.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in disregarding the fact that tax credit has been claimed on the income which has been taxed in both the countries, i.e. source country and resident country. 3.3 Alternatively, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the AO in not considering ac....
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.... negatived, or rather simply brushed aside, by the Assessing Officer without any discussion at all. Aggrieved by learned CIT(A) upholding the eligible tax credit at Rs 3,10,799, the assessee is in appeal before us. In the meantime, however, the order so followed by the CIT(A) also came up for examination before us. Vide order dated 3rd January 2017 on assessee's appeal for the assessment year 2009-10, the stand of the CIT(A) on quantification of tax credit was reversed, claim of the assessee on quantification, to a very large extent, was upheld, and, in the process, some observations on principles governing the quantification of such tax credit were made. Learned counsel for the assessee suggests that matter deserves to be remitted to the file of the CIT(A) for fresh adjudication, on quantification aspect, in the light of the order so passed by the Tribunal, and learned Departmental Representative does not oppose this prayer. On the quantification aspect, therefore, we remit the matter the file of the CIT(A) for adjudication de novo in accordance with the law, in the light of the observations made by the Tribunal for the assessment year 2009-10 in assessee's own case, by wa....
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....he allocation so made by the assessee. However, there seems to be no logic in allocating a share, in proportion of turnover, of all the costs borne by the assessee to these earnings- as has been done by the Assessing Officer. When the income in respect of such foreign operations is not separately computed, it is to be done on a reasonable basis, and what would constitute reasonable basis will be the basis which is based on sound reasoning. The concept of averaging on the basis of overall revenues and profits of the assessee, or on the basis of some other ratio analysis, can only come into play when the income element cannot be worked out on some other reasonable basis on the facts of a particular case So far as the facts of the present case are concerned, we have also noted that the assessee has, during the course of the assessment proceedings, given the working on the computation of income- a copy of which is placed at page 79 of the paper-book filed before us.. ....... 9. We see no infirmities in this computation showing the element of income embedded in the receipts which have been taxed abroad as well. These details were duly furnished to the Assessing Officer vide let....
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....nner, spread over the residence and source jurisdiction, but that's not the case here. Right now, we are dealing with a situation in which a major portion of income, by release of retention money as also by addition of an additional user by the customer, is a somewhat passive income, even though in the nature of business receipt, and as such, to that extent, allocation of all the expenses incurred by the assessee, in respect of such earnings, will not be justified. As regards the income from maintenance contracts, the relates costs have already been allocated and the Assessing Officer has not pointed out any infirmity in the same. In this view of the matter, quantification of income for the purpose of computing admissible tax credit, as done by the assessee and as reproduced earlier, is accepted. 10. We have noted that the tax credit for both the jurisdictions is to be computed separately but in a similar manner, as is provided in the respective treaties. So far as the tax credit in respect of Indonesian receipts is concerned, as noted above and in view of article 23(1) of the applicable tax treaty, it cannot "exceed the part of the income tax as computed before the de....
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.... 508/Ahd/2016 Assessment Year: 2012-13 (i.e. income tax withheld abroad minus the tax credit held admissible in such respect of such income tax paid abroad), the Assessing Officer is in appeal before us. 31. So far as this aspect of the matter is concerned, the stand of the assessee, at the assessment stage, has been that in case any part of the amount of income tax withheld abroad is not allowed as tax credit against the Indian tax liability, a deduction under section 37(1) be allowed in respect of the same. It was pointed that though there is a bar, under section 40(a)(ii), on deduction in respect of 'tax' on the profits and gains of the business, such a bar does not apply on the taxes paid outside India, as, in terms of definition of tax under section 2(43), "income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA". Reliance was placed on a coordinat....
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....ed order of the CIT(A). the scheme of benefit available to the assessee in respect of taxes paid or withheld outside India, by way of an example, is as follows: Assuming that the assessee earned an income of Rs 100 from outside India, and the taxes withheld abroad are Rs 60 and the admissible tax credit available to the assessee under section 90 and/or 91, in respect of these taxes withheld, is Rs 40 as the effective tax rate in India in respect of the said income is 40%, the benefit available to the assessee should be as follows: Tax credit to be adjusted against tax liability under the Income Tax Act, 1961 Rs 40 Deduction under section 37(1) in respect of taxes paid or withheld outside India Rs 20 In effect thus, the assessee gets a tax benefit of Rs 48 (i.e. Rs 40 plus 40% of Rs 20 which is allowed as deduction) as against a related tax liability of Rs 40 33. The stand of the revenue authorities, on the other hand, is that in the above example, no amount of tax paid or withheld outside India can be allowed as deduction under section 37(1). It is undisputed position that but for the restriction placed under section 40(a)(ii) income tax paid by an assess....
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....ficant to note that the word "tax'; is used in conjunction with the words "any rate or tax", The word "any" goes both with the rate and tax. The expression is further qualified as a rate or tax levied 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 or gains. If the word "tax" is to be given the meaning assigned to it by s. 2(43) of the Act, the word "any" used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word "tax" as defined in s. 2(43) of the Act is subject to "unless the context otherwise requires". In view of the discussion above, we hold that the words "any tax" herein refers to any kind of tax levied or leviable 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 or gains. [Emphasis, by underlining, supplied by us now] 34. The views so expressed by Hon'ble Bombay High Court, in Lubrizol's case (supra), were approved by Hon'ble Supreme Court in the case of Smithkline & French India Ltd Vs CIT [(1996)....
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....ollowed in several other decisions of that Court], Karnataka [CIT ITA No.197 and 508/Ahd/2016 Assessment Year: 2012- 13 vs. International Instruments Pvt. Ltd. (1983) 144 ITR 936 (Kar), Madras [Sundaram Industries Ltd. vs. CIT (1986) 159 ITR 646 (Mad), Andhra Pradesh [Vazir Sultan Tobacco Co. Ltd. vs. CIT (1988) 169 ITR 35 (AP)], Rajasthan [Associated Stone Industries Co. Ltd. vs. CIT (1988) 170 ITR 653 (Raj)], Gujarat [S.L.M. Maneklal Industries Ltd. vs. CIT (1988) 172 ITR 176 (Guj) followed in several cases thereafter], Allahabad [Himalayan Drug Co. Pvt. Ltd. vs. CIT (1996) 218 ITR 346 (All)] and Punjab & Haryana High Court [Highway Cycle Industries Ltd. vs. CIT (1989) 178 ITR 601 (P&H) : TC 17R.807]. 35. A coordinate bench of this Tribunal, while dealing with the same question of deductibility of income tax paid abroad and in the case of DCIT Vs Tata Sons Ltd [(1991) 9 ITR (Trib) 154 (Bom)] and speaking through one of us, elaborately set out the broad principles governing the issue and observed as follows: 7. Let us deal with some fundamentals first. The payment of income-tax in overseas tax jurisdictions, in addition to taxability in the home jurisdiction, is ....
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.... be distinguished from territorial systems. Most countries using an exemption system adopt exemption with progression, under which the total tax on all income of a resident is calculated, and then the average rate of tax is applied to the income that does not enjoy the exemption. Exemption systems are also increasingly subject to various conditions to ensure satisfaction of the assumption underlying the system (that the income has been taxed in the ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 source country at its ordinary rates).These conditions can consist of subject- to-tax tests (including the specification of tax rates) or selective application of exemption to foreign countries under domestic law or tax treaties. In particular, the exemption is usually not given where the source tax has been reduced or eliminated by a tax treaty. The result is that there are no countries asserting jurisdiction to tax worldwide income that give an exemption for all kinds of foreign income; where a country is referred to as an exemption country, this generally means that it provides some form of exemption to business income, dividends received from direct investments in foreign companies....
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....w. Whichever double tax relief system is adopted, some method of apportioning deductions between domestic and foreign income will be necessary. Where deductions allocated to foreign income exceed that income, the loss should not be available for use against domestic income." 8. There are thus four methods in which relief can be granted to a taxpayer in the residence country in respect of income-tax paid abroad. It is also important to bear in mind the fact that these four methods are mutually exclusive methods in the sense ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 that each one of these methods, on standalone basis, is meant to grant requisite relief from double taxation of an income. Application of more than one of these methods, in a particular situation can thus only result in granting relief greater than the double taxation itself. To sum up even at the cost of an element of repetition, these methods are as follows : • In the first method, residence country follows pure territorial method of taxation and brings to tax only such incomes as are sourced in the residence jurisdiction itself. There is then no conflict between the source rule....
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....ndia,-- (a) for the granting of relief in respect of-- (i) income on which taxes have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary ....
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.... or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that specified territory outside India, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India. (2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-s. (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (3) Any term used but not defined in this Act or in the agreement referred to in sub-s. (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. Explanation 1 : For the remov....
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....country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him-- (a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or (b) of a sum calculated on that income at the Indian rate of tax; whichever is less. (3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under s. 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates....
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....in India, which has suffered tax in such source jurisdiction. Sec. 90 and s. 90A provide that when India has entered into a DTAA with a foreign country, or a specified association outside India, the provisions of such agreements will override the provisions of the Indian IT Act-- except to the extent the provisions of the Indian IT Act are beneficial to the assessee. Under the tax credit scheme envisaged in the schemes of tax treaties, once again each income sourced in the treaty partner country is practically treated as a separate basket of income and the double taxation relief, in respect of taxes paid in that treaty partner country, is restricted to the taxes actually levied in the home country in respect of the said income. It thus follows that the least relief available in respect of income-tax paid abroad is if at all an assessee is also taxed in India in respect of the income-taxed abroad, it is only to the extent the tax rate abroad falls short of Indian tax rate. There is no dispute that the assessee has claimed double taxation relief under the scheme of the Act--as set out in s. 90 and s. 91 of the Act. 11. The assessee, however, was not satisfied with the relief....
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....in USA. That has at least restricted some intended double benefit to the assessee, but even in a situation in which tax relief is confined to a situation in which the same has been actually taxed in India, the relief will be available against tax liability in respect of other incomes to the extent of applicable tax rate on taxes actually paid abroad. The net effect is that even when there is admittedly no double taxation of an income, the assessee is able to reduce his Indian income-tax liability, in respect of other incomes, by being allowed deduction in respect of taxes paid abroad. Such a claim being accepted will lead to quite an incongruous result by any standard. 12. It is in the backdrop of the above claim for deduction that one has to take a look at s. 40(a)(ii) and s. 2(43) which are reproduced below for ready reference : "Sec. 40(a)(ii)--Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-- (ii) any sum paid on account of any rate of tax levied on the profits or gains of any business or profession or ....
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....s Act (i.e. IT Act, 1961)", and, as a corollary thereto, this limitation on deduction of tax does not extend its scope to taxes paid other than under IT Act, 1961. 14. The above claim of deduction has been approved by the Co-ordinate Benches, for the first time in the asst. yr. 1976-77, and which has also been followed by another Co-ordinate Bench, vide order dt. 23rd Oct., 1984--a copy of which was also filed before us. This decision has been followed by the Coordinate Benches since then. It has been noted in this order that "there is no finding that local taxes (abroad) were assessed on a proportion of the profits i.e. consultancy fees received". When CIT sought a reference under s. 256(1), for esteemed views of Hon'ble Bombay High Court and against this order on the question of deductibility of local taxes paid abroad, the Tribunal declined the reference and, inter alia, observed that "the question is one of the facts", that "the tax deducted is a local tax and not a tax on profits" and that "foreign tax is not covered by the provisions of s. 40(a)(ii)". Hon'ble High Court also declined CIT's prayer for reference under s. 256(2) and the order of the Tribunal....
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....C), has held that the task of interpretation is not a mechanical task and, quoted with approval, Justice Hand's observation that "it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning". Their Lordships further observed that, "we must not adopt a strictly literal interpretation of ... but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs" and that "we cannot ignore the context and the collection of the provisions in which ......, appears, because, as pointed out by Judge Learned Hand in the most felicitous language : interpret '. . .the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create . ..'" One of the things which is clearly discernible from....
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....ording of s. 40(a)(ii) and disagreed with the assessee's contention that the expression 'tax' is restricted to 'income-tax' as defined under s. 2(43). While doing so, their Lordships, inter alia, observed as follows : "It is significant to note that the word 'tax' is used in conjunction with the words 'any rate or tax'. The word 'any' goes both with the rate and tax. The expression is further qualified as a rate of tax levied 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 or gains. If the word 'tax' is to be given the meaning assigned to it by s. 2(43), the word 'any' used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word 'tax' as defined in s. 2(43) of the Act is subject to "unless the context otherwise requires". In view of the discussion above we hold that the word 'any' tax herein refers to any kind of tax levied or leviable on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the ....
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.... which the same has been actually taxed in India, the relief will be available against tax liability in respect of other incomes to the extent of 38.5 per cent of taxes paid abroad. The scheme of the Act does not visualize this kind of an undue relief to the assessee which provides much greater relief than the hardship caused to the assessee. The hardship is of double taxation of an income in more than one tax jurisdiction, and the relief must not go beyond mitigating this hardship; it cannot be turned into an undue advantage, or source of income, to the assessee. Sec. 91 restricts the double taxation relief only to such amount as may have been paid by the assessee in excess of his income-tax obligations in India. Similarly, in terms of the provisions of tax treaties which are entered into under s. 90, tax credits, in respect of taxes paid abroad, are restricted to assessee's domestic tax liability in respect of the subject income as was held by this Tribunal in the case of Jt. CIT vs. Digital Equipments India Ltd. (2005) 93 TTJ (Mumbai) 478 : (2005) 94 ITD 340 (Mumbai). If we are to hold that the assessee is entitled to deduction of tax paid abroad, in addition to admissibilit....
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.... the United States, India shall allow a deduction from the income of that resident an amount equal to incometax paid in the Unites States, whether directly or by way of deduction. Such deduction shall however not exceed that part of income-tax (as compute before the deduction is given) which is attributable to the income which is taxed in the United States.' A plain reading of the above provision makes it clear that the deduction on account of income-tax paid in the US, from income-tax payable in India, cannot exceed Indian income-tax liability in respect of such an income. This restriction on the deduction is unambiguous and beyond any controversy, as evident particularly from the last sentence in art. 25(2)(a) which is italicized as above the supply the emphasis on the same. As a matter of fact, we are unable to appreciate any basis whatsoever for the CIT(A)'s conclusion that the taxes paid in the US, in the instant case, are to be credited to the assessee's account and are to be refunded to the appellant, in case he has no income-tax liability in respect of that income in India. As for the CIT(A)'s observation, referring to payment of income-tax in the United Sta....
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....the entire tax paid in the US to the assessee and grant of refund to him in case there is no tax liability in India in respect of that income, as enunciated and adopted by the CIT(A), is wholly unsustainable in law. Where is the question of refund of taxes paid abroad when FTD (i.e., foreign tax credit), in view of specific provisions to that effect in the DTAAs, cannot even exceed the Indian income-tax liability ? It is not the tax payment abroad which is the material figure for the purpose of computing Indian income-tax liability, but it is the admissible foreign tax credit in respect of the same which affects such an Indian income-tax liability. The FTD in respect of income-tax paid in the US cannot exceed the Indian incometax liability in respect of the income on which income-tax is paid in US." 19. In view of the aforesaid judicial precedent, and being in considered agreement with the same, we reject this alternate claim of the assessee. 20. Learned counsel has also contended that in any event, we must allow deduction in respect of State income-taxes paid in USA and Canada as relief is not admissible in respect of the same in respective tax treaties. We have ....
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....nder s. 91 will be higher than relief under the tax treaty. It will be so for the reason that State income-tax will also be added to income-tax abroad, and the aggregate of taxes so paid will be eligible for tax relief--of course subject to tax rate on which such income is actually taxed in India. The tax relief under s. 91 thus works out to at least 38 per cent, as against tax credit of only 35 per cent admissible under the tax treaty. In such a situation, the assessee will be entitled to relief under s. 91 in respect of Federal as well as State taxes, and that relief being more beneficial to the assessee vis-à-vis tax credit under the applicable tax treaty, the provisions of s. 91 will apply to State income-taxes as well. The State incometax is also, therefore, covered by Expln. 1 to s. 40(a)(ii), and deduction cannot be allowed in respect of the same. Finally, in view of Hon'ble Bombay High Court's judgment in Gill's case (supra), income-tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between Federal and State taxes either. Interestingly, State income- taxes paid in USA, subject to certain limitation....
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....ut these significant developments, the coordinate bench, in Mastek's case (supra), has observed as follows: 39. Due consideration of the provisions of sec.37 and sec.40(a)(ii) of the Act as well, it emerges that u/s 37, all taxes and rates are allowable irrespective of the place where they are lived i.e., whether on Indian soil or offshore, whereas u/s 40(a)(ii) of the Act, income-tax which is a tax leviable on the profits and gains chargeable under the Act is deductible. On the other hand, all other taxes levied in foreign countries whether on profits or gains or otherwise are deductible under the provisions of sec. 37 of the Act and payment of such taxes does not amount to application of income. 40. Let us now have a glimpse at the judicial views on a similar issue. (i) South East Asia Shipping Co. ITA No.123 of 1976 - Mumbai Tribunal: The issue, in brief, was that the tax authorities of the respective country had collected income-tax at source, according to them, a part of such earnings accrued and arose in their countries which were liable to income-tax under its taxing laws. Such foreign tax claimed as a deduction by the assessee was turned down ....
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....ee, at least in that case litigation cannot be allowed to perpetuate for an indefinite period. In the instant case, the issue is not only settled in favour of the assessee in its own case by the Tribunal in ITA Nos. 5708/Mum/82 and 5790/Mum/83 dated 23.10.82, but even after rejection of Revenue's Application under section 256(1) in RA Nos.305 AND 306/Bom/85 dated 14.1.86, its application under section 256(2) on the issue has been rejected by the High court by its order dated 29/3/93 in ITA No.89 of 1989. thus, the issue has reached finality in the assessee's own case and it cannot be dragged into further litigation." 41. Taking into account all these facts and circumstances of the issue and in consonance with the findings of the Hon'ble Benches of Mumbai Tribunal (supra), we are of the firm view that the learned CIT (A) was justified in his stand which requires no interference of this Bench at this juncture. It is ordered accordingly. 37. The views so taken by the coordinate bench, however, are not only diametrically opposed to an earlier decision of another coordinate bench in the case of Tata Sons (supra), as reproduced earlier, and of Hon'ble Bo....
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.... so taken by Hon'ble Bombay High Court in Reliance Infrastructure's case (supra). Clearly, therefore, the coordinate bench, in Mastek Ltd's case (supra), was swayed by judicial precedents which, as held by Hon'ble Bombay High Court in the aforesaid case, are not really binding judicial precedents on the issue. There are direct decisions of Hon'ble Bombay High Court itself, in the case of Inder Singh (supra) and Lubrizol (supra), which, for the detailed reasons set out above by Hon'ble Bombay High Court, must be preferred over these decisions declining to admit reference applications under section 256(2), as it then existed. 39. Having said that, we may also point out that earlier decision of Hon'ble Bombay High Court in Lubrizol's case (supra) and the fact that it stands specifically approved by Hon'ble Supreme Court in the case of Smithkline and French India (supra) was not brought to the notice of Hon'ble Bombay High Court either. It was in this backdrop that Their Lordships further made the following observations in the case of Reliance Infrastructure (supra): It therefore, follows that the tax which has been paid abroad ....
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....f considering the impact of Hon'ble Supreme Court's decision in Smithkline and French (supra). 41. Learned counsel for the assessee submits that the decision of Hon'ble Bombay High Court in the case of Reliance Infrastructure (supra) is directly on the issue of foreign tax credit while Lubrizol's decision (supra) and Smithkline and French India decision (supra) are in the context of surtax. These decisions, according to the learned counsel, have nothing to do with the question of deductibility of taxes paid abroad. The only direct decision on the issue is from Hon'ble Bombay High Court in the case of Reliance Infrastructure (supra) and that is in favour of the assessee. It is his argument that since there is no decision by the jurisdictional High Court to the contrary of what has been stated by Hon'ble Bombay High Court, Reliance Infrastructure (supra) decision is a binding precedent for us and we must follow the same. Any other approach, he very politely tells us, would be violate fundamental principles of judicial discipline and cannot, therefore, meet approval of Hon'ble Courts above. He reminds us that the Tribunal decision in the case of Ta....
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....ive approaches canvassed are that (a) the connotations of expression 'tax' appearing in the above provisions are controlled by definition under section 2(43) of the Act; (b) the connotations of the expression 'tax' appearing in the above provision extend to any tax, whether under the Income Tax Act, 1961 or not, as long as the tax is levied on the profits and gains of business, or assessed at a proportion of, or otherwise on the basis of, any such profits and gains. This controversy is evident from the following extracts from the various decisions, including the decision cited by the learned counsel of the assessee, as also from orders impugned in appeal before us: (i) Mastek Ltd's decision by the coordinate bench, relied upon by the learned counsel: 39. Due consideration of the provisions of sec.37 and sec.40(a)(ii) of the Act as well, it emerges that u/s 37, all taxes and rates are allowable irrespective of the place where they are lived i.e., whether on Indian soil or offshore, whereas u/s 40(a)(ii) of the Act, income-tax which is a tax leviable on the profits and gains chargeable under the Act is deductible. On the other hand, all other tax....
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.... section 40(a)(ii) does not apply to them. The tax levied by different countries is not a tax on profits but a necessary condition precedent to the earning of profits. So the AAC was absolutely justified in allowing the appeal of the assessee and we see no reason to differ from the finding." Reference application of the Revenue was rejected by the Tribunal which has been ratified by the Hon'ble Bombay High Court in ITA NO.123 OF 1976. ....................... (ii) Reliance Infrastructure (supra) by Hon'ble Bombay High Court We would have answered the question posed for our consideration by following the decision of this Court in Inder Singh Gill (supra). However, we notice that the decision of this Court in 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 and/or gain of business. The Indian Income Tax Act, 1922 Act also contains a similar provision in Section 10(4) thereof. However, the Indian Income Tax Act, 1922 contains no definition of "tax" as provided in Section 2(43) of the Act. Consequent....
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....paid on account of any rate or tax levied 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 or gains",; "Tax" has been defined U/s.2(43) as "fax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA. It is submitted that "tax" only includes taxes levied under Indian Income Tax Act, 1961 and foreign tax is out of the definition of 'tax" hence foreign tax paid will not be disallowed by virtue of Sec.40 (a)(ii). Reliance is placed on following decided cases where it has been held that taxes paid in foreign country is an allowable expenditure U/s.37(1) ¬ CIT vs. Tata Sons Ltd (ITA No. 89 of 1989) - Bombay high court rejected reference in ....
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....th with the rate and tax. The expression is further qualified as a rate or tax levied 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 or gains. If the word "tax" is to be given the meaning assigned to it by s. 2(43) of the Act, the word "any" used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word "tax" as defined in s. 2(43) of the Act is subject to "unless the context otherwise requires". In view of the discussion above, we hold that the words "any tax" herein refers to any kind of tax levied or leviable 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 or gains. [Emphasis, by underlining, supplied by us now] (ii) Hon'ble Supreme Court in Smithkline and French's case (supra) specifically approving the Lubrizol judgment ...........Firstly, it may be mentioned, s. 10(4) of the 1922 Act or s. 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be de....
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....of credit for taxes abroad is concerned, even though Hon'ble Supreme Court notes, in the case of Smithkline French (supra), that "s. 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the IT Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession". We, therefore, do not think we have the liberty of taking the view that learned counsel is urging us to take. 45. In any case, Hon'ble Bombay High Court's judgment in the case of Reliance Infrastructure (supra) proceeds on peculiar facts and a sort of concession by the revenue inasmuch as it was not the case of the revenue that context in which the expression 'tax' is used in section 40(a)(ii) requires a meaning different from the meaning assigned by Section 2(43). This is evident from the observations made by Their Lordships to the effect that "We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word "In this Act, unless the context otherw....
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....said bench did not bring this judicial precedent to their notice. In the case of Punjab Land Development and Reclamation Corpn. Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682; (1990) 77 FJR 17 (SC) Hon'ble Supreme Court explained the expression 'per incuriam' thus (at p. 36 of 77 FJR) : 'The Latin expression 'per incuriam' means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court.' A fortiori, a decision of the Tribunal unmindful of its earlier decision(s) on the same issue is also a per incuriam decision. Of course, if the subsequent decision had considered the earlier decision and yet differed from the conclusion, the situation would have been materially different. The only reason we have preferred Tata Sons decision (supra) over Mastek decision (supra), both of which are decisions from benches of equal strength, is that the latter was delivered in ignorance of earlier decisions in the cases of Tata Sons (supra) and Lubrizol India (supra). 48. A per....
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....x credit under section 90 or 91 are covered by the proviso, these are covered by the scope of Section 40(a)(ii) as well. And if these taxes are covered by Section 40(a)(ii), the theory that meaning of 'tax' under section 40(a)(ii) must remain confined to the taxes levied under Income Tax Act, 1961 comes to a naught since the taxes in respect of which credits are available under section 90 or 91 cannot be, under any circumstances, imposed under the Indian Income Tax Act. The argument of the learned counsel, if we have understood it correctly, is devoid of, in our considered view, legally sustainable merits. 50. In view of the above discussions, we are of the considered view that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad as the same will be, for the detailed reasons set out above, hit by the disabling provisions under section 40(a)(ii) of the Act. The relief granted by the CIT(A), by directing the grant of deduction of Rs.52,50,507 in respect of income tax withheld abroad in respect of which no foreign tax credit is admissible, under section 37(1) of the Act must, therefore, stand vacated. We direct so. We further di....