AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (12) TMI 1227
X X X X Extracts X X X X
X X X X Extracts X X X X
....s with its Associated Enterprises (`AEs') under section 92CA of the Income-tax Act, 1961 ("the Act"). 2. The learned AO/ learned TPO/ Hon'ble CIT(A) has erred in law and in facts by ignoring the submissions filed by the Appellant in relation to the business model of the Appellant. 3. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in holding that the payments made for availing business development services are not at arm's length. 4. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the fact that the appellant, being an entrepreneurial entity, undertakes all strategic decisions for rendering the services and therefore, the related cost has to be borne by the same. 5. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the facts that services were rendered by Onmobile USA LLC to the customers of the Appellant on behalf of the Appellant, and therefore are not received by the subsidiaries in Latin American countries, and therefore in the absence of any service being availed by the subsidiaries in Latin American countries, no portion of the cost can be apportioned to the said entities. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation @ 60% on NMS CG/Tx cards, switches etc., by classifying the same as "Computers" whereas all the technical systems linked to computer cannot be termed as "Computers" eligible for higher depreciation and the same are to be treated only as "plant & machinery"? 2. Whether the Honourable CIT(A) was correct in allowing deduction of tax paid outside India by holding that tax paid outside India would be outside the scope of Section 40(a)(ii) of the Income tax Act? 3. Whether the Hon'ble CIT(A) has erred in not following the binding decision of the Hon'ble Karnataka High Court in the case of Kirloskar Electric Co. Ltd., vs CIT [1997] 228 ITR 676, in which it was held that tax paid outside India on profits and gains of any business cannot be deducted in view of provisions of Section 40(a)(ii) of the Income tax Act?" Brief facts of the case are as under: 2. Assessee is a telecommunication operator in India and abroad that provides mobile value added services. The Ld.AO has noted that the services include ring back tones (RBT). A. The Assessee provides mobile value added services ("MVAS") to telecommunication operators in India and abroad. The services ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see's customers in LATAM countries. The company renders data storage and data warehousing services for the Assessee's customers in LATAM countries, on behalf of the Assessee. The company is a captive service provider and caters exclusively to the customers of the Assessee in LATAM countries. The company is compensated by the Assessee at a cost plus mark-up of 6%. E. The Assessee selected Onmobile USA as the tested party and adopted TNMM method as the most appropriate method. Upon applying appropriate filters, the Assessee selected a set of comparable companies. The mean of the net cost plus mark up charged by the comparables stood at 11.77%. Accordingly, the mark up of 6% on costs paid by the Assessee was treated to be at arm's length. Re services received from LATAM affiliates: F. The Assessee selected the LATAM affiliates as the tested party, and adopted TNMM method as the most appropriate method. Upon applying appropriate filters, the Assessee selected a set of comparable companies. The mean of the net cost plus mark up charged by the comparables stood at 8.03%. Accordingly, the mark up of 5-7% on costs paid by the Assessee was treated to be at arm's length. G. ANALY....
X X X X Extracts X X X X
X X X X Extracts X X X X
....transfer pricing adjustment made by apportioning the expenses of assessee's affiliates. 4.1 The Ld.AR submitted that, adjustment were determined by the Ld.TPO by holding that, the costs ought to have been shared by the LATAM affiliates. It is submitted by the Ld.AR that, the object behind inserting the transfer pricing provisions is to avoid shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. It is thus submitted by the Ld.AR that the assumption of the authorities below runs contrary to the intent and purpose of the transfer pricing provisions. 4.2 It is submitted that the subsidiaries of the assessee work on a cost plus model, and assuming that the costs incurred by the assessee towards receipt of services from Onmobile USA, which in itself bears a mark-up, is apportioned to the LATAM affiliates, the LATAM affiliates would recover the said costs from the assessee, with a further mark up of 5-7%. This would lead to reduction in the income of the assessee in India, and shifting of the same to foreign country, which is contrary to the transfer pricing provisions. In fact, Section 92(3) of the Act,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es. The Ld.AR relied on the relevant agreements entered into with the AE in USA and the AEs in LATAM countries are placed at pages 408 - 453 of the paperbook. 4.5 Thirdly, it was submitted that the adjustment determined by the Ld.TPO is wholly erroneous and contrary to the provisions of the Act. It is submitted that in terms of Section 92C of the Act, the arm's length price of an international transaction shall be determined by any of the method prescribed thereunder. The Ld.TPO in the present case has determined the adjustment in an adhoc manner, without adhering to the statutory provisions. It is submitted that the adjustment determined in an adhoc manner is without jurisdiction and therefore ought to be set aside. 4.6 Reliance in this regard is placed on the following decisions: - CIT v. Johnson & Johnson Ltd. reported in [2017] 80 taxmann.com 337 (Bombay); - Merck Ltd. (supra); and - CIT v. Kodak India (P.) Ltd. reported in [2017] 79 taxmann.com 362 (Bombay). 4.7 The Ld.DR on the contrary relied on the orders passed by authorities below. He submitted that all these details that have been argued by the Ld.AR has not been considered by the L....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... * Assessment year 2014-15: Order dated 10.08.2022 passed by this Hon'ble Tribunal in ITA No.139/Bang/2019. * Assessment year 2015-16: Order dated 10.08.2022 passed by this Hon'ble Tribunal in ITA No.2560/Bang/2019. It is submitted that the order passed by this Tribunal for the assessment year 2008-09 (supra) is affirmed by the Hon'ble High Court of Karnataka vide order dated 18.01.2021 in ITA No. 340.2021. The Ld.DR thus supported the order of Ld.CIT(A) in granting relief to the assessee. We have perused the submissions advanced by both sides in the light of records placed before us. 5.2 We note that identical issue has been considered by Coordinate Bench of this Tribunal for A.Y. 2015-16 (supra) by observing as under: "24. During the year under consideration, the assessee has claimed depreciation @ 60% towards the addition made to the block of assets "Computers". These additions included items like NMS CG/TX cards, switches, etc. The AO following the earlier years orders, allowed depreciation only @ 15% treating the additions as part of telecom equipment as they relate to functioning of mobile phones. The DRP confirmed the disallowanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... would function only when attached to the computer. The MRBs increase the working capacity of the computers to the extent the computers receive calls and convert them into digital form. The MRBs work in conjunction with and as a part of the computer servers and cannot, in any way, be called as 'telecom equipment'. We also find that the facts of this issue in the case on hand, is similar to the facts of the case Datacraft India Ltd. (supra) wherein the Special Bench of the Mumbai Tribunal of this order held as under : '31. Now we have to consider whether a 'router' can be considered as "computer hardware" or a "computer component". Computer hardware refers to the physical parts of a computer and related devices. Internal hardware devices include motherboards, hard drives, and RAM. External hardware devices include monitors, keyboards, mouse, printers, and scanners. The internal hardware parts of a computer are often referred to as 'components', while external hardware devices are usually called 'peripherals'. Together, they all fall under the category of computer hardware. 'Software', on the other hand, consist of the programs and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tegrated with a 'computer' In other words, when a device is used as part of the computer in its functions, then it would be termed as a computer. 32. Now we will advert to the decisions relied on by the rival parties. We have set out above the cases decided by various Benches of the Tribunal in favour of the assessee. The lead order is in the case of Samiran Majumdar (supra) which has been followed, directly or indirectly, in most of the subsequent cases. We will take up this case for discussion, in which the question was whether printer and scanner could be allowed a higher rate of depreciation as applicable to computers. The Bench noticed that the printer and scanner cannot be used without computer. It was on this appreciation of the factual position that the printer and scanners were held to be part of computer qualifying for depreciation at the rate applicable to computer. In the opposition the orders taking view in favour of the Revenue are led by the case of router mania Technologies (supra). In this case it was observed that the router is a device which links or connects the computers for the exchange of relevant data. In reaching the conclusion that router ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. (supra) has been followed by the Delhi Tribunal in the case of Microsoft Corpn. India (P.) Ltd. (supra) wherein at para 16 of the order, it was held that : "16. ... it is clear that the above equipment primarily include the routers, switches, modems, etc. which are in the nature of input and output support devices which performs the functions including communication and control and, thus, they are computer hardware when they are used along with computer and when their functions are integrated with 'computer.' Such devices used as part of the computer in its functions and, thus, it can be termed as 'computer' only, therefore, eligible for depreciation @ 60%. Therefore, also we find no infirmity in the claim of the assessee of depreciation @ 60% of ITG networking equipments." 10.6-4 A similar view was adopted by a co-ordinate bench of this Tribunal in the case of NCR Corpn. (P.) Ltd. (supra) wherein at para 10 thereof it was held as under : "10. Having heard both the parties and having gone through the material on record, we find that this issue is more or less covered by the decision of the Special Bench in the case of Datacraft India Lt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espectfully following the above decision of the Tribunal, we hold that depreciation is to be allowed @ 60% on the CG/TX cards and switches, etc. This ground is allowed in favour of assessee." Respectfully following the above view, we direct the Ld.AO to allow the depreciation at 16% on the CG/TX Cards, switches etc. Accordingly, ground no. 1 raised by the revenue stands dismissed. 6. Ground nos. 2-3 has been raised by revenue challenging the action of the Ld.CIT(A) in directing grant of deduction of tax paid outside India in respect of which no foreign tax credit is eligible in India by holding that the same would be outside the scope of Section 40(a)(ii) of the Act. It is submitted that during the year under consideration, the Assessee had discharged taxes in foreign countries to the extent of Rs. 7,74,61,101/-, and claimed foreign tax credit of Rs. 3,97,38,075/-. 6.1 At the outset, the Ld.AR submitted that as regards the foreign taxes paid to the extent of Rs. 3,77,23,026/- (7,74,61,101 less 3,97,38,075), no deduction was claimed by the Assessee. It is submitted that to the extent no credit is available to the Assessee under Sections 90, 90A, 91 of the Act read with R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....year 1982-83 is prior to insertion of Explanation 1 and 2 to Section 40(a)(ii) of the Act, is not applicable to the facts of the present case of the assessee. The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 6.3 We note that this issue has been considered by this Tribunal in assessee's own case for A.Ys. 2014-15 and 2015-16 (supra) held as under: "48. We heard the ld DR. We notice that the Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) has considered a similar issue and held that - (h) Before dealing with the rival contentions, it would be useful to reproduce the statutory provision arising for our consideration to decide this issue. "Definitions 2. In this Act, unless the context otherwise requires, - (1) to (42)** ** ** 43. "tax" 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ping Co. (supra) is not available in its entirety. Therefore, it would not be safe to rely upon it as all facts and on what consideration of law, it was rendered is not known. Similarly, the decision of this Court in Tata Sons (supra) being Income Tax Appeal No.209 of 2001 produced before us, dismissed the appeal of the Revenue by order dated 2nd April, 2004 by merely following its order dated 23rd March, 1993 rejecting the Revenue's application for Reference under Section 256(2) of the Act. Thus, it also cannot be relied upon to decide the controversy. Moreover, the order of this Court in Tata Sons Ltd. (supra) as produced before us for Assessment Year 1985-86 had not noticed the decision of this Court in S. Inder Singh Gill (supra) on a Reference. Therefore, it is rendered per incuriam. (j) This Court in S. Inder Singh Gill (supra) was required to answer the question whether for the purpose of computing total world income of the assessee as defined in Section 2(15) of the I. T. Act, the income accruing in Uganda has to be reduced by the tax paid to the Uganda Government in respect of such income? The Court while answering the question in the negative observed that it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision of this Court in S. Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in S. Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act defines "tax" as income tax chargeable under the provisions of this Act. Thus, by definition, the tax which is payable under the Act alone on the profits and gains of business are not allowed to be deducted notwithstanding Sections 30 to 38 of the Act. (m) It therefore, follows that the tax which has been paid abroad would not be covered within the meaning of Section 40(a) (ii) of the Act in view of the definition of the word 'tax' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. 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 otherwise requires" the meaning of the word 'tax' as found in Section 2(43) of the Act would apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x is payable in India. (p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assessee such as the applicant assessee is entitled to a deduction under Section 40(a)(ii) of the Act. This is so as it is a tax which has been paid abroad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen/accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii) of the Act. (q) The Explanation to Section 40(a)(ii) of the Act was inserted into the Act by Finance Act, 2006. However, the use of the words "for removal of doubts" it is hereby declared "...." in the Explanation inserted in Section 40(a)(ii) of the Act, makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed ....