Tuesday, November 4, 2014

Reimbursement of administrative and management support services costs - No Tax withholding Sec 195


S. 195: Reimbursement of share of costs towards administrative and management support services in connection with technology updates etc. is not taxable

DCIT vs. Ernst & Young Pvt. Ltd (ITAT Kolkata)

The assessee company is a member of the international organization of Ernst & Yound and its several associate concerns worldwide. Ernst & Young Global Services LLP and Ernst Young UK LLP provide administrative and management support services in connection with technology updates, system and methodology and upgrades, training through webs etc. to the assessee and to other associate concerns of the Group.

The assessee and its other associate concerns share the costs. A sum of Rs.6,88,12,554 was reimbursed to Ernst & Young Global Services LLP and a sum of Rs.23,78,781 to Ernst & Young UK LLP by the assessee during the current assessment year on account of its share of costs for such services. The said concerns were set up by member firms of Ernst & Young for providing resources to obtain best methodologies at a lower cost which in the present days of globalisation was imperative for any professional firm. Development of such methods by anyone concern would have been cost prohibitive apart from lacking uniformity and mutual compatibility.

Accordingly, arrangement was arrived at for such services to be developed in pool by the said two concerns to which the member firms would have access to it and reimbursing their respective shares of cost incurred therefor. Such reimbursement was agreed on the basis of respective turnover of the member firms. These facts are not denied by revenue even now before us and these are reimbursement of expenses.

Once these are reimbursement of expenses the assessee is not liable to deduct TDS u/s. 195 of the Act.

Sunday, October 12, 2014

Vodafone Transfer Pricing Verdict: High Court Mocks Dept’s ‘Unique’ Interpreta​tion Of Law

Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)

The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed that the transfer pricing provisions did not apply as there was no income arising to it. The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s 144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. The High Court directed the DRP to decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. Upon the DRP’s decision, the assessee filed another Writ Petition. HELD by the High Court allowing the Petition:

(1) A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act.

(2) The word income for the purpose of the Act has a well understood meaning as defined in s. 2(24) of the Act. The amounts received on issue of share capital including the premium is undoubtedly on capital account. Share premium have been made taxable by a legal fiction u/s 56(2)(viib) of the Act and the same is enumerated as Income in s. 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);

(3) In case of taxing statutes, in the absence of the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it. It was not open to the DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word ‘Income';

(4) The other basis in the impugned order, namely that as a consequence of under valuation of shares, there is an impact on potential income and that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium.

(5) Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/consideration between AEs. The entire consideration received would not be a subject-matter of taxation;

(6) The department’s method of interpretation indeed is a unique way of reading a provision i.e. to omit words in the Section. This manner of reading a provision by ignoring/rejecting certain words without any finding that in the absence of so rejecting, the provision would become unworkable, is certainly not a permitted mode of interpretation. It would lead to burial of the settled legal position that a provision should be read as a whole, without rejecting and/or adding words thereto. This rejecting of words in a statute to achieve a predetermined objective is not permissible. This would amount to redrafting the legislation which is beyond/outside the jurisdiction of Courts.

(7) In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:- (a) subject of tax; (b) person liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above;

(8) The contention that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place is not acceptable because the entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax.

(9) W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within its scope the provisions of s. 56(2) (vii-b) of the Act. This indicates the intent of the Parliament to tax issue of shares to a resident, when the issue price is above its fair market value. In the instant case, the Revenue’s case is that the issue price of equity share is below the fair market value of the shares issued to a non-resident. Thus Parliament has consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad.

(10) Consequently, the issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case.

Friday, October 10, 2014

Microsoft case - Service provided to Principal situated in Singapore to market products in India - Is Export of Services

In the famous Microsoft case reported by us almost three years ago,due to divergent views of the Members constituting the Division Bench, the following was the difference of opinion framed for decision by the Third Member -
(i) Whether the impugned Business Auxiliary Service of promotion of market in India for foreign principal made in terms of Article 2 and 3 of the Agreement dated 01/07/2005 amounts to export of service considering Article 286 (1) (b) of the Constitution of India read with Apex decisions in the case of State of Kerala and Others Vs. The Cochin Coal Company Ltd. - (1961) 12 STC 1 (SC) , Burmah Shell Oil Storage and Distributing Co, of India Ltd. and Other Vs. Commercial Tax Officers and Others - 2002-TIOL-966-SC-CT-CB and the provisions of Export Service Rules, 2005 as well as Circular No. 141/10/2011 - TRU dated 13.05.2011 issued by CBE & C?
(ii) Whether the impugned Business Auxiliary Service of promotion of market in India for foreign principal made in terms of Article 2 and 3 of the Agreement dated 01/07/2005 was delivered outside India and used thereat and is immune from levy of service tax as export of service in terms of the provisions of Export Service Rules, 2005 read with circulars issued by CBE & C excluding Circular No.141/10/2011 - TRU dated 13.05.2011?
(iii) Whether the impugned Business Auxiliary Service provided in terms of Agreement dated 01/07/2005 is governed by the principles of equivalence and destination based consumption tax as well as law laid down by Apex Court in All India Federation of Tax Practitioners - 2007-TIOL-149-SC-STand Association of Leasing and Financial Services Companies Vs. UOI - 2010-TIOL-87-SC-ST-LB.
(iv) The Appeal in Appeal No. ST-828/2010 without being argued by both sides whether can be said to have involved the issue that output service was exported or conclusion is to be arrived at upon hearing both sides?
(v) Whether demand for the normal period sustains subject to grant of cum-tax benefit and CENVAT Credit?
We had reported this order as - 2011-TIOL-1508-CESTAT-DEL.
The Third Member has passed an order recently.
After hearing lengthy submissions by both sides, the Member (J) inter alia observed that in view of the Majority decision in Paul Merchants Ltd. - 2012-TIOL-1877-CESTAT-DEL it has to be held that services were being exported in terms of Export of Services Rules, 2005 and not liable to Service Tax.
The third Member also observed –
++ Even otherwise also, I find that the disputed service is the service being provided by the appellant to his principal located in Singapore. The marketing operations done by the appellant in India cannot be said to be at the behest of any Indian customer. The service being provided may or may not result in any sales of the product on Indian soil. The transactions and activities between the appellant and Singapore principal company are the disputed activities. As such, the services are being provided by the appellant to Singapore recipient company and to be used by them at Singapore, may be for the purpose of the sale of their product in India, have to be held as export of services.
Noting that in the case of Larsen & Toubro - 2013-TIOL-1458-CESTAT-DEL it is held that a majority decision is Larger Bench decision having the same binding criteria as that of Larger Bench, the Member (J) opined that the majority decision in the case of Paul Merchants is required to be followed.
 
The third Member also adverted to the decisions in Gap International Sourcing (India) Pvt. Ltd.- 2014-TIOL-465-CESTAT-DEL, Vodafone Essar Cellular Ltd.- 2013-TIOL-566-CESTAT-MUM, Bayer Material Science Pvt. Ltd.- 2014-TIOL-1084-CESTAT-MUM to conclude that Business Auxiliary services provided by the appellant to their principal company located in Singapore is to be considered as export of services.
 
Observing that the Revenue representative had not brought to notice any decision which is contrary to the law declared in the above referred decisions, the third Member agreed with the findings of the Member (Technical) of the referral Bench.
 
Inasmuch as the services provided by the appellant are covered by the Export of Service Rules, 2005 and are not liable to service tax is the Majority view.
 
The Appeal was allowed.
 
Source: TIOL
 

Thursday, October 9, 2014

Clarification on Transfer of Employees from STPI/Other Units to SEZ - Sec 10AA (Increased from 20% to 50%)

F.No.178/84/2012-ITA.I
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
NEW DELHI
Dated: October 8, 2014
CIRCULAR NO 14/2014
Subject: Clarification regarding allowability of deduction under section 10A/10AA on transfer of Technical Man-Power in the case of software industry.
 
CBDT had issued Circular No.12/2014 dated 18th July, 2014 to clarify that mere transfer or re-deployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred does not exceed 20 per cent of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit.
 
2. Representations have been received stating that the aforesaid limit of 20% is inadequate and restrictive since it impacts the competitiveness of Indian Software Industry in global market in terms of quality of product and delivery time-lines. Global competitiveness can be ensured only when highly skilled and experienced manpower is deployed for software development. Requests have, therefore, been made seeking enhancement of the limit of 20% in line with the recommendation of Rangachary Committee, which was set up to review the taxation of IT Sector and Development Centers.
 
3. The matter has been re-examined by the Board. In supersession of the Circular No.12/2014 dated 18th July, 2014, It has now been decided that the transfer or re-deployment of technical manpower from existing units(s) to a new unit located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred as at the end of the financial year does not exceed 50 per cent of the total technical manpower actually engaged in development of software or IT enabled products in the new unit.
 
4. Further, in the alternative, if the assesses (enterprise) is able to demonstrate that the net addition of the new technical manpower in all units of the assessee (enterprise) is at least equal to the number that represents 50% of the total technical manpower of the new SEZ unit during such previous year, deduction under section 10A/10AA would not be denied provided the other prescribed conditions are also satisfied.
 
5. For the sake of clarity, it is stated that the assessee will have a choice of complying with any one of the two alternatives given in Paras 3 and 4 above.
 
6. It is also clarified that this Circular shall be applicable only in the case of assessees engaged in the development of software or in providing IT Enabled Services in SEZ units eligible for deduction u/s 10A or u/s 10AA of the Act.
 
7. This Circular shall not apply to the assessments which have already been completed Further, no appeal shall be filed by the Department in cases where the issue is decided by an appellate authority in consonance with this Circular.
(Deepshikha Sharma)
Deputy Secretary to the Government of India

Saturday, September 13, 2014

One TDS challan for Payment Under Different sections & Years

Dear Deductor,

As per the records of the Centralized Processing Cell (TDS), it has been observed that you have used multiple challans in a month, for payment of Tax Deducted.
For Deductor's convenience, CPC(TDS) has established processing logic in the system that can accept a Single Challan for reporting of Tax Deposited in following circumstances :
  • Payment of Tax Deducted under different sections of the Income Tax Act, 1961:

    • The CPC(TDS) system gives credit of TDS against different sections of the Act, even though a specific section has been quoted in the challan.
    Example: The challan used for payment of TDS relevant to Section 192 of the Act can also be used for the purpose of reporting tax deposited under Section 194 of the Act also.





Situation prior to Financial Year 2012-13

Consumption of Challan in TDS Statement on the basis of Section quoted in the Challan details

Situation after Financial Year 2012-13

Section quoted in Challan, at the time of depositing Tax deducted/ collected is irrelevant for the purpose of consumption in TDS Statement.
Payment of Tax Deducted for different Assessment Years:

• In case tax has been deposited more than the required tax deducted at source for a particular Assessment Year, the excess amount of tax can be claimed in the following quarters of the relevant year. The balance amount if any, can be carried forward to the next year for claim in the TDS statement.
Example: If excess payment of Tax has been made in Quarter 1 of financial year 2013-14, the same can be used for Quarter 2,3&4 of F.Y. 2013-14 as well as for Q1 to Q4 of F.Y.2014-15. The excess amount of tax paid in Q1 of F.Y.2013-14 can also be used for payment of tax default of Q1 to Q4 of F.Y.2012-13.
  • Different challans used for the purpose of reporting multiple Deductees associated with different branches with same TAN:

    • The deductor may have used multiple challans for reporting multiple deductees associated with different branches, in the TDS Statement.
    • A single challan can be used for the purpose of reporting Tax Deducted for such deductees.
    Example: If a Bank has multiple branches with same TAN, payment of Tax Deducted can be made by a single challan and all the deductees can be tagged using the same.
Based on the above information, you may use a single challan in a month towards payment of Tax Deposited. For any assistance, you can also write to ContactUs@tdscpc.gov.in or call our toll-free number 1800 103 0344.
CPC (TDS) is committed to provide best possible services to you.

Payment of IPLC Charges subject to Tax Withholding - ITAT Chennai

In the case of Cognizant Technology Solutions India Pvt. Ltd. vs. ITO (2014-TII-131-ITAT-MAD-INTL) it is held that -
Payments made for International Private Leased Circuit (IPLC) are taxable as ‘Royalty’ for:
      i.        use or right to use commercial and scientific equipment u/s.9(1)(vi) of the Act read with explanation-2
     ii.        Alternatively, payment should be considered as payment for the use of the process provided by the assessee, whereby through the assured bandwidth, the customer is guaranteed the transmission of data and the voice.
Facts:
Assessee-company is engaged in the business of software development and export.It had made remittances to non-resident company M/s.Sprint USA for hiring International Private Leased Circuits, to receive bandwidth service, that enabled the assessee to communicate with its offices anywhere in the world through high speed connectivity via submarine cable. Through this dedicated high speed connectivity, the assessee was provided internet access and other telecommunication facilities. The foreign company, Sprint, USA, was responsible for installing and configuring the routers at the assessee’s customer’s site and backbone sites in US and Europe. The remittance made by the assessee to Sprint, USA, included the charges for router rental, installation, management and maintenance besides the software initialization charges.
The assessee remitted these amounts to the non-resident company without deduction of tax at source. arguing that these payments were for usage charges, recurring charges installation charges and also non usage charges which included service fee, access fee and equipment.
The Assessing Officer (AO) after analyzing the nature of services provided by Sprint USA to the assessee, held that the payments constituted 'royalty' for use of telecommunication equipment and other services and the assessee was liable for deducting tax at source under section 195. Accordingly, the AO disallowed the payment under section 40(a)(i) .
On appeal, the CIT(A) held that these payments were for international telecommunication services, which is a standard facility or service provided to all those willing to pay; that the assessee did not get any right to use any goods/equipment provided in such transmission. Therefore, the payments made to the overseas company were not in the nature of 'Royalty' for the use of equipment. The CIT(A) further held that M/s. Sprint USA did not have any permanent establishment in India and its income was in the nature of business income as it provided only 'service' to the assessee, who had not taken any equipment on lease. Thus, in the absence of PE, for the services rendered by Sprint, there was no necessity to pay taxes in India and as such the assessee was under no obligation to deduct tax under section 195 while making payments.
Order:


These are six appeals. Two appeals in ITA No.1535/Mds/2009 for the Assessment Year (AY) 2002-03 and ITA No.1536/Mds/2009 for the AY.2003-04 have been filed by the Revenue against the order of the Commissioner of Income Tax(Appeals)-XI, Chennai, dated 06-07-2009 passed u/s.201(1) and 201(1A) of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The CIT(Appeals) has passed common order for both the AYs.
ITA No.460/Mds/2010 relevant to the AY.2002-03 has been filed by the Revenue assailing the order of CIT(Appeals), LTU, Chennai dt.29-01-2010. The assessee has filed cross-objections in the said appeal.
ITA No.751/Mds/2010 relevant to the AY.2006-07 has been filed by the assessee against the order of CIT(Appeals), LTU, Chennai dt.12-03-2010. The Revenue has filed cross appeal in ITA No.864/Mds/2010 against the same order of CIT(Appeals).
ITA No.1922/Mds/2010 relevant to the AY.2006-07 has been filed by the Revenue assailing the order of CIT(Appeals), LTU, Chennai dt.31-08-2010 passed u/s.154 of the Act.
2. First we will take up the appeals of the Revenue in ITA No.1535 & 1536/Mds/2009 for the AYs.2002-03 & 2003-04 respectively assailing the order of CIT(Appeals) passed u/s.201(1) and 201(1A). The brief facts of the case are: The assessee-company is engaged in the business of software development and export. During the period relevant to the AYs under consideration, the assessee made remittances to M/s.Sprint USA for hiring International Private Leased Circuits [IPLC]. The aforesaid remittances made to non-resident company were without deduction of tax at source. M/s. Sprint USA is providing IPLC Bandwidth service to the assessee for internet access, business, data exchange, video conferencing and other telecommunication facilities to enable dedicated high speed connectivity. The details of the services provided by M/s.Sprint USA to the assessee are as under:
(a) International Private Leased Circuit (IPLC)
An IPLC is a point to point private line used by an organization to communicate between offices that are geographically dispersed throughout the World. An IPLC is used for internet access, business data exchange, video conferencing and any other form of telecommunication. This service entitles the customer to high speed connectivity anywhere in the world via submarine cable. It is stated that IPLC services are provided by two international career companies. Sprint is providing a US half channel and VSNL is providing India half channel. Congnizant is using IPLC services for their backbone connectivity and international customer connectivity.
(b) Private Leased Circuit (PLC)
A Private Leased Circuit is a direct or 'dedicated' line that connects customer specified locations, such as between the head office and a branch office, or a group company and a factory. Sprint provided private leased circuits in US and UK for connecting Cognizant customers to Cognizant US backbone.
(c) Frame Relay Circuit (FRC)
It is a cost effective data networking service that allows enterprises to connect to remote offices in a secure, private WAN environment. It is stated that the standard components include (i) ports – the customers' physical entry into the frame relay network from a particular site (ii) permanent virtual circuit (PVCs) – PVCs provide point to point connectivity between two sides like a private line (iii) local access/local loops – providing connectivity to the frame relay network. This is a dedicated access line from the end user's site to the nearest frame relay switch.
(d) Router Management
Sprint is responsible for installing/configuring the routers at Cognizant's customer's site in US and Europe and backbone sites in US and UK.
It is stated that Sprint provides equipment CSU/DSU (Customer Service Equipment/Digital Service Equipment) for terminating the circuits in Cognizant US Backbone and customer locations in US and Europe.
The payment to Sprint includes router rental charges, router management charges, router maintenance charges, software initialization charges, router installation charges.
After analyzing the nature of services provided by Sprint USA to the assessee, customer service agreement and services level agreement, the ITO (International Taxation-II) vide his order u/s.201(1) and 201(1A) held that the payments made to the nonresidents company constitutes 'Royalty' for use of telecommunication equipment and other services under the provisions of Income Tax Act. On the contrary, the stand of the assessee is that the remittances made by the assessee constitute payments for usage charges, recurring charges installation charges and also non usage charges which include service fee, access fee and equipment. The ld.Counsel for the assessee in order to support his contentions furnished customer service agreement with M/s. Sprint USA, copies of invoice raised by M/s. Sprint USA and copy of M/s. Videsh Sanchar Nigam Limited [VSNL].
2.1 Aggrieved against the said order, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) held that the payments made by the assessee were for international telecommunication services which is a standard facility or service providing to all those willing to pay. The assessee does not get any right to use any goods/equipment provided in such transmission. Therefore, the payments made to the overseas company is not in the nature of 'Royalty' for the use of equipment. The CIT(Appeals) further held that M/s. Sprint USA does not have any Permanent Establishment [PE] in India. The income of the Sprint is in the nature of business income as it provides only 'service' to the assessee as the assessee has not taken any equipment on lease. In the absence of PE for the services rendered by Sprint, there is no necessity to pay taxes in India and as such the assessee is under no obligation to deduct tax u/s.195 of the Act while making payments.
2.2 Aggrieved by the order of CIT(Appeals), the Revenue has come in appeal before the Tribunal. The ld.DR vehemently supporting the order of ITO (International Taxation) submitted that the payments made to M/s. Sprint USA are in the nature of 'Royalty'. In order to support his contentions, the ld.DR relied on the recent judgment of the Hon'ble Madras High Court in the case of M/s.Verizon Communications Singapore PTE Ltd., Vs. ITO (International Taxation) reported as 361 ITR 575 (Mad) = 2013-TII-48-HC-MAD-INTL.
2.3 On the other hand, Shri Saroj Kumar, Advocate appearing on behalf of the assessee strongly supported the order of CIT(Appeals) and prayed for dismissal of the appeal of the Revenue.
2.4 We have heard the submissions made by the representatives of both the sides and have perused the orders of the authorities below. We have also examined the judgment of the Hon'ble jurisdictional High Court in the case of M/s. Verizon Communications Singapore PTE Ltd., Vs. ITO (International Taxation) (supra). We find that the issue in dispute is identical to the one adjudicated by the Hon'ble High Court in the aforesaid case. Similar issue, "Whether the services provided by the overseas company constitutes 'Royalty' or not"? came up before the Hon'ble High Court. In the said case, the non-resident company was engaged in the business of providing international connectivity services (bandwidth services/telecom services) in the Asia Pacific region including India for transmission of data and voice. The international leg of telecommunication services outside India was provided by the non-resident company. In Indian territory, the connecting services were provided by VSNL. VSNL transmitted the traffic of the customer in India from the customers office in India to a virtual point outside India and the non-resident company transmitted it up to the customer location outside India. The non-resident company used its telecom service equipment situated outside India in providing international half circuit. The gateway/landing station in India used in transmitting the traffic within India belong to VSNL and was used by VSNL for providing Indian end services in accordance with the contract with its customers.
The Assessing Officer came to the conclusion that the payment received by the non-resident company in providing international private leased circuit was taxable as a 'Royalty' for use or right to use commercial and scientific equipment u/s.9(1)(vi) of the Act read with explanation-2 and Article 12(3) of the Doubt Taxation Avoidance Agreement between India and Singapore. In first appeal, the order of the assessee was upheld by the CIT(Appeals). On further appeal, the Tribunal held that even if the payments were treated as non-relating to the use of equipment, they should be considered as payment for the use of the process provided by the assessee, whereby through the assured bandwidth, the customer is guaranteed the transmission of data and the voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus, the consideration being for the use and right to use of the process, it is 'Royalty', within the meaning of Clause-(iii) of Explanation-2 to section 9(1)(vi) of the Act. The Hon'ble High Court affirmed the findings of the Tribunal on the issue.
2.5 The facts in the present case are identical to the one adjudicated by the Hon'ble High Court. Thus, in view of the facts and circumstances of the case and the law laid down by the Hon'ble jurisdictional High Court, we find merit in the appeals of the Revenue. Accordingly, both the appeals of the Revenue are allowed.
3. ITA No.460/Mds/2010 (AY.2002-03) & C.O.No.27/Mds/2010:
The Revenue has raised as many as six grounds in its appeal. Ground Nos. 1 & 6 are general in nature and as such they are not taken up for adjudication.
3.1 The ground No.2 relates to exclusion of foreign currency expenditure from export turnover and total turnover while computing deduction u/s.10A of the Act. The ld.Counsel for the assessee submitted at the outset that the ground raised in appeal by the Revenue has already been adjudicated by the co-ordinate Bench of the Tribunal in favour of the assessee in ITA No.114/Mds/2011 (AY.2005-06) decided on 23-01-2013 = 2013-TIOL-745-ITAT-MAD. The ld.AR placed on record the copy of the order of the Tribunal in the aforesaid appeal. The co-ordinate bench of the Tribunal following the decision of Hyderabad Bench of the Tribunal in the case of Patni Telecom P. Ltd., Vs. ITO reported as 308 ITR (AT) 414 (Hyderabad) = 2008-TIOL-665-ITAT-HYD wherein it was held that expenses incurred in foreign exchange, as part of the export carried out by the assessee, cannot be excluded from the export turnover. The Chennai Bench held that the facts of the assessee's case are exactly similar to the facts in the case of Patni Telecom P. Ltd., Vs. ITO (supra) and directed the Assessing Officer to include foreign currency expenditure to form part of export turnover of the assessee in computing deduction u/s.10A of the Act. We find that in the AY under consideration, there is no change in the facts and thus the same ratio can be applied in AY.2002-03 as well. Accordingly, this ground of appeal of the Revenue is dismissed.
3.2 The ground No.3 raised in appeal by the Revenue is exclusion of telecommunication expenses from export turnover and total turnover while computing deduction u/s.10A. Following the same principle as laid down by the Hyderabad Bench of the Tribunal in the case of Patni Telecom P. Ltd., Vs. ITO (supra), we dismiss this ground of appeal of the Revenue.
3.3 In Ground No.4, the Revenue has assailed the findings of CIT(Appeals) for deleting the disallowance u/s.40(a)(i) in respect of payments made to M/s.Sprint USA towards lease line charges. The CIT(Appeals) deleted the disallowance u/s.40a(ia) for nondeduction of tax at source on payments made to M/s. Sprint USA for the reasons that, the CIT(Appeals)-XI, Chennai vide order dt.06-07-2009 passed u/s.201(1) and 201(1A) for the relevant AY has held that the assessee was under no obligation to deduct tax u/s.195 while making such payments as M/s.Sprint USA had no PE in India. Since, the said order of the CIT(Appeals)-XI, Chennai has been set aside by us, in the appeal of the Revenue in ITA No.1535/Mds/2009, this ground of appeal of the Revenue has to be allowed.
3.4 Ground No.5 raised in appeal by the Revenue is with regard to levy of interest u/s.234D. The ld.Counsel for the assessee has submitted that the provisions regarding the levy of interest u/s.234D were inserted by the Finance Act, 2003 w.e.f. 01-06-2003, therefore they cannot be applied in the AY.2002-03.
It is an undisputed fact that the provisions of section 234D were inserted by the Finance Act, 2003 w.e.f.01-06-2003, therefore, they have no retrospective applicability. Moreover, the Special Bench of the Tribunal in the case of ITO Vs. Ekta Promoters P. Ltd., reported as 113 ITD 719 = 2008-TIOL-337-ITAT-DEL-SB has held that the interest u/s.234D is chargeable from AY.2004-05 onwards. Accordingly, this ground of appeal of the Revenue is dismissed.
3.5 In cross-objections, the assessee has primarily raised two issues. Issue No.1 relates to exclusion of foreign currency expenditure from export turnover and total turnover for computing deduction u/s.10A and 10B. This issue has already been decided in favour of the assessee in Revenue's appeal. Therefore, the first cross-objection has become infructuous and is dismissed as such.
3.6 The second issue is raised in cross-objection No.2 to 4. The assessee has supported the order of CIT(Appeals) with regard to the disallowance u/s.40(a)(i) in respect of payments made to M/s. Sprint USA towards lease line charges. Since this issue has been adjudicated in favour of the Revenue in ITA No.1535/Mds/2009, the assessee was liable to deduct tax u/s.195 of the Act on remittances made to M/s.Sprint USA. The Assessing Officer has rightly made disallowance u/s.40(a)(i) on such payments. Accordingly, cross-objections 2 to 4 are dismissed.
3.7 In result, the appeal of the Revenue is partly allowed and the Cross-objections of the assessee are dismissed.
4. ITA No.751/Mds/2010 (AY.2006-07) by Assessee and ITA No.864/Mds/2010 (AY.2006-07) by Revenue:
Both the appeals are directed against the order of CIT(Appeals), LTU dt.12-03-2010. The assessee in its appeal has raised as many as 19 grounds. Ground Nos.1 and 19 are general in nature and are thus not taken up for adjudication. Ground No.2 & 3 relate to exclusion of expenditure incurred in foreign currency from export turnover and Ground No.4 to 7 relate to exclusion of telecommunication expenditure from export turnover for the purpose of computing deduction u/s.10A. The issues raised by the assessee in above grounds of appeal have already been adjudicated in favour of the assessee in the appeal of the Revenue i.e., ITA No.460/Mds/2010. Reliance has been placed on the decision of Hyderabad Bench of the Tribunal in the case of Patni Telecom P. Ltd., Vs. ITO (supra) for deciding the issue in favour of the assessee. Both the issues in the present appeal are thus allowed. The Assessing Officer is directed to include foreign currency expenditure as well as telecommunication expenditure as part of the export turnover.
4.1 In Ground Nos. 8 to 13, the assessee has assailed the findings of CIT(Appeals) with respect to set off of current year's losses of eligible units against the profits of other units eligible for deduction u/s.10A. The ld.Counsel for the assessee in support of his submissions relied on the judgment of the Hon'ble Karnataka High Court in the case of CIT & Anr. Vs. Yokogawa India Ltd. and Others, reported as 246 CTR (Kar) 226 = 2011-TIOL-711-HC-KAR-IT and the decision of the co-ordinate bench in assessee's own case in ITA No.114/Mds/2011 for the AY.2005-06 (supra). The relevant extract of the findings of the Tribunal are reproduced here under:
"In the present case the Assessing Officer adjusted the brought forward losses of the assessment year 2004-05 of the eligible units against the current year's profits of the eligible units before computing the deduction under section 10A. The very same issue was considered by the Income-tax Appellate Tribunal, B-Bench, Chennai, in the case of RR Donnelley India Outsource Pvt. Ltd. vs DCIT, in ITA Nos.1489 & 1490(Mds)/2010. Through their order dated 26-7-2012 the Tribunal, following the decisions of the Hon'ble Karnataka High Court in the case of CIT & Anr. Vs. Yokogawa India Ltd. and Others, 246 CTR (Kar) 226 = 2011-TIOL-711-HC-KAR-IT and in the case of CIT & Anr. Vs. Tata Elxsi Ltd. & Others, 247 CTR 334 = 2011-TIOL-684-HC-KAR-IT, has held that the current year's profit of the eligible units should not be reduced by setting off of the brought forward losses of earlier years even though relating to eligible units. The Assessing Officer has to give deduction under section 10A on eligible profits of the current assessment year. This issue is decided in favour of the assessee.
We find that in the AY under consideration, there has been identical set of facts and the issue in appeal is squarely covered by the findings of the co-ordinate bench of the Tribunal in ITA No.114/Mds/2011 for the AY.2005-06 (supra). Accordingly, this ground of appeal of the assessee is allowed.
4.2 The next issue raised in para Nos.14 to 17 in the grounds of appeal by the assessee relate to disallowance u/s.14A of the Act. The Assessing Officer has made disallowance u/s.14A by applying the provisions of Rule 8D on tax free income of Rs.3,80,10,340/-. The CIT(Appeals) upheld the findings of the Assessing Officer on the issue. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., reported as 328 ITR 81 (Bom) = 2010-TIOL-564-HC-MUM-IT has held that the provisions of Rule 8D are applicable w.e.f. AY.2008-09. The newly introduced provisions of Rule 8D have no retrospective applicability, the authorities below have erred in applying the same. The Tribunal in assessee's own case for the AY.2005-06 has upheld the action of the Assessing Officer in making the disallowance @2% of the exempt income. The Tribunal further accepted alternate contention of the aassessee that the profit for the purpose of section 10A will be enhanced to the extent of disallowance. Therefore, proportionate enhancement will be in the amount of deduction available u/s.10A. Respectfully following the same, we direct the Assessing Officer to disallow 2% of the exempt income u/s.14A and further make proportionate enhancement in the amount of deduction available u/s.10A. This ground of appeal of the assessee is partly allowed.
4.3 Ground Nos.18 in the appeal of the assessee relate to disallowance u/s.40(a)(i) in respect of professional/technical fee paid to Taras Consulting LLC and Epicor Software Pty. Ltd., both nonresident entities towards travel and other expenditure. The assessee's contention before Assessing Officer for not deducting tax on such payment u/s.195 was based on CBDT Circular No.786 dt.07-02-2000. However, the said circular has been withdrawn vide subsequent Circular No.7 of 2009. Even before CIT(Appeals), the assessee was unable to produce any details in support of its claim. Before us also, the ld.Counsel for the assessee has not been able to substantiate the claim of the assessee. Accordingly, this ground of appeal of the assessee is dismissed.
4.4 In view of our above findings, the appeal of the assessee is partly allowed.
5. ITA No.864/Mds/2010 (AY.2006-07):
The Revenue has raised six grounds in its appeal. Ground Nos.1 to 6 are general in nature and therefore they are not taken up for adjudication. Ground Nos.2 to 4 relate to exclusion of foreign currency expenditure and telecommunication expenditure from both export turnover and total turnover for the purpose of computing deduction u/s.10A. Both these issues are squarely covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of CIT Vs. Saksoft Limited reported as 313 ITR (AT) (Madras) 553 = 2009-TIOL-187-ITAT-MAD-SB. The Special Bench has held that the expenses on freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India which are required to be excluded from the export turnover should also be excluded from total turnover while computing deduction u/s.10B of the Act. Moreover, these issue have already been held in favour of the assessee in assessee's appeal No.751/Mds/2010 in para No.4 herein above. Accordingly, both the grounds in the appeal of the Revenue are dismissed.
5.1 In Ground No.5, the Revenue has assailed the order of CIT(Appeals) with respect to disallowance of provisions for expenses. The ld.DR has submitted that the CIT(Appeals) has erred in deleting the disallowance made by Assessing Officer to the tune of Rs.6,25,02,220/- towards various expenses on the ground that the expenses are contingent in nature and not pertaining to the AY under consideration.
On the other hand, the ld.Counsel for the assessee submitted that similar issue was raised by the Revenue in appeal before the Tribunal in ITA No.90/Mds/2011 for the AY.2005-06. The Tribunal vide order dt.23-01-2013 = 2013-TIOL-745-ITAT-MAD, dismissed this ground of appeal of the Revenue by placing reliance on the decision of Hon'ble Supreme Court of India in the case of Bharat Earth Movers Vs. CIT reported as 245 ITR 428 = 2002-TIOL-123-SC-IT.
We examined the order of the co-ordinate bench of the Tribunal in ITA No.90/Mds/2011 (supra) = 2013-TIOL-745-ITAT-MAD. We find that the issue in hand is identical to the one adjudicated by the Tribunal in assessee's case in the appeal of the Revenue for the AY.2005-06. The relevant extract of the findings of the Tribunal in the said appeal are under:
"4.3 The next ground of the Revenue is that the provision made by the assessee for liabilities of expenditure was in the nature of provision and should not have been allowed by the Commissioner of Income-tax(Appeals) as an expenditure in computing the income. The assessee is providing provision for expenditure incurred in the previous year itself. The amount was not paid by the end of the year and in certain cases bills were not received by the end of the year and in such cases the assessee is making a provision for such expenditure already incurred during the relevant previous year. In the course of the next previous year the assessee is making the payment and the differential amount, if any, is adjusted in its profit and loss account. This is a consistent practice followed by the assessee. The provision for unpaid expenses is not in the nature of contingent expenditure. It is a provision made against actual expenditure. Therefore, the decision of the Hon'ble supreme Court rendered in the case of Bharat Earth Movers vs. CIT, 245 ITR 428 = 2002-TIOL-123-SC-IT, squarely applies here. The ground of the Revenue is dismissed".
Accordingly, this ground of appeal of the Revenue is dismissed for similar reasons.
5.2 In the result, the appeal of the Revenue is dismissed.
6. ITA No.1922/Mds/2010 (AY.2006-07):
In this appeal, the Revenue has assailed the order of CIT(Appeals), LTU Chennai dt. 31-08-2010 passed u/s.154 of the Act. The assessee had filed Miscellaneous Petition for rectification of the order dt.12-03-2010 passed by the CIT(Appeals), LTU, Chennai in ITA No.35/09-10/LTU(A) for the AY.2006-07. The CIT(Appeals) vide impugned order held that the issue raised in ground No.13 of the appeal was not adjudicated. The CIT(Appeals) while disposing off Miscellaneous Petition of the assessee decided the said ground. The relevant extract of the findings of the CIT(Appeals) are as under:
"5.1 I have carefully considered the petition by the appellant on this issue. I find that this ground (ground No.13) has not been adjudicated. Since separate expense has not been claimed by the appellant for earning of the dividend income, it may be accepted that the same was incurred from the business expenses. When part of the same is disallowed, business income would correspondingly increase. The AO is directed to allow enhanced deduction in respect of the additional income due to the disallowance of the expense. He is, however, directed to bifurcate the same between the income eligible for deduction u/s.10A and income which is not eligible for deduction u/s.10A. This ground is partly allowed".
6.1 The Revenue has come up in appeal against the aforesaid findings of the CIT(Appeals). We observe that the issue raised in appeal has already been adjudicated by us in the appeal of the assessee in ITA No.751/Mds/2010 in para No. 4.2 herein above. Therefore, for the reasons mentioned therein, the appeal of the Revenue is dismissed.
7. To sum up, ITA Nos. 1535/Mds/2009 and 1536/Mds/2009 of the Revenue are allowed. ITA No.460/Mds/2010 of the Revenue is partly allowed and C.O.No.27/Mds/2010 of the assessee is dismissed. The appeal of the assessee in ITA No.751/Mds/2010 is partly allowed. The appeals of the Revenue in ITA Nos.864/Mds/2010 and 1922/Mds/2010 are dismissed.




 
 

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