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.
