2014 (7) TMI 1167 - HC - Income Tax

Disallowance under Section 40(a)(i) - licenses in software acquired by the Respondent-assessee from M/s.GE Network Technologies Netherlands - whether the licenses are for the use of copyrighted article and the payments would be taxable as royalty? - Indo Netherlands treaty - Held that - Tribunal on fact found that the supplier has no business operations in India to which the income may be attributed to as required under Explanation 1(a) to Section 9(1)(i) of the Income Tax Act 1961 (for short the Act ). As this conclusion was arrived at by the Tribunal on appreciation of fact we do not find any wrong in it. As far as the second issue is concerned the Tribunal found that the royalty is not payable as required under Section 9(1)(i) of the Act or Article 12 of India-Netherlands DTAA. As it was a case of frequent purchases of software the question of payment of expenses incurred on account of the import does not arise. Communication charges - as per ITAT the charges shall not be excluded from Export Turnover though Explanation 2 to Section 10A - Held that - Tribunal has followed the decision of Coordinate Bench of the learned Tribunal in case of PATNI TELECOM (P) LTD. v. ITO 2012 (8) TMI 641 - ITAT HYDERABAD . This decision does not appear to have been upset by higher foram Foreign exchange fluctuation arisen on account of conversion of funds in EEPC account into Indian Rupees - eligible for deduction under Section 10A as per ITAT - Held that - As decided by the learned Tribunal following the decision of the Tribunal in case of SANYO LSI TECHNOLOGY INDIA PRIVATE LIMITED v. DEPUTY COMMISSIONER OF INCOME TAX 2014 (1) TMI 1257 - ITAT BANGALORE which was decided following Supreme Court decision in case of SUTLEJ COTTON MILLS LIMITED v. CIT. 1978 (9) TMI 1 - SUPREME Court Interest ought to be charged at LIBOR 2% when Indian entity advancing loan to its AE located in United States of America is in the nature of outbound loans effecting rupee loans on which PLR is applicable rather than LIBOR as per ITAT - Held that - It is legally acceptable discretion of the learned Tribunal this Court does not think fit to interfere with the same.

Summary

Issues:
1. Applicability of disallowance under Section 40(a)(i) of the Income Tax Act 1961 for software licenses acquired.
2. Interpretation of the Indo Netherlands treaty regarding royalty payments for copyrighted articles.
3. Exclusion of communication charges from Export Turnover under Section 10A of the Income Tax Act 1961.
4. Eligibility of foreign exchange fluctuation deduction under Section 10A not derived from software export.
5. Charging interest at LIBOR + 2% for outbound loans to an AE in the United States.

Analysis:
1. The first issue pertains to the applicability of disallowance under Section 40(a)(i) of the Income Tax Act 1961 for software licenses acquired. The Tribunal found that the supplier had no business operations in India, thus income attribution under Explanation 1(a) to Section 9(1)(i) was not applicable. The Tribunal also determined that royalty payments were not payable under Section 9(1)(i) or Article 12 of the India-Netherlands DTAA due to the nature of frequent software purchases, leading to no expenses incurred on imports.

2. Regarding the interpretation of the Indo Netherlands treaty on royalty payments, the Tribunal's decision aligned with the legal requirements under Section 9(1)(i) and Article 12 of the treaty. The judgment was based on factual findings and legal provisions, indicating no error in the Tribunal's conclusion.

3. The issue of excluding communication charges from Export Turnover under Section 10A was addressed by the Tribunal following a precedent set by the Coordinate Bench in the case of PATNI TELECOM (P) LTD. v. ITO. This decision was upheld as legally sound, and no intervention was deemed necessary by the Court.

4. The eligibility of foreign exchange fluctuation deduction under Section 10A, not derived from software export, was decided by the Tribunal in line with the judgment in the case of SANYO LSI TECHNOLOGY INDIA PRIVATE LIMITED v. DEPUTY COMMISSIONER OF INCOME TAX, which was based on a Supreme Court decision. The Court found no reason to overturn this decision.

5. Lastly, the question of charging interest at LIBOR + 2% for outbound loans was considered a legally acceptable discretion of the Tribunal. The Court declined to interfere with this decision, leading to the dismissal of the appeal without costs.