2011 (2) TMI 1528 - AT - Income Tax

Accrual of income - taxability of Foreign Dividends - whether liable to be taxed, on net basis, after deducting foreign taxes withheld abroad? - CIT(A) did not accept the assessee s contention to the effect that foreign dividends are liable to be taxed, on net basis, after deducting foreign taxes withheld abroad - HELD THAT - Issue as decided in favour of assessee as relying on case of AMBALAL KILACHAND 1994 (4) TMI 67 - BOMBAY HIGH COURT as held that amount initially available for distribution by the U.K. company cannot be considered as income accruing to the assessee, because the assessee does not have any right to receive the amount so initially declared. He does not have any right to claim any credit for the tax which is deducted on that amount. Therefore, under no circumstances can he claim that the gross amount available for distribution has accrued to him - A shareholder outside the United Kingdom cannot claim any credit for the tax paid by the company. Therefore, the only entitlement of a shareholder outside the United Kingdom is to receive dividend as reduced by the deduction of the corporation tax. Deduction u/s 80HHE - exclusion on account of maintenance of software and technical support, from the export turnover, to arrive at the deduction - reason for which receipts in respect of software maintenance and technical support have been not been taken into account for the purpose of computing deduction as deduction under section 80HHE is restricted to receipts in respect of development and production of software - HELD THAT - We find that the connotations of software maintenance are quite distinct and separate in scope than maintenance per se - we direct the Assessing Officer to take receipts, in respect of software maintenance , into account for the purpose of computing deduction under section 80HHE. To this extent, grievance of the assessee is upheld. Receipts for technical support services - We uphold the action of the authorities below, but, in view of the Special Bench decision in the case of ITO v. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D direct the Assessing Officer to exclude these receipts, both from the export turnover and from the total turnover, which are the numerator and the denominator, respectively, in the formula. The assessee will get the relief accordingly.

Issues Involved:

1. Tax credit for State Income-taxes paid in the USA and Canada.
2. Allocation of interest expenses to dividend income and capitalization of such expenses.
3. Taxation of foreign dividends on a net basis after deducting foreign taxes withheld abroad.
4. Exclusion of software maintenance and technical support receipts from export turnover for section 80HHE deduction.

Issue-wise Detailed Analysis:

1. Tax Credit for State Income-taxes Paid in the USA and Canada:

The primary issue was whether the assessee is entitled to a tax credit for State Income-taxes paid in the USA and Canada. Initially, the assessee did not press this ground, content with the CIT(A)'s decision to allow deductions for these taxes under section 37(1). However, the Tribunal, in a previous order, had upheld the Assessing Officer's appeal, disallowing deductions for any foreign income tax, whether State or Federal. The Tribunal reasoned that the tax treaties (Indo-US and Indo-Canada) only allowed credits for Federal Income-taxes, not State taxes. The Tribunal emphasized that tax treaties override domestic law only to the extent beneficial to the assessee. Therefore, under section 91, which does not differentiate between Federal and State taxes, the assessee is entitled to relief for State taxes if it results in a higher benefit than the treaty provisions. Despite this, the assessee's representative acknowledged that the tax credit for State taxes would not benefit the assessee due to existing credits exceeding the tax liability. Therefore, the Tribunal dismissed this ground as academic and infructuous.

2. Allocation of Interest Expenses to Dividend Income and Capitalization of Such Expenses:

The assessee did not press this ground of appeal. Consequently, the Tribunal dismissed it for want of prosecution.

3. Taxation of Foreign Dividends on Net Basis After Deducting Foreign Taxes Withheld Abroad:

The assessee contended that foreign dividends should be taxed on a net basis after deducting foreign taxes withheld abroad. The Tribunal agreed with the assessee, citing the Hon'ble Bombay High Court's judgment in CIT v. Ambalal Kilachand, which held that only the net dividend, after deducting foreign taxes, accrues to the assessee. Therefore, the Tribunal upheld the assessee's grievance and directed the Assessing Officer to grant relief in accordance with the principles laid down in Ambalal Kilachand's case.

4. Exclusion of Software Maintenance and Technical Support Receipts from Export Turnover for Section 80HHE Deduction:

The assessee challenged the exclusion of receipts from software maintenance and technical support from the export turnover for computing the deduction under section 80HHE. The Tribunal distinguished between 'software maintenance' and 'maintenance' of tangible assets, noting that software maintenance is part of ongoing development. Citing the case of Direction Software Solutions v. ITO, the Tribunal held that software maintenance receipts should be included in the export turnover for section 80HHE deduction. However, for technical support services, the Tribunal upheld the exclusion but directed the Assessing Officer to exclude these receipts from both export and total turnover, following the Special Bench decision in ITO v. Sak Soft Ltd.

Conclusion:

The appeal was partly allowed. The Tribunal provided relief to the assessee on the issues of foreign dividends and software maintenance receipts while dismissing the grounds related to tax credits for State Income-taxes and allocation of interest expenses.

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