2011 (1) TMI 915 - AT - Income Tax

Disallowance u/s 40(a)(i) - Royalty or fees for technical services - TDS u/s 195 - The payments made to service providers such as AT&T or MCI Telecommunications are for the use of bandwidth provided for downlinking signals in the United States - A.O., while completing the assessment as in the last year, held that the assessee company has got the benefit of technical consultation and it was concluded by the AO that the payment falls within the ambit of section 195 of the IT Act - Since the amounts for subscription to foreign entities mentioned above are not chargeable to tax in India, the assessee is not liable for tax deduction at source - Decided in favour of the assessee Provision for warranty for post sales customer support - held that - the estimation is implicit in the concept of provision and if the estimation is on reliable basis, it is to be accepted. In the case of Rotork Controls India (P) Ltd. v. CIT (2009 -TMI - 33420 - SUPREME COURT OF INDIA), it was held by the Hon ble Supreme Court that provision for warranty at the rate of 2% of turnover based on past experience was found to be acceptable. Deduction u/s 10A - Reduction of telecommunication charges from the total turnover while calculating deduction u/s 10A of the Act. - held that - decided in favor of assessee. Deduction u/s 80HHE - The assessee, while claiming deduction u/s 80HHE, considered the total turnover of only those units, which were eligible for deduction u/s 80HHE. The A.O. completed the assessment and adopted the entire turnover as per the P&L account in allowing deduction u/s 80HHE. - Decided in favor of assessee.

Issues Involved:
1. General Grounds (Ground Nos. 1.1 and 10.1)
2. Levy of Interest (Ground Nos. 8.1 and 9.1)
3. Payment towards Bandwidth Charges (Ground Nos. 2.1 to 2.3)
4. Payment made to Gartner Group and Other Entities (Ground Nos. 3.1 to 3.3)
5. Provision for Warranty for Post Sales Customer Support (Ground No. 4.1)
6. Reduction of Telecommunication Charges from Total Turnover for Deduction u/s 10A (Ground No. 5.1)
7. Deduction u/s 80HHE (Ground Nos. 6.1 to 6.3)
8. Levy of Surcharge before Granting Relief under Double Taxation (Ground No. 7)

Detailed Analysis:

1. General Grounds (Ground Nos. 1.1 and 10.1):
Ground Nos. 1.1 and 10.1 were general in nature and did not require specific adjudication. Therefore, these grounds were dismissed.

2. Levy of Interest (Ground Nos. 8.1 and 9.1):
The levy of interest under sections 234B and 234D of the Income Tax Act was found to be mandatory and consequential. Thus, these grounds were dismissed.

3. Payment towards Bandwidth Charges (Ground Nos. 2.1 to 2.3):
The assessee, a public limited company engaged in software development, had paid Rs. 10,37,42,694/- towards bandwidth charges to foreign companies. The AO disallowed the payment under section 40(a)(i) for non-deduction of tax at source as required under section 195. The CIT(A) upheld the AO's decision, citing that the assessee should have obtained a no-deduction certificate and referenced the AAR ruling that such payments are considered royalty. However, the Tribunal, referencing the Supreme Court decision in GE India Technology Centre P. Ltd. v. CIT (327 ITR 456), held that if the remittance is not taxable in India, there is no need for tax deduction at source. The Tribunal concluded that payments for bandwidth are not royalties or fees for technical services and allowed the grounds in favor of the assessee.

4. Payment made to Gartner Group and Other Entities (Ground Nos. 3.1 to 3.3):
The assessee made payments towards subscription charges to various international organizations, which the AO disallowed under section 40(a)(i) for non-deduction of tax at source. The CIT(A) affirmed the AO's view. However, the Tribunal referenced earlier decisions in the assessee's own case and other relevant cases, concluding that such payments for accessing information databases are not subject to tax deduction at source. Therefore, these grounds were allowed in favor of the assessee.

5. Provision for Warranty for Post Sales Customer Support (Ground No. 4.1):
The AO disallowed the provision for warranty, considering it excessive. The CIT(A) upheld this view. The Tribunal, referencing previous decisions in the assessee's own case and the Supreme Court's ruling in Rotork Control India (P) Ltd. v. CIT (314 ITR 62), held that the provision for warranty based on past experience is justifiable and allowable. Thus, this ground was allowed.

6. Reduction of Telecommunication Charges from Total Turnover for Deduction u/s 10A (Ground No. 5.1):
The AO recomputed the deduction u/s 10A by reducing telecommunication charges from the export turnover. The CIT(A) affirmed this computation. The Tribunal, referencing its decision in the case of M/s Jaipuria Silk Mills (P) Ltd., held that telecommunication charges should be excluded from both export turnover and total turnover while calculating the deduction u/s 10A. Therefore, this ground was allowed.

7. Deduction u/s 80HHE (Ground Nos. 6.1 to 6.3):
The AO adopted the entire turnover for computing the deduction u/s 80HHE, which was affirmed by the CIT(A). The Tribunal, referencing previous decisions in the assessee's own case, held that the total turnover for section 80HHE should only include the turnover of computer software. Therefore, these grounds were allowed.

8. Levy of Surcharge before Granting Relief under Double Taxation (Ground No. 7):
The AO computed surcharge before granting double taxation relief, which was upheld by the CIT(A) based on a previous Tribunal order in the assessee's own case. The Tribunal agreed with this precedent, and thus, this ground was dismissed.

Conclusion:
The appeal was partly allowed, with specific grounds decided in favor of the assessee while others were dismissed as indicated above.

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