2011 (12) TMI 339 - HC - Income Tax

DTAA between India and USA - Disallowance - Deduction u/s 80HHE - In respect of the same assessee arising in ITA.No.3232/2005 and by order dated 4.11.2011 has been answered against the assessee and in favour of the revenue Regarding deduction u/s 40(a)(i) - The material on record would clearly show that the question about non-deduction under Section 195 of the Act in respect of the payments made in a sum of Rs. 17, 35, 363/-to Powersolve Corporation USA was raised by the first appellate authority and a show cause notice was also issued to the assessee - the material on record would clearly show that the said payment of Rs. 17, 35, 363/- paid to the Powersolve Corporation USA was for the services rendered abroad to their office in USA which is a permanent establishment in DTAA and hence there is no liability to tax in India and even as per the DTAA tax was paid in USA and no amount out of the said payment was chargeable to tax in India and wherefore the question of applying Explanation relied upon by the learned Counsel appearing for the appellant would not arise - Decided in favor of the assessee

Summary

Issues:
1. Disallowance under Section 80HHE of the Income-Tax Act.
2. Disallowance under Section 40(a)(i) for non-deduction of TDS under Section 195.

Issue 1: Disallowance under Section 80HHE of the Income-Tax Act:
The appellant, an exporter of software, filed its income return admitting a total income. The assessing officer disallowed the claim under Section 80HHE due to exclusion of expenditure in foreign currency from export turnover. The first appellate authority upheld the disallowance, citing non-permissibility under Section 40(a)(i) and Section 195. The Income-tax Appellate Tribunal (ITAT) reversed this decision, stating that payments made to overseas consultants for services outside India did not accrue in India and were not taxable in India. The Tribunal held that the exclusion of expenditure in foreign currency from export turnover for technical services outside India was justified. The High Court upheld the Tribunal's decision, confirming the exclusion of expenditure in foreign currency from export turnover for computing deduction under Section 80HHE.

Issue 2: Disallowance under Section 40(a)(i) for non-deduction of TDS under Section 195:
The first appellate authority disallowed a sum for non-deduction of Tax Deducted at Source (TDS) under Section 195 for payments made to a non-resident company. The authority held that deductions under Section 195 were mandatory unless an exemption certificate was obtained. However, the ITAT disagreed, stating that the payments made outside India were not chargeable to tax in India and hence no TDS was required. The High Court agreed with the ITAT, citing a Supreme Court decision that clarified the obligation to deduct tax at source only when a sum is chargeable under the Act. The Court held that the reasoning of the revenue authority was incorrect and that the ITAT's decision to set aside the deduction made by the first appellate authority was justified. The High Court answered the second substantial question of law in favor of the assessee and against the revenue.

In conclusion, the High Court allowed the appeal in part, confirming the exclusion of expenditure in foreign currency from export turnover and total turnover when rendering technical services outside India for computing deduction under Section 80HHE of the Income-Tax Act.