2012 (11) TMI 903 - AT - Income Tax

Deduction u/s 10A, 10B - Setting off losses and unabsorbed Depreciation - Either in the case of non-STP units or in the case of the very same undertaking - held that - Respectfully following the dictum laid down by the Hon ble jurisdictional High Court in the case of CIT vs Yokogawa India Ltd. 2011 (8) TMI 845 - KARNATAKA HIGH COURT deduction u/s 10A/10B of the Act is to be calculated without setting off of the carried forward business loss of the assessee in respect of the earlier assessment years. Invoking provisions of sec40a(i)- Payment of TDS u/s 195 - royalties or fees for technical services. - Telecom voice service received by non-resident on account of business connection mentioned in s. 9(1)(i) not having any permanent establishment in India - held that - Payment made to a non-resident in respect of telecom voice services availed outside India cannot be termed as fees for technical services . payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider in other words, to fit into terminology making available , the technical knowledge, skills etc., must remain with the person receiving the service even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider has gone into it. - The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Payment for bandwidth would constitute neither royalties nor fees for technical services either under the Act or under the agreement for Avoidance of Double Taxation with USA. - the assessee had no obligation whatsoever to deduct tax at source when the payments made to Novatel and as such, no disallowance u/s 40(a)(i) of the Act was called for. - Decided in favor of assessee.

Summary

Issues Involved:
1. Quantification of deduction under section 10B before setting off unabsorbed depreciation and losses of earlier years.
2. Justification of invoking section 40(a)(i) and disallowing the payment to a non-resident company.

Issue 1: Quantification of Deduction under Section 10B

The assessee contended that the deduction under section 10B should be quantified before setting off unabsorbed depreciation and losses of earlier years. The CIT(A) dismissed this appeal based on the Karnataka High Court's judgment in Himatasingike Seide Ltd. The assessee appealed, citing the Karnataka High Court's decision in Yokogawa India Ltd., which held that deduction under section 10B is allowable without setting off brought forward losses.

The Tribunal examined the jurisdictional High Court's ruling in Yokogawa India Ltd., which clarified that the income of a 10A unit must be excluded before arriving at the gross total income. The High Court emphasized that the income eligible for exemption under section 10A should not enter into computation as it must be deducted at the source level. Therefore, the loss of non-10A units cannot be set off against the income of 10A units.

Respecting the High Court's decision, the Tribunal concluded that the deduction under section 10A/10B should be calculated without setting off the carried forward business loss of the earlier assessment years. Thus, the assessee's grounds 2, 3, and 4 were allowed.

Issue 2: Invoking Section 40(a)(i) and Disallowing Payment to Non-Resident Company

The assessee made payments to Novatel, USA, without deducting TDS, arguing that Novatel had no permanent establishment in India and the payments were not chargeable to tax under the Act. The AO disallowed the expenditure under section 40(a)(i) for non-compliance with section 195, considering the payments as fees for technical services (FTS).

The CIT(A) upheld the AO's decision, reasoning that the amendment to section 9 by the Finance Act 2007 made such payments taxable in India. The CIT(A) emphasized that the sum received by Novatel included a profit element, making it chargeable under the Act.

The Tribunal considered the assessee's argument that the services provided by Novatel were not technical services and thus not subject to TDS under section 195. The Tribunal referred to the Supreme Court's ruling in GE India Technology Centre (P) Ltd., which stated that TDS is required only if the sum is chargeable to tax under the Act. The Tribunal also noted that the services provided by Novatel did not fit the definition of technical services as per the Act or DTAA.

Additionally, the Tribunal cited the Mumbai Tribunal's decision in Sandoz (P) Ltd., which held that payments for services rendered outside India are not taxable in India if the non-resident has no permanent establishment in India. The Tribunal also referenced the jurisdictional High Court's ruling in De Beers India Minerals (P.) Ltd., which clarified that technical knowledge must be imparted to and absorbed by the receiver to be considered 'fees for technical services'.

Based on these precedents, the Tribunal concluded that the assessee was not obligated to deduct tax at source for payments made to Novatel, and thus, no disallowance under section 40(a)(i) was warranted. Consequently, the assessee's grounds 5, 6, and 7 were allowed, and the additional ground became superfluous.

Conclusion:

The appeal filed by the assessee was allowed, with the Tribunal ruling in favor of the assessee on both issues. The Tribunal held that the deduction under section 10B should be calculated without setting off carried forward losses and that the payments to Novatel were not subject to TDS under section 195, thus no disallowance under section 40(a)(i) was justified.