2014 (12) TMI 1062 - AT - Income Tax

Allowability of deduction u/s 10B Set off of brought forward business losses against the profits of the year Effect of amendment u/s 10B w.e.f. 1.4.2001 - Whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions - Held that - The similar matter has already been decided in The Deputy Commissioner of Income Tax, LTU Versus M/s. Biocon Limited 2014 (12) TMI 838 - ITAT BANGALORE wherein it has been held that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit - the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit - the claim made by the assessee deserves to be accepted. Payment made to M/s Novatel of the USA disallowed u/s 40(a)(i) Whether the fact that according to section 5(2)(b) total income includes income deemed to accrue or arise in India and the source of such payment being in India and the source rule reigning over the situs rule the same is chargeable under the provisions of the Act or not - Held that - As decided in assessee s own case for the earlier assessment year, as decided in Clearwater Technology Services (P.) Ltd. Versus Income-tax Officer, Ward-11(1), Bangalore 2012 (11) TMI 903 - ITAT BANGALORE wherein it was held that the payment was not fees for technical services rendered by the non-resident but was business income in the hands of the non-resident and since the non-resident did not have a permanent residence in India, the same is not chargeable to tax in the hands of the non-resident in India - there was no obligation on the part of the Assessee to deduct tax at source - the disallowance made by the AO u/s 40(a)(ia) of the Act relating to the payment made to M/s Novatel of the USA is deleted. Explanation 2 to section 195 inserted with retrospective effect from 1.04.1962 by the Finance Act, 2012 or not whether a liability to deduct tax at source can be fastened on an assessee on the basis of a retrospective amendment to the law - Held that - Though the Explanation 6 to sec. 9(1)(vi) inserted by Finance Act, 2012 is clarificatory in nature, the assessee cannot be held to be liable to deduct tax at source from the Pay Channel Charges the AO was not justified in disallowing the claim of pay channel charges by invoking the provisions of sec. 40(a)(ia) Decided against revenue.

Summary

Issues Involved:
1. Whether the deduction under section 10B should be allowed before setting off brought forward business losses.
2. Whether the payment made to M/s Novatel, USA, was liable for disallowance under section 40(a)(i) for non-deduction of tax at source.

Issue-Wise Detailed Analysis:

1. Deduction under Section 10B Before Setting Off Brought Forward Business Losses:

The assessee, a company engaged in IT-enabled services, claimed a deduction under section 10B of the Income Tax Act on the profits of its Export Oriented Unit (EOU). The Assessing Officer (AO) contended that the deduction should be allowed only after setting off the brought forward losses for the assessment years 2003-04 and 2004-05 against the profits of the 10B unit. Consequently, the AO allowed the deduction under section 10B on the balance profit after setting off these losses.

On appeal, the CIT(A) allowed the deduction under section 10B before setting off the brought forward losses, relying on the Karnataka High Court's decision in Yokogawa India Ltd. and the ITAT's decision in the assessee's own case for the assessment year 2008-09. The Revenue appealed, arguing that the decisions relied upon had not reached finality and that the deduction should be allowed only after aggregating profits and losses of various units and setting off brought forward losses.

The Tribunal, referencing its decision in DCIT Vs. Biocon and the Karnataka High Court's decision in Yokogawa India Ltd., held that section 10B is an exemption provision. Therefore, the deduction under section 10B should be allowed before setting off brought forward business losses. The Tribunal dismissed the Revenue's grounds, affirming the CIT(A)'s order.

2. Disallowance under Section 40(a)(i) for Payment to M/s Novatel, USA:

The AO disallowed the payment of Rs. 48,28,382 to M/s Novatel, USA, under section 40(a)(i) on the grounds that it constituted fees for technical services and was chargeable to tax in India. The AO argued that the assessee was obligated to deduct tax at source, which it failed to do.

On appeal, the CIT(A) deleted the disallowance, citing the ITAT's decision in the assessee's own case for the assessment year 2008-09, where it was held that the payment to M/s Novatel, USA, was not fees for technical services but business income. Since the non-resident did not have a permanent establishment in India, the income was not chargeable to tax in India, and there was no obligation to deduct tax at source.

The Revenue appealed, emphasizing the retrospective amendment to section 195 by the Finance Act, 2012, which clarified that tax should be deducted at source irrespective of the non-resident's presence in India. The Tribunal, however, upheld the CIT(A)'s order, stating that the obligation to deduct tax at source arises at the time of payment. The Tribunal noted that the retrospective amendment could not impose an obligation that did not exist at the time of payment and cited several judicial precedents supporting this view, including the ITAT's decisions in TTK Prestige Ltd. and Kerala Vision Ltd.

The Tribunal concluded that the assessee had no obligation to deduct tax at source when the payment was made to M/s Novatel, USA, and dismissed the Revenue's grounds.

Conclusion:

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues. The deduction under section 10B was to be allowed before setting off brought forward business losses, and the payment to M/s Novatel, USA, was not subject to disallowance under section 40(a)(i) due to non-deduction of tax at source. The Tribunal's decision was pronounced in open court on September 12, 2014.