2015 (10) TMI 826 - HC - Income Tax

Foreign tax credit ( FTC ) allowed with respect to income exempt in India - Section 90(1)(a)(ii), 91, 10A, India-USA DTAA, India-Canada DTAA With respect to the income of the assessee which was exempt in India u/s 10A, assessee paid tax in USA and Canada and claimed in India FTC benefit of the tax so paid in USA and Canada. Tax officer disallowed the claim of FTC on the ground that the said income is exempt in India u/s 10A and therefore does not form part of total income chargeable to tax as per provisions of section 4 of the Act. Relief u/s 10A is in the nature of exemption although termed as deduction and the said relief is only for a period of 10 years after which the said income is taxable. When such exemption is given under Indian Income tax Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, vide Finance Act, 2003 section 90 was amended. Amended section 90(1)(a)(ii) empowered the Central Government to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income tax chargeable under the Income-tax Act and under the corresponding law in force in that country. India-USA DTAA - India-USA DTAA does not speak about any tax being paid in India as a condition precedent for granting FTC credit - A perusal of Article 25 of India-USA DTAA makes it clear that if an Indian resident derives any income on which tax is paid USA, then credit of such tax shall be granted in India. The said provision does not speak of any income tax being paid by the Indian resident under the Indian Income-tax Act as a condition precedent for claiming the said benefit. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo - US convention or under section 90 of the Act, should pay tax in India on such income. India-Canada DTAA - For FTC benefit income must be subjected to tax both in India and Canada - A reading of Article 23 of India-Canada DTAA makes it clear that for an Indian resident to avail FTC benefit in respect of income from sources within Canada, income must be subjected to tax both in India and Canada, i.e., assessee has paid tax both in India as well as in Canada on the same income. Therefore, if the assessee is exempted from payment of tax in India, then if the same income is subjected to tax in Canada, the FTC benefit is not available to the Indian assessee. State Income Tax - The Income Tax in relation to any Country includes Income Tax paid in any part of the country or a local authority. It applies to cases where in a Federal structure a citizen is made to pay Federal Income tax and also the State Income Tax. The Income tax in relation to any country includes income tax paid not only to the Federal Government of that Country, but also any income tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter payment also. Therefore, even in the absence of an agreement under Section 90 of the Act, by virtue of the statutory provision, the benefit conferred under Section 91 of the Act is extended to the income tax paid in foreign jurisdictions. India has entered into agreement with the Federal Country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, aforesaid explanation explicitly makes it clear that income tax in relation to any country includes the income tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a Country and if the assessee has paid income tax to that State, the income tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of Section 90 is not available to the assessee is ex-facie illegal and requires to be set aside. - Decided in favour of assessee. No revised return was filed by the assessee under Section 139 (5) of the Act claiming the relief under Section 90 of the Act read with Double Taxation Avoidance Agreement - Held that - What the assessee is claiming by way of a letter is to bring to notice of the assessing authority the statutory provisions as well as the provisions of the Double Taxation Avoidance Agreement under which the assessee is entitled to claim tax benefit, as the said benefit of tax was not claimed in the return filed under Section 139(1) of the Act. Once the assessee files the necessary particulars and claims relief under the provisions of the Double Taxation Avoidance Agreement, the limitation placed by domestic law would yield to the tax relief provided for under the Double Taxation Avoidance Agreement. Therefore, the assessing authority was not justified in rejecting the said claim on the ground that no revised return is filed under Section 139(5) of the Act. In fact, probably the assessing authority was conscious that it is not a valid ground to reject the claim, he proceeded to consider the claim of the assessee on merits and has rejected the claim on merits also. In view of the aforesaid discussions, the said substantial question of law is answered in favour of the assessee and against the revenue and the assessee is entitled to the tax benefit to the extent set out above. Unavailed MODVAT credit - whether constitutes income under Section 2(24) of the Income-tax Act and liable to tax? - Held that - whatever may be the accounting practice adopted by the assessee, the cost price of the raw-material should include tax, duty, cess or fee and correspondingly, the said amount should be reflected in the opening stock as well as in the closing stock. Under the MODVAT scheme, once an assessee pays excise duty when the finished goods are liable for excise duty, he is entitled to set-off that duty payable by him as against the duty he has paid while purchasing the raw material. If for any reason, the assessee is not able to exhaust the said MODVAT credit available it continues in his accounts. He can avail the benefit whenever he makes sale and the liability to pay the duty arises. But that amount i.e., the unavailed MODVAT credit cannot be treated as an income till it is availed by the assessee. Section 43B provides that if a deduction is claimed of duty, unless the duty is paid, he would not be entitled to claim deduction. Now, the question before this Court is not claiming deduction as an expenditure. The question is whether the unavailed credit constitutes income which is liable to income-tax in the hands of the assessee. It is clear from the aforesaid pronouncement in Indo Nippon Chemicals 2003 (1) TMI 8 - SUPREME Court that the unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. Therefore, in terms of the order of the Tribunal, it is open to the assessing authority to recompute the opening and closing balance by adding the duty paid and duty availed but on the unavailed MODVAT credit, there is no liability to pay any tax. Therefore, the substantial question of law is answered in favour of the assessee and against the Revenue. Allocation of commission made - Held that - Salary includes commission. When the salary paid to a director by the assessee is allocated to the unit which the said director is heading as full time director, the commission paid to him which is a part of salary also needs to be allocated to the units which he is heading. When the salary paid to whole-time director is not dependent on profit the unit which the director is heading is making, the commission payable at the end of the year when the company makes profit, is nothing but a part of the salary. Therefore, it also has to be allocated to the unit which he is heading as a full time director. Though there are four units and each unit is carrying on different activities, assessee maintained separate accounts, preparing separate balance-sheets and also preparing profit and loss account, but in law it is the consolidation of four accounts which would be the account of the assessee. It is from the profits derived by the assessee that the salary is paid. The payment of the salary as it is not dependent on the profit earned by any unit, the basis of commission payable by the assessee to its directors also cannot be made subject to the profit making ability of a unit. Merely because by such allocation the profit margin of 10A unit is going to increase cannot be the basis to allocate the commission paid to the directors proportionately to the profit making unit. In that view of the matter we do not see any justification to deny the benefit which the assessee is entitled to. The impugned orders passed by the authorities has no legal basis. On the contrary it runs counter to the statutory provisions. - Decided in favour of the assessee and against the revenue. Exclusion of AMC profits for the purpose of computing deduction under Section 80IB of the Act, when AMC income is derived from the manufacturing units - Held that - Customers would get attracted to a product, because of the warranty and the after sales maintenance and hence warranty/after sales maintenance is integral to the manufacturing and business of the undertaking. When the consideration paid for three year warranty is treated as an income eligible for benefit under Section 80IB, we do not see any justification not to extend the same benefit to the income derived from one year warranty two years AMC for the computer which is sold. The said income has a direct nexus with the manufacturing activity. The said income constitute the income of eligible business. It is an income derived from the eligible business in respect of an industrial undertaking which is involved in the manufacture of computers. Therefore, the assessing authority was not justified in not extending the benefit of Section 80IB to the profits derived from AMC contract in relation to the computers manufactured by the assessee. However, it is to be made clear that, if the assessee is deriving any profit under an AMC contract in respect of computers which are not manufactured by them in the industrial unit at Pondicherry the said income does not form part of the eligible business and, therefore, to that extent they are not eligible for benefit under Section 80IB. Substantial questions are answered in favour of the assessee Purchase and sales of monitors - whether constituted a trading activity and thus excludable from the profits of the Pondicherry units for the purposes of computing deduction under Section 80-IB of the Act, when such monitors were part of the computers manufactured and sold by the units? - Held that - As set out earlier the assessee is carrying on the manufacturing of computers and sale of computers. He has satisfied all the requirements stipulated in sub-section (2) of Section 80IB and he is eligible for the said exemption. The monitors which he has purchased from outside is used as a spare part in the manufacture of computer and it is sold to the customers as such. In other words, those monitors which are used in the computers are not the traded commodities. Therefore, it is a part of the computer and the total consideration of the computer includes the value of this monitor. The profit derived from the said computer includes the sale of the monitor which is a part of the said computer which falls within the first degree. the profit derived from the said sale of monitor as a part of the computer is also eligible for benefit under Section 80IB. However, it is made clear the assessee is not entitled to the benefit of Section 80IB in respect of monitors which are purchased and sold separately as a traded commodity. In fact, the assessee has not claimed any benefit in respect of those monitors. Therefore, the finding recorded by the authorities that the assessee is not entitled to the benefit of deduction under Section 80IB in respect of the monitors which form part of the computer is hereby set aside. Decided in favour of the assessee Exclusion of VAT/GST from export turnover and total turnover for the purpose of computing deduction under Sec. 10A - Held that - In the instant case, VAT and GST is payable by the purchaser. It is a part of the sale price. The assessee collects the tax and remits it to the Government. It is an indirect tax. The definition of export turnover expressly says what is excluded from export turnover i.e., freight, telecommunication charges or insurance. It has not excluded the VAT and GST payable by the assessee in the foreign jurisdiction. The test to be applied in the light of the aforesaid definitions is excluding the aforesaid three charges from the sale consideration received, sale proceeds received in or brought into India in convertible foreign exchange constitutes the export turnover. If the sale proceeds are credited to a separate account maintained for the purpose by the assessee with any Bank outside India with the approval of the Reserve Bank of India, though the said proceeds are not actually received in India or brought into India, it is deemed to have been received in India and forms part of the export turnover. The finding recorded by the authorities is contrary to law. They have not taken into consideration explanation 2 to sub-sec. (3) of Sec. 10A and thus committed an error. Hence, the said finding requires to be set aside. Accordingly, it is set aside. The substantial question of law is answered in favour of the assessee Transfer of stock - whether took place during the year ended 31.03.2001 and not during the years when the execution and registration of the sale deeds took place? - Held that - The income tax is charged in the previous year in which such stock-in trade is sold. Sale took place in the assessment year 2004-05 and 2005-06. The power of attorney had been executed in assessment year 2001-02. When stock-in-trade is sold by executing a deed for conveyance and duly registered, the question of the said stock-in-trade being otherwise transferred would not arise at all. Therefore, the argument of the Revenue, that on the day the power of attorney was executed when the entire consideration due under the agreement of sale was received and by virtue of the power of attorney, the power of attorney holder is authorized to develop the property, to sell the property and to receive the entire consideration, it amounts to the stock-in-trade being otherwise transferred leading to the said income being chargeable to income tax in the previous year in which the power of attorney is executed is without any substance. As the stock-in-trade is sold by way of a registered deed, there is no intention to avoid payment of capital gains. On receipt of such capital gains, the capital gain tax has been paid in the previous year in which the stock-in-trade was sold and therefore the order of the Tribunal as well as the order of the assessing authority is contrary to the aforesaid statutory provisions. As such, it is unsustainable in law. Accordingly, the said two orders are set aside. The order passed by the Appellate Commissioner is restored. - Decided in fav0ur of assessee. Entitlment to claim deduction u/s 10A - foreign exchange which is yet to be received during the current assessment year for sale of software - application for extension had been filed and Section 155(11A) of the Foreign Exchange Management Act 1999 and RBI Rules were applicable - Held that - The assessee is a status holder exporter. The export has been done strictly in accordance with law. Foreign exchange remittances should have been received within six months from and of the financial year. It has not been received. Therefore, an application is filed seeking for extension of time to the Reserve Bank of India. Even to this day the Reserve Bank of India has not rejected the said request. On the contrary, after the period of 6 months, foreign exchange remittances are received and credited to the assessee s account through the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact there is no express order granting approval by the Reserve Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee Excluding the computer software sales made to STP units in India from export turnover for the purpose of computing deduction under section 10A - Held that - The said question came up for consideration before this Court in the case Tata Elxsi v. Asst. Commissioner of Income Tax 2015 (10) TMI 634 - KARNATAKA HIGH COURT . This Court has answered the said substantial question in favour of the assessee and against the revenue. Expenses incurred by the Corporate Division - whether cannot be allocated in respect of various business units of the assessee based on the turn over, but at an ad hoc percentage of 20% as held in the earlier assessment years? - Held that - Assessee. wanted allocation of actual expenditure incurred by each unit. When the Assessing Authority did not agree, they came forward and agreed that each of the units could be allocated 20% of the total expenditure incurred by corporate division. However, the Assessing Authority is of the view that, the allocation of the expenditure related to salary, wages and allowances and directors fee should be dependent on the revenue generated and therefore he did not accept the allocation of 20% of expenditure to each of the unit. There is no provision of law which is pointed out to us which states that the allocation of expenditure should be proportionate to the revenue generated by a unit when an assessee runs several units. Either it should be actual expenditure incurred or expenditure which is distributed equally to all the units of the assessee. In the instant case when department did not accede to the allocation of the actual expenditure, the assessee has come forward to distribute the entire expenditure equally to all the units and the said procedure is followed consistently by the assessee for more than a decade now. Expenditure incurred by the Corporate Office in respect of its subdivisions. In those circumstances, the Assessing Officer and the First Appellate Authority were not justified in allocating the substantial portion of the amount as the expenses incurred in respect of Section 10A and disallowing the deduction. That is precisely what the Tribunal has held on proper appreciation of the material on record. In that view of the matter we do not find any justification to interfere with the well considered order of the Tribunal. - Decided in favour of assessee. Difference in the price of shares of Wipro Finance Limited, purchased at market value and sold to assessee s advocate and ex-employee at a subsidized price being a colorable devise to avoid tax should be allowable as a capital loss? - Held that - It is only when we held that the purchase of shares at a premium is a genuine transaction and infusion of capital of ₹ 95 crores is a genuine transaction, the sale made by the assessee for a throwaway price to its ex-employees was held to be sham. Now whether those transactions were for the market price or the shares had no value but purchased on account of the previous contract and thereby the assessee incurred any loss in the business, is a matter to be gone into by the Tribunal. The Tribunal had not gone into the said question and, therefore, the matter is remanded back to the Tribunal to decide the said question and record a finding thereon. Exclusion of 80% of uplinking charges when the appellant and the respondent has agreed upon an exclusion of 5% of telecommunication expenses or attributable to delivery of computer software outside India for the later assessment years - Held that - Both the parties did not dispute the fact except for the relevant year, the assessee has been allowed exclusion of 5% of telecommunication expenses consistently for all other years. Only in so far as this year is concerned, relying on a judgment which is unconnected, the exclusion has been enhanced to 80%. Absolutely no reasons are forthcoming for deviating from the consistent practice. Under these circumstances, it would be proper to set aside the finding recorded by the Tribunal and remand the matter to the Tribunal to decide the matter afresh taking into consideration the consistent practice followed by the authorities in the case of the assessee itself. That would meet the ends of justice. Interest received under Section 244-A - whether would be taxable in the year of receipt of the said interest without considering the fact that the tax granted as a refund on which interest is computed itself is disputed in appeals by the respondent? - Held that - Matter is remitted to the Assessing Authority with a direction that he shall first calculate the interest received and amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter, calculate the interest taxable under the aforesaid act.

Summary

Issues Involved:
1. Entitlement to foreign tax credit under Section 90(1)(a) and Section 10A.
2. Deductibility of MODVAT credit under Section 43B.
3. Allocation of commission payments to directors.
4. Inclusion of AMC profits and monitor sales under Section 80IB.
5. Exclusion of VAT/GST from export turnover under Section 10A.
6. Timing of capital gains recognition on stock-in-trade conversion.
7. Entitlement to deduction under Section 10A for foreign exchange yet to be received.
8. Exclusion of software sales to STP units from export turnover under Section 10A.
9. Allocation of corporate expenses.
10. Allocation of selling, administrative, and general expenses.
11. Eligibility of units for deduction under Section 10A.
12. Allowability of capital loss on shares.
13. Deductibility of net receipts of software development centers under Section 10A.
14. Treatment of losses of 10A units.
15. Inclusion of various incomes under Section 80HHC.
16. Inclusion of certain incomes under Section 10A.
17. Allowability of provision for warranty claims.
18. Disallowance under Section 40(a)(i) for non-deduction of TDS.
19. Inclusion of excise duty and sales tax in total turnover under Section 80HHC.
20. Exclusion percentage for telecommunication expenses.
21. Remand of prior period items.
22. Levy of interest under Section 234D.
23. Allowability of termination expenses.
24. Taxability of interest received under Section 244A.

Detailed Analysis:

Issue 1: Entitlement to Foreign Tax Credit
The court held that credit for income tax paid in a foreign country in relation to income under Section 10A is not available under Section 90(1)(a). The court emphasized that Section 10A provides a deduction from total income, not an exemption, and thus, the income is chargeable to tax under the Act. The court also clarified that the amendment to Section 90(1) by the Finance Act, 2003, is clarificatory and applies retrospectively.

Issue 2: Deductibility of MODVAT Credit
The court ruled that unavailed MODVAT credit cannot be considered as income under Section 2(24) and is not liable to tax. The court referred to the Supreme Court judgment in CIT v. Indo Nippon Chemical Industries Limited, emphasizing that MODVAT credit is not an income.

Issue 3: Allocation of Commission Payments
The court held that the commission paid to directors should be allocated to the units they are heading, as commission is a part of salary. The court rejected the revenue's contention that allocation should be based on the profit-making ability of the units.

Issue 4: Inclusion of AMC Profits and Monitor Sales
The court ruled that AMC profits related to computers manufactured by the assessee are eligible for deduction under Section 80IB. However, profits from AMC contracts for computers not manufactured by the assessee are not eligible. The court also held that monitors sold as part of computers are eligible for deduction under Section 80IB, but monitors sold separately are not.

Issue 5: Exclusion of VAT/GST from Export Turnover
The court held that VAT and GST collected and paid in foreign jurisdictions should be included in the export turnover for the purpose of Section 10A, as these taxes are part of the sale consideration received in convertible foreign exchange.

Issue 6: Timing of Capital Gains Recognition
The court ruled that capital gains on the conversion of a capital asset into stock-in-trade should be recognized in the year the stock-in-trade is sold, not when a power of attorney is executed. The court emphasized that a power of attorney does not constitute a transfer of stock-in-trade.

Issue 7: Entitlement to Deduction Under Section 10A for Foreign Exchange Yet to be Received
The court upheld the Tribunal's decision that the assessee is entitled to deduction under Section 10A for foreign exchange yet to be received, as long as an application for extension has been filed with the Reserve Bank of India and the foreign exchange is eventually received.

Issue 8: Exclusion of Software Sales to STP Units
The court followed its earlier decision in Tata Elxsi v. Asst. Commissioner of Income Tax, ruling that software sales to STP units in India should be excluded from export turnover for the purpose of Section 10A.

Issue 9: Allocation of Corporate Expenses
The court upheld the Tribunal's decision to allocate corporate expenses at an ad hoc percentage of 20%, as agreed upon by the assessee, rather than based on turnover.

Issue 10: Allocation of Selling, Administrative, and General Expenses
The court followed its earlier decision in the assessee's case, ruling that allocation of expenses should be based on actual expenditure incurred by each unit, not on the proportion of sales.

Issue 11: Eligibility of Units for Deduction Under Section 10A
The court followed its earlier decision in the assessee's case, ruling that units that got approval from STPI as expansion of old undertakings are eligible for deduction under Section 10A.

Issue 12: Allowability of Capital Loss on Shares
The court followed its earlier decision, ruling that the transaction involving the sale of shares at a subsidized price was a colorable device to avoid tax and should not be allowed as a capital loss.

Issue 13: Deductibility of Net Receipts of Software Development Centers
The court remanded the issue back to the Tribunal for fresh consideration, as the Tribunal had considered a wrong question.

Issue 14: Treatment of Losses of 10A Units
The court followed the Supreme Court decision in CIT v. Canara Workshops, ruling that losses of 10A units should be carried forward and set off against eligible profits of the same unit in subsequent years.

Issue 15: Inclusion of Various Incomes Under Section 80HHC
The court followed its earlier decision, ruling that items like difference in foreign exchange, royalty, provision for doubtful debts written off, scrap sales, and sundry creditors written back should be included when computing deduction under Section 80HHC.

Issue 16: Inclusion of Certain Incomes Under Section 10A
The court followed its earlier decisions, ruling that income earned from sale of scrap, export incentives, rent received, interest income, and gain on exchange rate fluctuation should be treated as profits and gains derived from export and exempted under Section 10A.

Issue 17: Allowability of Provision for Warranty Claims
The court followed its earlier decision, ruling that the provision for warranty claims is an allowable deduction.

Issue 18: Disallowance Under Section 40(a)(i) for Non-Deduction of TDS
The court followed its earlier decision, ruling that payments made for import of software do not constitute royalty under Section 9(1)(vi) and are not subject to disallowance under Section 40(a)(i) for failing to deduct tax at source.

Issue 19: Inclusion of Excise Duty and Sales Tax in Total Turnover
The court followed its earlier decision, ruling that excise duty and sales tax should be included in total turnover for the purpose of Section 80HHC.

Issue 20: Exclusion Percentage for Telecommunication Expenses
The court remanded the issue back to the Tribunal to decide the matter afresh, taking into consideration the consistent practice of allowing exclusion of 5% of telecommunication expenses.

Issue 21: Remand of Prior Period Items
The court noted that this question does not arise for consideration and deleted it.

Issue 22: Levy of Interest Under Section 234D
The court remanded the issue back to the Tribunal for fresh consideration in light of the explanations inserted to Section 234D by the Finance Act, 2003.

Issue 23: Allowability of Termination Expenses
The court declined to answer the question, noting that it does not constitute a substantial question of law.

Issue 24: Taxability of Interest Received Under Section 244A
The court remanded the issue back to the Assessing Authority to calculate the interest received and the amount of refund on subsequent orders before determining the taxable interest.