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2015 (11) TMI 862 - AT - Income TaxDisallowance of overseas taxes paid - AO disallowed deduction holding that such taxes are covered by the provisions of section 40(a)(ii) - Held that - Tribunal has decided this issue against the assessee in the case of Tata Sons Ltd. (2010 (11) TMI 709 - ITAT, MUMBAI ), and the said decision has not been stated to have been stayed on appeal, respectfully following the same, this issue is decided against the assessee Software expenses under section 40(a)(i) on account of non-deduction of TDS u/s 195 - Held that - Withholding tax obligation on the payer applies on payments to nonresidents onlys if there is income chargeable to tax in India. It was held that accordingly, there was no obligation of the assessee to deduct tax at source u/s 195 of the Act, from making remittances to non-residents. The ld. CIT(A) correctly held that he agreed with the assessee s contention that no tax was deductible on the same and accordingly, no disallowance could be made u/s 40(a)(i) of the Act. The locally acquired software expenses have been treated as capital expenditure, placing reliance on various judicial decisions, which hold that the expenses on software are in the nature of capital expenditure and depreciation is to be allowed on the same. As such, expenses on imported software are also in the nature of capital expenditure and deprecation needs to be allowed thereon. The AO, therefore, is directed to allow depreciation on the imported software purchased by the assessee. This alternative plea raised by the assessee is, hence, accepted. Claim u/s 10A of the Act on units on which deduction u/s 80HHE was allowed in the past - Held that - Since both the sections, i.e., section 80HHE and section 10A entitle the benefit, the assessee would legitimately be entitled to the benefit of that provision of law, which enables a larger benefit being earned by him. This finds support from the decision of the Hon ble Supreme Court in Collector Central Excise vs. Indian Petro Chemicals , (1996 (12) TMI 66 - SUPREME COURT OF INDIA). We, therefore, do not find any justification in the action of the ld. CIT(A) to hold that the assessee being an old unit and having once claimed deduction u/s 80HHE, was not entitled to claim deduction u/s 10A from the profits of its units. The expenditures which are required to be reduced from the export turnover as per the provisions of section 10A of the Act should also be reduced from the total turnover. Addition on account of TP adjustments in relation to transaction with AE, M/s. Tata America International Corporation Inc. ( TAIC) - CIT(A) deleted the addition - Held that - The AO erred in not himself examining the issue of TP and with the approval of the ld. CIT, made a reference to the TPO u/s 92CA(1) of the Act; that the AO as well as the ld. CIT(A) failed to apply their mind to the TP Report filed by the assessee, or to any other material or information or document furnished. The TPO made an adjustment which was incorporated by the AO in the assessment order. Thereby, the AO as well as the ld. CIT(A) did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA of the Act. Further, the assessee is also correct in contending that no TP adjustment can be made in a case like the present one, where the assessee enjoys u/s 10A or 80HHE of the Act, or where the tax rate in the country of the Associated Enterprises is higher than the rate of tax in India and where the establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible. - Decided in favour of assessee.
Issues Involved:
1. Deduction of Overseas Taxes Paid 2. Penal Interest Paid in the USA 3. Software Expenses and Non-Deduction of TDS 4. Claim under Section 10A on Units with Previous Section 80HHE Deductions 5. Transfer Pricing Adjustments with Associated Enterprises Detailed Analysis: 1. Deduction of Overseas Taxes Paid: The issue revolves around whether the overseas taxes paid by the assessee amounting to Rs. 216,27,28,177/- can be allowed as a deduction. The Assessing Officer (AO) disallowed this deduction under section 40(a)(ii) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction for state taxes but not for federal taxes, stating that the amended provisions of section 40(a)(ii) are retrospective and federal tax is eligible for relief under section 90. The Tribunal upheld the decision against the assessee based on the precedent set in the case of "Tata Sons Ltd." 2. Penal Interest Paid in the USA: This issue is related to the first one, where the CIT(A) allowed the penal interest paid towards late payment of taxes in the USA amounting to Rs. 4,61,683/-. The Tribunal rejected this ground as well, following the same reasoning as in the first issue. 3. Software Expenses and Non-Deduction of TDS: The assessee claimed a deduction for software expenses amounting to Rs. 25,11,88,831/-, which was disallowed by the AO under section 40(a)(i) due to non-deduction of TDS. The CIT(A) allowed the claim, agreeing with the assessee that the payment for software is for copyrighted articles and not royalty, hence not chargeable to tax in India in the absence of a permanent establishment. The Tribunal directed the AO to allow depreciation on the imported software, accepting the assessee's alternative plea. 4. Claim under Section 10A on Units with Previous Section 80HHE Deductions: The AO did not allow the deduction under section 10A for units that had previously claimed deductions under section 80HHE, citing section 80HHC(5). The CIT(A) allowed the claim, following appellate orders from previous years. The Tribunal upheld the CIT(A)'s decision, referencing several case laws that support the claim of deduction under section 10A for the residual years within the block of 10 years, even if section 80HHE was claimed earlier. 5. Transfer Pricing Adjustments with Associated Enterprises: The AO made a reference to the Transfer Pricing Officer (TPO) without independently examining the transfer pricing report submitted by the assessee. The CIT(A) deleted the additions made on account of transfer pricing adjustments. The Tribunal upheld the CIT(A)'s order, emphasizing that the AO and CIT(A) failed to discharge their judicial functions by not applying their minds to the transfer pricing report or other relevant materials. The Tribunal also noted that no TP adjustment can be made where the assessee enjoys benefits under sections 10A or 80HHE, or where the tax rate in the country of the associated enterprise is higher than in India. Conclusion: The Tribunal dismissed the Department's appeal on most grounds, except for partially allowing the appeal concerning software expenses by directing the AO to allow depreciation. The cross-objections filed by the assessee were dismissed as not pressed. The final order was pronounced on November 4, 2015.
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