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2017 (11) TMI 1675 - AT - Income TaxTDS u/s 195 - Disallowance of Subscription charges paid to M/s. Gartner, Forrester Research Inc., USA and Meta - addition under Section 40(a)(i) - Held that - It is not in dispute that the payments to Forrester Research Inc., USA and Meta are similar to the payments made to the Gartner Group. In this factual and legal matrix of the case, the decision of the Hon ble High Court of Karnataka in the assessee s own case dt.15.10.2011 for Assessment Years 2000-01 to 2003-04 (2011 (10) TMI 370 - KARNATAKA HIGH COURT) are squarely applicable to the issue before us in the case on hand. Respectfully following the aforesaid we uphold the disallowance under Section 40(a)(i) of the Act of the payments made by the assessee to Forrester Research Inc., USA and Meta for non-deduction of tax at source under Section 195 of the Act TDS u/s 195 - TDS liability Software expenses paid to overseas entities - Held that - Respectfully, following CIT Vs. Samsung Electronics Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT)and CIT Vs. Synopsys International Old Ltd. 2013 (2) TMI 448 - KARNATAKA HIGH COURT we uphold the disallowance made by the authorities below, of software expenses paid to overseas entities under Section 40(a)(i) of the Act for not deducting tax at source under Section 195 of the Act thereon TDS liability on software expenses paid to Indian entities - Held that - We find that in the F.Y. 2005-06 relevant to A.Y. 2006-07, the year under consideration, there was no liability to deduct tax at source under Section 194J of the Act in respect of software expenses paid to Indian entities as the term royalty in Sec. 194J of the Act was introduced by the Taxation Laws Amendment Act, 2006 w.e.f. 13.7.2006. Therefore, in our view, the disallowance under Section 40(a)(ia) of the Act, in respect of software expenses paid to Indian entities amounting to ₹ 55,90,949 is bad in law and therefore deleted. Disallowance under Section 40(a)(i) should not be made in respect of payments actually made during the year under consideration - Held that - This issue is no longer res integra as the Hon ble Apex Court in the case of Palam Gas Service Vs. CIT (2017 (5) TMI 242 - SUPREME COURT) has held that the word payable in section 40(a)(ia) of the Act not only covers amount payable on the last day of the previous year but also covers amounts actually paid. Consequently, Ground No. 4.4 of the assessee s appeal is dismissed. Treating the brand building expenses as deferred revenue expenditure - Held that - On a perusal of the orders of the authorities below, it appears to us that the Assessing Officer and learned CIT (Appeals) in coming to their views have merely gone by the nomenclature brand building expenditure without actually examining the nature of each expenditure under the above head. In view of the above, we restore this issue of brand building expenditure back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head brand building Deduction u/s. 10A in respect of rental income - Held that - Respectfully following the decisions of the Hon ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO 2015 (1) TMI 875 - KARNATAKA HIGH COURT we hold that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A of the Act in the case on hand. Allowability of state taxes paid outside India either as a deduction in computing the total income or as credit under Section 91 - Held that - Remand the issue raised in additional ground No.2 to the file of the Assessing Officer for verification of details and documents in respect of the assessee s claim for state taxes paid outside India under Section 91 of the Act in the light of the aforesaid decisions of the Hon ble Karnataka High Court in the case of Wipro Ltd. Vs. CIT 2011 (10) TMI 473 - KARNATAKA HIGH COURT and CIT Vs. Samsung Electronics Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT). Disallowance u/s. 14A - Held that - The disallowance under Section 14A for the year 2006-07, is to be computed under Rule 8D of the IT Rules, 1962 is not tenable and is accordingly dismissed. Further, before us, Revenue has not been able to demonstrate that the disallowance of ₹ 33,43,422 under Section 14A of the Act as upheld by the learned CIT (Appeals) was incorrect. In this factual and legal matrix of the case, we find no reason to interfere with the finding of the learned CIT (Appeals) and consequently dismiss ground No.2 raised by Revenue. TDS liability on commission paid to non residents - Held that - Respectfully following the decision of the Hon ble High Court of Delhi in the case of CIT Vs. Angelique International Limited (2013 (10) TMI 17 - DELHI HIGH COURT), we uphold the finding of the learned CIT (Appeals) that in the year under consideration the commission paid to non-residents was not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) of the Act. Deduction under Section 10A - Held that - As find from a perusal of the orders of the authorities below that the Assessing Officer has only relied on certain extracts from the Annual Report in support of contentions; rather than examining the agreements, contracts, invoices and other relevant evidences in the matter. In view of the above, we set aside the issue of reductionof expenditure incurred in foreign currency from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination based on factual evidence as stipulate that expenditure incurred in foreign currency for rendering of technical services abroad for development, production and provision of computer software services are not to be excluded from export turnover while computing the deduction under Section 10A of the Act expenses reduced from export turnover should not be reduced from total turnover while computing deduction under Section 10A - Held that - The issue raised in these grounds is covered against revenue by the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Limited (2011 (8) TMI 782 - KARNATAKA HIGH COURT), wherein it is held that expenses reduced from export turnover should also be reduced from total turnover while computing the deduction under Section 10A of the Act.
Issues Involved:
1. Disallowance of subscription charges paid to M/s Gartner, Forrester Research, and Meta. 2. Disallowance of software expenses paid to non-residents. 3. Disallowance of software expenses paid to residents. 4. Disallowance of brand building expenses. 5. Deduction under Section 10A in respect of rental income. 6. Disallowance under Section 14A of the Act. 7. Commission paid to non-residents. 8. Computation of deduction under Section 10A of the Act. 9. Reduction of expenses from export turnover and total turnover. Detailed Analysis: 1. Disallowance of Subscription Charges: The Tribunal upheld the disallowance of subscription charges paid to M/s Gartner, Forrester Research, and Meta amounting to ?8,42,00,399 under Section 40(a)(i) of the Act for non-deduction of tax under Section 195. The decision was based on the Hon'ble Karnataka High Court's ruling that such payments constituted royalty and were liable for TDS under Section 195. 2. Disallowance of Software Expenses Paid to Non-Residents: The Tribunal upheld the disallowance of software expenses paid to non-residents amounting to ?10,21,856 under Section 40(a)(i) for failure to deduct tax under Section 195. This decision followed the Karnataka High Court's rulings in the cases of CIT Vs. Synopsys International Old Ltd. and CIT Vs. Samsung Electronics Co. Ltd., which held that payments for software imports constitute 'Royalty' and are liable for TDS. 3. Disallowance of Software Expenses Paid to Residents: The Tribunal deleted the disallowance of software expenses paid to residents amounting to ?55,90,949 under Section 40(a)(ia). It was held that there was no liability to deduct tax at source under Section 194J during the relevant financial year as the term 'royalty' was introduced into Section 194J by the Taxation Laws (Amendment) Act, 2006, effective from 13.7.2006. 4. Disallowance of Brand Building Expenses: The Tribunal restored the issue of brand building expenses back to the Assessing Officer for verification. The expenses, amounting to ?30,36,80,000, were initially treated as 'deferred revenue expenditure' by the Assessing Officer and CIT (Appeals), but the Tribunal directed a detailed examination of the nature and description of each expenditure. 5. Deduction Under Section 10A in Respect of Rental Income: The Tribunal held that rental income received from Infosys BPO Ltd. and BSNL, Chennai, cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A. This decision followed the Karnataka High Court's rulings in the cases of Subex Ltd. Vs. ITO and Wipro Ltd. Vs. DCIT. 6. Disallowance Under Section 14A of the Act: The Tribunal upheld the CIT (Appeals)'s decision to restrict the disallowance under Section 14A to ?33,43,422, rejecting the Revenue's contention that the disallowance should be computed under Rule 8D of the IT Rules, 1962, as Rule 8D applies prospectively from A.Y. 2008-09. 7. Commission Paid to Non-Residents: The Tribunal upheld the CIT (Appeals)'s decision allowing the commission expenses of ?31 Crores paid to non-residents. It was held that the withdrawal of CBDT Circulars No.23 and 786 by Circular No.7 of 2009 does not have retrospective effect, and the payments made during the relevant financial year were not liable for TDS. 8. Computation of Deduction Under Section 10A of the Act: The Tribunal set aside the issue of reducing expenses incurred in foreign currency from export turnover while computing the deduction under Section 10A to the Assessing Officer for examination. The decision followed the Karnataka High Court's rulings that such expenses should not be excluded from export turnover if they are incurred for development, production, and provision of computer software services. 9. Reduction of Expenses from Export Turnover and Total Turnover: The Tribunal dismissed the Revenue's grounds that expenses reduced from export turnover should not be reduced from total turnover while computing the deduction under Section 10A. This decision followed the Karnataka High Court's ruling in the case of CIT Vs. Tata Elxsi Limited. Conclusion: Both the assessee's and Revenue's appeals were partly allowed for statistical purposes. The Tribunal directed a detailed examination and verification of certain issues by the Assessing Officer, while upholding or dismissing others based on established legal precedents.
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