2017 (5) TMI 1749 - AT - Income Tax

Set off of unabsorbed business losses pertaining to the eligible unit of 10B against the profits of non eligible undertaking of 10B units - HELD THAT - The issue is squarely covered by the Hon ble Supreme Court judgment in the case of CIT Anr. v. Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT in favour of assessee as held that as per the amended provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter-IV of IT Act and not at the stage of total income under Chapter-VI. Therefore, the loss of the eligible unit would be allowed as a deduction at source before computing the total income under Chapter-VI. Therefore, we do not find any infirmity in the order the Ld.CIT(A) and the same is upheld. The revenue s appeal is dismissed. Exclusion of freight from the export turn over for the purpose of computation of deduction u/s.10B - As per the judicial precedents the expenditure of freight incurred in foreign currency outside India for delivery of goods has to be reduced both from the export turnover as well as the total turnover i.e. numerator and denominator. CIT(A) followed the same principle decided in the case of Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D and allowed the assesse s appeal. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and this ground of appeal of the Revenue is dismissed. Apportionment of R D expenditure to 10B unit s - AO found that the assessee claimed weighted deduction in respect of capital expenditure incurred towards in-house R D facility as per Sec.35(2AB) - CIT(A) deleted the addition and allowed the assesse s appeal stating that the R D activity is not related to the 10B unit and the 10B unit is a separate and distinct unit - CIT(A) given a finding that the expenditure related to R D is for a full assembly unit which cannot be allocated to the units which are manufacturing and exporting only components. CIT(A) also stated that the assessee s case is squarely covered by the decision of jurisdictional High Court in the case of Brakes India Ltd. 2013 (9) TMI 192 - ITAT CHENNAI and also Punjab Con Cast Steel Vs. CIT ors. 1993 (3) TMI 142 - ITAT CHANDIGARH . During the appeal, the Ld.DR vehemently argued stating that non-allocation of expenditure to 10B Units was only a device to reduce the taxable income but no evidence has been brought on record to controvert the submissions of the assessee or to establish that the in-house R D facility belong to the eligible 10B units also. Therefore, we do not find any infirmity in the order of the Ld.CIT(A). Loss on forward contracts - HELD THAT - In the instant case the loss has arisen in the course of appellants trading operation only. The assessee has entered into forward contract for hedging purposes against the underlying receivables (exports) and payables (imports) transactions in foreign currencies. As rightly explained by the assessee derivative products are intangible and are not capable of delivery or transfer. It was also explained that forex derivatives are not traded on security markets and therefore has no application of Sec.43(5) of IT Act. The assessee has entered into forward contracts for the purpose of its business and there was no dispute on this issue. As on the closing date, the foreign exchange was restated which resulted into loss and the assessee relied on M/S WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT wherein it was held that the loss incurred on account of restatement of foreign exchange as on the Balance sheet date is a business loss. TDS u/s 195 - Disallowance u/s.40(a)(i) - payment made to non-resident Export agent M/s.Biggleswade Ltd., Hongkong without deduction of tax at source - HELD THAT - Explanation to Sec.9(2) of IT Act is amended by Finance Act, 2010 w.e.f. 01.04.1976. The assessment year involved is 2007-08 to 2009-10 and there is no provision to tax the payments made to the services rendered outside India to the foreign agents in the Income Tax u/s.9(1)(vii) prior to the amendment. This view is upheld by the decision of the Hon ble Supreme Court relied upon by the Ld.AR in the case of Ishikawajima-Harima Heavy Industries Ltd vs. DIT 2007 (1) TMI 91 - SUPREME COURT which clarified that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. The explanation to section 9(2) was introduced by Finance Act 2010 w.e.f.1976 and as on the date of assessment there was no such provision to tax the FTS rendered outside India and hence we agree with the Ld.A.R that no tax is deductible u/s 195 and consequent disallowance is not called for. We hold that the payment made by the assessee for the services rendered outside India are not taxable under section 9(1)(vii) of I.T. Act in the assessment years under consideration and the disallowance is not called for. TDS u/s 195 - Disallowance u/s.40(a)(i) in respect of payment made to Sonima Logistics, Germany without deduction of tax at source - HELD THAT - CIT(A) examined the Explanation of the assessee and the document placed before the CIT and concluded that the services rendered by the non-resident do not fall under the category of technical or managerial services. Ld.CIT(A) further stated that the services are rendered outside India and there is no permanent establishment or business connection to the non-resident in India. This fact has not been disputed by the Revenue. The profits of the services rendered outside India cannot be taxed in India unless the non-resident has permanent establishment/or business connection in India as envisaged in Sec.9(1) of IT Act. The Ld.CIT(A) deleted the addition relying on the decision of the Hon ble Apex Court in the case of GE Technological Centre Pvt. Ltd. v. CIT 2010 (9) TMI 7 - SUPREME COURT . The findings and conclusions arrived in earlier ground in respect of payment made to M/s.Biggleswade Ltd., are squarely applicable to this ground also. Disallowance of expenditure as per Sec.14A r.w.r.8D - CIT(A) held that the Rule 8D is not applicable for AY 2007-08 and confirmed the disallowance to the extent of 2% of dividend income - HELD THAT - Rule 8D is introduced on 24.03.2008 and applicable w.e.f. 24.03.2008. This Tribunal has consistently followed that Rule 8D is applicable from 24.03.2008 but not to the earlier period. Therefore, we are of the considered opinion that the Ld.CIT(A) has correctly applied the provisions of Rule 8D and held that Rule 8D is not applicable for the AY under consideration. Prior to the introduction of Rule 8D this Tribunal has consistently upheld the disallowance of expenditure related to the exempt income @ 2% of exempt income. The Ld.CIT(A) also restricted the disallowance to the extent of 2%. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the Revenue on this issue is dismissed. Additional depreciation claimed by the assessee u/s.32(1)(iia) - HELD THAT - Balance additional depreciation which was not allowed in the year in which it was put to use, should be allowed in the subsequent year. Depreciation @60% on UPS - we are unable to accept the contention of the Ld.AR that UPS is eligible for 80% depreciation - we uphold the order of the Ld.CIT(A) and direct the AO to allow the depreciation @60%. In the result, the assessee s appeals as well as Revenue s appeals are dismissed. TDS u/s 194J - addition u/s.40(a)(i) for Software purchase for non-deduction of tax at source - HELD THAT - The provisions of section 9(1)(vi) as a whole, would stand attracted in the case of the latter and not the former. Explanations 4 and 7 relied by the authorities would thus have to be read and understood only in that context and cannot be expanded to bring within its fold transaction beyond the realm of the provision. The Tribunal has relied on the decision of the Division Bench of the Delhi High Court in the case of The Principal Commissioner of Income Tax-6 V. M.Tech India Pvt Ltd 2016 (1) TMI 812 - DELHI HIGH COURT which supports our view as above. It is brought to our notice that the decision of the Delhi High Court has not been accepted by the Department and an SLP is pending. Be that as it may, in view of the facts and circumstances as observed above, we have no hesitation in dismissing the Departmental Appeal answering the questions of law in favour of the assessee and against the Revenue. Payment towards software purchase is not royalty within the meaning of non-taxable u/s.9(1)(vi) of Income Tax Act and not liable for deduction of tax at source, accordingly, we uphold the orders of the Ld.CIT(A)dismiss the revenue s appeal on this issue. Disallowance u/s 14A - HELD THAT - No details regarding shares which earned dividend income was placed by the Ld.AR. This Tribunal has consistently followed that investments made from the common account attracts the disallowance u/s.14A. Once, the assessee earns the dividend income, the application of Sec.14A is attracted and consequently the disallowance has to be made applying the Rule 8D. Therefore, we do not find any infirmity in the Orders of the lower authorities and the same is upheld. The appeal of the assessee on this ground is dismissed. Deduction u/s.35(AB) - HELD THAT - The act does not place any restrictions to incur the expenditure. The expenditure incurred for the purpose of scientific research required to be allowed as deduction u/s.35(AB) subject to complying the conditions laid down in Rule 6. The expenditure was incurred by the assessee which is certified by the tax audit report. There is no dispute regarding the actual amount incurred by the assessee. The assessee relied on the jurisdictional High Court decision supra. The decisions relied upon by the Ld.AR are not directly related to the issue of R D expenditure incurred over and above the specified limit of DSIR. However, the essence of the judgments relied upon by the Ld.AR suggests to allow the actual expenditure. There is no dispute regarding the genuineness of expenditure. Therefore, we hold that the assessee is entitled for the weighted average deduction on the amount actually spent.

Summary

Issues Involved:
1. Set off of unabsorbed business losses of 10B units against profits of non-10B units.
2. Exclusion of freight from export turnover for computing deduction under Section 10B.
3. Apportionment of R&D expenditure to 10B units.
4. Loss on forward contracts.
5. Disallowance under Section 40(a)(i) for payments to non-resident agents without TDS.
6. Disallowance under Section 14A read with Rule 8D for exempt income.
7. Additional depreciation on plant and machinery.
8. Depreciation on UPS.
9. Disallowance for software purchases without TDS.
10. Weighted deduction for scientific research under Section 35(2AB).

Issue-wise Detailed Analysis:

1. Set off of unabsorbed business losses of 10B units against profits of non-10B units:
The Revenue appealed against the CIT(A)'s order allowing the set-off of losses from 10B units against non-10B unit profits. The AO had disallowed this set-off, asserting that 10B units should be treated as separate entities. The CIT(A) relied on the ITAT Chennai's decision in Brakes India Ltd and held that losses of 10B units could be set off against non-10B unit profits. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's judgment in CIT & Anr. v. Yokogawa India Ltd., which clarified that the deduction under Section 10A should be computed at the stage of gross total income, allowing the set-off of 10B unit losses against other business income.

2. Exclusion of freight from export turnover for computing deduction under Section 10B:
The AO excluded freight charges from the export turnover but not from the total turnover. The CIT(A) directed the exclusion of freight charges from both export and total turnover, following the ITAT Chennai's decision in SRA Systems Ltd. The Tribunal upheld the CIT(A)'s order, stating that freight expenses should be excluded from both export and total turnover.

3. Apportionment of R&D expenditure to 10B units:
The AO apportioned R&D expenditure to 10B units, reducing the deduction under Section 10B. The CIT(A) allowed the assessee's appeal, noting that the R&D facility was related to the development of new turbocharger assemblies, not the components exported by the 10B units. The Tribunal upheld the CIT(A)'s decision, finding no evidence that the R&D facility belonged to the 10B units.

4. Loss on forward contracts:
The AO disallowed the loss on forward contracts, treating it as speculative. The CIT(A) allowed the assessee's appeal, citing the Supreme Court's decision in CIT v. Woodward Governor India P. Ltd., which allowed the deduction of losses on account of foreign exchange fluctuations. The Tribunal upheld the CIT(A)'s order, confirming that the losses were business losses.

5. Disallowance under Section 40(a)(i) for payments to non-resident agents without TDS:
The AO disallowed payments to non-resident agents for services rendered outside India, treating them as fees for technical services. The CIT(A) allowed the assessee's appeal, stating that the services did not fall under managerial or technical services and were not taxable in India. The Tribunal upheld the CIT(A)'s decision, noting that the services were rendered outside India and the agents had no business connection in India.

6. Disallowance under Section 14A read with Rule 8D for exempt income:
The AO disallowed expenditure related to exempt income under Rule 8D. The CIT(A) restricted the disallowance to 2% of the dividend income. The Tribunal upheld the CIT(A)'s decision, noting that Rule 8D was not applicable for the assessment year under consideration and that a 2% disallowance was reasonable.

7. Additional depreciation on plant and machinery:
The AO disallowed additional depreciation on plant and machinery purchased in the previous year. The CIT(A) confirmed the disallowance. The Tribunal, following the jurisdictional High Court's decision in Brakes India Ltd., allowed the additional depreciation, holding that the balance additional depreciation should be allowed in the subsequent year.

8. Depreciation on UPS:
The AO disallowed depreciation on UPS at 80%, treating it as general plant and machinery. The CIT(A) confirmed the disallowance. The Tribunal, following its decision in Sundaram Asset Management Co. Ltd., held that UPS is an integral part of the computer and allowed depreciation at 60%.

9. Disallowance for software purchases without TDS:
The AO disallowed payments for software purchases, treating them as royalty. The CIT(A) allowed the assessee's appeal. The Tribunal upheld the CIT(A)'s decision, following the jurisdictional High Court's ruling in Vinzas Solutions India Pvt. Ltd., which held that payments for software purchases are not royalty and not subject to TDS.

10. Weighted deduction for scientific research under Section 35(2AB):
The AO disallowed weighted deduction for scientific research expenditure exceeding the amount approved by DSIR. The CIT(A) confirmed the disallowance. The Tribunal allowed the assessee's appeal, holding that the actual expenditure incurred should be allowed as a deduction, following the jurisdictional High Court's decisions.

Conclusion:
The appeals of the assessee were partly allowed, and the appeals of the Department were dismissed. The Tribunal upheld the CIT(A)'s decisions on various issues, confirming that the set-off of 10B unit losses, exclusion of freight from turnover, non-apportionment of R&D expenditure, deduction of forward contract losses, non-disallowance of payments to non-resident agents, and additional depreciation were correctly allowed. The Tribunal also upheld the disallowance under Section 14A and the depreciation on UPS at 60%. The Tribunal allowed the weighted deduction for scientific research and the software purchase payments without TDS.