2019 (9) TMI 1662 - AT - Income Tax

TDS u/s 195 - disallowing expenditure representing remittance to a foreign concern by invoking Sec. 40(a)(i) on the ground that the requisite tax has not been deducted at source - whether the payments made by the assessee to Tekla Finland would constitute Royalty as per the provisions of Sec. 9(1)(vi) of the Act and/or under the provisions of India-Finland Double Taxation Avoidance Agreement which governs the recipient of income? - HELD THAT - Additional evidence now sought to be produced by the assessee does not enable the assessee to make out a new case but only would enable the assessee to support its assertions made before the authorities in an appropriate manner. Not only that the Additional evidence will also enable Income tax authorities to determine the correct nature of the payments in accordance with the extant position of law. The assessee has consistently been asserting that the Re-seller agreement is merely a back to back arrangement whereby assessee distributes the software products developed by its holding company. In fact the emphasis by the AO of the Re-seller agreement would be suspect to treat payments in the nature of royalty if factually assessee is able to demonstrate that it has not undertaken any separate development in the software products on its own in the course of selling the product to the customer. Be that as it may in our considered opinion the aforesaid Additional evidence is germane and in the interest of justice it deserves to be considered while determining the tax liability of the assessee qua the impugned payments. Of course the said evidence was not before the lower authorities and therefore we deem it fit and proper to remit the matter back to the Assessing Officer who shall revisit the controversy after considering the submissions put forth by the assessee and as per law. Thus on this aspect assessee succeeds for statistical purposes. Disallowance towards foreign exchange loss on account of restatement of trade receivables/ payables on the end of the year - HELD THAT - AO as well as the CIT(A) disallowed the claim on the ground that it was a contingent liability. In this context the Ld.Representative for the assessee relied upon the judgment of the Hon ble Supreme Court in the case of CIT vs. Woodward Governor India Private Limited 2009 (4) TMI 4 - SUPREME COURT to contend that loss was allowable as an expenditure in computing the total income. Our attention has also been drawn to the judgment of Vassantram Mehta Co. 2015 (5) TMI 269 - BOMBAY HIGH COURT wherein it has been held that the loss incurred on account of fluctuation in foreign exchange rate was allowable on the date of making of balance sheet and its allowability could not be postponed to a future date. In view of the aforesaid precedents we find that the claim of the assessee is justified and it is ordered to be allowed. Thus on this aspect assessee succeeds.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act.
2. Treatment of purchase cost as royalty payments.
3. Application of the India-Finland Tax Treaty.
4. Applicability of the newly inserted explanation to Section 9(1)(vi) of the Act.
5. Requirement for a certificate for deduction of tax at nil/lower rate.
6. Disallowance of foreign exchange loss on restatement of trade receivables/payables.
7. Treatment of foreign exchange loss as contingent loss.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income Tax Act:
The primary dispute involved the addition of ?7,03,09,000 to the returned income by disallowing expenditure representing remittance to a foreign concern under Section 40(a)(i) of the Act due to non-deduction of tax at source. The appellant, a company engaged in the distribution of specialized off-the-shelf software products developed by its holding company in Finland, argued that the payments made to Tekla Finland were not in the nature of 'Royalty'. However, the Assessing Officer and CIT(A) considered these payments as 'Royalty' under Section 9(1)(vi) of the Act, leading to the disallowance.

2. Treatment of Purchase Cost as Royalty Payments:
The Assessing Officer emphasized clause 4.13 of the agreement, which allowed the appellant to develop customer-specific features using software tools provided by Tekla. This led to the conclusion that the payments were for the use or right to use the software, thus constituting 'Royalty'. The appellant contended that no such additional features were developed during the relevant period and that the payments were merely for the purchase of software for resale in India.

3. Application of the India-Finland Tax Treaty:
The appellant argued that the beneficial provisions of the India-Finland Tax Treaty should apply, which had not undergone any change despite the retrospective amendment in Explanation 2 to Section 9(1)(vi) of the Act. The appellant maintained that the payments should not be treated as 'Royalty' under the treaty provisions.

4. Applicability of the Newly Inserted Explanation to Section 9(1)(vi) of the Act:
The CIT(A) referred to Explanation-4 to Section 9(1)(vi) of the Act, inserted by the Finance Act, 2012 with retrospective effect from 01.06.1976, to support the view that the payments were for the right to use the software, thus amounting to 'Royalty'.

5. Requirement for a Certificate for Deduction of Tax at Nil/Lower Rate:
The CIT(A) held that the appellant was required to deduct taxes as it had not obtained a certificate for deduction of tax at nil/lower rate under Sections 195(2), 195(3), or 197 of the Act. The appellant argued that the payments were not taxable under the beneficial provisions of the India-Finland Tax Treaty, thus negating the need for such a certificate.

6. Disallowance of Foreign Exchange Loss on Restatement of Trade Receivables/Payables:
The appellant claimed a loss of ?6,936,000 due to the restatement of trade receivables/payables at the end of the financial year. The Assessing Officer and CIT(A) disallowed this claim, treating it as a contingent liability. The appellant relied on the Supreme Court judgment in CIT vs. Woodward Governor India Private Limited and the Bombay High Court judgment in Vassantram Mehta & Co. vs. JCIT, which supported the allowability of such losses as revenue expenditure.

7. Treatment of Foreign Exchange Loss as Contingent Loss:
The CIT(A) held that the foreign exchange loss was a contingent loss and not an allowable expenditure under Sections 30 to 37 of the Act. The appellant countered this by citing precedents that allowed such losses as revenue expenditure.

Judgment:
The Tribunal admitted additional evidence provided by the appellant, which demonstrated that no additional features were developed in the software products before resale. The Tribunal remitted the matter back to the Assessing Officer for reconsideration in light of this evidence. Additionally, the Tribunal allowed the appellant's claim for foreign exchange loss, citing relevant judicial precedents. The appeals for both assessment years 2009-10 and 2010-11 were allowed, with the decision for 2009-10 applying mutatis mutandis to 2010-11.