2022 (4) TMI 1558 - AT - Income Tax

Disallowance u/s. 40 (a)(ii) in respect of state taxes paid in overseas countries - HELD THAT - This issue is already covered by the Co-ordinate Bench decision of this Tribunal in assessee s own case for A.Y.2009-10 2019 (11) TMI 408 - ITAT MUMBAI State taxes paid overseas cannot be allowed as deduction in view of the provisions of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act. Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression 'income tax'. In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. Disallowance made on account of advertisement expenses - HELD THAT - This issue is already covered by the Co-ordinate Bench decision of this Tribunal in assessee s own case for A.Y.2009-10 2019 (11) TMI 408 - ITAT MUMBAI evidences were not furnished before the Departmental Authorities, to afford a fair opportunity to the Department to verify the authenticity of assessee's claim vis-a-vis the additional evidences furnished before us, we restore the issue to the AO for de novo adjudication after providing reasonable opportunity of being heard to the assessee. We make it clear, our aforesaid direction is only with regard to the experience certainty expenditure - The decision of learned Commissioner (Appeals) on this issue is modified to this extent only. Foreign tax credit in respect of income pertaining to Section 10A/10AA eligible units in India - HELD THAT - Credit for foreign tax paid shall be eligible only for nine countries listed above. Respectfully following the aforesaid decision for the A.Y.2009-10 in assessee s own case 2019 (11) TMI 408 - ITAT MUMBAI decided in favour of assessee. Deduction of education cess - Though this issue is covered in favour of the assessee by the decision of Sesa Goa Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT we find that there is an amendment by the Finance Act 2022 in Section 40(a)(ii) wherein it had been categorically stated that no deduction on account of education cess shall be allowed while computing the income from business and profession. Admittedly, this amendment has been brought in statute with retrospective effect and is accordingly, applicable for the year under consideration. Hence, in view of the amendment in the statute, this additional ground raised by the assessee on account of claim for deduction of education cess is dismissed. Deduction u/s.10AA on commercial profit instead of on income from business and profession - HELD THAT - The expression profits and gains derived was subject matter of adjudication in the case of Vijay Industries Ltd. 2019 (3) TMI 171 - SUPREME COURT wherein the Hon ble Apex Court observed that the profits and gains referred to commercial profits without deducting depreciation and investment allowance as per the Act. Since this aspect was not raised by the assessee before the lower authorities, accordingly, the lower authorities did not have an occasion to give their finding on the same. Hence, in the interest of justice and fair play, we deem it fit and appropriate to remand this issue raised in the additional ground to the file of the ld. AO for denovo adjudication Accordingly, the additional ground raised by the assessee in respect of claim of deduction u/s.10A of commercial profits is allowed for statistical purposes. TDS u/s 195 - Disallowance of expenditure on imported software u/s.40(a)(i) - non-deduction of tax at source - HELD THAT - As given the definition of royalties' contained in article 12 of the DTAAs there was no obligation on the persons mentioned in section 195 of the Act to deduct tax at source, as the distribution agreements and end-user licence agreements did not create any interest or right in such distributors or end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Act which deal with royalty, not being more beneficial to the assessees, had no application in the facts of these cases. The amounts paid by resident Indian end-users or distributors to non-resident computer software manufacturers or suppliers, as consideration for the resale or use of the computer software through end-user licence agreements or distribution agreements, was not royalty for the use of copyright in the computer software, and did not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Act were not liable to' deduct any tax at source under section 195 - Decided against revenue. Disallowance u/s.14A r.w.r. 8D - HELD THAT - We find that it is the duty of the ld. AO to record objective satisfaction with cogent reasons as to why the voluntary disallowance made by the assessee is incorrect having regard to the accounts of the assessee. Without recording such objective satisfaction with cogent reasons, the ld. AO cannot proceed directly to apply the computation mechanism provided in Rule 8D(2) of the Income Tax Rules and make disallowance u/s.14A of the Act. This issue is also addressed by the decision in the case of Maxopp Investments 2018 (3) TMI 805 - SUPREME COURT Hence, the disallowance made by the ld. AO u/s.14A of the Act has been rightly deleted by the ld. CIT(A) for want of recording of objective satisfaction with cogent reasons. Accordingly, the ground Nos. 2 3 raised by the Revenue for the A.Y.2012-13 are hereby dismissed. Nature of expenses - Disallowance of payment made towards Tata Brand equity subscription which was treated as capital expenditure - HELD THAT - We find that this Tribunal in assessee s group concern s case of Tata Autocomp Systems Ltd. 2013 (6) TMI 909 - ITAT MUMBAI as deleted the disallowance made by the A.O. on account of subscription paid by the assessee to Tata Sons Ltd. towards brand equity and promotion scheme and allow ground of assessee s appeal. TDS u/s 195 - disallowance of expenditure on commission paid to non-residents which was disallowed for non-deduction of tax at source u/s.40(a)(i) - HELD THAT - As decided in own case for A.Y.2009-10 in 2019 (11) TMI 408 - ITAT MUMBAI factual finding recorded by learned Commissioner (Appeals) that the non-resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non-resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. Method of computation of deduction u/s.10AA - whether the list of items that are subject matter of reduction from export turnover would be liable for reduction from total turnover also, while computing deduction u/s.10AA? - HELD THAT - We find that this issue is no longer res integra in view of the decision of the Hon ble Jurisdictional High Court in the case of CIT vs. TCS Limited 2019 (4) TMI 1439 - BOMBAY HIGH COURT held that the total turnover for the purpose of section 10 of the Act cannot be understood as defined for the purpose of section 80 HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover. TP adjustment made in respect of provision of software consultancy services - Partial relief granted by CIT(A) - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI it becomes clear that significant marketing functions are being performed and distribution and marketing risk are being taken by the AEs. On examination of the financials of the subsidiaries it is revealed that some subsidiaries are still making loss at net level which signifies that some risk is being borne by the AEs. It has further been brought on record that the manpower base of AEs performed various functions relating to marketing as well as client co-ordination. The AEs have developed sufficient competency to handle the marketing work independently. The entire contract related work is performed by the AEs, though, in cooperation with the assessee. Thus, it is quite natural that for being a sufficiently motivated work force, the AEs are compensated at return on sales and not merely on value added costs. Therefore, learned Commissioner (Appeals) was justified in directing the Transfer Pricing Officer to adopt the PLI of gross margin on sales. As regards consideration by the Transfer Pricing Officer, the outsourcing / sub-contracting cost to assessee as a pass through cost, learned Commissioner (Appeals) was absolutely correct in observing that the decision of the Transfer Pricing Officer to exclude such costs while computing the margin of the AEs is incorrect. When similar cost incurred by the comparables were not excluded while computing their margin, a different treatment cannot be given to such costs in case of the AEs. Alternative benchmarking furnished by the assessee before the Transfer Pricing Officer by considering the AEs in different geographic locations as tested parties with the comparables selected on the basis of the respective geographic locations furnished before the Transfer Pricing Officer were not properly considered. However, in course of appeal proceedings, the learned Commissioner (Appeals) examined them in detail and after a detailed analysis approved some comparables selected by the assessee and also added some new comparables. Whereas, the comparable selected by the Transfer Pricing Officer were not on the basis of any detailed search process. At least, no such analysis is either forthcoming from the order of the Transfer Pricing Officer or could be brought to our notice by learned Departmental Representative. On the contrary, on a thorough and careful reading of the impugned order of learned Commissioner (Appeals), we are of the view that learned Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking done by the assessee with foreign comparables and after detailed analysis has shortlisted the final comparables to be considered for comparability analysis. TP adjustment made in respect of provision of loans to Associated Enterprises (AEs) - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder's activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section 92B r/w Explanation-1(c). Since, the aforesaid legal and factual aspects have not been considered properly, we are inclined to restore the issue to the file of the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. The Assessing Officer must examine all relevant facts to find out the exact nature of the advances made to the AEs. He should also examine the applicability of the ratio laid down in the case of DLF Hotel Holdings Ltd. 2016 (11) TMI 1031 - ITAT DELHI and any other case laws which may be cited before him. The assessee must be afforded reasonable opportunity of being heard. TP Adjustment made in respect of provision of guarantee - HELD THAT - As in assessee s own case in A.Y.2009-10 in 2019 (11) TMI 408 - ITAT MUMBAI after introduction of Explanation-(i)(c) to section 92B of the Act, with retrospective effect from 1st April 2002, provision of guarantee to AEs has to be considered as an international transaction. Different Benches of the Tribunal have also expressed similar view on the issue. Therefore, we hold that the provision of guarantee to the AEs is an international transaction. In fact, the aforesaid view has been expressed in WNS Global Services Pvt. Ltd. 2019 (1) TMI 1128 - ITAT MUMBAI Therefore, we direct the Assessing Officer to charge guarantee commission @ 0.5% per annum both on performance / lease guarantee as well as financial guarantee. Disallowance of expenditure u/s.40(a)(ia) in respect of year end provision both under normal provisions as well as in the computation of book profits u/s.115JB - HELD THAT - We find that provision has been made in the books by the assessee as per the standard accounting practices followed by it and that since the accounts of the company are closed within short period after the end of the year, before which the data or invoice from the concerned vendor was not available with the assessee whereas the services had already been provided by the vendor to the assessee. In respect of these items, the assessee had made provision for expenses in its books as per the applicable accounting standard and as per the generally accepted accounting principles on accrual basis. Since the concerned vendor account is not credited by the assessee they are not identifiable for want of bills, the assessee has credited provision for expenses and had not deducted tax at source for the same, as according to the assessee, only when the party name is identifiable, the provisions of 40(a)(ia) of the Act would come into operation. Accordingly, it pleaded that no liability of TDS could be fastened on the assessee when the payee is not identifiable. We further find that the very same issue has been the subject matter of adjudication of this Tribunal in the case of Mahindra and Mahindra Ltd. 2013 (9) TMI 522 - ITAT, MUMBAI AO has not examined the issue about year-end payments.There is a difference between the payments that are made during the year and the payments made at the fag-end of the year.In our humble opinion in 2nd category of payments tax has been detected in the subsequent year when Bills are booked. In this regard we have also considered the amendment made to Sec.40(a)(ia) by the finance act,2008, with retrospective effect from 1.4.2005.We have also perused the case laws relied upon by the AR.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ii) for state taxes paid overseas.
2. Disallowance of advertisement expenses.
3. Foreign tax credit for Section 10A/10AA units.
4. Deduction for education cess.
5. Deduction under Section 10AA on commercial profits.
6. Rate of dividend distribution tax.
7. Disallowance under Section 40(a)(i) for imported software.
8. Disallowance under Section 14A.
9. Payment towards Tata Brand equity subscription.
10. Disallowance of commission paid to non-residents.
11. Computation method for Section 10AA deduction.
12. Transfer pricing adjustment for software consultancy services.
13. Transfer pricing adjustment for loans to AEs.
14. Transfer pricing adjustment for guarantees.
15. Year-end provision disallowance under Section 40(a)(ia).

Detailed Analysis:

1. Disallowance under Section 40(a)(ii) for state taxes paid overseas:
The Tribunal held that state taxes paid overseas, not eligible for relief under Section 90 or 91, do not fall under Section 40(a)(ii). The AO must verify if the state taxes paid by the assessee overseas are eligible for any relief under Section 90. If not, the deduction should be allowed.

2. Disallowance of advertisement expenses:
The Tribunal found that the AO's reasoning that the expenditure was for brand building was without basis. The expenditure was for promoting the assessee's own business and not for brand building. The AO was directed to verify the additional evidence provided by the assessee regarding the "experience certainty expenditure."

3. Foreign tax credit for Section 10A/10AA units:
The Tribunal directed that foreign tax credits should be allowed for taxes paid in countries where the tax treaties provide for such credit, even if the income is exempt under Section 10A/10AA. This applies except for countries like Finland and Canada, where the treaties do not allow such credit unless the income is taxed in both countries.

4. Deduction for education cess:
The Tribunal dismissed the claim for deduction of education cess due to the retrospective amendment by the Finance Act 2022, which disallows such deductions.

5. Deduction under Section 10AA on commercial profits:
The Tribunal remanded the issue back to the AO to adjudicate in light of the Supreme Court decision in Vijay Industries Ltd., which interprets "profits and gains" to mean commercial profits without deducting depreciation and investment allowance.

6. Rate of dividend distribution tax:
The assessee did not press this issue, and it was dismissed as not pressed.

7. Disallowance under Section 40(a)(i) for imported software:
Following the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd., the Tribunal held that payments for software do not constitute "royalty" and are not subject to TDS under Section 195. The disallowance was dismissed.

8. Disallowance under Section 14A:
The Tribunal upheld the deletion of disallowance under Section 14A, as the AO did not record objective satisfaction with cogent reasons for rejecting the assessee's voluntary disallowance.

9. Payment towards Tata Brand equity subscription:
The Tribunal followed its earlier decision and allowed the payment as a revenue expenditure, rejecting the AO's treatment of it as a capital expenditure.

10. Disallowance of commission paid to non-residents:
The Tribunal upheld the deletion of disallowance, as the commission paid to non-resident agents was not chargeable to tax in India, and hence, there was no obligation to deduct tax at source.

11. Computation method for Section 10AA deduction:
The Tribunal held that expenses excluded from export turnover should also be excluded from total turnover for computing the deduction under Section 10AA, following the Supreme Court decision in HCL Technologies.

12. Transfer pricing adjustment for software consultancy services:
The Tribunal upheld the CIT(A)'s decision, which considered the AEs as tested parties and used comparable companies in the same geographic locations for benchmarking.

13. Transfer pricing adjustment for loans to AEs:
The Tribunal remanded the issue back to the AO to determine whether the loans were in the nature of quasi-equity and whether they constituted an international transaction under Section 92B.

14. Transfer pricing adjustment for guarantees:
The Tribunal directed the AO to charge a guarantee commission of 0.5% per annum on both performance/lease guarantees and financial guarantees, following its earlier decision.

15. Year-end provision disallowance under Section 40(a)(ia):
The Tribunal upheld the deletion of disallowance, as the provision was made as per standard accounting practices, and the payee was not identifiable at the time of making the provision.