2021 (1) TMI 463 - AT - Income Tax

Forex Loss on Derivatives - CIT(A) upholding the disallowance made by the AO by holding the same as hypothetical and contingent in nature - as argued these expenses are recognized in accordance with the accounting treatment provided in the Accounting Standard -11 and 30, issued by the Institute of Chartered Accountants of India - HELD THAT - Forward contracts entered into for the purpose of protecting against loss and which has a nexus to the business of the assessee and which are on revenue account have to be allowed as a deduction. The decision cited on behalf of ld. counsel for the assessee supports the claim made in this regard. We, however, find that the details of forward contracts and nexus with the business of the assessee have not been submitted by assessee before the AO - As upholding the principle that losses on account of exchange fluctuation on forward covered contracts are allowable as a deduction, we hold that the factual details in this regard should be examined by the AO and for the purpose we set aside the order of CIT(Appeals) and remand the issue to the AO for fresh consideration. Addition u/s 40(a)(ia) - Payment for software license fees - AO was of the view that payment in question was in the nature of royalty or fees for technical services and therefore taxable in India - whether payment for software license fee made by the Appellant is the consideration not for Copyright but for Copyrighted Article and hence, would not fall under the definition of the Royalty both under the Act and the respective DTAA between India and USA? - HELD THAT - As relying on S. ALLEGIS SERVICES INDIA PVT. LTD. 2017 (9) TMI 1799 - ITAT BANGALORE we hold that disallowance u/s. 40(a)(i) of the Act in the present case cannot be sustained as the obligation to deduct tax at source was in respect of the date and period prior to the decision rendered by the Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd 2011 (10) TMI 195 - KARNATAKA HIGH COURT . Deduction u/s. 10A computation - communication charges inclusion - HELD THAT - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that communication charges should be excluded both from export turnover and total turnover. Disallowance of contribution to Super Annuation Fund - AO disallowed the said contribution u/s 40A(7) - HELD THAT - We are of the view that the stand taken by the revenue cannot be sustained. The recognition of superannuation fund granted by the CIT, LTU is a department s own document and they cannot be allowed to dispute the same. The only ground on which disallowance was made by the AO was that superannuation fund was not approved. Now that the approval is granted by the CIT, LTU, we are of the view that there is no merit in ground raised by the revenue

Issues Involved:
1. Forex Loss on Derivatives
2. Payment for Software License Fees
3. Deduction u/s 10A
4. Contribution to Recognized Superannuation Fund

Detailed Analysis:

1. Forex Loss on Derivatives:
The assessee claimed a deduction for forex loss on derivatives amounting to ?1,82,04,000, which the AO disallowed, considering it hypothetical and contingent. The assessee argued that these losses were recognized per Accounting Standards AS-11 and AS-30 and were not speculative but binding obligations. The CIT(A) upheld the AO's disallowance. The Tribunal, referencing the Special Bench ITAT decision in ACIT v. Bank of Bahrain and the Bangalore Bench decision in Quality Engineering & Software Technologies (P.) Ltd. v. DCIT, concluded that forex losses on forward contracts related to business should be allowed as deductions. However, since the assessee did not provide detailed forward contracts and their nexus to the business, the Tribunal remanded the issue to the AO for fresh consideration, emphasizing the need to establish the nature and business connection of the forward contracts.

2. Payment for Software License Fees:
The AO disallowed ?1,10,33,217 for software license fees, treating it as royalty, which required TDS deduction under section 195. This was based on the Karnataka High Court's decision in CIT v. Samsung Electronics Co. Ltd. The assessee contended that the payment was for a copyrighted article, not a copyright, and thus not royalty. The Tribunal, referencing the decision in Allegis Services India (P.) Ltd. v. DCIT and other similar cases, noted that the obligation to deduct TDS should be based on the law at the time of payment. Since the law before the Karnataka High Court's decision did not clearly mandate TDS on such payments, the Tribunal held that the disallowance under section 40(a)(i) could not be sustained and deleted the disallowance.

3. Deduction u/s 10A:
The revenue challenged the CIT(A)'s decision to allow the assessee's claim for deduction under section 10A, arguing that the matter was pending before the Supreme Court. The Tribunal, referencing the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd and the Supreme Court's affirmation in CIT v. HCL Technologies Ltd., upheld the CIT(A)'s decision, stating that communication charges should be excluded from both export turnover and total turnover.

4. Contribution to Recognized Superannuation Fund:
The AO disallowed ?3,72,61,000 contributed to an approved superannuation fund due to the absence of approval documentation for the relevant assessment year. The assessee later provided the approval from the CIT (LTU) for the pertinent year. The Tribunal upheld the CIT(A)'s decision to allow the deduction, noting that the approval was a departmental document, and the revenue could not dispute it.

Conclusion:
The assessee's appeal was partly allowed, with the Tribunal remanding the forex loss issue for further examination and deleting the disallowance for software license fees. The revenue's appeal was dismissed, affirming the CIT(A)'s decisions on section 10A deduction and superannuation fund contribution.

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