2022 (4) TMI 544 - AT - Income Tax

TDS u/s 195 - disallowance of State taxes paid overseas under section 40(a)(ii) - eligibility to relief under section 90 - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI we direct the Assessing Officer to verify as to whether the State Tax 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, the assessee s claim of deduction should be allowed. Accordingly, ground no.2 raised in assessee s appeal is allowed for statistical purpose. Expenditure incurred on import of software - Addition under section 40(a)(i) as tax at source was not deducted from the payments made to overseas vendors - assessee submitted that there was no withholding tax obligation on the assessee on the payments made to the non residents as no income was chargeable to tax in India - HELD THAT - No factual verification vis-a-vis relevant clauses of agreements entered into by the assessee for import of software was done by the Assessing Officer or the DRP. There is no iota of doubt that payment for transfer of copyrighted article as against the payment for transfer of copyright does not qualify as royalty and thus the same is not taxable in India in the absence of PE of the seller. However, each case is decided on its own facts. It is also pertinent to note that the conclusion in favour of the taxpayer in Engineering Analysis Centre for Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT was also reached after considering relevant clauses of End User License Agreement. However, in the present case as is evident from the orders passed by the Assessing Officer and DRP, such factual aspects were not considered and claim of the assessee was denied merely by referring to judicial precedents and CBDT circular. In view of the above we deem it appropriate to restore this issue to the file of AO for de novo adjudication after examination of the agreements entered into by the assessee for import of software - In view of the above, ground no. 3 raised in assessee s appeal is allowed for statistical purpose. Disallowance made under section 14A of the Act by applying provisions of rule 8D - HELD THAT - From the facts available on record, it is evident that the Revenue has merely treated the expenditure offered for disallowance as meager in nature and proceeded to make further disallowance by treating 0.5% of average value of investment income as expenditure towards earning the exempt income on ad hoc basis. The Revenue has also not discharged its onus that the claim made by the assessee is incorrect and there exist a direct nexus between the expenditure disallowed under section 14A and the exempt income earned by the assessee - we direct the Assessing Officer to delete the disallowance of expenditure and accept the suo motu disallowance offered by the assessee under section 14A. MAT computation - Assessing Officer is also directed to delete the addition of disallowance under section 14A r/w Rule 8D while computing Book Profit under section 115JB Disallowance of advertisement expenditure - expenditures were incurred by the assessee for advertisement in newspaper, marketing of its products, etc., in respect of its on going business - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI reasoning of the Assessing Officer that the expenditure was incurred for brand building is without any basis. It is to be noted, before the Departmental Authorities the assessee had demonstrated that in no way it is connected with development of Tata brand. The details of expenditure incurred clearly demonstrate that they were basically for the purpose of advertising assessee s products in print media or through seminar, conferences, etc. As rightly observed by learned Commissioner (Appeals), the Assessing Officer has brought no material on record to establish that the expenditure is for brand building. As observed earlier, the expenditure relates to advertisement in newspaper, magazine, events, seminars, conferences, exhibitions, etc. Thus, the nature of expenditure incurred by the assessee clearly indicates that it was for promoting its own business. Further, considering the turnover of the assessee, the expenditure incurred on advertisement does not appear to be unusually high. That being the case, the expenditure incurred on advertisement cannot be treated to be in the nature of capital expenditure and amortized over a period of five years. Disallowance of payment towards Tata Brand Equity subscription - HELD THAT - As per the Tata Brand Equity and Business Promotion Agreement , the assessee was under contractual obligation to make annual payment towards the subscription fees. According to assessee, in consideration of this subscription fees, Tata Sons Limited was, inter-alia, responsible for organising corporate identity and brand promotional activities and campaigns, engage professional consultants, make available a pool of sharable resources of the Tata Group to the assessee and provide assistance in accessing the network of domestic and international business contacts and also permit the assessee to use the business name. All the activities were predominantly the activities carried out or to be carried out by Tata Sons Limited to enhance the value of TATA Brand, which is owned by Tata Sons Limited and for same expenses were incurred by Tata Sons Limited and accounted in its books of account. In the present case, nothing has been brought on record to suggest that the subscription fee paid by the assessee to Tata Sons Limited under the Tata Brand Equity and Business Promotion Agreement is different in nature from the one considered in aforesaid decisions. Thus, we direct the Assessing Officer to delete the disallowance on account of subscription fees paid by the assessee to Tata Sons Limited. Accordingly, ground no. 6 raised in assessee s appeal is allowed. Disallowance of commission paid to non resident under section 40(a)(i) - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI we direct the Assessing Officer to delete the disallowance made under section 40(a)(i) of the Act in respect of commission paid by assessee to non resident agents - we direct the Assessing Officer to delete the disallowance made under section 40(a)(i) of the Act in respect of commission paid by assessee to non resident agents. Additional reduction from Export and Total Turnover of foreign currency communication expenses included in proportionate expenses excluded by the Assessing Officer - HELD THAT - As per the assessee, foreign currency communication expenses have been reduced twice from Export and Total Turnover. Thus, we direct the Assessing Officer to conduct necessary verification and delete the additional/double reduction of foreign currency communication expenses if any, from Export and Total Turnover as per law. As a result, ground no.8 raised in assessee s appeal is allowed for statistical purpose.d Deduction under section 10AA in respect of SEZ units of the assessee which commenced its operations during earlier years - fifth year of deduction claimed on SEZ unit under section 10AA - HELD THAT - Once the first set of conditions is established in the initial year, these should not be examined in subsequent assessment years. We are of the view that provisions of section 10AA(4) of the Act lay down the first set of conditions which is to be satisfied in the initial year of operation and should not be examined in the subsequent years. As the CIT(A) has already allowed the deduction under section 10AA of the Act in respect of SEZ units for assessment years 2008 09, 2009 10 and 2010 11 and no further appeal has been filed by the Revenue against the same, which has also not been controverted by the learned Departmental Representative nor any facts contrary to the same has been adduced. Thus, as the deduction under section 10AA of the Act has already been allowed to the assessee in respect of SEZ units for the assessment years 2008 09, 2009 10 and 2010 11, we find no reason to deny the same in the relevant assessment year which is the fifth year of deduction claimed on SEZ unit under section 10AA of the Act. Thus, to this extent, we endorse the conclusion of the DRP and accordingly the Assessing Officer is directed to allow the deduction under section 10AA of the Act in respect of SEZ units commenced during the assessment years 2008 09, 2009 10 and 2010 11 as the same has already been allowed in the preceding assessment years. Thus, grounds no.9 and 10, raised in assessee s appeal are allowed. Grant of foreign tax credit as per the provisions of section 90(1)(a) read with provisions of the applicable Double Taxation Avoidance Agreement ( DTAA ) for taxed paid overseas in relation to income eligible for deduction under section 10A/10AA - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo USA treaty, treaties with various other countries such as Indo Denmark, Indo Hungary, Indo Norway, Indo Oman, Indo US, Indo Saudi Arabia, Indo Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo Canada and Indo Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly - ground is allowed for statistical purpose. Short credit for tax deducted at source - HELD THAT - We direct the Assessing Officer to verify the claim of the assessee and grant credit for tax deducted at source after necessary verification and in accordance with law. Deduction on education cess paid by the assessee - HELD THAT - We deem it appropriate to direct the Assessing Officer to decide the issue of allowability of education cess, as per law. Consequently, the first issue raised by way of additional ground of appeal is allowed for statistical purpose. Claim of deduction under section 10AA of the Act on the basis of commercial profit instead of income from business or profession - HELD THAT - We find that the issue raised by the assessee by way of additional ground of appeal is squarely covered in favour of the assessee by the aforesaid order passed by the Co ordinate Bench of the Tribunal in Reliance Industries Ltd. 2020 (12) TMI 165 - ITAT MUMBAI and the law laid down in Vijay Industries 2019 (3) TMI 652 - SC ORDER - DR could not show us any reason to deviate from it. In view of the above, respectfully following the aforesaid judicial precedence, we direct the Assessing Officer to allow the deduction under section 10AA of the Act on Commercial Profit instead of Income From Business And Profession . Consequently, the second issue raised by way of additional ground of appeal is allowed. Transfer pricing adjustment - International transaction pertaining to provision of software consultancy services - HELD THAT - As in assessee s own case 2020 (11) TMI 36 - ITAT MUMBAI the order of the TPO and DRP on the issue of transfer pricing adjustment in respect of provision of software consultancy services cannot sustain and are accordingly set aside to this extent - TPO/ Assessing Officer is directed to conduct the benchmarking of the international transaction of provision of software consultancy services as per the findings of the Tribunal referred above. The TPO/Assessing Officer is also directed to consider the comparables selected by the CIT(A) in previous assessment years, for North American Region, APAC Region and Europe Region, for the purpose of benchmarking after necessary verification. Further, any transfer pricing adjustment should be restricted to the international transactions undertaken by the assessee. In view of the above, ground no.17 in assessee s appeal is allowed for statistical purpose. Transfer pricing adjustment in respect of provision of guarantee - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI Following the decision in CIT v/s Everest Canto Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT directed the Assessing Officer to charge guarantee commission @ 0.5% per annum. Deduction u/s 10A - Reduction of expenses incurred in foreign exchange from both export turnover and total turnover while computing the deduction under section 10A - HELD THAT - We find that this issue is no longer res integra and has been decided in favour of the taxpayer by the Hon'ble Supreme Court in CIT v/s HCL Technologies Ltd., 2018 (5) TMI 357 - SUPREME COURT Wherein the Hon'ble Court held that the expenditure excluded from the export turnover while computing the deduction under section 10A of the Act should also be reduced from the total turnover - Decided against revenue. Charging of interest on loans provided to A.Es. - HELD THAT - It is pertinent to note that while charging mark up, over and above the interest rate paid by the assessee on borrowed funds, for computation of adjustment the TPO held that the mark up of 3% will cover various risks factors like exchange rate fluctuation risk, entity risk, country specific risk. Thus, when TPO itself had applied a mark-up of 3%, interest charged by assessee in the range of 4% to 5% by applying the principle of LIBOR plus 300 to 400 basis points cannot be find fault with and to this extent we do not find any infirmity in the directions issued by the DRP. As a result, ground no. 3 raised in Revenue s appeal is dismissed. Disallowance of interest / penalty for delayed overseas return filing and delayed payment of overseas advance tax - HELD THAT - As we have restored the issue arising in ground no.1, in the present appeal for the assessment year 2006 07 to the Assessing Officer, with similar directions the present issue is also restored to the file of the Assessing Officer for necessary verification as to whether the interest / penalty paid by the assessee overseas is eligible for any relief under section 90 of the Act and if it is not found to be so, the assessee s claim should be allowed. Accordingly, ground no.2, raised in assessee s appeal is allowed for statistical purpose. Set off of loss of the STP units against the taxable business income - HELD THAT - It is now settled by Hon ble Supreme Court in Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT that after amendment by Finance Act 2000 with effect from 1-4-2001, section 10A has become a provision for deduction. Thus,Assessing Officer is directed to allow set off of losses of STP units eligible under section 10A of the Act against the taxable business income. Accordingly, the ground no. 5(a) raised in assessee s appeal is allowed. Claim of deduction under section 10A in respect of units on which deduction under section 80HHE of the Act was availed in past - only basis for denying the claim of the assessee is that deduction under section 80HHE was previously claimed in respect of such units - HELD THAT - We find that on identical issue in assessee s own case 2019 (11) TMI 408 - ITAT MUMBAI held that old unit of assessee on which deduction under section 80HHE was claimed is entitled to claim deduction under section 10A of the Act from the profits of its units. TP Adjustment - adjustment in respect of loan to A.Es - HELD THAT - Adjustment made by TPO by adopting rate of interest of 6% based on loan given by the assessee itself to another A.E. is not a valid CUP as the transaction is also between the related parties, thus to this extent order passed by the TPO and upheld by the DRP is set aside. Further, as we have already upheld the benchmarking of this transaction of loan to the A.Es., inter-alia, for the purpose of acquisition of downstream subsidiaries, for assessment year 2011-12 by applying the principle of LIBOR plus 300 to 400 basis points, we direct the TPO / Assessing Officer to compute the adjustment in respect of loan to A.Es. for the relevant assessment year by applying rate of interest of LIBOR, which will further be marked up with basis points. We further direct that the quantification of markup shall be done by the TPO / Assessing Officer after hearing the assessee. As a result, ground no.11 raised in assessee s appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of State taxes paid overseas under section 40(a)(ii) of the Act.
2. Expenditure incurred on import of software.
3. Disallowance under section 14A of the Act.
4. Disallowance of advertisement expenditure.
5. Disallowance of payment towards Tata Brand Equity subscription.
6. Disallowance of commission paid to non-resident under section 40(a)(i) of the Act.
7. Additional reduction from Export and Total Turnover of foreign currency communication expenses.
8. Deduction under section 10AA of the Act in respect of SEZ units.
9. Grant of foreign tax credit as per the provisions of section 90(1)(a) of the Act.
10. Short credit for tax deducted at source.
11. Deduction on account of education cess paid by the assessee.
12. Allowability of deduction under section 10AA on “commercial profit” instead of income from business and professional.
13. Transfer pricing adjustment in respect of international transaction pertaining to provision of software consultancy services.
14. Transfer pricing adjustment in respect of provision of guarantee.
15. Charging of interest on loans provided to A.Es.
16. Disallowance of interest/penalty for delayed overseas return filing and delayed payment of overseas advance tax.
17. Disallowance of set off of loss of the STP units against the taxable business income.
18. Claim of deduction under section 10A in respect of units on which deduction under section 80HHE of the Act was availed in past.
19. Charging of interest under section 234B of the Act before grant of credit of taxes paid under section 90/91 of the Act.

Detailed Analysis:

1. Disallowance of State taxes paid overseas under section 40(a)(ii) of the Act:
The Tribunal found that taxes paid overseas which are not eligible for relief under section 90 or 91 of the Act would not come within the purview of section 40(a)(ii) of the Act. The Assessing Officer was directed to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if not, the assessee’s claim of deduction should be allowed.

2. Expenditure incurred on import of software:
The Tribunal restored the issue to the file of the Assessing Officer for de novo adjudication after examining the agreements entered into by the assessee for import of software in light of the Supreme Court decision in Engineering Analysis Centre for Excellence Pvt. Ltd. The Assessing Officer was directed to allow the payment for import of software if it falls within the parameters laid down by the Supreme Court.

3. Disallowance under section 14A of the Act:
The Tribunal found that the Assessing Officer had not provided any cogent reason for doubting the correctness of the claim of the assessee. The Revenue had merely treated the expenditure offered for disallowance as meager. The Tribunal directed the Assessing Officer to delete the disallowance of expenditure to the extent of ?14,51,54,283 and accept the suo-motu disallowance offered by the assessee under section 14A of the Act.

4. Disallowance of advertisement expenditure:
The Tribunal found that the expenditures were incurred by the assessee for promoting its own business and not for brand building. The Tribunal directed the Assessing Officer to delete the disallowance on account of advertisement expenditure following the decision of the Co-ordinate Bench in the assessee’s own case for the preceding assessment years.

5. Disallowance of payment towards Tata Brand Equity subscription:
The Tribunal found that the payment made by the assessee towards subscription fees to Tata Sons Limited was for the purpose of carrying out normal business activities of the company. The Tribunal directed the Assessing Officer to delete the disallowance on account of subscription fees paid by the assessee to Tata Sons Limited.

6. Disallowance of commission paid to non-resident under section 40(a)(i) of the Act:
The Tribunal found that the commission paid to non-resident agents was not chargeable to tax in India as the non-resident agents operated outside India and the commission was remitted directly outside India. The Tribunal directed the Assessing Officer to delete the disallowance made under section 40(a)(i) of the Act in respect of commission paid by the assessee to non-resident agents.

7. Additional reduction from Export and Total Turnover of foreign currency communication expenses:
The Tribunal directed the Assessing Officer to conduct necessary verification and delete the additional/double reduction of foreign currency communication expenses of ?45.91 crore, if any, from Export and Total Turnover as per law.

8. Deduction under section 10AA of the Act in respect of SEZ units:
The Tribunal found that the deduction under section 10AA of the Act has already been allowed to the assessee in respect of SEZ units for the assessment years 2008-09, 2009-10, and 2010-11. The Tribunal directed the Assessing Officer to allow the deduction under section 10AA of the Act in respect of SEZ units commenced during the assessment years 2008-09, 2009-10, and 2010-11.

9. Grant of foreign tax credit as per the provisions of section 90(1)(a) of the Act:
The Tribunal found that the foreign tax credit should be provided for taxes paid in overseas jurisdiction in respect of section 10A/10AA of the Act eligible income in India as per the provision of respective DTAA. The Tribunal directed the Assessing Officer to grant the foreign tax credit accordingly.

10. Short credit for tax deducted at source:
The Tribunal directed the Assessing Officer to verify the claim of the assessee and grant credit for tax deducted at source after necessary verification and in accordance with law.

11. Deduction on account of education cess paid by the assessee:
The Tribunal directed the Assessing Officer to decide the issue of allowability of education cess as per law, considering the amendment proposed in the Finance Bill, 2022.

12. Allowability of deduction under section 10AA on “commercial profit” instead of income from business and professional:
The Tribunal directed the Assessing Officer to allow the deduction under section 10AA of the Act on “Commercial Profit” instead of “Income From Business And Profession” following the decision of the Co-ordinate Bench in Reliance Industries Ltd. v/s ACIT.

13. Transfer pricing adjustment in respect of international transaction pertaining to provision of software consultancy services:
The Tribunal directed the TPO/Assessing Officer to conduct the benchmarking of the international transaction of provision of software consultancy services as per the findings of the Tribunal in the assessee’s own case for the assessment year 2010-11. The TPO/Assessing Officer was also directed to consider the comparables selected by the CIT(A) in previous assessment years for the purpose of benchmarking after necessary verification.

14. Transfer pricing adjustment in respect of provision of guarantee:
The Tribunal upheld the conclusion of the TPO/DRP to the extent provision of guarantee was held to be an international transaction. However, the Tribunal directed the TPO/Assessing Officer to charge guarantee commission @ 0.5% and compute the adjustment accordingly.

15. Charging of interest on loans provided to A.Es.:
The Tribunal upheld the benchmarking of the transaction of loan to the A.Es. for the assessment year 2011-12 by applying the principle of LIBOR plus 300 to 400 basis points. The Tribunal directed the TPO/Assessing Officer to compute the adjustment in respect of loan to A.Es. for the relevant assessment year by applying the rate of interest of LIBOR, which will further be marked up with basis points.

16. Disallowance of interest/penalty for delayed overseas return filing and delayed payment of overseas advance tax:
The Tribunal restored the issue to the file of the Assessing Officer for necessary verification as to whether the interest/penalty paid by the assessee overseas is eligible for any relief under section 90 of the Act and if not, the assessee’s claim should be allowed.

17. Disallowance of set off of loss of the STP units against the taxable business income:
The Tribunal directed the Assessing Officer to allow the set-off of losses of STP units eligible under section 10A of the Act against the taxable business income following the judicial precedents cited.

18. Claim of deduction under section 10A in respect of units on which deduction under section 80HHE of the Act was availed in past:
The Tribunal directed the Assessing Officer to allow the assessee’s claim of deduction under section 10A in respect of units on which deduction under section 80HHE of the Act was availed in past following the decision of the Co-ordinate Bench as upheld by the Hon’ble Jurisdictional High Court in the assessee’s own case.

19. Charging of interest under section 234B of the Act before grant of credit of taxes paid under section 90/91 of the Act:
The Tribunal directed the Assessing Officer to compute the interest under section 234B of the Act after giving credit of taxes paid under section 90/91 of the Act as per law.