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2014 (10) TMI 463 - AT - Income TaxValidity of reopening of assessment Change of opinion - TDS deduction on payment to Non-resident companies - Held that - The returns filed by the assessee company for the AYs 2003-04 and 2005-06 were processed under sec.143(1) - Obviously, there is no question of change of opinion - when the AO has arrived at a finding that the assessee company is in fact paying Royalty to the non-resident companies, he has to apply the same ratio for pending assessments as well as assessments concluded recently, especially, the assessments concluded u/s 143(1) - wherever the time permits, the AO had to reopen the earlier assessments - the reassessments completed by the assessing authority for the four AYs 2003-04, 2004-05, 2005-06 and 2006-07 are valid in law Decided against assessee. TDS deduction on payment Royalty or not - payments made to non-resident companies for supply of standard software products, which in turn, are to be sold in India Held that - The software transmitted to the assessee company is installed on a server with identifying location and machine No. of the customer - the orders are placed by customers and banks in India with the assessee company on a need based arrangement - The supply of the products are made by the non-resident companies only after approving the technicality of the software module and other necessary particulars - The software products are delivered to the assessee on a CD/any other media specified in the invoices - the assessee does not have ownership in the copyright supplied by the non-resident companies - the assessee does not have any right to make copies of software or use the software anywhere else - The software is carefully marked for that particular customer to whom the assessee has sold the software product - the relationship subsisted between the assessee company and the non-resident companies was on a principal-to-principal basis - The risk of the failure of the software product is borne by the assessee company - The assessee company does not have any right to make changes in the software supplied by ACI Singapore and IRPL Australia - The assessee company is permitted to make only nominal/cosmetic modifications for the purpose of installing the software and running the software product in the system of customers - The software transferred by the non-resident companies is a standard software - there was no requirement on the part of the assessee company to deduct tax at source as provided u/s 195 of the Act - the assessing authority is not justified to invoke sec.40(a)(i) and make disallowance in respect of the amounts paid by the assessee company to ACI Singapore and IRPL Australia - The disallowances is to be set aside. Even if the amendment brought in sec. 9(1)(vi) by Finance Act, 2012, is considered as a milestone, the judgment rendered by the Hon ble Delhi High Court in the case of Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT , really supports the argument of the assessee. In the said decision, even after the amendment, the Hon ble Delhi High Court has held that the amount received by the assessee from a non-resident company for granting license to use copyright software to its own business purposes could not be brought to tax as Royalty under Article 12(3) of Indo-US DTAA. Disallowance u/s 40(a)(i) Held that - It is very difficult to hold that the assessee is a dependent agent of ACI Singapore and IRPL Australia - The result is that the assessee company does not create a PE in India for ACI Singapore and IRPL Australia - the issue of PE is decided in favour of the assessee by holding that Singapore Company and Australian Company do not maintain any PE in India through the medium of the assessee company. Short fall in credits Held that - The AO restricted the grant of credit on the ground that the credit as per Form 26AS is reflected to that extent alone - Once difference is reconciled, it is to be seen that the assessee is entitled for the credit on full amount of TDS - there is difference between the amount of TDS as per the return of income filed by the assessee and the credit reflected in Form 26AS - the assessee has relied on instruction No.5/2013 dated 8th July, 2013 issued by the CBDT stating that when an assessee approaches the assessing authority with requisite details and particulars in the form of withholding tax certificate as evidence for any mismatched amount, the AO should verify whether or not the deductor has made payment of the withholding tax to the Government account and if the payment has been made, credit of the same should be given to the assessee the AO is directed to give the appropriate withholding tax credit to the assessee company on the basis of withholding tax certificate produced by the assessee Decided in favour of assessee. Computation of relief u/s 10A/10B Held that - Following the decision in ITO v. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D - such deductions made from the export turnover should be correspondingly made from the total turnover so as to maintain the parity of the turnover segments - the AO is directed to reduce the expenses also from the total turnover of the respective AYs the AO is directed has excluded the unrealized foreign exchange from the export turnover without making corresponding deduction in the total turnover of the assessee company - when the foreign exchange is not realized and corresponding export turnover is already reduced, it is a corollary that the total turnover is reduced to that extent for the reason that the total turnover includes export turnover as well Decided partly in favour of assessee.
Issues Involved:
1. Validity of income escaping assessments for AY 2003-04 to 2006-07. 2. Nature of payments made to non-resident companies - whether Royalty or not. 3. Permanent Establishment (PE) status of non-resident companies in India. 4. Denial of 100% depreciation on interior facilities for AY 2004-05. 5. Shortfall in TDS credits for AY 2004-05, 2009-10, and 2010-11. 6. Partial disallowance in computing relief under sec.10A/10B. Detailed Analysis: 1. Validity of Income Escaping Assessments for AY 2003-04 to 2006-07: The assessee argued that reopening of assessments without fresh material is invalid. They contended that the Tax Audit reports were already available during original assessments, and thus, reopening assessments based on TDS issues raised in AY 2007-08 constitutes a change of opinion. The tribunal held that as the original returns for AY 2003-04 and 2005-06 were processed under sec.143(1), there was no change of opinion. The Assessing Officer (AO) had reasons to believe that income had escaped assessment, thus validating the reassessments. The tribunal rejected the assessee's grounds and upheld the reassessments. 2. Nature of Payments Made to Non-Resident Companies - Whether Royalty or Not: The assessee made payments to ACI Singapore and IRPL Australia for software products, arguing these were not royalties but payments for copyrighted articles, thus not subject to TDS under sec.195. The tribunal examined the agreements and concluded that the software products were standard and the assessee had no rights to modify or reproduce them. The tribunal referenced several judicial precedents, including Dassault Systems K.K., Dynamic Vertical Software India (P) Ltd., and Infrasoft Ltd., concluding that the payments were not royalties but purchase considerations for copyrighted articles. The tribunal also noted the retrospective amendment by Finance Act, 2012, but held that the assessee could not foresee this change, thus disallowing the sec.40(a)(i) disallowance. 3. Permanent Establishment (PE) Status of Non-Resident Companies in India: The AO argued that the assessee acted as a PE for ACI Singapore and IRPL Australia. The tribunal, however, found that the assessee operated on a principal-to-principal basis, bore the entrepreneurial risk, and had no authority to conclude contracts on behalf of the non-resident companies. Thus, the tribunal held that the assessee did not constitute a PE for the non-resident companies in India. 4. Denial of 100% Depreciation on Interior Facilities for AY 2004-05: The assessee claimed 100% depreciation on interior furnishing expenses, which the AO allowed at 10%, considering them capital in nature. During the hearing, the assessee did not press this issue further. Consequently, the tribunal decided this issue against the assessee. 5. Shortfall in TDS Credits for AY 2004-05, 2009-10, and 2010-11: The assessee claimed discrepancies in TDS credits granted by the AO. For AY 2004-05, the AO withdrew TDS credit on amounts written off by the assessee. For AY 2009-10 and 2010-11, the AO restricted TDS credits based on Form 26AS. The tribunal directed the AO to verify and grant appropriate TDS credits based on withholding tax certificates and CBDT instructions. 6. Partial Disallowance in Computing Relief Under Sec.10A/10B: The AO made partial disallowances of deductions under sec.10A/10B for various expenses. The tribunal directed the AO to reduce travel and communication expenses from both export turnover and total turnover, in line with the ITAT Special Bench decision in Sak Soft Ltd. However, the tribunal upheld the disallowance of foreign exchange loss from export turnover. Regarding unrealized foreign exchange, the tribunal directed corresponding deductions from total turnover. Conclusion: The tribunal partly allowed the appeals, providing relief on several issues while upholding the AO's stance on others. The key findings included validating the reassessments, classifying the payments to non-resident companies as non-royalty, and directing appropriate TDS credits and adjustments in sec.10A/10B deductions.
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