2015 (3) TMI 850 - HC - Income Tax

Amount paid to M/s AT & T and MCI Telecommunication towards down linking charge - whether an allowable deduction even when no TDS under Section 195 of the Act has been made and provisions of Section 40(a)(i) of the Income Tax Act has not been complied with? - Held that - The assessee was not in default for non-deduction of tax as the said payment cannot be treated as a royalty, the authorities were not justified in disallowing the expenditure. Therefore, no fault to be found with the order passed by the tribunal. - Decided against revenue. Subscription charges - whether is an allowable deduction despite the assessee failing to deduct the tax at source under Section 195 of the Act and contrary to Section 40(a)(i) of the Act? - Held that - Assessee is liable to deduct tax. Substantial question of law is answered in favour of the revenue. Expenditure due to exchange rate variation arising in foreign currency and exchange variation EEFC - whether is not deductable either from export turnover or total turnover without computing deduction under Section 80HHE of the Act? - Held that - Issue is already covered by a Judgment of this Court in Infosys Technologies Ltd. 2011 (11) TMI 443 - KARNATAKA HIGH COURT in favour of the assessee and against the Revenue arrived at by the authorities is justified as the fluctuation in the valuation of currency which has to be converted to foreign currency has direct nexus to the export of software and can never be included as income from other sources. Wherefore, the said finding does not suffer from any error or illegality as to call for interference in this appeal Accordingly, we answer the fourth' . - Decided in favour of assessee. Expenditure towards travel expenses, professional charges, maintenance allowance and other expenses in foreign currency - whether is not deductible either from export turnover or total turnover when computing deduction under Section 80HHE of the Act? - Held that - In the assessee's own case 2013 (6) TMI 193 - KARNATAKA HIGH COURT , this Court decided that the assessing officer has to examine the material relevant for the period of assessment to be produced by the assessee and to record a finding as to the nature of the activity keeping in view the legal position discussed in the aforesaid judgment and answered the question related to exclusion of expenses strictly keeping in view the kind of amounts sought to be excluded in the case of export turnover being attributable to the export of computer software,in which event, the exclusion being only freight telecommunication charges or insurance attributable to the delivery of the computer software outside India and if it is the case of providing technical services outside India in connection with development of computer software, then the actual expenditure, if any, incurred in foreign exchange in providing technical services outside India should be excluded and therefore, the matter was remanded back to the assessing authority. - Decided in favour of assessee for statistical purposes. Payments paid to M/s AT&T and MCI Telecommunications towards down linking charges - whether cannot be excluded from export turnover as well as total turnover for the purpose of computation of deduction u/s.10A of the Act? - Held that - A perusal of the order passed by the assessing officer which deals with computation of deduction under Section 10A, the assessing officer has deducted a sum of ₹ 10,39,88,322/- towards M/s AT&T and MCI Telecommunication expenses both from export turnover and total turnover and therefore, there is no merit in the said question of law as the assessee has already been granted the benefit. - Decided against assessee. Computation of total turnover - whether the business profits of the entire business of the assessee need not be taken but only that of 80HHE of the Act units should be taken for the purpose of computation of deduction u/s.80HHE of the Act? - Held that - This question arose for consideration before this Court in The Commissioner of Income-Tax vs. Sasken Communication Technologies Limited 2014 (1) TMI 1538 - KARNATAKA HIGH COURT where it has been held that the total turnover of the business referred to under Sub-Section (3) of Section 80HHE cannot be construed as the total turnover of the business carried on by the assessee.The total turnover refers only to the business carried on under Section 80HHE viz., the business of software. Therefore, if the assessee is carrying on business of computer software and is exporting such computer software and is also supplying it to the domestic market, then the total turnover of the business includes the total turnover of export and the total turnover in the domestic market. But, merely because the assessee is owning two more units which fall under section 10A, which is also engaged in computer business and is in the export business neither the profit earned by 10A units nor the total turnover of the said 10A units is liable to be included in the total turnover. Therefore, in computing the profits of the said units, the turnover of 10A units could be added to find out the profit from export of computer software under section 80HHE and ... therefore, the said question was held against the revenue and in favour of the assessee. Provision for post sales customers support service - whether is an allowable deduction when the particulars of the same was not furnished nor method of arriving at it was not disclosed and consequently recorded a perverse finding as the same had not accrued? - Held that - This question arose for consideration in the assessee's case itself 2011 (12) TMI 330 - KARNATAKA HIGH COURT wherein held he benefit of the decision of the hon'ble Supreme Court in Rotork Controls India P. Ltd.'s case 2009 (5) TMI 16 - SUPREME COURT OF INDIA was not available to the Tribunal - In the said decision, the hon'ble Supreme Court has laid down the conditions which are required to be satisfied for making claim in respect of post-sale customer service and has laid down the principles pertaining to the same - SC has stated that in each case all the conditions to be satisfied are to be considered - Appeal disposed of accordingly in the light of the principles laid down in Rotork Controls India P. Ltd.'s case and the matter is remanded to the Tribunal to pass fresh orders in accordance with law on the said question. - Decided in favour of assessee for statistical purposes. Club membership fee - whether is an allowable business expenditure ? - Held that - acquisition of membership of the club would be revenue expenditure and not capital expenditure and decision of this Court relied upon by the learned counsel appearing for the assessee in CIT v. Wipro Systems 2009 (11) TMI 402 - KARNATAKA HIGH COURT would also show that the amount spent towards the membership acquired by the assessee should be treated as revenue expenditure. - Decided in favour of assessee. Sum received on sale of Onscan International Notification System to M/s Onscan INC., California - whether the aforesaid consideration received by the assessee is to be treated as a capital gain or a business profit? - Held that - In view of the judgment Commissioner of Income-tax Versus Infosys Technologies Ltd. 2011 (11) TMI 455 - KARNATAKA HIGH COURT , the said consideration amount is to be treated as a business profit and rightly the Tribunal held that the assessee is entitled to deduction under Section 10-A of the Act treating it as a business profit - Decided in favour of the assessee. Expenses in foreign currency - whether should be allowed from export turn over for the benefit of computation for deduction under Section 10-A of the Act - Held that - Both the Appellate Authorities have not applied their mind to the difference that exist between Section 80HHE and Section 10-A of the Act. They have followed the judgment rendered in connection with Sections 80HHE and 80HHC. Therefore, the impugned finding cannot be sustained. It is necessary for the authorities to determine on the basis of the material produced by the assessee as to whether the technical services rendered is post-sales services or pre-sales services and then decide in the light of two statutory provisions and the various decisions on the point whether assessee is entitled to exclusion of the expenditure incurred towards technical services. Therefore, as none other authorities have applied their mind in this regard, it is appropriate to set aside the judgment and remand the matter back to the assessing authority to make the aforesaid computation. The Assessing Authority also shall decide whether the said amount has to be deducted when it is deducted from export turnover whether it has to be deducted from total turn over also in the light of various decisions. - Decided in favour of assessee.

Summary

Issues Involved:

1. Allowable deduction of downlinking charges without TDS under Section 195.
2. Allowable deduction of subscription charges without TDS under Section 195.
3. Deductibility of exchange rate variation expenditure under Section 80HHE.
4. Deductibility of foreign currency expenses under Section 80HHE.
5. Exclusion of downlinking charges from export and total turnover under Section 10A.
6. Computation of total turnover for deduction under Section 80HHE.
7. Allowable deduction for provision for post-sales customer support service.
8. Allowable deduction for club membership fee.
9. Classification of sale proceeds from "Onscan International Notification System" as revenue expense or capital asset.
10. Not pressed.

Detailed Analysis:

Issue 1: Allowable Deduction of Downlinking Charges Without TDS
The tribunal held that the assessee was not in default for non-deduction of tax on downlinking charges, as these payments were not treated as royalty under Section 9(1)(vii) of the Income Tax Act. The High Court found no substantial question of law arising from this issue and upheld the tribunal's decision.

Issue 2: Allowable Deduction of Subscription Charges Without TDS
The tribunal's decision, based on an earlier case, was set aside by the High Court. The High Court ruled that the payment to M/s Gartner, a non-resident company, amounted to royalty and thus required TDS under Section 195. The matter was remanded to the assessing authority to consider the Apex Court's judgment on the issue.

Issue 3: Deductibility of Exchange Rate Variation Expenditure
The High Court referenced its previous judgment, which held that fluctuations in currency valuation directly related to the export of software should not be included as income from other sources. The High Court upheld the tribunal's decision favoring the assessee.

Issue 4: Deductibility of Foreign Currency Expenses
The High Court referred to its earlier judgment, which required the assessing officer to examine the nature of the expenses and their relation to the export of computer software. The matter was remanded back to the assessing authority for further examination.

Issue 5: Exclusion of Downlinking Charges from Export and Total Turnover
The High Court noted that the assessing officer had already deducted the downlinking charges from both export and total turnover. Therefore, this issue was found to have no merit.

Issue 6: Computation of Total Turnover for Deduction Under Section 80HHE
The High Court referenced its previous judgment, which held that the total turnover for Section 80HHE should include only the business of software and not other units under Section 10A. The High Court upheld the tribunal's decision favoring the assessee.

Issue 7: Allowable Deduction for Provision for Post-Sales Customer Support Service
The High Court referred to its earlier judgment, which remanded the matter to the tribunal for fresh consideration in light of the Supreme Court's guidelines in Rotork Controls India (P.) Ltd.'s case. The tribunal's findings were set aside for reconsideration.

Issue 8: Allowable Deduction for Club Membership Fee
The High Court upheld its previous judgment, which classified club membership fees as revenue expenditure and not capital expenditure. The tribunal's decision favoring the assessee was upheld.

Issue 9: Classification of Sale Proceeds from "Onscan International Notification System"
The High Court referenced its earlier judgment, which classified such proceeds as business profit rather than capital gain. The tribunal's decision treating the proceeds as business profit and allowing deduction under Section 10A was upheld.

Issue 10: Not Pressed
The High Court noted that this issue was not pressed and did not require consideration.

Additional Issue in ITA Nos. 192 and 194 of 2008: Deductibility of Foreign Currency Expenses Under Section 10A
The High Court remanded the matter back to the assessing authority to determine whether the technical services rendered were post-sales or pre-sales and to decide on the exclusion of expenses in light of the relevant statutory provisions and judicial decisions.

Conclusion:
The appeals were disposed of with specific directions for remand and reconsideration on certain issues, while other issues were resolved in favor of the assessee based on previous judgments and legal principles.