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2017 (5) TMI 9 - AT - Income TaxAddition u/s 40(a)(ia) - tax withheld with respect to purchase of software from foreign sellers - addition under the head software purchases - Held that - CIT(A) had correctly came to the conclusion that income from overseas operations cannot be brought to tax in India and to that extent, supported by various case law, he has rightly concluded that profits earned by the USA branch cannot be brought to tax in India. We affirm the order to that extent. The claim of purchases to an extent of ₹ 49,83,08,802/- made in the branch accounts are not covered by the provisions of TDS as the transactions occurred overseas. Even with reference to the software purchases, claims made with reference to exports from India, it was submitted by Ld. Counsel that they are not covered by the provisions of TDS. Even though various case law relied that the software purchases that it does not amount to royalty, we are not adjudicating that issue on the simple reason that there are no outstanding payments ( payble) at the end of the year to be disallowed u/s. 40(a)(ia). If the issue is considered u/s. 201, then a finding is required whether the amounts paid are covered by TDS provisions or not? Since the disallowance made was under the provisions of Section 40(a)(ia), following the Special Bench decision in the case of Merilyn Shipping and Transport Ltd., Vs. ACIT (2012 (4) TMI 290 - ITAT VISAKHAPATNAM ), we are of the opinion that since there is no outstanding payable at the end of the year, provisions of Section 40(a)(ia) are not attracted. To that extent, order of the CIT(A) gets affirmed and Revenue grounds on this issue are to be dismissed. Estimation of income and allowance of deduction u/s. 10A - Held that - As can be seen from the order of the AO, there is no dispute with reference to claim of 10A. In fact, AO has re-worked out the profit and allowed the deduction more than what assessee has claimed by way of his own working by taking a less export turnover and more profit. There is no dispute with reference to the fact that assessee is eligible for a deduction u/s. 10A. Therefore, order of the CIT(A) that deduction u/s 10A is not to be allowed has no basis. As seen from the record also, there is no such admission by assessee that he will not claim 10A deduction. Therefore, assessee s grounds to that extent are allowed. To that extent, order of the CIT(A) gets modified. Estimation of income u/s. 10A, assessee himself has accepted the estimation of income by rejecting the books of account. Assessee admitted for estimation up to 6%, whereas Ld.CIT(A) without any basis, has estimated the income at 10%. Whether it is 3% or 6% or 10%, the same does not matter as the entire income get exempted u/s. 10A. In view of that, we do not intend to estimate the profit at any particular rate. Since Ld. CIT(A) has already, rather arbitrarily, fixed the rate at 10%, we are of the opinion that the estimation of income at 10% can be resorted to only on the software exports from India of ₹ 20,80,35,745/-. Income offered under MAT provisions - Held that - Subject to satisfying the AO with reference to the export proceeds received into India, the AO is directed to estimate the income only on the export turnover from India at 10% and allow the deduction u/s. 10A as applicable as per the provisions of the Act. In case the total income determined becomes less than the income offered the income under the MAT provisions, AO is directed to accept the income offered under MAT provisions by assessee at ₹ 1,27,55,690/-. Subject to the above observations, assessee s grounds are considered allowed partially. Unexplained cash credits - Held that - The principle is established that AO has power to bring to tax unexplained cash credits as income from other sources provided they are not connected to business activity/business income. In view of that, the order of the CIT(A) to that extent is not justifiable. However, it is the contention of assessee that necessary evidence for proving the genuineness of the credits were already furnished before the AO which are not verified/accepted. In view of that we are of the opinion that in principle while accepting that income from other sources can be brought to tax by way of unexplained cash credits, the issue is restored to the file of the AO to examine the cash credits separately and give due findings whether they are explained cash credits or unexplained cash credits. Assessee is directed to furnish necessary evidence and cooperate with the AO in making necessary enquiries
Issues Involved:
1. Disallowance of software purchases under Section 40(a)(ia). 2. Re-computation of exemption under Section 10A. 3. Unexplained cash credits treated as income from other sources. 4. Estimation of income and rejection of books of account. Detailed Analysis: 1. Disallowance of Software Purchases under Section 40(a)(ia): The Assessing Officer (AO) disallowed the software purchases amounting to ?64,09,69,696/- under Section 40(a)(ia) due to non-deduction of TDS. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the transactions were conducted by the Permanent Establishment (PE) in the USA and the sale took place in the USA, thus not taxable in India. CIT(A) cited judicial pronouncements, including the ITAT Hyderabad case of AP Power Generation Corporation Ltd and ITAT Delhi case of Royal Airways Ltd, to support the conclusion that no TDS was required as the transactions were not taxable in India. The ITAT affirmed the CIT(A)'s decision, noting there were no outstanding payables at the end of the year, hence Section 40(a)(ia) was not applicable. 2. Re-computation of Exemption under Section 10A: The AO restricted the deduction under Section 10A and reworked the profit, allowing a deduction of ?4,05,17,110/-. CIT(A) found that the AO erroneously treated the entire turnover as revenue derived from exports from India, ignoring the PE in the USA. CIT(A) rejected the books of account due to lack of verifiable details and estimated the net profit at 10% of the turnover, denying any further deduction under Section 10A. ITAT modified this, affirming the CIT(A)'s decision that overseas profits are not taxable in India and directing the AO to estimate income at 10% of the Indian export turnover, allowing the deduction under Section 10A as applicable. 3. Unexplained Cash Credits Treated as Income from Other Sources: The AO added ?1,55,25,000/- as unexplained cash credits under 'income from other sources'. CIT(A) included these in the estimation of profit, but ITAT disagreed, citing the Supreme Court's judgment in Kale Khan Mohammad Hanif Vs. CIT, which allows unexplained cash credits to be taxed separately. ITAT remanded the issue to the AO to verify the genuineness of the credits with the evidence provided by the assessee. 4. Estimation of Income and Rejection of Books of Account: CIT(A) rejected the books of account due to discrepancies and estimated the net profit at 10% of the turnover. The assessee contended that the estimation should be limited to the Indian export turnover and not the entire turnover. ITAT agreed, directing the AO to estimate the income at 10% of the Indian export turnover and allow the deduction under Section 10A. The ITAT noted that since the entire income would be exempt under Section 10A, the exact percentage of estimation was less critical. Conclusion: - The appeal of the assessee is partly allowed, affirming the CIT(A)'s decision on the non-applicability of Section 40(a)(ia) for software purchases and modifying the estimation of income to apply only to the Indian export turnover. - The appeal of the Revenue is partly allowed for statistical purposes, remanding the issue of unexplained cash credits to the AO for verification.
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