2019 (11) TMI 408 - AT - Income Tax

Disallowance of State taxes paid overseas - relief under section 90 - addition u/s 40(a)(ii) - specific plea of the assessee that the State tax is not covered either under Indo US or Indo Canada tax treaty, hence, not eligible for any relief under section 90 - HELD THAT - Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation 1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of the Act would not be allowable as deduction under section 40(a)(ii) of the Act. It is the say of the assessee that the tax eligible for relief under section 90 of the Act are only those taxes which are levied by Federal / Central Government and not by any local authority of State, City or County. Thus, it is ineligible for any relief under section 90 of the Act. The aforesaid submissions of leaned Sr. Counsel for the assessee, prima facie, is acceptable if one has to strictly go by the meaning of tax , defined under section 2(43) of the Act, as it only refers to tax paid under the provisions of the Act. Pertinently, unlike section 91 read with Explanation (iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression income tax . In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes 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, assessee s claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required. TDS u/s 195 - Disallowance of expenditure incurred for purchase of software by invoking the provisions of section 40(a)(i) - HELD THAT - Further enquiry is required to be made by the Assessing Officer to factually verify the nature of transaction relating to acquisition of software product for trading purpose to find out whether it is sale of copyrighted article simpliciter or sale of copyright. In case, the payment made by the assessee is found to be royalty in view of Explanation 4 to section 9(1)(vi) of the Act, the contention of the assessee that it could not have withheld tax anticipating the change in law brought with retrospective effect, has to be considered keeping in view the decision of the Hon'ble Jurisdictional High Court in NGC Network India Pvt. Ltd. 2018 (5) TMI 1148 - BOMBAY HIGH COURT In case, the payment made by the assessee does not fit into the definition of royalty as provided under the relevant tax treaty, the assessee certainly would get the benefit of the tax treaty and in that event the liability under section 195 of the Act cannot be fastened on the assessee. - Matter restored before AO. Advertisement expenditure - Nature of expenditure - revenue or capital expenditure - Admission of additional evidence - HELD THAT - Since, the additional evidences furnished by the assessee will have a crucial bearing in determining the nature of expenditure, we are inclined to admit the additional evidences. However, considering the fact that these evidences were not furnished before the Departmental Authorities, to afford a fair opportunity to the Department to verify the authenticity of assessee s claim vis a vis the additional evidences furnished before us, we restore the issue to the Assessing Officer for de novo adjudication. Foreign tax credit in respect of income pertaining to section 10A/10AA of the Act eligible units in India - HELD THAT - 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. Addition made on account of provision of interest free loans provided to the AEs - HELD THAT - After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder s activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section 92B r/w Explanation 1(c). Since, the aforesaid legal and factual aspects have not been considered properly, we are inclined to restore the issue to the file of the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. The Assessing Officer must examine all relevant facts to find out the exact nature of the advances made to the AEs. He should also examine the applicability of the ratio laid down in the case of DLF Hotel Holdings Ltd. 2016 (11) TMI 1031 - ITAT DELHI and any other case laws which may be cited before him. The assessee must be afforded reasonable opportunity of being heard. Ground is allowed for statistical purposes. Addition made on account of provision for various guarantees - HELD THAT - After introduction of Explanation (i)(c) to section 92B of the Act, with retrospective effect from 1st April 2002, provision of guarantee to AEs has to be considered as an international transaction. Different Benches of the Tribunal have also expressed similar view on the issue. Therefore, we hold that the provision of guarantee to the AEs is an international transaction. In fact, the aforesaid view has been expressed by the Co ordinate Bench in WNS Global Services Pvt. Ltd. 2019 (1) TMI 1128 - ITAT MUMBAI . Therefore, following the aforesaid decision of the Co ordinate Bench and the decision of the Hon'ble Jurisdictional High Court in Everest Canto Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT we direct the Assessing Officer to charge guarantee commission @ 0.5% per annum both on performance / lease guarantee as well as financial guarantee. Claim of exemption under section 10A of the Act in respect of units for which deduction under section 80HHE - HELD THAT - The purpose of subsection (5) of section 80HHE was to avoid double benefit and that would not mean that if the assessee for a particular assessment year wanted relief only under section 10A of the Act that would be denied to the assessee. The only embargo was not to give relief under both the provisions. total turnover for the purpose of section 10 of the Act cannot be understood as defined for the purpose of section 80 HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover. TDS u/s 195 - Disallowance of commission paid to non residents under section 40(a)(i) - HELD THAT - No material has been brought on record by the Assessing Officer to demonstrate that the non resident agents either have any business connection in India or have PE in India so as to bring the commission payment within the tax net. The factual finding recorded by learned Commissioner (Appeals) that the non resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. Accordingly, we uphold the decision of learned Commissioner (Appeals) on this issue. Comparable selection - HELD THAT - learned Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking done by the assessee with foreign comparables and after detailed analysis has shortlisted the final comparables to be considered for comparability analysis. No convincing argument or evidence has been brought on record by the learned Departmental Representative to persuade us to disturb the finding of learned Commissioner (Appeals) on these issues. In view of the aforesaid, we do not find any merit in the grounds raised by the Revenue on the issues. Accordingly, grounds are dismissed.

Summary

Issues Involved:

1. Disallowance of State taxes paid overseas.
2. Disallowance of expenditure incurred for purchase of software.
3. Disallowance of advertisement expenditure.
4. Claim of foreign tax credit in respect of income pertaining to section 10A/10AA eligible units.
5. Addition made on account of transfer pricing adjustment in respect of provisions of software consultancy services.
6. Addition made on account of provision of interest-free loans provided to the AEs.
7. Addition made on account of provision for various guarantees.
8. Allowing assessee’s claim of exemption under section 10A of the Act in respect of units for which deduction under section 80HHE was earlier claimed.
9. Deletion of disallowance of commission paid to non-residents under section 40(a)(i) of the Act.
10. Reduction of expenditure incurred in foreign currency both from export turnover as well as total turnover while computing deduction under section 10A/10AA.

Detailed Analysis:

1. Disallowance of State taxes paid overseas:
The assessee challenged the disallowance of State taxes paid overseas, arguing that such taxes paid in the USA and Canada do not fall under section 40(a)(ii) of the Act. The Tribunal directed the Assessing Officer to verify if the State taxes paid are eligible for relief under section 90 of the Act. If not, the deduction should be allowed under section 37 of the Act, following the jurisdictional High Court's decision in Reliance Infrastructure Ltd. v/s CIT.

2. Disallowance of expenditure incurred for purchase of software:
The Tribunal upheld the decision that expenditure on software for internal use is capital in nature and eligible for depreciation. However, for software acquired for trading purposes, the issue was remanded to the Assessing Officer for fresh adjudication to determine if the payment is for a copyrighted article or royalty, considering the retrospective effect of Explanation-4 to section 9(1)(vi) of the Act.

3. Disallowance of advertisement expenditure:
The Tribunal upheld the decision of the learned Commissioner (Appeals) that the advertisement expenditure incurred was for promoting the assessee's business and not for brand building. However, the issue of expenditure on "experience certainty campaign" was remanded to the Assessing Officer for fresh consideration with the admission of additional evidence.

4. Claim of foreign tax credit in respect of income pertaining to section 10A/10AA eligible units:
The Tribunal directed the Assessing Officer to grant foreign tax credit for taxes paid in overseas jurisdictions in respect of section 10A/10AA eligible income, except for taxes paid in Finland and Canada, following the decision of the Karnataka High Court in Wipro Ltd. v/s DCIT.

5. Addition made on account of transfer pricing adjustment in respect of provisions of software consultancy services:
The Tribunal upheld the decision of the learned Commissioner (Appeals) that the AEs should be considered as tested parties and that the appropriate PLI would be gross margin/sales. The Tribunal also agreed with the learned Commissioner (Appeals) that the cost incurred by the AEs should not be treated as pass-through costs and accepted the alternative benchmarking provided by the assessee.

6. Addition made on account of provision of interest-free loans provided to the AEs:
The Tribunal remanded the issue to the Assessing Officer for fresh adjudication to examine the nature of advances made to the AEs and whether they fall within shareholder’s activity, considering the ratio laid down in relevant case laws.

7. Addition made on account of provision for various guarantees:
The Tribunal held that the provision of guarantee to AEs is an international transaction as per section 92B of the Act. Following the jurisdictional High Court's decision in Everest Canto Cylinders Ltd., the Tribunal directed the Assessing Officer to charge guarantee commission at 0.5% per annum.

8. Allowing assessee’s claim of exemption under section 10A of the Act in respect of units for which deduction under section 80HHE was earlier claimed:
The Tribunal upheld the decision of the learned Commissioner (Appeals) allowing the assessee’s claim, following the jurisdictional High Court's decision that section 80HHE(5) does not prohibit claiming deduction under section 10A for the same profits in subsequent years.

9. Deletion of disallowance of commission paid to non-residents under section 40(a)(i) of the Act:
The Tribunal upheld the decision of the learned Commissioner (Appeals) that the commission paid to non-resident agents for services rendered outside India is not chargeable to tax in India, and hence, no tax deduction at source is required.

10. Reduction of expenditure incurred in foreign currency both from export turnover as well as total turnover while computing deduction under section 10A/10AA:
The Tribunal upheld the decision of the learned Commissioner (Appeals) that foreign currency expenditure should be reduced from both export turnover and total turnover, following the jurisdictional High Court's decision in the assessee’s own case for the assessment year 2005-06.

Conclusion:
The Tribunal provided detailed directions on various issues, including remanding certain matters for fresh adjudication, upholding the decisions of the learned Commissioner (Appeals) on others, and providing clarity on the application of specific provisions and judicial precedents. The decisions were made considering the facts, applicable laws, and relevant case laws to ensure a fair and just outcome.