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2020 (11) TMI 36 - AT - Income TaxEducation Cess as allowable deduction - HELD THAT - We are in agreement with the submissions of assessee that the income tax is chargeable at the rate specified in Part-I of First Schedule and such tax shall be increased by surcharge for the purpose of Union, calculated in each case in the manner provided therein. Education Cess is not included either as a rate or surcharge in Part-I. The objections raised by ld DR for the revenue that the decision of Bombay High Court 2020 (3) TMI 347 - BOMBAY HIGH COURT is per-incurium, is not tenable as the decision of Hon ble Supreme Court in Smith Kline French (India) Ltd. 1996 (4) TMI 2 - SUPREME COURT has also been specifically considered by Hon ble Rajasthan High Court in Chambal Fertilizer 2018 (10) TMI 589 - RAJASTHAN HIGH COURT . In the result, this ground of appeal is allowed for statistical purpose. Addition u/s 40(a)(ii) read with section (r.w.s.) 2(43) - provision of section 40(a)(ii) applicable to the State Tax - Whether deduction is prohibited only for those taxes / credit is allowed under section 90/91? - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the 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 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. Advertisement Expenses disallowance - assessee submits that expenses incurred in respect of advertisement in newspaper/ Magazine in respect Experience Certainty Campaign which is routinely incurred for the ongoing business and not in the nature of Brand Building - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI restore the issue to the Assessing Officer for de novo adjudication after providing reasonable opportunity of being heard to the assessee. Foreign tax credit in respect of income pertaining to section 10A/10AA eligible units in India - assessee submits that foreign tax credit should also be provided for taxes paid in overseas jurisdiction, in respect of section 10A/10AA eligible income in India, as per the tax credit provisions of respective DTAA - HELD THAT - As decided in 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. Disallowance of payments of software from non-residents venders under section 40(a)(i) - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI 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. Since, all these issues have not been properly examined and deliberated upon by the Departmental Authorities; we are inclined to restore the issue to the Assessing Officer for fresh adjudication in terms with our observations hereinabove. The Assessing Officer must decide the issue after providing reasonable opportunity of being heard to the assessee. Disallowance u/s 14A - assessee has earned dividend income which is claimed exempted under section 10(34) - No suo moto disallowances was offered by the assessee - HELD THAT - No reason as to why the AO is not satisfied with the working of the assessee except recording that the expenses are very meager. The ld CIT(A) after considering the submissions and the material placed before him directed to delete the disallowance including the disallowance of Rule 8D(iii). The ld DR for the revenue failed to bring any material in our notice to take the other view, no contrary decision is also brought to our notice. Thus, we affirm the order of ld CIT(A). In the result this ground of appeal is dismissed. Expenses on advertisement in news paper / magazine for marketing of its product and is routinely incurred for its business and not in brand building. No enduring benefit is occurred by such expenses, which is revenue in nature. TDS u/s 195 - payment to non resident agents - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI 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. TP Adjustment - Comparable selection - TPO held that the PLI to compute the margin would be operating profit/ value added expenditure (OP/VAE) - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI Commissioner (Appeals) examined them in detail and after a detailed analysis approved some comparables selected by the assessee and also added some new comparables. Comparable selected by the Transfer Pricing Officer were not on the basis of any detailed search process. At least, no such analysis is either forthcoming from the order of the Transfer Pricing Officer or could be brought to our notice by learned Departmental Representative. On the contrary, on a thorough and careful reading of the impugned order of learned Commissioner (Appeals), we are of the view 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. Corporate guarantee commissions/ fee - decision of CIT(A) in restricting the charge of guarantee commission only on 34% i.e. onsite portion of the contract which was performed by AEs - HELD THAT - As relying on own case we direct the Assessing Officer to charge guarantee commission @ 0.5% per annum both on performance / lease guarantee as well as financial guarantee. TP adjustment on account of interest free loans to AEs - HELD THAT - As decided in own case 2019 (11) TMI 408 - ITAT MUMBAI 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. Excessive valuation paid for shares of AE - HELD THAT - CIT(A) while granting relief to the assessee correctly has followed the decision of Vodafone India Services (P) ltd 2014 (10) TMI 278 - BOMBAY HIGH COURT wherein it was held that share subscription is a capital subscription is a capital account transaction, therefore, no transfer pricing adjustment is warranted on such transactions. Disallowance of Interest paid in overseas countries - HELD THAT - General principle of allowability that the expenditure cannot be overlooked and that the accepted principle is that only those expenditure can be allowed which are attributable to the business activity as well as laid out wholly and exclusively for the purposes of the business - we direct the AO to allow the interest on delayed payment of State tax or Federal Taxes being compensatory in nature. In the result these grounds of appeal are allowed. Computation of deduction u/s 10A - HELD THAT - 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. Charging of guarantee fee on the entire amount - HELD THAT - Performance guarantees is treated as chargeable services, the charges should be levied only on the component of services performed by the AE and if the lease guarantee is treated as chargeable services, the charges should be levied only for the 60% during the year under consideration.
Issues Involved:
1. Disallowance of Taxes Paid Overseas to Local/State Provincial Authorities 2. Advertisement Expenditure 3. Foreign Tax Credit (Double Tax Relief) 4. Transfer Pricing Adjustments/Additions/Variations 5. Provision of Software Consultancy Services 6. Provision of Loans to AEs 7. Provision of Guarantees 8. Deduction of Education Cess 9. Disallowance of Payments of Software from Non-Resident Vendors 10. Disallowance under Section 14A 11. Method of Computation of Deduction under Section 10A 12. Disallowance of Commission to Non-Residents 13. Deduction under Section 10A/10AA Detailed Analysis: 1. Disallowance of Taxes Paid Overseas to Local/State Provincial Authorities: The Tribunal noted that the term "tax" under section 2(43) of the Act includes only taxes chargeable under the Indian Income Tax Act. Taxes paid overseas to local/state authorities are not eligible for relief under sections 90 or 91 of the Act and thus do not fall under section 40(a)(ii). The Tribunal directed the Assessing Officer (AO) to verify whether the state taxes paid overseas are eligible for any relief under section 90 of the Act and if not, to allow the deduction. 2. Advertisement Expenditure: The Tribunal upheld that advertisement expenses for promoting the business are revenue expenditures. It noted that the AO's reasoning that these expenses were for brand building lacked basis. The Tribunal restored the issue of "experience certainty expenditure" to the AO for de novo adjudication after considering additional evidence. 3. Foreign Tax Credit (Double Tax Relief): The Tribunal followed the Karnataka High Court's decision in Wipro Ltd., which allows foreign tax credit even if the income is not taxed in India, provided the tax treaties allow such credit. The Tribunal directed the AO to grant foreign tax credit in accordance with the respective tax treaties. 4. Transfer Pricing Adjustments/Additions/Variations: The Tribunal upheld the CIT(A)'s decision to use the Gross Margin on Sales as the Profit Level Indicator (PLI) and rejected the TPO's approach of excluding costs incurred by the AEs. The Tribunal emphasized that the AEs bear significant marketing and distribution risks and thus should be compensated accordingly. The Tribunal also approved the alternative benchmarking analysis provided by the assessee. 5. Provision of Software Consultancy Services: The Tribunal upheld the CIT(A)'s decision that the AEs are the tested parties and the PLI should be Gross Margin on Sales. The Tribunal found that the AEs perform significant marketing and distribution functions and bear related risks. 6. Provision of Loans to AEs: The Tribunal restored the issue of interest-free loans to AEs to the AO for fresh adjudication, directing the AO to examine the nature of the advances and whether they fall within shareholder activities. 7. Provision of Guarantees: The Tribunal directed the AO to charge guarantee commission at 0.5% per annum for both performance/lease and financial guarantees, following the decision in Everest Kanto Cylinder. The Tribunal also noted that charges should be levied only on the component of services performed by the AE. 8. Deduction of Education Cess: The Tribunal admitted the additional ground regarding the deduction of education cess and restored the issue to the AO to consider it on merit in accordance with the decision of the Bombay High Court in Sesa Goa Ltd. 9. Disallowance of Payments of Software from Non-Resident Vendors: The Tribunal restored the issue to the AO to verify whether the software payments are for copyrighted articles and whether they fall under the definition of royalty as per the relevant tax treaties. 10. Disallowance under Section 14A: The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Rule 8D(2)(iii), noting that the AO did not examine the correctness of the assessee's claim and merely recorded that the expenses were meager. 11. Method of Computation of Deduction under Section 10A: The Tribunal upheld the CIT(A)'s decision that foreign currency expenditure should be reduced from both export turnover and total turnover, following the Bombay High Court's decision in HCL Technologies. 12. Disallowance of Commission to Non-Residents: The Tribunal upheld the CIT(A)'s decision that the commission paid to non-resident agents for services rendered outside India is not chargeable to tax in India, and thus no TDS is required. 13. Deduction under Section 10A/10AA: The Tribunal upheld the CIT(A)'s decision allowing deduction under section 10A for units previously claiming deduction under section 80HHE, following the Bombay High Court's decision in the assessee's own case for earlier years. Conclusion: The appeals were partly allowed, with several issues restored to the AO for fresh adjudication and others decided in favor of the assessee based on precedents and detailed analysis. The Tribunal's decisions were consistent with its previous rulings and higher court judgments.
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