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2020 (11) TMI 36 - AT - Income Tax


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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