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2020 (11) TMI 741 - AT - Income TaxRelief u/s 90 - Disallowance u/s 40(a)(ii) - payment of State Taxes - HELD THAT - In Reliance Infrastructure Ltd. 2016 (12) TMI 1293 - BOMBAY HIGH COURT has held that the assessee was entitled to deduction for foreign taxes paid on income accrued or arisen in India in computing its income, to the extent that such tax was not entitled to the benefit of section 91 of the Act. Facts being identical, we follow the said judgement and also the above order of the Co-ordinate Bench and direct the AO to verify whether the State taxes paid by the assessee overseas are eligible for any relief u/s 90 of the Act and if it is not found to be so, assessee s claim of deduction should be allowed. Disallowance u/s 40(a)(ia) - business expenditure being deduction towards interest, which is compensatory in nature, paid on account of delayed payment / shortfall of overseas taxes - HELD THAT - A perusal of the records indicate that the assessee has not filed the details with supporting documents on the penal interest. It is not possible to decipher whether the penal interest is compensatory in nature or not. In view of the above, we set aside the order of the Ld. CIT(A) on the above ground and restore it to the file of the AO for deciding it afresh. TDS u/s 195 - payment to non-resident vendors for purchasing standard software products - HELD THAT - We hold that the Ld. CIT(A), following the order of the Tribunal in assessee s own case for AY 2005-06, has rightly held that the expenditure on software acquired for internal use is a capital expenditure and the assessee is entitled to depreciation on this amount. In the context of payments made on software for resale, having examined the relevant documents and rival submissions, we arrive at a finding that the facts in the impugned year on the above matter are identical to the AY 2009-10 in assessee s own case 2019 (11) TMI 408 - ITAT MUMBAI . Facts being identical, we follow the above order of the Co-ordinate Bench and restore the matter to the file of the AO for fresh adjudication in terms of the observations made therein. The AO would decide the issue after providing reasonable opportunity of being heard to the assessee. Disallowing foreign tax relief as per the provisions of section 90(1)(a)(ii) of the Act read with provisions of the applicable Double Tax Avoidance Agreements - income taxes paid in overseas jurisdiction in relation to income eligible for deduction under section 10A/10AA - HELD THAT - Foreign tax credit would be available to the assessee in view of treaties India is having with USA, Denmark, Hungary, Norway, Oman, Saudi Arabia and Taiwan. The assessee is directed to file before the AO the relevant provisions of India- South Africa Treaty. TP Adjustment - PLI determination - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI affirmed the order of the Ld.CIT(A) on the matter that GP/sales is the appropriate PLI, . 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. Interest free loans outstanding/provided during the year by the appellant to its AEs - whether not at ALP? - whether the loans given by the appellant are in substance quasi-equity in nature and as a part of shareholder s activity on which returns are not expected in the form of interest? - HELD THAT - In assessee s own case 2019 (11) TMI 408 - ITAT MUMBAI 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. Guarantees by the appellant to third parties on behalf of its AEs - international transactions or not? - upward adjustment - HELD THAT - As relying on own case 2019 (11) TMI 408 - ITAT MUMBAI we direct the AO to charge guarantee commission @0.5% per annum both on performance / lease guarantee as well as financial guarantee. In this context , we direct the AO to examine the contentions of the assessee that (i)part of the activity with respective performance guarantee, was performed by the assessee itself, while the remaining services are rendered by the AE and thus, if the performance guarantee is treated a chargeable services, the charges should be levied only on the component of services performed by the AE (ii) part of the premises i.e. 40% during the year under consideration was occupied by the assessee and thus, if lease guarantee is treated as chargeable services, the charge should be levied only for the balance i.e. 60% during the year under consideration. Adopt guarantee fee rate @0.5% per annum for the performance guarantee. Addition u/s 40(a)(ia) on education cess - HELD THAT - It is held in Sesa Goa Limited v. JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT that education cess and higher and secondary education cess are liable for deduction in computing income chargeable under the head profits and gains of business or profession.
Issues Involved:
1. Deduction of state taxes paid overseas. 2. Disallowance under section 40(a)(ia) for interest on delayed payment of overseas taxes. 3. Tax deduction under section 195 for payments to non-resident vendors for software purchases. 4. Foreign tax relief for income eligible for deduction under section 10A/10AA. 5. Transfer pricing adjustments and arm’s length price (ALP) determination. 6. Interest-free loans to associated enterprises (AEs). 7. Provision of guarantees to AEs. 8. Provision of undertaking by the appellant on behalf of its AE. 9. Deduction of education cess. Detailed Analysis: 1. Deduction of State Taxes Paid Overseas: The assessee claimed a deduction for state taxes paid overseas, which was disallowed by CIT(A) under section 40(a)(ii) of the Act. The Tribunal referenced the Bombay High Court decision in Reliance Infrastructure Ltd. v. CIT, which clarified that taxes paid abroad are not covered under section 40(a)(ii) as they are not taxes chargeable under the Indian Income Tax Act. The Tribunal directed the AO to verify if the state taxes paid by the assessee overseas are eligible for relief under section 90 or 91 and allow the deduction if they are not. 2. Disallowance Under Section 40(a)(ia) for Interest on Delayed Payment of Overseas Taxes: The CIT(A) disallowed the business expenditure for interest on delayed payment of overseas taxes. The Tribunal noted that the nature of the penal interest (whether compensatory) was not clear and remanded the issue to the AO for fresh adjudication, instructing the assessee to provide supporting documents. 3. Tax Deduction Under Section 195 for Payments to Non-Resident Vendors for Software Purchases: The AO treated payments for software as royalty and disallowed them under section 40(a)(i) due to non-deduction of TDS. The CIT(A) upheld this view for software used internally but allowed depreciation. For software purchased for resale, the Tribunal remanded the issue to the AO to verify if the payments were for copyrighted articles or royalty, following the Tribunal’s decision in the assessee’s own case for AY 2009-10. 4. Foreign Tax Relief for Income Eligible for Deduction Under Section 10A/10AA: The CIT(A) restricted foreign tax credit relief only to taxes paid in the USA. The Tribunal, referencing its decision in the assessee’s case for AY 2009-10, held that foreign tax credit is available under DTAAs with several countries, including the USA, Denmark, Hungary, Norway, Oman, Saudi Arabia, and Taiwan, and directed the AO to grant credit accordingly. 5. Transfer Pricing Adjustments and Arm’s Length Price (ALP) Determination: The TPO made adjustments to the ALP of international transactions. The CIT(A) modified the ALP margins and directed the AO to compute adjustments accordingly. The Tribunal upheld the CIT(A)’s order, referencing the decision in the assessee’s case for AY 2009-10, and confirmed that GP/sales is the appropriate PLI. 6. Interest-Free Loans to Associated Enterprises (AEs): The CIT(A) held that interest-free loans to AEs are not at arm’s length. The Tribunal remanded the issue to the AO for fresh adjudication, following the decision in the assessee’s case for AY 2009-10, to examine if the loans were quasi-equity and part of the shareholder’s activity. 7. Provision of Guarantees to AEs: The CIT(A) held that guarantees provided to AEs are international transactions and directed a guarantee fee rate of 1.42%. The Tribunal, following its decision in the assessee’s case for AY 2009-10, directed the AO to charge a guarantee commission of 0.5% per annum on performance/lease and financial guarantees. 8. Provision of Undertaking by the Appellant on Behalf of its AE: The CIT(A) treated the provision of undertaking as similar to a corporate guarantee. The Tribunal directed the AO to adopt a guarantee fee rate of 0.5% per annum for the performance guarantee, following its earlier decision. 9. Deduction of Education Cess: The Tribunal admitted the additional ground regarding the deduction of education cess and allowed it, following the Bombay High Court decision in Sesa Goa Limited v. JCIT, which held that education cess is deductible in computing income chargeable under the head "profits and gains of business or profession." Conclusion: The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was dismissed. The Tribunal provided specific directions for the AO to follow, ensuring compliance with judicial precedents and proper verification of facts.
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