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TMI Blog2015 (11) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses have been treated as capital expenditure, placing reliance on various judicial decisions, which hold that the expenses on software are in the nature of capital expenditure and depreciation is to be allowed on the same. As such, expenses on imported software are also in the nature of capital expenditure and deprecation needs to be allowed thereon. The AO, therefore, is directed to allow depreciation on the imported software purchased by the assessee. This alternative plea raised by the assessee is, hence, accepted. Claim u/s 10A of the Act on units on which deduction u/s 80HHE was allowed in the past - Held that:- Since both the sections, i.e., section 80HHE and section 10A entitle the benefit, the assessee would legitimately be entitled to the benefit of that provision of law, which enables a larger benefit being earned by him. This finds support from the decision of the Hon’ble Supreme Court in “Collector Central Excise vs. Indian Petro Chemicals”, (1996 (12) TMI 66 - SUPREME COURT OF INDIA). We, therefore, do not find any justification in the action of the ld. CIT(A) to hold that the assessee being an old unit and having once claimed deduction u/s 80HHE, was not enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) erred in allowing claim u/s 10A on units on which deduction u/s 80HHE was passed and method of computation of deduction u/s 10A of the I.T. Act. 5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the additions on account of Transfer Pricing adjustment in relation to transaction with Associated Enterprises M/s. Tata America International Corporation Inc. (TAIC). 2. Apropos Ground No.1, it states that the ld. CIT(A) has erred in allowing overseas taxes paid of ₹ 216,27,28,177/-. As per the record, the assessee has paid the following Federal taxes in the USA, Canada and other Overseas branches and State taxes in the USA and Canada, which were claimed as deduction in the return of income: Federal tax of ₹ 19,99,80,754/- State taxes of ₹ 16,28,38,423/- Total Overseas tax ₹ 216,27,28,177/-. The AO disallowed deduction for ₹ 2162728177/- holding that such taxes are covered by the provisions of section 40(a)(ii) of the Income tax Act, 1961. 3. The Ld. CIT(A) confirmed the disallowance of Federal tax of ₹ 199.99 crores. However, deduction of State Taxes of ₹ 16.28 crores was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO disallowed the expenditure claimed, applying the provisions of section 40(a)(i) of the Act on the ground that the tax was required to be deducted at source u/s 195 of the Act. 10. The ld. CIT(A) allowed the claim, observing that he agreed with the contention of the assessee that payment towards purchase of software is payment for copy righted articles and hence, it only represented the purchase price of an article and could not be considered as royalty, either under the Act, or under the DATA; that it is purely in the nature of business income and in the absence of a permanent establishment in India of the nonresident payees, the amount so remitted to the non-resident is not chargeable to tax. The ld. CIT(A) relied on the decision in the case of ACZ India (P) Ltd. , 2010-TIOL-187- Del-IT and that in the case of Parsad Production Limited , rendered by the Chennai Special Bench of the Tribunal in ITA No.663/Mad/2003. The ld. CIT(A) agreed with the view that withholding tax obligation on the payer applies on payments to nonresidents onlys if there is income chargeable to tax in India. It was held that accordingly, there was no obligation of the assessee to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Act, once deduction was claimed under this section. The ld. CIT(A) allowed the claim following the first appellate orders passed in the assessee s case in earlier years. 15. The challenge of the ld. DR to the ld. CIT(A) s action reiterates the findings recorded by the AO. It has been contended that at the time of commencement/inception of the undertaking, deduction u/s 10A of the Act was not available for export of computer software. Section 10A was substituted w.e.f. 1.4.2001, whereby, for the first time, the profit from the export of computer software was included in section 10A of the Act in respect of the newly established undertakings; that prior to that, even though section 10A was in the statute, the deduction was available only on profits and gains derived by an assessee from an industrial undertaking but was not available to the undertaking engaged in computer software; and that hence, deduction u/s 10A is not allowable to the undertakings which were already in existence and claiming deduction u/s 80HHE of the Act. It has been contended that the assessee-company, upto 1998-99, opted out of the deduction u/s 80-O and section 80HHE, which was more beneficial to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier year and so, no deduction under any provision of this section for the same, or any other assessment year can be allowed. This clearly indicates that if in any year deduction has been claimed, the assessee cannot claim deduction of such profits for the same year, or any other assessment year. Such profits does not mean profit of that year alone, but the profit of such nature earned in any assessment year. If the legislative intention was otherwise, there was no need to employ the phrase for the same or any other assessment year . This clearly indicates that the assessee cannot opt for deduction under any provision of the Act in the subsequent years. Then, section 10BA, inserted w.e.f. 1.2.2004, allows the deduction from the profits and gains derived from an undertaking from the export of eligible articles or things, i.e., hand made articles or things having artistic value, which requires the use of wood as the main rawmaterial. The undertaking exporting such articles is also covered u/ss 10A 10B of the Act and, therefore, a restriction has been put in section 10BA, that if deduction has been claimed by an undertaking u/s(s) 10A or section 10B, the undertaking will not be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les a larger benefit being earned by him. This finds support from the decision of the Hon ble Supreme Court in Collector Central Excise vs. Indian Petro Chemicals , (1997) 11 SSC 318 and also from the decision of the Hon ble Delhi High Court, in the case of C.S.Mathur vs. CBDT (supra). We, therefore, do not find any justification in the action of the ld. CIT(A) to hold that the assessee being an old unit and having once claimed deduction u/s 80HHE, was not entitled to claim deduction u/s 10A from the profits of its units. 19. The Hon ble Delhi High Court has upheld the aforesaid decision of the Tribunal in the case of CIT vs. Legato Systems India (P) Ltd. , 203 CTR 101 (Del). A similar view has been taken by the Tribunal in the case of ITO vs. Dempo Solutions Pvt. Ltd. , 200 Taxman 26 (Del), as also in the case of DCIT vs. Interra Software India P. Ltd. , 112 TTJ 982 and in the case of Vidya Tech Solutions Pvt. Ltd. 8 ITR (AT) 705 ( ITAT Delhi). Further, in keeping with Excell software Tech. Limited (supra), there is no attempt by the assessee to extend the period of the tax holiday by exercising option to claim deduction u/s 10A instead of u/s 80HHE of the Act. The cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that the various judicial decisions have held that deduction u/s 80HHC of the Act is governed by the provisions of the said section, which is a code in itself; that on a similar analogy, the deduction u/s 10A is to be taken as governed by the provisions of the said section and that the said section, i.e., section 10A, is also a code in itself; that the legislature, in its wisdom, has introduced the section in Chapter III, i.e., Incomes which do not form part of total income and not under Chapter VIA of the Act; that the CBDT, in circular No.694, dated 23.11.1994, clarified the intention of bringing in sections 10A section 10B in the Act, that the attempt to introduce these sections requires a simple interpretation and the reason as to why the legislature has not given a definition of total turnover , as given in section 80HHC, in the provisions of section 10A; that it is the discretion of the legislature to frame such a section, by which, a particular category will get a deduction on fulfilling certain conditions; that, however, at the same time, it gives discretion as to how much of that deduction should be given and as to how the deduction is to be computed; and that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e independently, whether the determination of arm s length price by the assessee should be accepted, or whether or not after applying the provisions of section 92CA, the transfer pricing adjustment should be made. This is a statutory safeguard for the assessee. It has been contended that similarly, it is only after proper application of mind to all the facts and holding a prima facie belief that the AO can make reference to the TPO, or that the ld. CIT(A) can grant approval to such a reference. This, again, is a statutory safeguard for the taxpayer. It is submitted that CBDT Instruction No. 3 of 2003, dated 20.05.2003 detracts the AO and the ld. CIT(A) from the above obligation in complete violation of the statutory provisions of the principles of natural justice. It has been submitted that in the present case, in compliance of the said CBDT Instruction No.3 of 2003, the AO did not himself examine the issue of transfer pricing and with the approval of the ld. CIT(A), made a reference to the TPO u/s 92CA(1) of the Act. The AO and the ld. CIT(A) did not apply their minds to the Transfer Pricing Report, or to any other material or information or document. The TPO made an adjustment wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned therein. The initial burden is on the assessee to select the most appropriate method. It is also the assessee s onus to show that the price was at arm s length. In case the TPO redetermines the ALP, the burden shifts on him. Reference can be made to the OECD Guidelines, US Regulations, etc., subject to the domestic statutory regulations. Industry average (Nasscom) cannot be taken as up. The TNMM requires comparability at a broad functional level. The Special Bench of the Tribunal upheld the use of current year data. With reference to Coca Cola Pvt. Ltd. (supra), it has been contended that as per this decision, there is no need for hearing to be given to the assessee before making reference to the TPO. Once an International transaction is there, in view of the plain and unambiguous language, ALP has to be determined. There is no requirement of showing shifting of profit, evasion of tax, etc., before invoking the provisions of Chapter X of the Act. The mere fact that the assessee has chosen one method does not take away the discretion of the TPO to select any other method. Restriction of payment or remission imposed by the RBI or FERA cannot control the provisions of Chapter X ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the TPO for determination of its ALP and it is neither arbitrary, nor unreasonable and is not ultravires the act. 31. It has rightly been contended on behalf of the assessee with regard to Sony India Pvt. Limited (supra) that the Hon ble Bombay High Court, in the case of Vodafone India Services P. Ltd. vs. Union of India , 361 ITR 531 (Bom.), has held that CBDT Instruction No.3 dated 20.05.2003 is contrary to the decision being taken therein and it is not binding on the AO. It was held that this Instruction departs from the provisions of law. It was held that the decision in Sony India Limited (supra), is not applicable after the amendment of 2007 (paras 35 to 37 of the judgment are relevant in this regard). 32. In Aztec Software Technology Services Ltd. (supra), the Bangalaore Special Bench) of the Tribunal held that it is not a legal requirement under the provisions contained in Chapter X of the Act, that the AO should prima facie demonstrate that there is tax avoidance, before invoking the relevant provisions. It was held that before the case is referred to the TPO u/s 92CA(1) of the Act for computation of arm s length price, the AO is not required to prima fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (supra) is also inapplicable, the Hon ble Supreme Court having directed the authorities to decide the matter afresh uninfluenced by the observations made by the Hon ble High Court. Further, in Sony Ericsson Mobile Communications Pvt. Limited , 374 ITR 116 (Delhi), the same is the position maintained. This apart, the question raised before us was nowhere argued or adjudicated in any of these judgments. The assessee has contended that the AO has abrogated his obligation under a wrong assumption that CBDT Circular, i.e., CBDT Instruction No.3 of 2003 dated 20.05.2003 mandated him to go ahead without making any reference to the TPO. The AO, thus, in the present case, did not examine the question, whether he should himself accept the transfer pricing report of the assessee or whether he should himself determine the arms s length price. Therefore also, these judgments are not applicable and they do not help the cause of the Department. 36. The Department has further sought to place reliance on Interra Information Technology (I) Pvt. Limited vs. DCIT , (2012) 27 Taxman.com.1(Del) (Trib.). In that case, considering assessment years 2006- 07 2007-08, it was held that it cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terate, in Vodafone India , (supra). CBDT Instruction No.3/2003 has been held to detract from the provisions of law. In Vodafone India (supra), it has been held that necessary hearing is required to be given to the assessee in accordance with the principles of natural justice before a reference is made to the AO after the amendment in the year 2007. 39. In the case of Johari Lal vs. CIT , 88 ITR 439 (SC), it has been held that the prima facie belief of the AO that it is necessary or expedient to make a reference to the TPO is the condition precedent to be satisfied upon application of mind to the material or information or document in his possession. Such prima facie belief is a condition precedent and is mandatory and it is the statutory safeguard for the assessee s statutory right. The absence of such a belief vitiates the entire proceedings. 40. Like-wise, the approval of the ld. CIT for the reference to the TPO on a proper application of mind to the relevant facts and circumstances is a condition precedent and a necessary safeguard for the statutory right of the assessee and this has to be performed not in a mechanical manner. This is what has been held by the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cify conditions, but conditions cannot have the effect of curtailing the scope of the deduction granted by the section; that the amplitude of the deduction permitted by the section cannot be cut down under the guise of imposing a condition; that in fact, this is not a condition, but an impermissible attempt to re-write the section. It was held that the CBDT may control the exercise of the powers of the Officers of the Department in matters administrative, but not quasijudicial. 44. In the following decisions, amongst others, it has been held that the Tribunal can ignore alone invalid Circulars of the CBDT: (i) Tata Iron Steel , 69 ITD 292 (Mumbai) (ii) Mahindra Mahindra , 8 ITD 427 (Mumbai) and (iii) Pardeep Agencies vs. ITO , 18 SOT 12 (Delhi) (SB) 45. The assessee has further sought to support the ld. CIT(A) s order on the contention that Transfer Pricing adjustment cannot be made in a case where the assessee enjoys benefit u/s 10A or section 80HHE of the Act, or where the tax rate in the country of the Associated Enterprise is higher than the Indian rate and where, accordingly, establishment of tax avoidance or manipulation of prices or establishment of shifti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in error in ignoring the position that it was if and only if it stood proved that there was manipulation of prices to avoid taxes in India, that the TP provisions of the Act could be invoked; that the TP regulations in India have been brought on the statute book with the intent of preserving the tax base in India and preventing tax evasion through manipulation of pricing of inter-company transactions; that further, application of tax jurisprudence provisions could have been justified, if the rate of tax was lower in Japan as compared to that in India, which was not so; and that it was, therefore, beyond comprehension as to why the assessee would harbour any motive of shifting income. 52. In the case of Philip Software , 119 TTJ 721 (Bang.), it was held that since the basic intention behind introducing the TP provisions in the Act is to prevent shifting of profits outside India, and the assessee was claiming benefit u/s 10A of the Act, the TP provisions ought not to be applied to the assessee. 53. Similar is the position in the following cases, amongst others: i) ITO vs. Zydus Altana Healthcare (P) Limited , 44 SOT 132 (Mumbai) ii) ACIT vs. Dufon Laboratories , 39 S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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