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TMI Blog2016 (1) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Therefore, according to us assesse’s claim deserves to be considered favourably in view of the beneficial circular issued by CBDT. However at the time of making assessment AO was not having the privilege of this circular , we set aside this matter to the file of with direction to grant benefit of deduction of set off of losses of STPI unit of ₹ 54, 90, 557/- against the profit of non - STPI unit in accordance with this circular. Non deduction of tds on expenses of the FTS - disallowance u/s 40a (i) - withholding of tax - Held that:- The sum is not chargeable to tax in India according to the domestic tax laws and consequently there is no withholding tax liability in case of such payments, we do not wish to address the alternative arguments of the AR of the assessee regarding non-taxability of such sum in accordance with the provision of Article 12 (6) of the indo Japan DTAA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subject AY on September 29, 2008 declaring nil taxable income after claiming deduction of Rs.l9, 47, 610/- under section 10A of the Act and setting off of brought forward losses and unabsorbed depreciation. Thereafter, the Appellant filed a revised return of income on September 26, 2009 followed by paper filing of acknowledgement on October 6, 2009. As per the revised return of income, the Appellant declared business income of ₹ 19, 69, 567/-. No deduction was claimed under section 10A of the Act since the STPI unit had reported losses. However, the taxable income was reduced to Nil after claiming set off of brought forward losses and unabsorbed depreciation. Notice under section 143(2) of the Act was issued. In response to the said notice, the Appellant furnished documentation/ information/ clarifications as requested by the AO during the course of assessment proceedings. The AO completed assessment proceedings for the subject AY and passed an assessment order dated December 9, 2011 under section 143(3) of the Act determining the assessed income of the Appellant at ₹ 179, 945, 360 after making following adjustments to the returned income of the Appellant:- a) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regarding his submission that the circulars issued by CBDT are binding on Revenue authorities he relied up on decision of Honourable supreme court in case of Navnitlal C Jhaveri V ACIT 56 ITR 198 (SC) , Ellerman Lines Ltd V CIT 82 ITR 913 (SC ), K P verghese V ITO 131 ITR 597 and UCO bank V CIT 237 ITR 889. 7. Ld. DR on the other hand submitted that this circular is issue in 2013 where as the appeal pertains to AY 2008-09 and therefore cannot be made applicable in case of the assessee. He further submitted that now the issue is squarely covered in favour of the revenue in view of the decision of honourable jurisdiction High court in the case of CIT V Kie Ind Limited 373 ITR 574. 8. In rejoinder, Ld. AR submitted that CBDT has given a general direction on the interpretation of law by CBDT and it does not apply to a specific year but to the mechanism of computation of total income and set off losses. Therefore, it should apply with equal force to the period prior to issue of the circular. He further submitted that as this circular is beneficial to the assessee it should be applied in favour of the assessee and benefit should be granted to the assesse. 9. We have carefully co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute in 1981 and 1988 respectively, and continued with some modifications and amendments till 31.03.2001. Section 10A as inserted by Finance Act, 1981 read as under: 10A. Special provision in respect of newly established industrial undertakings in the free trade zones.-(1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee. 2.1 Similarly section 10B as inserted by Finance Act, 1988 read as under: 10B. Special provision in respect of newly established hundred per cent export oriented undertakings.-Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee. 3. Vide Finance Act, 2000 sections 10A and 10B of the Act were substituted. Section 10A as substituted by Finance Act, 2000 reads as under: 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation arising in the assessment year 2001- 02 and subsequent years. 5. From the above it is evident that irrespective of their continued placement in Chapter III, sections 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article or thing or computer software. The deduction is to be allowed from the total income of the assessee. The term 'total income' has been defined in section 2 (45) of the IT Act and it means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. 5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and computed in accordance with the provisions of Chapter IV of the Act- Salaries Income from house property Profits and gains of business and profession Capital gains Income from other sources 5.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the board would be binding on all officers and all persons employed in the execution of the act. It is also a settled law that even if such circulars are found not to be in accordance with the law and they depart and deviate from the construction of law. Hon. Supreme court in case of Uco bank V CIT In 237 ITR 889 has held as under :- In the case of Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, the legal effect of such circular is, inter alia, considered by a Bench of five judges of this court. Section 2(6A)(e) and section 12(1B) were introduced in the Income-tax Act by the Finance Act 15 of 1955, which came into force on April 1, 1955. The Government, however, realised that the operation of section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and would impose an unreasonably high liability on the shareholders to whom the loans might have been advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. This court, however, clarified that the Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act. Also a circular cannot impose on the taxpayer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the laws is the exclusive domain of the courts. However, the Board has the statutory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C. B. Gautam v. Union of India [1993] 199 ITR 530 at page 546, a Bench of five judges of this court considered as enforceable, Instruction No. 1A-88 issued by the Central Board of Direct Taxes relating to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility . The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this court in Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, or the subsequent decision in K. P. Varghese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or sticky loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferently by the Officers of the Department as well as by different High Courts. Therefore, it cannot be said that circular is against the provision of the law merely because different high courts have interpreted the law differently. It is apparent that this circular is issued with an intention to clarify anomaly in law and its interpretation. Undoubtedly circular is beneficial to the assessee as it sets certain controversy involved therein to rest. Therefore we are of the opinion that this issue now should be decided in view of the above circular where in it is provided that If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Therefore, according to us assesse s claim deserves to be considered favourably in view of the beneficial circular issued by CBDT. However at the time of making assessment AO was not having the privilege of this circular , we set aside this matter to the file of with direction to grant benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside Japan. The Japan BO also serves as the point of contact between the customers and NEC HCL India. Japan BO is full-fledged, independent, empowered and competent to undertake any and all activities and objects for which the assessee company was established. In furtherance of the JV Agreement entered, as mentioned above, a Framework Agreement dated June 1, 2006 was signed between the assessee, HCL Technologies (JV Partner) and HCL Japan Ltd., a company incorporated in Japan for the purpose of subcontracting software development work to HCL Japan Ltd obtained by Japan BO from NEC Corporation, Japan, which could not have been serviced by the assessee. In accordance with the above agreements, Japan BO undertook marketing and sales efforts and obtained work / projects from NEC Corporation Japan. The projects which are not serviced by NEC HCL India, assessee were sub contracted to HCL Japan by the Japan BO as agreed. HCL Japan raised invoice on Japan BO for the sub contracted work. Japan BO makes payment to HCL Japan as outsourcing cost. Such outsourcing cost represents the expenses paid by the Japan BO and are accordingly debited in the profit and loss account of the Japan BO whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the argument that Japan BO has an independent existence in Japan and carries out business activities in Japan. 17. Aggrieved by the order of the Learned AO, the Appellant preferred appeal before CIT (A) who deleted the disallowance u/s 40a(i) holding that case of the assessee is covered by exclusion of section 9(1) (vii) (b) of the Income tax act as assessee carried on the business in Japan through its branch office which is a permanent establishment in Japan of the assessee , the Japan Branch office has its independent existence and carries on business in that country complying with the Japanese laws locally, payments are also made outside India i.e. by Japan BO to HCL Japan Limited and are also debited in the books of Japan branch office, appropriates taxes have been paid in Japan as the income of Japan BO is Japan sourced income, only for purposes of the balance sheet of the assessee company profit and loss etc. are incorporated in the balance sheet of the assessee, credits for taxes paid in Japan by Branch office are also claimed as credit of foreign taxes in case of return of income of the assessee company in India and Fees for technical services are utilised by the Japa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the agreement between the Japan BO and HCl Japan limited relating to this payments. Therefore he submitted that according to section 9(1) (vii) (b) of the income tax act the payment does not results in to income of the recipient as it does not deemed to accrue or arise in India. He submitted that the reliance on page no 18 and 19 of the assessment order by DR is unfounded; as these allegations are not based on the facts, which is proved by the documents submitted before CIT (A) at para no 3.3 of his order. He further submitted that this issue is now squarely covered in favour of the assessee by the decision of honourable Delhi high court in case of Lufthansa cargo 375 ITR 85 (Del).He alternatively submitted that Income is also not taxable in India provision of article 12 (6) of the Indo Japan DTAA which has bene considered by CIT (A) correctly. He further submitted that in subsequent assessment year 2010-11 on identical facts the ld. DRP has considered all these arguments and has directed AO to delete the similar additions. Therefore, he supported the order of CIT (A) and submitted that the disallowance is deleted correctly. 21. In rejoinder LD DR submitted that services pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee has substantiated by providing their job profile. Further Assessee has submitted the details of project sout sourced to HCL Japan Limited by Japan BO and corresponding month wise revenue earned and cost incurred by the Japan BO. It has also submitted the copy of the bank statement of the Japan BO where the payments have been made by itto HCL Japan Limited. Further assessee has also substantiated the argument of rendering of services in Japan where the sample projects details were also submitted along with the sample copies of the bills of the work carried out outside India. Assessee has also submitted the financial statements of the Japan BO where in the project cost is debited in Profit and loss statement of Japan BO. Further, the copy of computation of total Income for offering the tax in Japan by the Branch office was also submitted along with copy of the return of income filed by Japan BO in Japan. All these overwhelming documents submitted by the assessee remained uncontroverted by the AO in remand proceedings before CIT (A) as well as before us. Further AO has not ledus to any evidence that services have not been rendered by the Japan BO of the assessee through its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down the principle what is basically known as the 'source rule', that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The clause further mandates and requires that the services should be utilised in India. 25. In the present case, the Income-tax Appellate Tribunal held that the overwhelming or predominant nature of the assessee's activity was to wet- lease the aircraft to LCAG, a foreign company. The operations were abroad and the expenses towards maintenance and repairs payments were for earning abroad. In these circumstances, the Income-tax Appellate Tribunal's factual findings cannot be faulted. The question of law is answered in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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