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TMI Blog2017 (5) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... e no outstanding payments ( payble) at the end of the year to be disallowed u/s. 40(a)(ia). If the issue is considered u/s. 201, then a finding is required whether the amounts paid are covered by TDS provisions or not? Since the disallowance made was under the provisions of Section 40(a)(ia), following the Special Bench decision in the case of Merilyn Shipping and Transport Ltd., Vs. ACIT (2012 (4) TMI 290 - ITAT VISAKHAPATNAM ), we are of the opinion that since there is no outstanding payable at the end of the year, provisions of Section 40(a)(ia) are not attracted. To that extent, order of the CIT(A) gets affirmed and Revenue grounds on this issue are to be dismissed. Estimation of income and allowance of deduction u/s. 10A - Held that:- As can be seen from the order of the AO, there is no dispute with reference to claim of 10A. In fact, AO has re-worked out the profit and allowed the deduction more than what assessee has claimed by way of his own working by taking a less export turnover and more profit. There is no dispute with reference to the fact that assessee is eligible for a deduction u/s. 10A. Therefore, order of the CIT(A) that deduction u/s 10A is not to be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es - 165/Hyd/13, 238/Hyd/13 - - - Dated:- 26-4-2017 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For The Assessee : Shri P. Murali Mohan Rao, AR For The Revenue : Shri P. Chandra Sekhar, DR ORDER PER B. RAMAKOTAIAH, A.M. : These two are cross-appeals by Assessee and Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)- III, Hyderabad dated 11-12-2012. 2. Briefly stated, assessee is involved in the business of software development and has a branch in USA. Assessee has filed NIL return of income for the AY. 2009-10 on 29-09-2009 and offered income under the MAT provisions at ₹ 1,27,55,690/- and tax due on that at ₹ 16,04,910/- was paid by way of self-assessment tax. In the scrutiny assessment, the Assessing Officer (AO) has noted that company has made export software to an extent of ₹ 78,70,97,271/- and admitted profit of ₹ 1,27,96,345/-. AO also records that assessee has claimed deduction u/s. 10A of the Income Tax Act [Act] of ₹ 1,20,67,509/- after adjusting depreciations, accordingly, it filed NIL return of income. AO also notes that assessee had on-site developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out without considering the Board Circular No. 621 dt. 09- 12-1991 and also relied on various case law to submit that deduction u/s. 10A was wrongly computed by the AO. With reference to the cash credits, it was submitted that necessary details and confirmations have been furnished to the AO in the course of assessment proceedings. Therefore, addition is not correct and not justified. Assessee made detailed explanations in the course of appellate proceedings. 3.1. Ld.CIT(A) has considered the detailed submissions and decided the issues as under: 4.2. I have seen carefully the facts and evidence and I have also gone through the relevant case law on the .issues. The first issue to be decided is whether tax had to be' withheld with respect to purchase of software from foreign sellers. 4.3. First of all it is important to quote section 9(1)(vi) wherein explanation 2 defines royalty: Explanation 2 to section 9(1)(vi) of the Act, defines the term royalty as consideration for - - transfer of all or any right (including the granting of a licence) in respect of a patent, technology or of copyright, trade mark; - use of technology ; - u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r fixed base. In such case, the provisions of Article 7 (Business Profits) or Article 14 (Independent personal services), as the case may be, shall apply. 4. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right, or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the lastmentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each contracting State, due regard being had to the other provisions of the Convention. The main difference is that OECD Model would recommend that royalty is not taxed in the country which uses the technology for which royalty is paid, unless the lender has permanent establishment in the borrower's country. But this has not been accepted by almost all the borrowing countries. The recommendation of UN Model enables tax on royalty in both countries, subject to agreement that the rate of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d default by not deducting tax in respect of sums paid to '5', 'E' and BHEL' in relevant financial years - Whether from agreements it was evident that property in goods passed to see only in India that more than 80 per cent of contract value pertained to activities that had been undertaken in Japan clearly pointed out that element of contract was most densely grouped in Japan and not india and, thus, that was a pure sale contract and not a works contract - Held, yes - Whether since contract between assessee and '5' was a contract of sale, no portion of income of 'S' was chargeable to tax in India under Income-tax Act Held, yes _ Whether when no portion of gross remittances to 'S' was liable to charge under Act . India, there was no liability on part of assessee to deduct tax at source under section 195 in respect of remittances to 'S' - Held, yes _ Whether provisions of section 194C would be applicable to payment made to 'BHEL'-Held,yes Similarly, the decision of the Hon'ble ITAT, Delhi bench in the case of Royal Airways Ltd vs Additional director of Income Tax(lnternational Taxation), 98 ITO 259 (Delhi) also ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation of exemption under section10A of the income tax act. First of all, I find that both the assessing officer as well as the appellant had been unable to go into details of the issues. Firstly the assessing officer has erroneously concluded that the entire turnover amounting to ₹ 78,07,97,271/- pertains to revenue derived from export of software from India. In the same paragraph the assessing officer has held that the appellant has a permanent establishment in USA and on-site software development work has also been undertaken in that country. Further, the only reason why the ass4ssing officer has held the entire turnover to be from software exported from India is that there is an invoice is raised amounting to $87,86,181/- by the appellant company. I do not find that there is any reason to support the conclusion that the permanent establishment in USA is a sham and that the entire work has been done in India. Neither the facts nor any evidence support such a conclusion. Therefore, I disagree with the assessing officer on this conclusion and hold it to be incorrect. Further, the assessing officer has disallowed all on-site expenses without verifying any details. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, resorting to estimation by the CIT(A) when books are not rejected by the AO. It is also a ground that the Ld.CIT(A) ignored addition made on account of unexplained cash credits by stating that the same is covered in the estimation of profit. Thus, both the parties are in appeal before us. 5. It was the contention of Ld. Counsel that Indian office has suffered losses whereas there are profits in the overseas branch and the entire profits is exempt from tax. Since assessee has offered income u/s. 115JB, the same should have been accepted by the Ld.CIT(A). It was further contended that even if estimation was resorted to, the same can only be done on the Indian export turnover, but not the entire turnover of the company as that includes the overseas turnover which cannot be brought to tax in India. Accordingly, he requests for restricting the estimation to the exports made from India only. Further, it was the contention that assessee has suffered losses and estimation of income at 10% is on higher side. It is also submitted that Ld.CIT(A) wrongly denied the benefit u/s. 10A when assessee has not made any such ground nor it is warranted on the facts of the case. He referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings, Ld. Counsel raised additional grounds of appeal on the issue that the order of the AO (ITO) is void as the monetary limit for assigning cases to ITO is only upto ₹ 30 Lakhs as per the Board instructions No.1/2011 dt. 31-01-2011 which was applicable from 01-04-2011. In the course of present proceedings, when it was pointed out that the Board instruction was issued w.e.f. 01-04-2011 and the impugned assessment year being AY 2009-10, for which the said instruction was not applicable, having been selected for scrutiny much earlier than the issuance of circular, Ld. Counsel withdrew the grounds pertaining to this issue. Accordingly, grounds on issue of jurisdiction raised by assessee are treated as withdrawn. 8. We have considered the rival submissions and perused the evidence placed on record. As seen from the P L A/c placed on record, assessee has shown the total turnover at ₹ 78,07,97,271/- and total software purchases debited at ₹ 64,09,69,596/-. However, the bifurcation of the turnovers furnished indicate that the exports from India are to the extent of ₹ 20,80,35,745/- whereas the overseas turnover was to the extent of ₹ 57,27,61,526/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reference to estimation of income and allowance of deduction u/s. 10A on the same. As can be seen from the order of the AO, there is no dispute with reference to claim of 10A. In fact, AO has re-worked out the profit and allowed the deduction more than what assessee has claimed by way of his own working by taking a less export turnover and more profit. There is no dispute with reference to the fact that assessee is eligible for a deduction u/s. 10A. Therefore, order of the CIT(A) that deduction u/s 10A is not to be allowed has no basis. As seen from the record also, there is no such admission by assessee that he will not claim 10A deduction. Therefore, assessee s grounds to that extent are allowed. To that extent, order of the CIT(A) gets modified. 10. Coming to the issue of estimation of income u/s. 10A, assessee himself has accepted the estimation of income by rejecting the books of account. Assessee admitted for estimation up to 6%, whereas Ld.CIT(A) without any basis, has estimated the income at 10%. Whether it is 3% or 6% or 10%, the same does not matter as the entire income get exempted u/s. 10A. In view of that, we do not intend to estimate the profit at any particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th reference to disallowance u/s. 40(a)(ia) for not deducting tax on the said amounts. The Revenue Ground No. 2 raised on the issue is accordingly misleading and does not warrant any interference/adjudication. 13. Coming to the estimation of income after rejecting the books of account, this issue was already discussed in assessee s appeal. We do not find any reason to interfere, since the AO has not understood the facts of the case properly while making the assessment. Ld.CIT(A) therefore had to resort to estimation of income which assessee has not objected. Accordingly, Ground Nos. 3 4 on the issue are rejected. 14. Ground Nos. 5 6 pertains to the issue of unexplained cash credits. It is the contention of assessee that it has furnished necessary evidence/confirmations before the AO. Ld.CIT(A) order that these are covered by the estimation of income cannot be accepted, in view of the judgment of the Hon'ble Supreme Court in the case of Kale Khan Mohammad Hanif Vs. CIT [50 ITR 1] (SC) (supra). 14.1. In all the cases relied on by the Ld.DR in the course of arguments, the principle is established that AO has power to bring to tax unexplained cash credits as income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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