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TMI Blog2019 (8) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... r software licence agreement results in only a transfer of right to use copy of the software, constituting royalty under the provisions of section 9(1)(vi). As the instant case is that of a resident paying royalty to another resident, there is no need to examine any DTAA from the angle of taxability or otherwise of royalty in the hands of the recipient as the same stands established under the Act. Section 194J(1) deals with deduction of tax at source, inter alia, from royalty as per clause (c) and provides that the payer of royalty, not being an individual or a Hindu undivided family, shall, deduct tax at source at the rate of 10%. Clause (ba) to the Explanation to section 194J further provides that royalty for the purpose of this section shall have the same meaning as given in section 9(1)(vi). Thus, it is clear that where income in the nature of royalty is payable to a resident-payee, then the payer is liable to deduct tax at source u/s 194J. Failure to deduct and pay such tax in the Government exchequer entails, inter alia, disallowance u/s 40(a)(ia), as has been made by the authorities below in the instant case. - Decided against assessee. Disallowance of foreign tax credit - t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds in the form of share capital and reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) to the tune of 5,49,818/-. Disallowance made u/s 8D(2)(iii) - as seen that the same has been worked out by the AO at 0.50% of average amount of investments - HELD THAT:- We set aside the impugned order to this extent and remit the matter to the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments in calculating the average value of investments, which have yielded exempt income during the year. The assessee will be allowed hearing opportunity in the fresh proceedings. AR further contended that a suo motu disallowance was offered by the assessee u/s 14A. The AO is directed to verify this claim and then accordingly compute the amount disallowable u/s.14A r.w. Rule 8D(2)(iii). Addition being, the value of lapsed ESPOs in the income computed under the normal provisions of the Act as well as the profits computed u/s 115JB - HELD THAT:- As decided in own case the amount of ESOPs was right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [ 2013 (12) TMI 9 - KARNATAKA HIGH COURT] has held that interest u/s.234B and 234C cannot be levied for default in payment of advance tax in case wherein section 115JB is invoked pursuant to such amendment. We, therefore, hold that interest u/ss.234B and 234C should not be charged to the extent of retrospective amendment to section 115JB affecting the computation of book profits accordingly. X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the assessee was not accepted by the ITO (TDS), who held that the assessee was a defaulter for not deducting tax at source from the remittances made for purchase of the software as the provisions of section 9(1)(vi) of the Act were attracted and the payment made by the assessee was in the nature of royalty on which tax ought to have been deducted. The AO placed reliance on the definition of the term `royalty' as mentioned in the DTAA and accordingly held that the assessee was a defaulter within the meaning of section 201(1) of the Act. The first appeal failed but the Tribunal granted relief by holding that payment was not in the nature of royalty for the reason that it did not partake of the character of royalty in terms of the DTAA. When the matter came up before the Hon'ble High Court, it held that a resident payer who had not filed an application u/s. 195(2) of the Act cannot later on contend that no part of the payment resulted in any taxable income in the hands of non-resident recipient. In Para 69 of the judgment, the Hon'ble High Court also held that : "The assessing authority and the first appellate authority while are correct to the extent of holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.B. (2012) 343 ITR 0470 (Del) has held that in order to qualify as royalty payment within the meaning of section 9(1)(vi) and particularly cl. (v) of Expln. 2 thereto, it is necessary to establish that the cellular operator, by making such payment, obtained all or any of the copyright rights of such literary work. It held that a distinction was required to be made between the acquisition of a "copyright right" and a "copyrighted article". Software supplied by the assessee, being, an integral part of the GSM mobile telephone system, incapable of independent use and there being nothing to establish that the cellular operator had obtained any copyright of such software, it held that no part of the payment received by the assessee under the supply agreement could be classified as royalty within the meaning of section 9(1)(vi) of the Act or under the relevant clause of the DTAA. 8. In DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Delhi), the assessee, an international software marketing and development company opened a branch office in India and imported package in the form of CDs customized according to requirements of customers. The AO treated entire amount receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Under these circumstances, a question arises as to which Hon'ble High Court exercises jurisdiction over the assessee for the year under consideration. 11. There is hardly any need to accentuate that the jurisdiction is decided by the office of the Assessing Officer as has been held by Hon'ble Delhi High Court in Suresh Desai & Associates Vs. CIT (1998) 230 ITR 912 (Delhi). In that case, the assessment was made at Bombay, the appeal against which was also decided by the CIT(A), Bombay. Both the parties preferred appeals to Tribunal, Delhi, which were disposed of by the Delhi Tribunal. Rejecting the contention of the assessee for hearing by it, the Hon'ble Delhi High Court held that jurisdiction under s. 256 vested in High Court of Bombay and not the High Court of Delhi. It further observed that transfer of assessment cases of the assessee under section 127(1) for some years other than the year in question has no relevance or bearing on territorial jurisdictional competence. In deciding so, it was also observed that the: `decisions of the High Courts are binding on the subordinate Courts and authorities or Tribunal under its superintendence throughout the territory in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e governed by the law laid down by its jurisdictional High Court as per Article 226 of the Constitution of India notwithstanding a contrary favourable view of the Hon'ble Delhi High Court, which even this Bench of the Pune Tribunal has followed in some cases not falling within the jurisdiction of the Hon'ble Karnataka High Court. Ex consequenti, the assessee will have to be subjected to the view canvassed by the Hon'ble Karnataka jurisdictional High Court, as per which consideration for the purchase of off-the-shelf software under software licence agreement results in only a transfer of right to use copy of the software, constituting royalty under the provisions of section 9(1)(vi). As the instant case is that of a resident paying royalty to another resident, there is no need to examine any DTAA from the angle of taxability or otherwise of royalty in the hands of the recipient as the same stands established under the Act. 15. At this juncture, it is pertinent to note that the Finance Act, 2012 has carried out an amendment to section 9(1)(vi) dealing with `income by way of royalty' through insertion of Expl. 4 w.r.e.f. 1.6.1976, which reads as under : - Explanation 4.- For the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce u/s 40(a)(ia) of the Act, as has been made by the authorities below in the instant case. 18. The ld. AR added another dimension to the issue by contending that the first judgment in the case of CIT Vs. Samsung Electronics Co. Ltd. & Ors (supra) was delivered on 24-09-2009 and the transaction of payment of software charges by the assessee got concluded during the year ending on 31-03-2009. It was, therefore, urged that the assessee could not have foreseen its liability of deduction of tax at source on the payment made for renewal of software license and hence, the provisions of section 40(a)(ia) should not be applied. 19. This argument of the ld. AR, though sounds attractive at first flush, but, loses its shine on an in-depth analysis. There are two reasons for our not concurring with the same. First, the earlier judgment in Samsung Electronics Co. Ltd. (supra) relates to the assessment years 1999-200 and 2001-02 and obviously the assessment year under consideration, namely, 2009-10 is posterior to the years considered by the Hon'ble jurisdictional High Court. In the absence of any change in the legal position favouring the assessee during the interregnum, the same would have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the assessee claimed tax credit of ₹ 1,91,52,577/- in the computation of income towards taxes paid by its overseas branches situated in five countries, namely, Netherland, France, US, UK and Belgium. On being called upon to explain the reasons for claiming such tax credit, the assessee submitted that its foreign branches constituted Permanent Establishments (PEs) and suffered tax on such incomes in accordance with the domestic tax laws of the respective countries. The income earned by the above foreign branches, in addition to suffering tax in respective foreign jurisdictions, again came to be included in the total income for the purposes of taxation in India. Since profits of the foreign branches got doubly taxed, the assessee made out a case for claim of credit for such taxes paid abroad against the amount of tax payable in India. The AO required the assessee to reconcile the amount of income included in its total income under the Act and the amount of income which was offered in foreign tax jurisdictions for which it was claiming tax credit against the tax liability under the Act. The assessee submitted a reconciliation determining revenue of ₹ 10,13,61,402/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter appreciate the position in the light of the relevant provisions contained in Chapter IX of the Act with the caption `Double taxation relief'. Section 90, being, the first section of this Chapter, to the extent it is relevant for our purpose, runs as under: - ₹ 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or…..' 25. A circumspection of the above provision deciphers that in so far as sub-clause (i) is concerned, the same talks of granting relief in respect of 'income' on which tax is paid both in India and the other country; and sub-clause (ii) talks of granting relief in respect of 'income-tax' chargeable under the Act and the concerned foreign country. Mechanism for gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is given) which is attributable to the income which may be taxed in the United States.' 28. The above para fairly indicates that where a resident of India derives income which may be taxed in the United States also, then India shall allow a deduction from the tax on the income of that resident of an amount equal to the income tax paid in the United States. However, a cap has been provided to the extent of allowing such credit in the immediately next line by stating that: `Such deduction shall not, however, exceed that part of the income tax … which is attributable to the income which may be taxed in the United States.' 29. It has been noticed above that the AO determined the tax liability of the assessee under section 115JB of the Act. This section contains a special provision for payment of tax by certain companies with reference to 'Book profits', which expression has been defined in its Explanation 1 to mean the profit as shown in the statement of profit and loss of the relevant previous year as increased by certain items given in clauses (a) to (k) and then reduced by certain items given in clause (i) to (viii). Though a part of the income of the assessee qualifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this issue, is ₹ 1,14,84,247/-, meaning thereby that the tax paid in foreign countries to the tune of ₹ 76,68,330/- (₹ 1,91,52,577/- minus ₹ 1,14,84,247/-) cannot qualify for credit against the tax liability arising under the Act. 32. The ld. AR relied on the judgment in Wipro Ltd. vs. DCIT (2016) 382 ITR 179 (Karn) to contend that credit for the full amount of foreign tax at ₹ 1,91,52,577/- should be allowed. In our considered this judgment does not advance the case of the assessee. In that case, the assessee claimed that it was entitled to relief of income taxes paid in foreign jurisdictions. The AO did not accept the claim, which was allowed by the CIT(A). However, the Tribunal restored the matter to file of the CIT(A) by holding that when the assessee was not liable to pay tax in view of exemption u/s. 10-A, it was not entitled to tax relief in respect of taxes paid in contracting country as per section 90. The Hon'ble High Court observed that income u/s. 10A was chargeable to tax u/s. 4 and was includible in total income u/s. 5, but no tax was charged because of exemption given u/s. 10A only for a period of 10 years. It held that merely beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill get automatically excluded from the total tax liability computed under the Act. Second is that the deduction from the income tax liability under the Act has to be restricted to the amount of income tax paid in the USA on such doubly taxed income. The above two propositions, when applied to the factual panorama of the extant case, leads us to the inevitable conclusion that once the doubly taxed income is to be excluded, it would mean that the foreign tax credit will have to be allowed on it at the rate at which such income attracted taxation under the Act, which is 11.33% under section 115JB of the Act. If however, the amount of tax paid in the other country is less than 11.33%, then the deduction should be limited to the amount of tax paid on such doubly taxed income in the other country. The AO has noted in the assessment order that the assessee paid foreign tax at the rates ranging from 10% to 40%. Thus if the doubly taxed income was subjected to tax in the other country at the rate of 10%, then tax credit should be restricted to 10% and in case it was subjected to foreign tax in the other country at a rate higher than 11.33% (say, 15% or 20% or 40%), then the amount of fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), upholding the view of the lower authorities that when interest free funds in the form of share capital and reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) to the tune of ₹ 5,49,818/-. 38. Now we come to the disallowance made under Rule 8D(2)(iii) amounting to ₹ 75,43,252/-. It is seen that the same has been worked out by the AO at 0.50% of average amount of investments. This computation is strictly in accordance with the mandate of Rule 8D(2)(iii). Since Rule 8D is applicable from the assessment year under consideration, the disallowance has to be made and sustained in accordance with the prescription of such rule only. 39. Here we would like to clarify that the Hon'ble Delhi High Court in ACB India Ltd. vs. CIT (2015) 374 ITR 108 (Del) has held that the average value of investments, for the purposes of Rule 8D(2)(iii), should be confined to those securities in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and internet usage charges be reduced from 'Export turnover' and also from 'Total turnover'. 44. This issue also came up for consideration before the Tribunal in relation to the A.Y. 2007-08. Vide its order dated 05-08-2019 in IT(TP)A. No.286/Bang/2013, the Tribunal has held that any amount reduced from 'Export turnover' should also be reduced from the amount of 'Total turnover' in the computation of deduction u/s.10A of the Act. Following the same, we allow the assessee's ground and dismiss that of the Revenue. 45. Ground No.6 of the assessee's appeal is against excluding Foreign currency expenses amounting to ₹ 1,07,63,08,980/- from the 'Export turnover' in the process of computation of deduction u/s.10A. The ld. AR fairly agreed that the full amount of foreign currency expenses has been rightly held to be excludible from the amount of 'Export turnover'. It was, however, prayed that the same amount may also be excluded from the amount of 'Total turnover'. Following similar view taken by us in relation to Ground No.5 of the assessee's appeal and Ground No.1 of the Revenue's appeal above, we hold that the amount of Foreign currency expenses to the tune of ₹ 107.63 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating to foreign tax credit, which we have decided supra. 52. Ground No.12 is against the levy of interest u/ss. 234B and 234C. The ld. AR submitted that pursuant to amendment carried out in section 115JB by substitution of clause (i) of Explanation 1, the amount or amount set-aside as provision for diminution in the value of any asset came to be added to the amount of profit as shown in the statement of profit and loss. The ld. AR submitted that this amendment came into force after the close of the relevant financial year and hence, the assessee could not have anticipated its liability to pay advance tax on the same at the material time. It was, therefore, prayed that interest u/ss.234B and 234C should be directed to be suitably reduced. 53. We have heard both the sides and gone through the relevant material on record. The assessee's computation of income u/s.115JB has been placed at page 58 of the paper book. It can be seen that in such computation, the assessee added ₹ 6,99,33,296/- towards `the amount or amounts set-aside for diminution in the value of any asset'. The amendment to section 115JB through clause (i) has been brought out by the Finance (No.2) Act, 2009 with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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