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TMI Blog2019 (11) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... e declaring total income of Rs. 77,25,47,829, under the normal provisions of the Income Tax Act, 1961 (for short "the Act") after claiming deduction under section 10A / 10AA of the Act. Further, the assessee also declared book profit of Rs. 40,32,25,37,283, under section 115JB of the Act. Subsequently, on 30th March 2011, the assessee filed a revised return of income enhancing the claim of TDS from Rs. 139,10,63,978, to Rs. 160,10,63,978. During the assessment proceedings, the Assessing Officer while verifying the return of income filed by the assessee along with the financial statements noticed that the assessee had claimed deduction of State taxes paid in overseas countries. It was submitted that these taxes were paid in USA and Canada. It was submitted by the assessee that the State taxes paid in USA and Canada do not come within the purview of section 40(a)(ii) of the Act. According to the assessee, the term "tax" as defined under section 2(43) of the Act, would mean the tax chargeable under the Income Tax Act, 1961. Further, it was submitted, in respect of State taxes paid, the assessee is not eligible for any relief either under sections 90 or 91 of the Act r/w the applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , has decided the issue against the assessee, however, by virtue of the recent decision of the Hon'ble Jurisdictional High Court in Reliance Infrastructure Ltd. v/s CIT, [2017] 390 ITR 271 (Bom.), the issue stands covered in favour of the assessee. 5. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, the decision in Reliance Infrastructure Ltd. (supra) would not apply to the facts of the present case as the taxes levied by Saudi Arabia was both on Indian income as well as income earned in that country. He submitted, the facts in assessee's case are different as the State taxes were levied on USA income only. He submitted, since the assessee is governed by the applicable tax treaties it is covered by the provisions of section 90 of the Act. Hence, the State taxes paid by the assessee are covered under section 40(a)(ii) of the Act. 6. We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term "tax", as defined under section 2(43) of the Act would only include taxes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the meaning of the word "tax" as defined under section 2(43) of the Act would mean only the tax chargeable under the Act. Thus, as per the aforesaid decision of the Hon'ble Jurisdictional High Court, taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act. Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression 'income tax'. In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required. 7. In ground no.2, the assessee has challenged disallowance of expenditure incurred for purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue undecided, assessee filed an application under section 254 of the Act and the appeal order on the issue was recalled. He submitted, that while deciding the issue afresh in ITA no. 7513/Mum./2010, dated 23rd March 2017, the Tribunal has held that the expenditure incurred for acquiring software for trading purpose is not in the nature of royalty. Hence, there is no requirement for deduction of tax at source. He submitted, the reasoning on the basis of which the Tribunal came to such conclusion was, the payment made for purchase of software is for acquiring a copyrighted article and not for transfer of any right in a copyright, hence, cannot be treated as royalty. The leaned Sr. Counsel submitted, by incorporation of Explanation-4 to section 9(1)(vi) of the Act by Finance Act, 2012, with retrospective effect, Revenue cannot fasten the liability of TDS on the assessee as the assessee cannot be expected to deduct tax at source in respect of a transaction effected long time back anticipating such amendment. In this context, he relied upon the following decisions:- i) NGC Networks India Pvt. Ltd. v/s CIT, ITA no.397/2015 (Bom.); and ii) Channel Guide India Ltd., ITA no.1221/Mum. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Undisputedly, in the year under consideration, the assessee has claimed deduction on account of expenditure incurred towards purchase of software products acquired for internal use. The expenditure relating to that has been treated as capital in nature and depreciation has been allowed by the Departmental Authorities. Insofar as software products acquired for re-sale / trading purpose, the assessee's claim of deduction in respect of expenditure incurred thereon as revenue in nature has been disallowed on the ground that the payment made being in the nature of royalty, the assessee was required to deduct tax at source under section 195 of the Act. Insofar as the expenditure incurred on the software products acquired in internal use, we, on a perusal of the facts on record are of the view that by incurring such expenditure, the assessee has acquired assets of enduring benefit. Therefore, the expenditure incurred is capital in nature and the assessee would be entitled for depreciation on the cost of such assets. The Tribunal while deciding identical issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st April 2010, computer software was defined to mean any computer program recorded on any disc, tape, perforated media or other information storage device and includes any such program or any customized electronic data. The scope of the term "royalty" was further explained by Explanation-4 to section 9(1)(vi) of the Act inserted by Finance Act, 2012, with retrospective effect from 1st June 1976, wherein, it was clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software including granting of a license irrespective of the medium through which such right is transferred. It is the contention of the assessee that the software acquired by the assessee for the purpose of trading is a copyrighted article and the assessee has sold it to the customers as it is. It has been submitted that while re-selling / trading the software products, there is neither any transfer of right in copyright in favour of the assessee nor the assessee has transferred any right in the copyright. However, the learned Commissioner (Appeals) has recorded a categorical findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh adjudication in terms with our observations hereinabove. The Assessing Officer must decide the issue after providing reasonable opportunity of being heard to the assessee. 16. In ground no.3, the assessee has challenged the decision of learned Commissioner (Appeals) in partly sustaining the disallowance made out of advertisement expenditure by treating it as capital in nature. 17. At this stage, we must observe, against the partial relief granted by learned Commissioner (Appeals) on this issue, Revenue has also came in appeal and the corresponding ground being ground no.1. Accordingly, we propose to dispose of both the grounds together. 18. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited substantial expenditure of Rs. 39,69,25,798, towards advertisement. After calling for necessary details, he found that the expenditure incurred are for advertising in newspapers/magazines, holding events/seminars, conferences, exhibitions, etc., advertising at airports, global campaign etc.. Thus, mostly, the expenditure incurred was for promotional/publicity activities of the assessee. After considering the submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Sr. Counsel submitted, the said expenditure was incurred towards experience certainty campaign. He submitted, learned Commissioner (Appeals) completely misconceived the submissions made by the assessee while observing that the assessee has itself admitted it to be a capital expenditure. The leaned Sr. Counsel submitted, the expenditure incurred by the assessee towards experience certainty campaign is no less different from the other advertisement expenditure, hence, should be allowed. He submitted, had learned Commissioner (Appeals) called upon the assessee to clarify his doubt, the assessee would certainly have produced the documentary evidences to demonstrate that the experience certainty campaign is nothing but advertisement expenditure incurred by the assessee. To support his contention, the learned Senior Counsel sought the permission of the Bench to furnish certain documents as additional evidence under rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The leaned Sr. Counsel submitted, the additional evidences submitted by the assessee may be admitted and the issue may be restored back to the Assessing Officer for fresh consideration. 22. The learned Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of advertisement only and in this context, he has furnished before us the details of such expenditure through additional evidences. Since, the additional evidences furnished by the assessee will have a crucial bearing in determining the nature of expenditure, we are inclined to admit the additional evidences. However, considering the fact that these evidences were not furnished before the Departmental Authorities, to afford a fair opportunity to the Department to verify the authenticity of assessee's claim vis-a-vis the additional evidences furnished before us, we restore the issue to the Assessing Officer for de novo adjudication after providing reasonable opportunity of being heard to the assessee. We make it clear, our aforesaid direction is only with regard to the experience certainty expenditure of Rs. 5.28 crore. The decision of learned Commissioner (Appeals) on this issue is modified to this extent only. 24. As regards ground no.4, the leaned Sr. Counsel submitted that the assessee has already got the desired relief in the order passed by the Assessing Officer while giving effect to the first appeal order. Thus, he submitted, the ground has become academic. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds raised by the assessee and Revenue, as noted above, are on a common issue, we dispose of both the grounds together. 29. The leaned Sr. Counsel for the assessee submitted, as per section 90(1)(a)(ii) of the Act, the Central Government may enter into an agreement with any country outside India for granting relief in respect of Income Tax chargeable under the Act and under the corresponding law in force in that country, as the case may be, to promote mutual economic relationship, trade and investment. Thus, he submitted, section 90 of the Act empowers the Central Government to enter into DTAA with the Government of any other country for granting relief in respect of cases where income tax is chargeable. He submitted, section 10A/10AA grants deduction from eligible income from the total profit. However, such income is chargeable to tax in India as per the provisions of section 4 and 5 of the Act. He submitted, the exemption under section 10A / 10AA of the Act is for a specified period and after expiry of that period such income would otherwise be chargeable to tax. Referring to article 25 of Indo-U.S. DTAA, the leaned Sr. Counsel submitted, the condition mandated in the treaty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As could be seen, while the Assessing Officer has disallowed assessee's claim of foreign tax credit in respect of income exempt under section 10A/10AA of the Act on the reasoning that only such income which is subjected to tax in both the countries would qualify for tax credit, learned Commissioner (Appeals) has restricted the relief of foreign tax credit only in respect of tax paid in USA even in respect of income which is exempt under section 10A/10AA of the Act. The learned Commissioner (Appeals) has come to such conclusion by following the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra). The reasoning of the learned Commissioner (Appeals) on the issue is, as per the decision of Hon'ble Karnataka High Court in Wipro Ltd. (supra), the foreign tax credit benefit under section 90(1)(a)(ii) of the Act would only be applicable under Indo-US DTAA and would not be applicable to other DTAA countries and non-DTAA countries. On a careful reading of the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra), it is noted, while dealing with ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t credit accordingly. 32. In grounds no.7 and 8, the assessee has challenged the addition made on account of transfer pricing adjustment in respect of provisions of software consultancy services. The Revenue has also raised grounds no.8, 9 and 10, in its appeal on identical issue. Therefore, these grounds, if necessary, would be dealt with at a later stage while dealing with grounds no.8, 9 and 10 of Revenue's appeal. 33. In ground no.9, the assessee has challenged the addition made on account of provision of interest free loans provided to the AEs. 34. Brief facts are, in the course of proceedings before him, the Transfer Pricing Officer noticed that the assessee has provided loan facilities to its AEs without charging any interest. He found that as on 1st April 2008, there was an outstanding loan of U.S. $ 92,50,000 against TCS, Singapore, part of which was re-paid by the AE on 12th December 2008, and on 25th November 2008. When the Transfer Pricing Officer called upon the assessee to show cause why the adjustment in respect of interest chargeable on the interest free loan should not be made at appropriate market rate, it was submitted by the assessee that since the loan prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Counsel submitted, as per OECD transfer pricing guidelines 2010, the provision of loan for acquisition of downstream subsidiary is a shareholder activity, hence, not part of internal transaction. In this context, he also referred to UK and Australian Regulations. Referring to the commercial position of the AEs, learned Sr. Counsel submitted, in case of TCS Ibero America, loan was provided as continuous loss made in the downstream subsidiary restricted the ability to service a loan. Hence, the loan was subsequently converted to equity. He submitted, in case of TCS FNS Australia, debt equity ratio did not permit it to obtain third party funding. He submitted, TCS Morocco has been dormant ever since its incorporation and did not have any operation revenue or significant assets. He submitted, TCS Singapore was also in similar position and the loan was for acquisition of downstream subsidiary. He submitted, in all these cases, the assessee has taken strategic decision for acquisition of entities and had decided it to route it through its AEs and accordingly advanced loans to the AEs for further acquisition. Thus, he submitted, the advancement of loan to the AEs being a shareholder' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of loan. In this context, the assessee has referred to OECD Transfer Pricing Guidelines as well as UK and Australian Regulations. It is evident from the impugned order of the learned Commissioner (Appeals), though, he sketchily referred to some of the submissions made by the assessee, however, he has not at all dealt with them in an effective manner. The learned Commissioner (Appeals), though, has observed that the loans advanced were not merely for downstream acquisition but for a variety of purpose including working capital requirement and other business uses, however, he has not elaborated as to for what other purpose loans were advanced. Without properly dealing with the factual aspect of the issue, learned Commissioner (Appeals) has jumped to the legal aspect and has held that the amount advanced by the assessee is in the nature of loan and has to be benchmarked as such. After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Allahabad Bank charged guarantee commission @ 2.4% per annum. Whereas, in respect of financial guarantee, he fixed guarantee commission @ 3% per annum. 40. While deciding assessee's appeal on the issue, the learned Commissioner (Appeals) reduced the guarantee commission on performance and lease guarantee to 1.23% per annum i.e., the rate of fee paid by the assessee to the insurance company. Insofar as financial guarantee is concerned, learned Commissioner (Appeals) reduced the guarantee commission to 0.77% per annum relying upon the decision of the Tribunal in Asian Paints India Ltd. (supra). 41. Contesting the charging of guarantee commission, learned Sr. Counsel for the assessee submitted, the provision of corporate guarantee to the AEs does not come within the purview of international transaction as per section 92B of the Act as the guarantee transaction does not constitute purchase, sale or lease of either tangible or intangible property. It also does not have any bearing on the profits, income, losses or assets and does not include any cost apportionment. He submitted, guarantee also does not tantamount to lending or borrowing of money. It also does not constitute prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have upheld the decision of learned Commissioner (Appeals) on the issue on the basis of our detailed reasoning therein. In view of the aforesaid, this ground is dismissed. 47. In ground no.2, the Revenue has challenged the decision of learned Commissioner (Appeals) in allowing assessee's claim of exemption under section 10A of the Act in respect of units for which deduction under section 80HHE of the Act was earlier claimed. 48. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction under section 10A of the Act in respect of a unit for which deduction under section 80HHC of the Act was claimed in the past. 49. The Assessing Officer observed, at the time when the unit was commenced, section 10A of the Act was not available and the assessee was claiming deduction under section 80HHE of the Act. He observed that after opting out of section 80HHE of the Act for the assessment year 2001-02, the assessee started claiming benefit under section 10A of the Act. Thus, holding that the assessee is not eligible to claim benefit under section 10A of the Act, the Assessing Officer disallowed the same. The assessee challenged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the ground of the revenue that the deduction under section 10A of the Act claimed by the assessee in the present year is in relation to profit for which the assessee was granted deduction under section 80HHE. Sub-section 5 of section 80 HHE of the Act, therefore, in the present case would have no applicability. We are fortified in our view by a division bench judge ent of Delhi High Court in the case of Commissioner Income Tax Vs. Damco Solutions Pvt. Ltd., reported in 200 Taxman page 26 in which it was observed as under:- "2. This stand of the Assessing Officer was repelled by the CIT (A) holding that the purpose of subsection (5) of section 80HHE was to avoid double benefit and that would not mean that if the assessee for a particular assessment year wanted relief only under section 10A of the Act that would be denied to the assessee. The only embargo was not to give relief under both the provisions." 7] Coming to the revenue's second objection to the assessee's claim of deduction under section 10A of the Act, we may recall, that the assessee had admittedly started manufacturing computer software for export prior to 1st April 2001, when section 10A was substituted by the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of computing total turnover. 2. Thus, respectfully following the decision of the Co-ordinate Bench and the decision of the Hon'ble Jurisdictional High Court in assessee's own case as referred to above, we uphold the decision of learned Commissioner (Appeals) on the issue. This ground is dismissed. 3. In grounds no.3 and 4, the Revenue has challenged deletion of disallowance of commission paid to non-residents under section 40(a)(i) of the Act. 4. Brief facts are, during the year under consideration the assessee paid commission to some non-residents located in Denmark, Saudi Arabia, UAE and South Africa without withholding tax under section 195 of the Act. When the Assessing Officer called upon the assessee to explain why the commission paid should not be disallowed under section 40(a)(i) of the Act, the assessee submitted that these commissions were paid outside India to non-resident agents operating outside India. It was submitted, these commissions were paid in respect of services performed / delivery by the non-resident agents outside the territory of India in respect of assessee's export business. The Assessing Officer, however, did not find merit in the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the Act on such payment. Accordingly, we uphold the decision of learned Commissioner (Appeals) on this issue. 6. In grounds no.5 and 6, the Revenue has challenged the decision of learned Commissioner (Appeals) in directing the Assessing Officer to reduce the expenditure incurred in foreign currency both from export turnover as well as total turnover while computing deduction under section 10A / 10AA of the Act. 7. Brief facts are, while computing deduction under section 10A of the Act, the Assessing Officer held that the expenditure incurred in foreign currency while providing technical services outside India, which is basically salary paid to TCS employees stationed abroad should be reduced from the export turnover. Though, it was argued by the assessee that it is not in the business of providing technical services, but is providing software development services, however, the Assessing Officer was not convinced with the submissions of the assessee and concluded that a part of the foreign currency expenditure can be linked to provision of technical services. So, estimating such expenditure in respect of provision of technical services @ 30%, he reduced it from the export tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution would only apply in respect of international transactions with the AEs in USA and Netherland and would not apply to the international transactions with AEs located in other countries. Keeping the aforesaid factual position in perspective, we will proceed to resolve the issue at hand. 13. Brief facts are, the assessee provides consultancy services, develops and implements products for customers on all the matters covering implementation of computer software and hardware system, management and data processing and information system and data communication system. It has several subsidiaries in India and abroad. As stated by the assessee, its foreign subsidiaries (AEs) carry out significant marketing and distribution functions, perform onsite services and play key role in securing contracts with clients and maintaining customer relationship. The assessee carries out software development services in India. It is stated that the assessee has rendered software development, technical and consultancy services to its AEs on the basis of specific request received from them. While benchmarking the international transaction in the transfer pricing study report, the assessee considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer Pricing Officer. The adjustment made to the arm's length price was challenged before the first appellate authority. 14. Learned Commissioner (Appeals), after considering the submissions of the assessee, though, agreed with the Transfer Pricing Officer that the task performed by the AEs is less complex, hence, they have to be treated as tested parties, however, accepting assessee's contention on functional analysis he held that the appropriate PLI would be gross margin / sales (gross profit / sales). Further, learned Commissioner (Appeals) also held that the Transfer Pricing Officer was not justified in not considering the costs incurred by the AEs by treating it as pass through cost while not doing the same exercise while computing the margin of the comparables. Further, learned Commissioner (Appeals) also proceeded to examine the alternative benchmarking provided by the assessee by considering the respective AEs as a tested parties and after a detailed analysis he accepted such benchmarking and directed the Assessing Officer to make adjustment accordingly on the basis of comparables finally selected by the first appellate authority. Being aggrieved with the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extract from UK and U.S. transfer pricing guidelines wherein it is made clear that in such circumstances, remuneration should be based on sales verses costs. In this context, he also referred to para-2.27 and Para-2.35 of OECD guidelines. He also relied upon the following case laws:- i) Mastek Ltd., [2012] 53 SOT 111 (Ahd.); ii) Development Consultants Pvt. Ltd. v/s DCIT, [2008] 115 TTJ 577 (Kol.); and iii) ITO v/s Loreal India Pvt. Ltd., ITA no.5423/Mum./2009, dated 25.04.2012. In addition, he also relied upon various other decisions as referred to in the written notes. 19. The learned Sr. Counsel for the assessee submitted, the AEs undertake all marketing activities overseas and obtain contracts on behalf of the assessee. In fact, he submitted, the AEs are the signatory to the contracts and outsource/sub-contract part of the work to the assessee. Therefore, ignoring the major cost of the work done in the execution of the contract would be contrary to the FAR analysis as a risk bearing distributor. He submitted, the AEs are risk bearing entities including credit risk. Therefore, the cost of TCS in sub-contracting is not pass through cost that can be ignored unlike a commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of risk bearing distributors. It is well brought out by learned Commissioner (Appeals) in his order that the AEs are bearing credit risk and risk of default by client. In fact, the assessee through proper evidences has demonstrated instances where the credit risk with reference to part cancellation of contract has been borne by the AEs without compensation from the assessee. The documentary evidences in this regard furnished by the assessee were thoroughly examined not only by learned Commissioner (Appeals) but they were also produced before us. Thus, from the aforesaid facts, it becomes clear that significant marketing functions are being performed and distribution and marketing risk are being taken by the AEs. On examination of the financials of the subsidiaries it is revealed that some subsidiaries are still making loss at net level which signifies that some risk is being borne by the AEs. It has further been brought on record that the manpower base of AEs performed various functions relating to marketing as well as client co-ordination. The AEs have developed sufficient competency to handle the marketing work independently. The entire contract related work is performed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis 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. In view of the aforesaid, we do not find any merit in the grounds raised by the Revenue on the issues. Accordingly, grounds are dismissed.
21. In view of our decision on the grounds raised by the Revenue, grounds no.7 and 8, in assessee's appeal have become academic, hence, do not require adjudication.
22. At this juncture, we must make it clear that our decision hereinabove on the aforesaid grounds would not apply to transfer pricing adjustment made in respect of AEs situated in USA and Netherland, as such issues are covered under the MAP resolution, as discussed earlier.
23. In view of our decision in ground no.10 in assessee's appeal, no separate adjudication of grounds no.11, 12 and 13, in Revenue's appeal is required. Hence, they are dismissed.
24. In the result, Revenue's appeal is dismissed and assessee's appeal is partly allowed.
Order pronounced in the open Court on 30.10.2019 X X X X Extracts X X X X X X X X Extracts X X X X
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