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TMI Blog2020 (7) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... nover as well the total turnover while working out the deduction u/s 10A Addition on account of licence fee paid to DOT - HELD THAT:- An identical issue was considered by the co-ordinate bench in assessee s own case [ 2015 (1) TMI 924 - ITAT DELHI] similar to the facts involved in the case of CIT Vs Bharti Hexacom Ltd. (Delhi) [ 2013 (12) TMI 1115 - DELHI HIGH COURT] we, therefore, restored this issue to the file of the AO to be decided in accordance with the findings given by the Hon'ble Jurisdictional High Court in the case of Bharti Hexacom Ltd. and if any expenditure on account of licence fee was payable up to 31.07.1999, it should be treated as capital expenditure and the licence fee on revenue sharing basis after 01.08.1999 should be treated as revenue in nature. Claim of foreign tax credit - HELD THAT:- As relying on WIPRO LTD.[ 2015 (10) TMI 826 - KARNATAKA HIGH COURT] Assessee would be entitled to only the tax paid for that relevant financial year in America, i.e., the income attributable to that year in America. In other words, the income tax paid in the same calendar year in United States of America is to be accounted for two financial years in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Gulati, Sr. DR ORDER PER BENCH: ITA No. 5555/DEL/2014 and ITA No. 5924/DEL/2014 are cross appeals by the assessee and Revenue pertaining to assessment year 2005-06. ITA No. 6162/DEL/2013 and ITA No. 6181/DEL/2013 are cross appeals by the assessee and Revenue pertaining to assessment year 2006-07. ITA No. 835/DEL/2014 and ITA No. 922/DEL/2014 are cross appeals by the assessee and Revenue pertaining to assessment year 2008-09. Since all these appeals pertain to same assessee involving common issues and were heard together, we are disposing them off by this common order for the sake of convenience and brevity. ITA No. 5555/DEL/2014 [Assessee s appeal A.Y 2005-06] 2. Ground No. 1 relates to the disallowance made u/s 14A of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] being 10% of dividend income earned during the financial year. 3. Facts on record show that during the year under consideration, the assessee earned dividend income of ₹ 6,12,626/-. However, no disallowance was made by the assessee u/s 14A of the Act in respect of earning this exempt income. The Assessing Officer was of the firm belief that some expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 4 relate to adjustment of foreign currency expenditure and tele-communication charges for working out the deduction u/s 10A of the Act. 11. The main contention of the appellant is that the ld. CIT(A) erred in exceeding his jurisdiction u/s 251(1) of the Act in restoring the matter back to the file of the Assessing Officer. 12. During the course of scrutiny assessment proceedings. The Assessing Officer was of the opinion that certain expenditure has to be excluded from the export turnover for the purpose of deduction u/s 10A of the Act. Accordingly, the assessee was directed to give details of telecommunication charges attributable to the delivery of computer software outside India and also details of expenditure incurred in foreign exchange in providing the technical services outside India. 13. Details were furnished by the assessee. After perusing the details, the Assessing Officer asked the assessee to explain as to why the tele-communication expenses pertaining to the delivery of the computer software not be excluded from the export turnover for the purpose of computation of deduction u/s 10A of the Act. The assessee was also asked to explain as to why the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /DEL/2013 for A.Y 2007-08. In that year also, the ld. CIT(A) has set aside the assessment to the file of the Assessing Officer. The relevant findings of the co-ordinate bench read as under: 8. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed HCL Comnet Systems Services Ltd. that the issue under consideration is squarely covered vide order dated 19.12.2011 of the ITAT 'B' Bench, Bangalore in ITA Nos. 975 979/Bang/2011 for the assessment year 2002-03 in the case of Intel Technology India Pvt. Ltd. Vs DCIT, LTU, Bangalore, wherein one of us (Accountant Member) is the author. In the said case the relevant findings have been given in paras 21 and 22 which read as under: 21. We have considered the submissions of both the parties and carefully gone through the material available on record. It is noticed that an identical issue has been decided in favour of the assessee by the Special Bench of ITAT Chennai in the case of ITO v. Sak Soft Ltd. 313 ITR (AT) 353 (Chennai)(SB) wherein it has been held as under: To say that in the absence of any definition of total turnover for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover also. A similar view has also been taken by the Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. 2010-TIOL-456-HC-MUM-IT. We, therefore, by considering the totality of the facts as discussed hereinabove, are of the view that the ld. CIT(Appeals) was not justified in confirming the action of the Assessing Officer. We therefore set aside the impugned order on this issue and the Assessing Officer is directed to exclude the telecommunication charges from the export turnover as well as total turnover while working out the deduction u/s. 10A. 9. It is also noticed that in assessee's own case also for the assessment year 2004-05 in ITA No. 3199/Del/2007 vide order dated 23.01.2009, ITAT Delhi Bench 'C' New Delhi vide paras 8 and 9 has held as under: 8. With regard to the revenue's ground of appeal, he submitted that the issue is squarely covered by a number of decisions of the ITAT. He relied upon the order of the ITAT in the case of Binary Sematics (supra) and the order of the ITAT in the case of ACIT Vs Infoses Technologies reported in 172 Taxman 134. Similarly, he pointed out that an identical issue has been considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that as per the terms of the license agreement with the Department of Telecommunication, in terms of migration to the revenue sharing scheme under the National Telecom Policy, 1999, effective from 1.8.1999, the assessee company was paying license fee at specified percentage of the gross revenue derived by the assessee. 28. The assessee pointed out that under the new revenue sharing regime, effective from 1.8.1999, the license fees was a direct function of the revenue and that the license fee was correctly claimed as revenue expenditure. 29. The contention of the assessee did not find any favour with the Assessing Officer who was of the opinion that the license fee debited in the profit and loss account is to be amortized over the remaining period of license and since the assessee has claimed ₹ 16,06,36,027/-, the Assessing Officer was of the opinion that 1/10th of the payment is to be allowed u/s 35ABB of the Act for expenses incurred during the year under consideration and accordingly, disallowed excess amount of ₹ 14,45,72,425/- 30. The assessee carried the matter before the ld. CIT(A) and reiterated its contentions as taken before the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee as such is similar to both prospecting fee, acquisition of right to lease as well as leases which enabled removal of sand/tendu leaves, etc. as nothing has to be won over, or extracted. Part payment was towards an initial investment which an assessee had to make to establish the business. It was a precondition to setting up of business. It has element and includes payment made to acquire the 'asset' i.e. the right to establish cellular telephone service. But the licence permits and allows the assessee to maintain, operate and continue business activities. Payment of licence fee has certain ingredients and is like lease rent which is payable from time to time to be able to use the licence. The licence acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. The payment of yearly licence fee on revenue sharing basis was for carrying on business as cellular telephone operator and, thus it was a normal business expense. Read in this manner, the licence granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate in view of section 3SABB. The provision provides that licence fee of capital nature shall be amortized by dividing the amount by number of remainder years of licences. Thus, the capitalized amount of licence fee is to be apportioned as a deduction in the unexpired period of the licence. The provision will have ballooning effect with amortized amount substantially increasing in the later years and in the last year the entire licence fee along with the brought forward amortized amount would be allowed as deduction. After a particular point of time, deduction allowable under section 35ABB would be more than the actual payment by the assessee as licence fee for the said year. This would normally happen after the mid- term of the licence period. Section 35ABB, therefore, ensures that the capital payment is duly allowed as a deduction over the term and once the expenditure is allowed, it would be revenue or tax neutral provided the tax rates remain the same during this period. 31. The Hon'ble Jurisdictional High Court concluded as under: (i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable up to 31- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NTPC 229 ITR 383 and Jute Corporation of India 187 ITR 686. It is the say of the ld. counsel for the assessee that this additional ground has been raised pursuant to the law being clarified by the Hon'ble Karnataka High Court, which is the first decision on this issue and, therefore, the omission to raise the aforesaid additional ground of appeal earlier was neither wilful nor deliberate. 43. The ld. DR strongly objected to the admission of the aforesaid additional ground. It is the say of the ld. DR that no such claim was made in the return of income, neither during the assessment proceedings nor before the first appellate authority and, therefore, the authorities below had no occasion to examine the claim of the assessee. 44. We have given thoughtful consideration to the contents of the additional ground. We find force in the contention of the ld. counsel for the assessee. The Hon'ble Supreme Court in the case of NTPC [supra] has laid down the ratio that the legal issue can be raised by way of additional ground before the appellate authorities. 45. Similar issue arose before the Tribunal in the case of Maruti Suzuki in ITA No. 961/DEL/2015 wherein the co-ordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax is charged on such income because of exemptions given u/s 10A of the Act only for a period of 10 years. 50. The Hon'ble Karnataka High Court was seized inter alia, with the following substantial question of law: Whether the Tribunal was right in holding that the credit for Income tax paid in a country outside India in relation to income eligible for deduction u/s 10A of the Act would not be available u/s 90(1)(a) of the ACT. 51. The Hon'ble High Court observed as under: 26. The answer to the question depends on the interpretation to be placed on Section 90 which is found in Chapter IX which deals with Double Taxation Relief. 27. Section 90 deals with agreement with foreign countries or specified territories. The present Section came into force from 01.04.2004. Earlier to that period, Section 90 read as under: 90. Agreement with foreign countries.-(1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country; or 28. The notes on claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gaxette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relief was granted in respect of income on which the income tax is paid under the Income Tax Act in the contracting country. Therefore to get the benefit of the said provision, payment of income tax in both the countries was sine qua non. However, by the amendment made by the Finance Act 2003, the benefit of granting the relief was extended to even in respect of income tax chargeable under the Act. Therefore, the payment of income tax in both jurisdictions is not sine qua non any more for granting the relief. This provision was introduced with the object of promoting mutual economic relations, trade and investment. In other words, it was a policy of the Government. 33. When there is a specific provision in the double taxation avoidance agreement providing for a particular mode of computation of income or granting of relief, the same should be followed irrespective of the provisions of the Act. If the agreement with the foreign country is under Clause (a)(i) for relief against double taxation and not under Clause (b) for the avoidance of double taxation; the assessee must show that the identical income has been doubly taxed and that he has paid tax both in India and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidence of the taxable entity, maintenance of a permanent establishment, and so on. A country might choose to emphasise one or the other of the aforesaid factors for exercising fiscal jurisdiction to tax the entity. Depending on which of the factors is considered to be the connecting factor in different countries, the same income of the same entity might become liable to taxation in different countries. This would give rise to harsh consequences and impair economic development. In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter into bilateral treaties, Conventions or agreements for granting relief against double taxation. Such treaties, conventions or agreements are called double taxation avoidance treaties, conventions or agreements. The power of entering into a treaty is an inherent part of sovereign power of the State. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition for the entry into an international treaty in time ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Tax in the other country, by such agreement, relief could be given by giving credit of the tax paid in the foreign country to the assessee in India. In cases covered under this provision the assessee pays tax in both the jurisdictions. After payment of such tax, he is entitled to double taxation relief by way of credit in respect of the tax paid in the foreign jurisdiction. 39. Thirdly, in cases covered under Section 90 (1)(a)(ii) of the Act it is not a case of the income being subjected to tax or the assessee has paid tax on the income. This applies to a case where the income of the assessee is chargeable under this Act as well as in the corresponding law in force in the other country. Though the income tax is chargeable under the Act, it is open to the Parliament to grant exemptions under the Act from payment of tax for any specified period. Normally it is done as an incentive to the assessee to carry on manufacturing activities or in providing the services. Though the Central Government may extend the said benefit to the assessee in this country, by negotiations with the other countries, they could also be requested to extend the same benefit. If the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in section 5, computed in the manner laid down in this Act. Section 5 deals with the scope of total income. It reads as under :- (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived, which - (a) is received or is deemed to be received in India in such year by or on behalf of such person, or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year . The proviso speaks about a person not ordinarily resident. 43. Chapter III deals with Incomes which do not form part of Total Income. One such income which does not form part of a total income is contained in Section 10A; i.e. income of newly established undertakings in free trade zone, etc. Section 10A(1) provides, Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Therefore, by virtue of the aforesaid statutory provision namely Section 10A of the Act, the income of the assessee from exports in respect of the said unit is exempted from payment of income tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under Section 10A is in the nature of exemption although termed as deduction. But for this exemption, the said income namely profits and gains derived by an undertaking, is chargeable to tax under the Act. The said exemption is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemption is given under the Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, to promote mutual economic relations, trade and investment, the Act was amended by way of Finance Act, 2003 which came into force from 1.4.2004. By insertion of a new clause (ii) in subsection (1)(a) of Section 90 the Central Government has been vested with the power to enter into an agreement with the Government of any country outside India for the granting of relief in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val of goods from the factory. Rule 9A of the said Rules merely does that. That is the scheme of the Act. It does not, in our opinion, make removal the taxable event. The taxable event is the manufacture. But the liability to pay the duty is postponed till the time of removal under Rule 9- A of the said Rules. In this connection, reference may be made to the decision of the Karnataka High Court in Karnataka Cement Pipe Factory v. Supdt. Of Central Excise (1986 23 ELT 313) (Karn HC)), where it was decided that the words 'as being subject to a duty of excise' appearing in section 2(d) of the Act are only descriptive of the goods and do not relate to the actual levy. Excisable goods , it was held, do not become non-excisable goods merely by reason of the exemption given under a notification.' 56. Therefore, it follows that the income under Section 10A is chargeable to tax under Section 4 and is includible in the total income under Section 5, but no tax is charged because of the exemption given under Section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... States of America. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo - US convention or under this provision of Act should pay tax in India on such income. However, the said provision makes it clear that such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which is to be taxed in United States. Therefore, an embargo is prescribed for giving such tax credit. In other words, the assessee is entitled to such tax credit only in respect of that income, which is taxed in the United States. This provision became necessary because the accounting year in India varies from the accounting year in America. The accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year. Whereas in America, the 1st of January is the commencement of the assessment year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in United States, falls within two years in India. Therefore, while clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is imperative and accordingly, disallowed ₹ 34,78,410/-. 57. The assessee carried the matter before the ld. CIT(A) and vehemently argued that Rule 8D of the Rules is not applicable for the year under consideration. 58. The ld. CIT(A) was convinced that the applicability of Rule 8D of the Rules is prospective from A.Y 2008-09 and accordingly, restricted the disallowance to 5% of the dividend income earned by the assessee. 59. Before us, the ld. DR strongly supported the findings of the Assessing Officer. 60. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. 61. We have given thoughtful consideration to the orders of the authorities below. It is a settled law that Rule 8D of the Rules is applicable from A.Y 2008-09 onwards. However, some reasonable expenditure needs to be disallowed for earning exempt income. Since the ld. CIT(A) has considered the reasonableness and restricted the disallowance to 5% of dividend income, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground No. 1 is accordingly, dismissed. 62. Ground Nos. 2 and 3 relate to the deletion of addition of ₹ 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the exempt income has been received by the assessee only in relation to investments made in mutual funds which were purchased and sold during the year, namely, Templeton India Treasury Management Account SIP, Birla Cash Plus Institutional Premium Daily Dividend Reinvestment and HDFC Liquid Fund Daily Dividend. All the units purchased in the aforementioned mutual funds were sold during the year under consideration itself which means that the opening and closing balance of these investments is zero on account of being purchased and sold during the year. 73. We are of the considered view that the disallowance u/s 14A r.w.r 8D of the Rules is in relation to the income which does not form part of the total income and this can be done by taking into consideration the investment which has given rise to exempt income which does not form part of the total income. 74. We find that the Tribunal in assessee s own case for A.Y 2011-12 has held that wherein dividend was received from investments made in mutual funds which were brought and sold during the year and since there was no opening and closing balance of investments from mutual funds, it is impossible to determine the average va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us, the ld. counsel for the assessee stated that inadvertently, sum of ₹ 25.69 lakhs was shown as advance recoverable from DOT. It is the say of the ld. counsel for the assessee that the said amount was not an advance which subsequently came to the notice of the assessee and accordingly, the same was written off and claimed as business loss u/s 28 of the Act. 86. Reliance was placed on the decision of the Tribunal in the case of Vodafone Mobile Services Ltd ITA No. 4722/DEL/2013 wherein it has been held that WPC paid to DOT on quarterly basis as a percentage of revenue was payment necessary for running business and the assessee could not run the business without making these payments on quarterly basis and, thus, this could not be held as capital in nature. The ld. counsel for the assessee prayed for deletion of ₹ 25.69 lakhs. 87. Per contra, the ld. DR strongly supported the findings of the authorities below. It is the say of the ld. DR that at the most, the claim of ₹ 25.69 lakhs is prior period expenses and, therefore, being prior period expenses cannot be allowed in the year under consideration and should have been claimed in the relevant A.Y. 88. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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