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TMI Blog2017 (5) TMI 1749X X X X Extracts X X X X X X X X Extracts X X X X ..... be reduced both from the export turnover as well as the total turnover i.e. numerator and denominator. CIT(A) followed the same principle decided in the case of Sak Soft Ltd.[ 2009 (3) TMI 243 - ITAT MADRAS-D ] and allowed the assesse s appeal. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and this ground of appeal of the Revenue is dismissed. Apportionment of R D expenditure to 10B unit s - AO found that the assessee claimed weighted deduction in respect of capital expenditure incurred towards in-house R D facility as per Sec.35(2AB) - CIT(A) deleted the addition and allowed the assesse s appeal stating that the R D activity is not related to the 10B unit and the 10B unit is a separate and distinct unit - CIT(A) given a finding that the expenditure related to R D is for a full assembly unit which cannot be allocated to the units which are manufacturing and exporting only components. CIT(A) also stated that the assessee s case is squarely covered by the decision of jurisdictional High Court in the case of Brakes India Ltd. [ 2013 (9) TMI 192 - ITAT CHENNAI] and also Punjab Con Cast Steel Vs. CIT ors. [ 1993 (3) TMI 142 - ITAT CHANDIGA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in India as well as utilized in India. The explanation to section 9(2) was introduced by Finance Act 2010 w.e.f.1976 and as on the date of assessment there was no such provision to tax the FTS rendered outside India and hence we agree with the Ld.A.R that no tax is deductible u/s 195 and consequent disallowance is not called for. We hold that the payment made by the assessee for the services rendered outside India are not taxable under section 9(1)(vii) of I.T. Act in the assessment years under consideration and the disallowance is not called for. TDS u/s 195 - Disallowance u/s.40(a)(i) in respect of payment made to Sonima Logistics, Germany without deduction of tax at source - HELD THAT:- CIT(A) examined the Explanation of the assessee and the document placed before the CIT and concluded that the services rendered by the non-resident do not fall under the category of technical or managerial services. Ld.CIT(A) further stated that the services are rendered outside India and there is no permanent establishment or business connection to the non-resident in India. This fact has not been disputed by the Revenue. The profits of the services rendered outside India cannot be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Division Bench of the Delhi High Court in the case of The Principal Commissioner of Income Tax-6 V. M.Tech India Pvt Ltd [ 2016 (1) TMI 812 - DELHI HIGH COURT] which supports our view as above. It is brought to our notice that the decision of the Delhi High Court has not been accepted by the Department and an SLP is pending. Be that as it may, in view of the facts and circumstances as observed above, we have no hesitation in dismissing the Departmental Appeal answering the questions of law in favour of the assessee and against the Revenue. Payment towards software purchase is not royalty within the meaning of non-taxable u/s.9(1)(vi) of Income Tax Act and not liable for deduction of tax at source, accordingly, we uphold the orders of the Ld.CIT(A)dismiss the revenue s appeal on this issue. Disallowance u/s 14A - HELD THAT:- No details regarding shares which earned dividend income was placed by the Ld.AR. This Tribunal has consistently followed that investments made from the common account attracts the disallowance u/s.14A. Once, the assessee earns the dividend income, the application of Sec.14A is attracted and consequently the disallowance has to be m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B is a separate entity for the purpose of Income Tax and to be assessed as an independent unit as if it is only the source of income. The unabsorbed losses of eligible units of 10B undertaking should be carried forwarded separately and allowed to be set off against the future incomes of 10B units alone. Further, the AO opined that in case, the assessee wishes to avail the normal provisions of the Income Tax Act, it should opt out from claiming the deduction u/s 10B and submit a declaration as per Sec.10B(8) of IT Act before the due date of filing the return of income treating the eligible unit as a non-eligible unit u/s.10B of IT Act. In the instant case the assesse has not furnished any such undertaking hence the AO was of the view that the provisions of Sec.80IA and 10B are parimeteria and accordingly, disallowed the set off of losses relating to 10B unit against the profits of non-eligible units and computed the total income at ₹ 85,25,27,170/- against the returned income of ₹ 82,91,65,600/-. 2.1 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) the Ld.CIT(A) allowed the assesses s appeal, placing reliance on the decision of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, the ground is allowed. 2.2 Aggrieved by the order of the Ld.CIT(A), the Department is on appeal before us. Appearing for the Revenue, the Ld.DR argued that the assessee is eligible for deduction u/s 10B for ten consecutive assessment years which is recognized as tax holiday period and during the tax holiday period units eligible to claim exemption u/s.10B are being treated as separate and independent unit as if it is only the source of income. The profits and gains of the eligible unit has to be computed separately and the deduction has to be allowed to the extent of profits and in case of loss incurred during the tax holiday period the same should be considered separately and to be carried forwarded to the next year and set off against the income of the eligible unit in the subsequent year. In case ,the assessee wants to opt out from 10B for the relevant previous year, the assessee is free to opt out from the tax holiday period for any previous year, by furnishing a declaration as required u/s.10B(8) of IT Act to include the profits of eligible units in normal provisions of IT Act. In the assessee s case, the assessee has not furnished any such declaration. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The Ld.AR further argued that the provisions of Sec.80IA cannot be equated with that of the provisions of Sec.10B. As per Sub Sec.5 of 80IA, the profits and losses of eligible units required to be computed separately as a separate unit for the purpose of carry forward and set off of losses and computation of income during the tax holiday period. Such provisions are not placed in Sec.10B. Therefore, the Ld.AR contended that the losses of 10B units need not separately be carry forward and the assessee is eligible for set off of loss of 10B units from the normal taxable units. The Ld.AR also relied on the following decisions: 1. Lason India (Vetri Software) Vs. ITO (301 ITR 306) 2. Scientific Atlanta India Technology vs. CIT (129 TTJ 273) (Chennai) 3. CIT vs. Yokogawa India Ltd. (341 ITR 385) (Kar HC) 4. Brakes India (266/Mds/2012) (Chennai) 2.4 We heard the rival submissions and perused the material placed on record. The issue is squarely covered by the Hon ble Supreme Court judgment in the case of CIT Anr. v. Yokogawa India Ltd. [2017] 77 taxmann.com 41 (SC) in favour of assessee. The questions raised before the Hon ble Apex Court are under: The broad ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had incurred a loss of ₹ 2,33,61,500/- relating 10B unit which was claimed set off against the income of non-eligible units. The AO in the assessment proceedings u/s 143(3) for the A.Y.2006-07 disallowed the loss of eligible unit claimed from the taxable income and re-computed the total income of the assessee. During the AY under consideration, the AO has set off the brought forward unabsorbed loss of ₹ 2,33,61,500/- relating to AY 2006-07 of the eligible unit from the profit of 10B units ₹ 3,15,19,439/- and re-computed the deduction u/s.10B at ₹ 18,49,480/- which was allowed as deduction from the total income. 3.1 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the assesse s appeal holding that the deduction u/s.10B is allowable before setting off of brought forward unabsorbed business losses and the depreciation relating to the earlier AYs. For ready reference, we extract the relevant paragraph No.4.3 from Ld.CIT(A) s Order as under: 4.3 I have carefully considered the facts of the case and the submissions made by the AR. I have also gone through the decisions relied upon by the AO an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decisions, I hold that the deduction u/s. 10B has to be allowed before set off of the brought forward losses. 3.2 We heard both the parties and perused the material placed on record. The assessee s appeal for the AY 2006-07 is allowed by us in this appeal in earlier paragraphs holding that the loss of 10B unit is allowed to set off at the source point under Chapter-IV of the IT Act before computing the gross total income. Therefore, there was no unabsorbed loss remained relating to the eligible unit u/s.10B for the AY 2006-07 to adjust against the profits of the eligible units in the year under consideration. The issue regarding the stage of deduction u/s.10B was decided by the Hon ble Supreme Court in the case of CIT Anr. v. Yokogawa India Ltd. 45 DTR 000 1. The Hon ble Apex Court held that the deduction u/s.10B would be allowed while computing the total income of the eligible undertaking at the stage of Chapter-IV of the Act and not at the stage of computation of income under Chapter-VI. Accordingly, the appeal of the assessee for the AY 2006-07 was allowed by this Tribunal in favour of the assessee and there was no unabsorbed business losses of 10B units which required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. numerator and denominator. The Ld.CIT(A) followed the same principle decided by the Hon ble special Bench ,Chennai in the case of Sak Soft Ltd., and allowed the assesse s appeal. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and this ground of appeal of the Revenue is dismissed. 5.0 The next issue for the A.Y 2007-08 is the apportionment of R D expenditure to 10B units. The assessing officer found that the assessee claimed weighted deduction in respect of capital expenditure incurred towards in-house R D facility as per Sec.35(2AB) of Income Tax Act. The expenditure incurred was ₹ 4,95,26,696/- and the weighted deduction claimed was ₹ 6,72,67,539/-. No expenditure was allocated towards the eligible units. The AO examined the details and observed that the assessee is doing in-house research of the business activities carried on by the assessee and further observed from Form-3CM (order of approval of in-house R D facility the Ministry of Science and Technology) that the objective of the scientific research to be conducted by the in-house R D facility was mentioned as design development of turbo charges for various engines manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Brakes India Ltd., in Tax Appeal Nos.737 to 739 of 2005 dated 17.10.2012 and also Punjab Con Cast Steel Vs. CIT ors. 49 ITD 430 Chandigarh. During the appeal, the Ld.DR vehemently argued stating that nonallocation of expenditure to 10B Units was only a device to reduce the taxable income but no evidence has been brought on record to controvert the submissions of the assessee or to establish that the in-house R D facility belong to the eligible 10B units also. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the order of the Ld.CIT(A) is confirmed. The appeal of the Revenue is dismissed. 6.0 Ground No.5 in Revenue s appeal for the AY 2007-08 is addition of ₹ 77.99 lakhs relating to loss on forward contracts. This issue is involved for the A.Y.2007-08 in appeal No.629/2013 and for the A.Y 2008-09 in ITA No.204/2014. 6.1 During the assessment proceedings, the AO found that the assessee had incurred a loss of ₹ 77.99 lakhs in AY2007-08 and ₹ 3,99,47,000/- for the AY 2008-09 on account of restatement of foreign exchange contracts. The assessee argued before the AO that the forward contract was the hedging activity of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 37(1) of the Income tax Act, 1961 . As clearly laid down by the Supreme Court, the loss incurred by the appellant on account of exchange fluctuations has to be allowed as deduction. Respectfully following the decision of the Supreme Court, the claim of the appellant is allowed. Against the Orders of the Ld.CIT(A), the Revenue has filed appeal before us. 6.3 We heard the rival submissions and perused the material placed on record. The Ld.DR argued that the forward contracts loss is a notional loss which is contingent in nature and not allowable to be set off against taxable income. The loss was only due to restatement of foreign exchange which should be allowed only on actual happening of the event. Further, Ld.DR stated that the loss was booked without actual delivery of the commodity and hence the loss should be treated as speculative transaction as per Sec.43(5) of Income Tax Act. On the other hand, the Ld.AR argued that the loss is business loss and squarely covered by the following decisions 1. Cotton Blossom (ITA No.2032/Mds/2011) (Chennai) 2. Wheels India Ltd. ITA No.91/Mds/2011 (Chennai) 3. CIT vs. Panchmahal Steel Ltd. (215 Taxman 140) (G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeals on this issue for the A.Y.2007-08 and for the A.Y 2008-09 are dismissed. 7.0 Ground No.6 of Revenue for the AY 2007-08 is the disallowance u/s.40(a)(i) in respect of payment made to non-resident Export agent M/s.Biggleswade Ltd., Hongkong without deduction of tax at source. This isuue is involved for the A.Y 2007-08, 2008-09 and A.Y 2009-10. 7.1 The AO found that the assessee has paid a commission of ₹ 2,21,80,564/- to M/s.Biggleswade Ltd., Hongkong for the services rendered by the foreign agent to the assessee as per the details given below: A.Y 2007-08 ₹ 2,21,80,564/- A.Y 2008-09 ₹ 2,30,44,518/- A.Y 2009-10 ₹ 2,00,00,000/- 7.2 The AO considered the payment made to the foreign agent was in the nature of Managerial services as per Explanation-2 of Sec.9(1)(vii) of IT Act and held the payment as fee for technical services which attracts the TDS provisions of Sec.195 of IT Act and the assessee required to deduct the tax at source. Since the assessee failed to deduct the tax at source, the AO has brought the payments made to the non-resident agent to tax u/s.40(a)(i) of IT Act. 7.3 The Ld.CIT(A) allowed the assessee s appeal with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. The explanation to section 9(2) was introduced by Finance Act 2010 w.e.f.1976 and as on the date of assessment there was no such provision to tax the FTS rendered outside India and hence we agree with the Ld.A.R that no tax is deductible u/s 195 and consequent disallowance is not called for. 7.7 Therefore, we hold that the payment made by the assessee for the services rendered outside India are not taxable under section 9(1)(vii) of I.T. Act in the assessment years under consideration and the disallowance is not called for. We uphold the order of the Ld.CIT(A) and the Revenue appeals on this issue for the AYs 2007-08, 2008-09 and AY 2009-10 are dismissed. 8.0 Ground No.7 of the AY 2007-08 is the disallowance u/s.40(a)(i) in respect of payment made to Sonima Logistics, Germany without deduction of tax at source. This issue is involved for the A.Ys 2007-08, 2008-09 and A.Y 2009-10. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd (125 ITD 196) (Bang) G.E. Technology Centre Pvt. Ltd., Vs. CIT (327 ITR 456) 8.2 We heard the rival submissions and perused the material placed on record. The assessee has produced the copy of the agreement before the Ld.CIT(A). The Ld.CIT(A) examined the Explanation of the assessee and the document placed before the CIT and concluded that the services rendered by the non-resident do not fall under the category of technical or managerial services. Ld.CIT(A) further stated that the services are rendered outside India and there is no permanent establishment or business connection to the non-resident in India. This fact has not been disputed by the Revenue. The profits of the services rendered outside India cannot be taxed in India unless the non-resident has permanent establishment/or business connection in India as envisaged in Sec.9(1) of IT Act. The Ld.CIT(A) deleted the addition relying on the decision of the Hon ble Apex Court in the case of GE Technological Centre Pvt. Ltd. v. CIT 327 ITR 456. The findings and conclusions arrived in earlier ground in respect of payment made to M/s.Biggleswade Ltd., are squarely applicable to this ground also. Therefore, we do no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery in the subsequent Financial year and not eligible for additional Depreciation. (ii) Depreciation is allowed on the Plant and machinery and included in the block of assets. There is no provision in the block of assets to carry forward and allow the residual additional Depreciation. 10.1 The Ld.CIT(A) confirmed the addition made by the AO holding that additional Depreciation is only one time measure in the year of purchase and it is not possible to carry forward the unavailed/unabsorbed additional depreciation to the subsequent assessment year. For ready reference we extract the relevant part of the Ld.CIT(A) order in Para No.10 as under: As per the provisions of section 32(1 )(iia), the additional depreciation shall be available only for the new assets added during the year. For better clearance, the relevant provisions of section 32(1)(iia) is reproduced as under: 32(1 )(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31St day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee filed appeal for the AY 2007-08 and the Revenue has filed appeal for the AY 2008-09 and 2009-10. This issue is involved for the AYs200708, 2008-09 2009-10. The AO disallowed a sum of ₹ 1,26,086/- for the A.Y 2007-08, ₹ 3,75,082/- for the AY 2008-09 and ₹ 6,29,235/- for the A.Y 2009-10.The assessee claimed the depreciation @80% on UPs stating the UPS being an automatic voltage controller as well as power saving equipment is a energy saving device and claimed the depreciation @80% in accordance with Appendix-I to Income-Tax Rules. Reliance is also placed on the decision of 1TAT s Order in DCIT v Surface Finishing Equipment (2003) 81 TTJ 448. The AO examined the explanation of the assessee and held that the UPS is neither a part of the computer nor a energy saving device but it is only as an uninterrupted power supply equipment for all the electrical appliances. The AO relied on the decision of Hon ble ITAT Delhi in the case of Nestle India Limited Vs. DCIT [111 TTJ 498], wherein it was held that UPS is not an integral part of computer and allowed depreciation as a part of general plant and machinery. Accordingly, the excess depreciation claimed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nics Ltd v. ITO (TDS)-1 (94 ITD 91 and Hon ble Special Bench, ITAT in the case of Motorolo Inx. vs. DCIT reported in 95 ITD 269. 12.1 We heard the rival parties and perused the material placed before us. There is no dispute in fact that the assessee has purchased the software and the assessing officer has admitted this fact in the assessment order. The payment made towards the purchase of software is squarely covered by the decision of the Hon ble jurisdictional High court in CIT Vs M/s.Vinzas Solutions India Pvt. Ltd. in ITA No.861/2016 dated 04.01.2017 wherein their lordships held as under: 4. We are of the view that the provisions of Section 9[1][vi] dealing with and defining Royalty cannot be made applicable to a situation of outright purchase and sale of a product. The Corpus Juris Secundum understands Royalty thus: The word royalty means a share of the product or profit reserved by the owner for permitting another to use the property, the share of the production or profit paid the owner; a share of the product or proceeds therefrom reserved to the owner for permitting the another to use the property; the share of the produce reserved to the owner for permitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the payment towards software purchase is not royalty within the meaning of non-taxable u/s.9(1)(vi) of Income Tax Act and not liable for deduction of tax at source, accordingly, we uphold the orders of the Ld.CIT(A)dismiss the revenue s appeal on this issue. 13.1 The Next issue for the A.Y.2008-09 and 2009-10 in assessee s appeal is the disallowance u/s.14A r.w.Rule 8D of Income Tax Rules. The AO disallowed the expenditure relating to the dividend income for the AYs 2008-09 and 2009-10 as under: AY 2008-09 ₹ 5,42,601/- AY 2009-10 ₹ 10,13,125/- The AO noticed from the P L Account that the assessee has shown income by way of dividend from the mutual fund and domestic companies for the AYs 2008-09 2009-10, but the assessee has not disallowed any expenditure in the P L account for earning the dividend income. The AO asked the assessee to explain why the expenditure for earning of the dividend income should not be disallowed by applying Rule 8D w.r.t. Section 14A of the Income-Tax Act and the assessee s submitted it s reply stating that the Company has no borrowed funds and hence there is no question of interest payments and consequently no interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons. The argument of the appellant that administrative expenses were incurred only for manufacturing activity but not for earning exempt income was also rejected by the AO since no bifurcation of such expenses were forthcoming from the accounts. Therefore, the contention of the appellant that no expenditure was incurred for earning exempt income is not acceptable. Further, the section 14A(3) itself states that the provisions of sub-sec (2) of 14A shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income. In the case of Godrej Boyce Mfg. Co. v. DCIT, 328 ITR 81, the Bombay High Court has held that the Rule 8D is applicable from A.Y. 2008-09 onwards and disallowance under Rule 8D r.w.s. 14A(2) is fair and reasonable . The very act of the AO in invoking the provisions show that the AO is not satisfied with the working of the appellant with regard to expenditure relatable to exempt income and taxable income. The reason why he was not satisfied is proved by the fact that the details relatable to taxable income and exempt income and the investment relatable to earni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyce Manufacturing Company Ltd (supra) has also held that the provisions of rule 8D are fair and reasonable and are applicable from A.Y.2008-09 onwards. Therefore, Rule 8D is exigible in the appellant s case and the AO has invoked the provisions correctly. It is to be noted here that presumptions have no role to play in claiming any exemptions. 10.2.2 With regard to the argument that while taking averages of investment, the entire investments as per balance-sheet were taken instead of only the investment on which taxfree income was earned, I cannot find fault with the AO. When it is the duty of the appellant to furnish the details of the investment relatable to earning of dividend income and investment relatable to others, and when such details were not forthcoming from the records or accounts of the appellant, AO was left with no alternative but to invoke the laid down provisions of sec 14A r.w. Rule 8D. Further, when a laid down principle in the form of Rule 8D is prescribed, the appellant s argument that at best only the salary paid to one officer alone should be taken for disallowance has no meaning. 10.2.3 The appellant s another argument that only 2% of tax-free inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares earned the income which is exempt. No details regarding shares which earned dividend income was placed by the Ld.AR. This Tribunal has consistently followed that investments made from the common account attracts the disallowance u/s.14A. Once, the assessee earns the dividend income, the application of Sec.14A is attracted and consequently the disallowance has to be made applying the Rule 8D. Therefore, we do not find any infirmity in the Orders of the lower authorities and the same is upheld. The appeal of the assessee on this ground is dismissed. 14.0 Ground No.3 in assessee s appeal for the A.Y 2009-10 is disallowance of weighted deduction for scientific Research u/s.35(2AB) of IT Act. The AO disallowed a sum of ₹ 1,13,05,335/- over and above the expenditure prescribed by the authority while issuing the approval for the scientific research. The Ld.CIT(A) confirmed the order of the AO. The assessee argued that the claim which is otherwise allowable cannot be restricted, merely because the amount is not originally included in the Annual Report. The due process of approval by DSIR require the reconciliation of amount of claim as certified by auditor and the amount di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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