Case Law Details

Case Name : DCIT Vs M/s. Tata Consultancy Services (ITAT Mumbai)
Appeal Number : Income tax (Appeal) nos. 7513 of 2010 and Cross appeal no. 216 of 2010
Date of Judgement/Order : 04/11/2015
Related Assessment Year :
Courts : All ITAT (4611) ITAT Mumbai (1499)

Brief of the Case

ITAT Mumbai held In the case of DCIT vs. M/s. Tata Consultancy Services that section 80HHC does not place any restriction to shift the claim of deduction or exemption under any other provision in respect of profits for which no deduction has been claimed and allowed in the previous year. Since both the sections, i.e., section 80HHE and section 10A entitle the benefit; the assessee would legitimately be entitled to the benefit of that. We, therefore, do not find any justification in the action of the CIT (A) to hold that the assessee being an old unit having once claimed deduction u/s 80HHE was not entitled to claim deduction u/s 10A from the profits of its units. Further, there is no attempt by the assessee to extend the period of the tax holiday by exercising option to claim deduction u/s 10A instead of u/s 80HHE

Facts of the Case

Overseas Taxes

The assessee has paid the Federal taxes amounting Rs. 19,99,80,754/- in the USA, Canada and other Overseas branches and State taxes amounting Rs. 16,28,38,423/- in the USA and Canada, which were claimed as deduction in the return of income. The AO disallowed these deductions holding that such taxes are covered by the provisions of section 40(a) (ii).

Disallowance u/s 40(a) (i)

The assessee imported certain software products for its business. The software products imported were both for use in its own business as well as for the purpose of trading. Such expenditure amounting to Rs, 25, 11, 88,831/- was claimed as a deduction in the return of income. The AO disallowed the expenditure claimed, applying the provisions of section 40(a) (i) on the ground that the tax was required to be deducted at source u/s 195.

Contention of the Assessee

  Overseas Taxes

The ld counsel of the assessee contended that on this issue, the decision of the Mumbai Bench of the Tribunal in the case of “Tata Sons Limited.”, reported as 9 ITR 154 (Mumbai) is against the assessee and an appeal against the same is pending before the Hon’ble High Court, having been admitted.

Disallowance u/s 40(a) (i)

The ld counsel for the assessee has pleaded that other than the issue at hand, the assessee had incurred expenses of Rs.38,59,97,989/- on account of software acquired within India for facilitating the assessee’s business operations; that the AO disallowed such expenditure, treated it as a capital expenditure and allowed the depreciation thereon. It has been stated that the CIT (A) has upheld this order of the AO. It has been contended that the assessee wants to finish off the litigation and so, here also, depreciation allowed. It has been contended that it is only a timing issue and the assessee will get it over a period of five years.

Deduction u/s 10A on units which deduction u/s 80HHE allowed in past

The ld counsel of the assessee contended that the deduction u/s 10A, is available for the balance number of years in respect of units where deduction u/s 80HHE has been claimed in the past. Reliance has been placed on the following case laws: i) Legato Systems India (P) Ltd. 93 TTJ 828 (Delhi), affirmed by the Hon’ble Delhi High Court in 203 CTR 101 ii) CIT vs. Excel Softec Limited, 219 CTR 405 iii) EDS Electronic Data Systems India Pvt. Ltd. 211 Taxman 133 (Del.) iv) Dempo Solutions Pvt. Ltd. 200 Taxman 26 (Del.) v) Excell software Tech. Limited, 219 CTR 405 (P&H) vi) Interra Software India P. Ltd.112 TTJ 982 (Del.) and vii) Vidya Tech Solutions Pvt. Ltd. 8 ITR (AT) 705 ( ITAT Delhi).

It has been contended that there is no attempt to extend the period of the tax holiday, as the claim was made for the residual year remaining in the block of 10 years.

TP Adjustment

The ld counsel of the assessee support the CIT (A) order. It was contended that under section 92C or 92CA of the Act, it is the statutory duty of the AO to decide independently, whether the determination of arm’s length price by the assessee should be accepted, or whether or not after applying the provisions of section 92CA, the transfer pricing adjustment should be made. This is a statutory safeguard for the assessee. It has been contended that similarly, it is only after proper application of mind to all the facts and holding a prima facie belief that the AO can make reference to the TPO, or that the CIT (A) can grant approval to such a reference. This, again, is a statutory safeguard for the taxpayer.

It has been submitted that in the present case, in compliance of the CBDT Instruction No.3 of 2003, the AO did not himself examine the issue of transfer pricing and with the approval of the ld. CIT(A), made a reference to the TPO u/s 92CA(1). The AO and the CIT (A) did not apply their minds to the Transfer Pricing Report, or to any other material or information or document. The TPO made an adjustment which was incorporated by the AO in the assessment order. On their part, the AO and the CIT (A) did not discharge necessary judicial functions conferred upon them u/s 92C or 92CA.

Contention of the Revenue

 Disallowance u/s 40(a) (i)

 The ld counsel of the revenue contended that depreciation can be allowed only if it is a capital expenditure and that in the present case, it is not so.

Deduction u/s 10A on units which deduction u/s 80HHE allowed in past

  The ld counsel of the revenue contended that at the time of commencement of the undertaking, deduction u/s 10A was not available for export of computer software. Section 10A was substituted w.e.f. 1.4.2001, whereby, for the first time, the profit from the export of computer software was included in section 10A of the Act in respect of the newly established undertakings; that prior to that, even though section 10A was in the statute, the deduction was available only on profits and gains derived by an assessee from an industrial undertaking but was not available to the undertaking engaged in computer software; and that hence, deduction u/s 10A is not allowable to the undertakings which were already in existence and claiming deduction u/s 80HHE.

It has been contended that the assessee-company, upto 1998-99, opted out of the deduction u/s 80-O and section 80HHE, which was more beneficial to the assessee for its units in AY 1999-2000. In AY 1999-2000 & in AY 200001, the assessee claimed deduction u/s 80HHE. Section 10A was substituted w.e.f. 1.4.2001, in which, the deduction was allowed for the 10 years beginning with the assessment year in which the undertaking began to produce the computer software. It has been contended that the section nowhere provides that the deduction will be available to the existing undertaking. The second proviso to section 10A can only be referred to in respect of the industrial undertakings, which were already covered u/s 10A prior to its substitution w.e.f. 1.4.2001.

It has been contended that deduction u/s 10A was not available to the units engaged in the export of computer software upto assessment year 2000-01 and hence, no question of allowing the deduction u/s 10A on such units arises. It has been contended that moreover, section 80HHC (5) of the Act prohibits the claim under any other section of the Act, once deduction was claimed under section 80 HHE.

TP Adjustment

The ld counsel of the revenue support the AO & CIT (A) orders. He placed reliance on the following case laws: i) Coca Cola India Inc vs. ACIT, 309 ITR 194 (P&H) ii) Sony India P. Ltd. vs. Central Board of Direct Taxes and Another, 288 ITR 52 (Delhi) and iii) Aztec Software and Technology Services Ltd. vs. ACIT, 294 ITR (AT) 32 (Bangalore) [SB].

Held by CIT (A)

Overseas Taxes

The CIT (A) confirmed the disallowance of Federal tax of Rs.199.99 crores. However, deduction of State Taxes of Rs.16.28 crores was allowed. It was held that since the amended provisions of section 40(a)(ii), by way of insertion of Explanation-1, is clarificatory in nature, the AO was correct in holding that the amended provisions of the section are retrospective in effect. It was also held that the Federal tax was eligible for relief u/s 90. It was held that however, State taxes paid in the USA and Canada are ineligible for relief u/s 90, read with the provisions of Article 1(3) of the Indo- Canada Treaty and Article 2(a) of the Indo-USA Treaty and that accordingly, the provisions of section 40(a)(ii) do not apply to the State Taxes.

Disallowance u/s 40(a) (i)

The CIT(A) allowed the claim, observing that he agreed with the contention of the assessee that payment towards purchase of software is payment for copy righted articles and hence, it only represented the purchase price of an article and could not be considered as royalty, either under the Act, or under the DATA; that it is purely in the nature of business income and in the absence of a permanent establishment in India of the nonresident payees, the amount so remitted to the non-resident is not chargeable to tax.

The CIT(A) relied on the decision in the case of ACZ India (P) Ltd., 2010-TIOL-187- Del-IT and that in the case of Parsad Production Limited, rendered by the Chennai Special Bench of the Tribunal in ITA No.663/Mad/2003. The CIT (A) agreed with the view that withholding tax obligation on the payer applies on payments to nonresidents only if there is income chargeable to tax in India. It was held that accordingly, there was no obligation of the assessee to deduct tax at source u/s 195, from making remittances to non-residents.

Deduction u/s 10A on units which deduction u/s 80HHE allowed in past

 The CIT (A) allowed the claim following the first appellate orders passed in the assessee’s case in earlier years.

Held by ITAT

Overseas Taxes

The Tribunal has decided this issue against the assessee in the case of Tata Sons Ltd. 9 ITR 154 and the said decision has not been stated to stay on appeal. Respectfully following the same, this issue is decided against the assessee.

Disallowance u/s 40(a) (i)

Considering the rival contentions, we find that the argument of the assessee is correct. The locally acquired software expenses have been treated as capital expenditure, placing reliance on various judicial decisions, which hold that the expenses on software are in the nature of capital expenditure and depreciation is to be allowed on the same. As such, expenses on imported software are also in the nature of capital expenditure and deprecation needs to be allowed thereon. The AO, therefore, is directed to allow depreciation on the imported software purchased by the assessee. This alternative plea raised by the assessee is, hence, accepted.

Deduction u/s 10A on units which deduction u/s 80HHE allowed in past

We find that in Legato Systems India (P) Limited 93 TTJ 828 (Delhi), the Delhi Bench of the Tribunal held that “upon a harmonious reading of the entire provision, i.e., section 80HHE, the expression “such profit” as appearing in clause (v) is found to refer to the profits of a particular assessment year and the section does not place any restriction to shift the claim of deduction or exemption under any other provision in respect of profits for which no deduction has been claimed and allowed in the previous year. Since both the sections, i.e., section 80HHE and section 10A entitle the benefit; the assessee would legitimately be entitled to the benefit of that.

This finds support from the decision of the Hon’ble Supreme Court in Collector Central Excise vs. Indian Petro Chemicals, (1997) 11 SSC 318 and also from the decision of the Hon’ble Delhi High Court, in the case of C.S.Mathur vs. CBDT . We, therefore, do not find any justification in the action of the CIT (A) to hold that the assessee being an old unit having once claimed deduction u/s 80HHE was not entitled to claim deduction u/s 10A from the profits of its units.

The Hon’ble Delhi High Court has upheld the aforesaid decision of the Tribunal in the case of CIT vs. Legato Systems India (P) Ltd., 203 CTR 101 (Del). A similar view has been taken by the Tribunal in the case of ITO vs. Dempo Solutions Pvt. Ltd., 200 Taxman 26 (Del), as also in the case of DCIT vs. Interra Software India P. Ltd., 112 TTJ 982 and in the case of Vidya Tech Solutions Pvt. Ltd. 8 ITR (AT) 705 (ITAT Delhi). Further, there is no attempt by the assessee to extend the period of the tax holiday by exercising option to claim deduction u/s 10A instead of u/s 80HHE.The claim of deduction u/s 10A was supported by the requisite audit certificate. In the said certificate also, the date of commencement of manufacture/production has been taken as the original date and not as the date of commencement of claim u/s 10A.

Also we find that the decision of the Special Bench in Sak Soft Limited 30 SOT 55 (Chennai) (SB), wherein, it was held that for the purpose of applying the formula u/s 10B(4), which is pari materia to section 10A(4), the freight, telecom charges or insurance   attributable to the delivery of articles or things or computer software outside India, or the expenses if any, incurred in foreign exchange in providing   technical services outside India, are to be excluded from export turnover and from total turnover, which are the numerator and the denominator, respectively, in the formula , holds the field. It has not been upset on appeal. No decision to the contrary has also been placed on record before us. Therefore, the action of the CIT (A) also cannot be found fault with. The same is confirmed. As such, this ground is rejected.

 TP adjustment

 In the case of “Johari Lal vs. CIT”, 88 ITR 439 (SC), it has been held that the prima facie belief of the AO that it is necessary or expedient to make a reference to the TPO is the condition precedent to be satisfied upon application of mind to the material or information or document in his possession. Such prima facie belief is a condition precedent and is mandatory and it is the statutory safeguard for the assessee’s statutory right. The absence of such a belief vitiates the entire proceedings.

Like-wise, the approval of the ld. CIT for the reference to the TPO on a proper application of mind to the relevant facts and circumstances is a condition precedent and a necessary safeguard for the statutory right of the assessee and this has to be performed not in a mechanical manner. This is what has been held by the Hon’ble Supreme Court in the case of Krishna Pvt. Ltd. vs. ITO, 221 ITR 538 (SC) and by the Hon’ble jurisdictional Bombay High Court in the case of German Remedies, 287 ITR 494(Bom.).

In CIT vs. Amedius, 351 ITR 82 (Del.), it has been held that it is primarily the duty of the AO to compute the arm’s length price in relation to an international transaction in accordance with the most appropriate method specified in section 92C (1) of the Act; and that however, where the AO requires the arm’s length price to be computed by specialist, a reference may be made to the TPO.

For the above discussion, the assessee’s support to the impugned order on both counts is found to be correct. The AO erred in not himself examining the issue of TP and with the approval of the CIT, made a reference to the TPO u/s 92CA (1) of the Act; that the AO as well as the CIT (A) failed to apply their mind to the TP Report filed by the assessee, or to any other material or information or document furnished. The TPO made an adjustment which was incorporated by the AO in the assessment order. Thereby, the AO as well as the CIT (A) did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA. Further, the assessee is also correct in contending that no TP adjustment can be made in a case like the present one, where the assessee enjoys u/s 10A or 80HHE or where the tax rate in the country of the Associated Enterprises is higher than the rate of tax in India and where the establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible.

Accordingly appeal of the revenue partly allowed.

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