Income Tax Appellate Tribunal - Pune
Capgemini Technology Services (I) Ltd ... vs Deputy Commissioner Of Income-Tax,, ... on 26 August, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER
आयकर अपील सं. / ITA. No.342/PUN/2014
िनधा रण वष / Assessment Year : 2009-10
DCIT, Circle-4, iGate Global Solutions Ltd.,
Pune Vs. 158-162(P),
EPIP Phase-II, Whitefield,
Bangalore - 560066
PAN : AABCM4573E
(Appellant) (Respondent)
आयकर अपील सं. / IT(TP) A. No.10/BANG/2014
िनधा रण वष / Assessment Year : 2009-10
Capgemini Technology ACIT, Range-11,
Services India Limited Vs. Bangalore
(earlier known as iGATE
Global Solutions Ltd.),
Plot No.14,
Rajiv Gandhi Infotech Park,
Hinjewadi, Phase-III,
MIDC-SEZ, Taluka Mulshi,
Pune, Maharashtra - 411 057
PAN : AABCM4573E
(Appellant) (Respondent)
Assessee by Shri Padamchand Khincha
Revenue by Shri Neeraj Bansal, CIT
Date of hearing 20-08-2019
Date of pronouncement 26-08-2019
2
ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014
iGate Global Solutions Ltd.
आदेश / ORDER
PER R.S.SYAL, VP :
These two cross appeals - one by the assessee and the other by the Revenue - are directed against the order passed by the CIT (A)-
IV, Bangalore on 08-11-2013 in relation to the assessment year 2009-10.
2. Briefly stated, the facts of the case are that the assessee, an Indian company, is a subsidiary of iGate Incorporated, USA. It acts as a single source broad range of information technology applications, solutions and services that include client/server position and development. The assessment was completed by the AO applying the provisions of section 115JB since the amount of tax payable under such provision was more than the amount of tax computed under the normal provisions.
3. Firstly we espouse ground No.3 of the assessee's appeal, which is against the confirmation of disallowance of Rs.90,59,117/- made u/s.40(a)(ia) of the Income-tax Act, 1961 (hereinafter also called `the Act') for failure to deduct tax at source from payment of software expenses.
3ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
4. The factual matrix of this ground is that the assessee claimed deduction of Rs.90,59,117/- towards software expenses. No deduction of tax at source was made on payment made to a resident payee. Relying on the judgment in the case of CIT Vs. Samsung Electronics Co. Ltd. & Ors., the AO made the disallowance u/s 40(a)(ia) of the Act, which came to be countenanced in the first appeal. The assessee is aggrieved by the sustenance of such disallowance.
5. We have heard both the sides and gone through the relevant material on record. The assessee paid Rs.90.59 lakh to an Indian party towards Annual license fee for renewal of Microsoft software license, which was claimed as revenue expenditure. The revenue nature of the expenditure was not disputed by the AO. However, the authorities below held such payment to be in the nature of Royalty requiring deduction of tax at source and in the absence of any tax withholding by the assessee, the disallowance was attracted u/s.40(a)(ia) of the Act.
6. The moot question is whether the payment made by the assessee, a resident-payer, to a resident-payee towards annual license fee paid for the renewal of Microsoft software is in the 4 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
nature of royalty? In CIT & Ors Vs. Samsung Electronics Company Ltd. & Ors (2009) 227 CTR 335 (Kar.) the assessee, a branch of Samsung Electronics Co. Ltd., Korea, was engaged in the development, manufacture and export of software for use by its parent company, i.e., Samsung Electronics Co. Ltd., Korea. In the assessment year 1999-2000, the assessee imported software products of Rs.2,28,960/- from Tektronix Inc., USA. Similarly, during the other two years, the assessee imported software, namely, Telelogic Tau TTCN Suite, which was readily available in the market. No deduction of tax at source was done as such payments, in the opinion of the assessee, made to the foreign companies could not be treated as royalty as per the provision of section 9(1)(vi) read with the respective Double Taxation Avoidance Agreements. The contention of the assessee was not accepted by the ITO (TDS), who held that the assessee was a defaulter for not deducting tax at source from the remittances made for purchase of the software as the provisions of section 9(1)(vi) of the Act were attracted and the payment made by the assessee was in the nature of royalty on which tax ought to have been deducted. The AO placed reliance on the definition of the term `royalty' as mentioned in the DTAA and accordingly held that the assessee was a defaulter within the 5 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
meaning of section 201(1) of the Act. The first appeal failed but the Tribunal granted relief by holding that payment was not in the nature of royalty for the reason that it did not partake of the character of royalty in terms of the DTAA. When the matter came up before the Hon'ble High Court, it held that a resident payer who had not filed an application u/s. 195(2) of the Act cannot later on contend that no part of the payment resulted in any taxable income in the hands of non-resident recipient. In Para 69 of the judgment, the Hon'ble High Court also held that : "The assessing authority and the first appellate authority while are correct to the extent of holding that there was an obligation on the part of the resident payers in effecting a deduction from out of the payments made by them in favour of the non-resident recipients even as consideration for acquiring what is known as 'shrink wrapped software' or what is sought to be described as 'ready to sell, off the shelf, packaged software product'....'. The assessee approached the Hon'ble Supreme Court, which remitted the matter to the Hon'ble High Court for rendering a fresh decision. After considering all the aspects, the Hon'ble Karnataka High Court in the second round in CIT Vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar.) has held that the assessee having imported shrink wrapped 6 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
software/off-the-shelf software from non-resident companies under software licence agreement whereby licence is granted to the assessee for taking copy of the software, store the same in the hard disk of the designated computer and to take a back up copy while the ownership of the copyright continues to vest in the supplier, there is only a transfer of right to use copy of the software for the internal business as per the terms and conditions of the agreement and, therefore, the payment made to the suppliers of the software constitutes 'royalty' within the meaning of Article 12(3) of the Indo- US DTAA and also as per the provisions of section 9(1)(vi). Consequently, the assessee was under held to be under obligation to deduct tax at source under section 195 from the amount paid to the foreign software suppliers. Similar view has been reiterated by the Hon'ble Karnataka High Court in CIT (IT) Vs. Sunray Computers (P) Ltd. (2012) 348 ITR 196 (Karn) by holding that the payment made for supply of software by L-Technologies, USA was Royalty and liable to be taxed in India u/s.9(1)(vi) read with the DTAA between India and USA. In view of the above precedents, it is clear that the Hon'ble Karnataka High Court has taken a view that the purchase of off-the-shelf software under software licence agreement results in only a transfer of right to use copy of the software and, 7 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
hence the payment made to the supplier of the software constitutes 'royalty', inter alia, as per the provisions of s. 9(1)(vi). Failure to deduct tax at source has been held to attract the legal consequences flowing therefrom.
7. Au contraire, the Hon'ble Delhi High Court in DIT vs. Ericsson A.B. (2012) 343 ITR 0470 (Del) has held that in order to qualify as royalty payment within the meaning of section 9(1)(vi) and particularly cl. (v) of Expln. 2 thereto, it is necessary to establish that the cellular operator, by making such payment, obtained all or any of the copyright rights of such literary work. It held that a distinction was required to be made between the acquisition of a "copyright right" and a "copyrighted article". Software supplied by the assessee, being, an integral part of the GSM mobile telephone system, incapable of independent use and there being nothing to establish that the cellular operator had obtained any copyright of such software, it held that no part of the payment received by the assessee under the supply agreement could be classified as royalty within the meaning of section 9(1)(vi) of the Act or under the relevant clause of the DTAA.
8ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
8. In DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Delhi), the assessee, an international software marketing and development company opened a branch office in India and imported package in the form of CDs customized according to requirements of customers. The AO treated entire amount received by the assessee for transfer of software as well as other incidental services in nature of royalty and further held that since royalty income had accrued/arisen to assessee company through its PE in the form of branch office in India, the same was chargeable to tax in India as per Article 13 of DTAA. The CIT(A) concurred with the AO. The ITAT held that such income was not liable to be taxed as royalty. The Hon'ble High Court held that what has been transferred is not copyright or right to use copyright but a limited right to use copyrighted material and hence did not give rise to any royalty income. It noted that the licensee had no right to deal with the product just as an owner would be in a position to do and further there was no transfer of any right in respect of copyright by assessee and it was a case of mere transfer of a copyrighted article. As the payment was for a copyrighted article and represented purchase price of an article, it held that the same could not be considered as 9 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
royalty either under the Act or the DTAA. Similar view has been reiterated in CIT Vs. ZTE Corporation (2017) 392 ITR 890 (Delhi).
9. It can be seen from the discussion made in the immediately preceding paragraphs that there is a cleavage of opinion amongst the High Courts. Whereas the Hon'ble Karnataka High Court has held that the purchase of off-the-shelf software under software licence agreement is a payment in the nature 'royalty' to the supplier, inter alia, under the provisions of section 9(1)(vi) of the Act, the Hon'ble Delhi High Court has held it to be in the nature of business income of the recipient and not royalty. The matter is sub judice before the Hon'ble Supreme Court waiting finality.
10. The ld. AR contended that since the appeal of the assessee has been transferred from Bangalore to Pune, it cannot be subjected to the jurisdiction of the Hon'ble Karnataka High Court. In this context, it is noted that the assessee filed its return and the assessment was completed u/s.143(3) of the Act by the Addl. CIT, Range-11, Bangalore. The ld. first appellate authority, who decided the appeal of the assessee, is CIT(A)-IV, Bangalore. The assessee preferred second appeal before the Bangalore Benches of the Tribunal. Subsequently, a prayer was made for transfer of appeals 10 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
from Bangalore to Pune, which request was accepted and the appeals were transferred to Pune. Under these circumstances, a question arises as to which Hon'ble High Court exercises jurisdiction over the assessee for the year under consideration.
11. There is hardly any need to accentuate that the jurisdiction is decided by the office of the Assessing Officer as has been held by Hon'ble Delhi High Court in Suresh Desai & Associates Vs. CIT (1998) 230 ITR 912 (Delhi). In that case, the assessment was made at Bombay, the appeal against which was also decided by the CIT(A), Bombay. Both the parties preferred appeals to Tribunal, Delhi, which were disposed of by the Delhi Tribunal. Rejecting the contention of the assessee for hearing by it, the Hon'ble Delhi High Court held that jurisdiction under s. 256 vested in High Court of Bombay and not the High Court of Delhi. It further observed that transfer of assessment cases of the assessee under section 127(1) for some years other than the year in question has no relevance or bearing on territorial jurisdictional competence. In deciding so, it was also observed that the: `decisions of the High Courts are binding on the subordinate Courts and authorities or Tribunal under its superintendence throughout the territory in relation to which it 11 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
exercises jurisdiction. The binding authority does not extend beyond its territorial jurisdiction .... the questions of law arising for decision in a reference should be determined by the High Court which exercises territorial jurisdiction over the situs of the AO. Else it would result in serious anomalies. An assessee affected by an assessment order at Bombay may invoke the jurisdiction of the Delhi High Court to take advantage of the law laid down by it and suited to him and thus get rid of the law laid down to the contrary by the High Court of Bombay not suited to the assessee. This cannot be allowed.'
12. The assessee in CIT vs. Balak Capital P. Ltd. (2017) 391 ITR 112 (P&H) was based in Gujarat whose assessment order was passed by the ITO, Surat. The first appeal was also filed before the CIT(A), Surat. Further appeal was filed by the assessee before the Tribunal at Ahmedabad. Thereafter, when the registered office of the assessee was transferred to Amritsar, the appeal also got transferred. The assessee preferred appeal against the order passed by the Tribunal before the Hon'ble Punjab & Haryana High Court. The Hon'ble High Court held that since initial process of assessment was started at Surat and final assessment was framed by 12 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
AO at Surat, it lacked territorial jurisdiction to adjudicate the matter. Similar view has been taken by the Hon'ble Punjab & Haryana High Court in CIT Vs. Tibetan Childrens Village (2016) 388 ITR 126 (P&H) and the Hon'ble Allahabad High Court in CIT (E) Vs. Yamuna Expressway Industrial Development Authority (2017) 395 ITR 18 (Allahabad) holding that the jurisdiction of the Bench will be determined not by the place of business or residence of the assessee but by the location of the office of the AO.
13. In view of the foregoing discussion, it is evident that the assessee is subject to the jurisdiction of the Hon'ble Karnataka High Court as the assessment order was passed by the Addl.CIT, Range- 11, Bangalore. The contrary contention of the ld. AR in this regard is, therefore, repelled.
14. We have noticed above that there is a difference of opinion between the Hon'ble Karnataka High Court por una parte and the Hon'ble Delhi High Court por otra parte on the point in controversy before us. Having regard to the fact that the assessee is subject to the jurisdiction of the Hon'ble Karnataka High Court, it will be governed by the law laid down by its jurisdictional High Court as per Article 226 of the Constitution of India 13 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
notwithstanding a contrary favourable view of the Hon'ble Delhi High Court, which even this Bench of the Pune Tribunal has followed in some cases not falling within the jurisdiction of the Hon'ble Karnataka High Court. Ex consequenti, the assessee will have to be subjected to the view canvassed by the Hon'ble Karnataka jurisdictional High Court, as per which consideration for the purchase of off-the-shelf software under software licence agreement results in only a transfer of right to use copy of the software, constituting royalty under the provisions of section 9(1)(vi). As the instant case is that of a resident paying royalty to another resident, there is no need to examine any DTAA from the angle of taxability or otherwise of royalty in the hands of the recipient as the same stands established under the Act.
15. At this juncture, it is pertinent to note that the Finance Act, 2012 has carried out an amendment to section 9(1)(vi) dealing with `income by way of royalty' through insertion of Expl. 4 w.r.e.f. 1.6.1976, which reads as under : -
Explanation 4.-- For the removal of doubts, it is hereby 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 licence) irrespective of the medium through which such right is transferred.14 ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
16. There are certain noticeable points of this amendment.
Firstly, it is for the removal of doubts and hence clarificatory in nature. Secondly, it has been inserted retrospectively from 1.6.1976 covering the year under consideration. Next, it clearly provides that the transfer of any rights in respect of `any right, property or information', being the same expression as used in the clause (b) of section 9(1)(vi) which attracts taxation of income from royalty payable by a resident, shall include transfer of all or any right for use or right to use a computer software, which also covers within its ambit the granting of a licence. What is further relevant to note next is that it is not only that the expression `rights in respect of any right, property or information' shall `include' use or right to use a computer software, but it will `always' be considered to have been so included, which gives further strength to the retrospective effect of the insertion of the Explanation 4. The net effect of the insertion of the Explanation 4 read with Explanation 2 to section 9(1)(vi) of the Act is that the legislature has made it clear beyond an iota of doubt that consideration for the use or right to use a computer software in any form, including a mere granting of 15 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
licence, will be considered under the Act as income from royalty in the hands of the recipient.
17. Section 194J(1) of the Act deals with deduction of tax at source, inter alia, from royalty as per clause (c) and provides that the payer of royalty, not being an individual or a Hindu undivided family, shall, deduct tax at source at the rate of 10%. Clause (ba) to the Explanation to section 194J further provides that "royalty" for the purpose of this section shall have the same meaning as given in section 9(1)(vi) of the Act. Thus, it is clear that where income in the nature of royalty is payable to a resident-payee, then the payer is liable to deduct tax at source u/s 194J. Failure to deduct and pay such tax in the Government exchequer entails, inter alia, disallowance u/s 40(a)(ia) of the Act, as has been made by the authorities below in the instant case.
18. The ld. AR added another dimension to the issue by contending that the first judgment in the case of CIT Vs. Samsung Electronics Co. Ltd. & Ors (supra) was delivered on 24-09-2009 and the transaction of payment of software charges by the assessee got concluded during the year ending on 31-03-2009. It was, 16 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
therefore, urged that the assessee could not have foreseen its liability of deduction of tax at source on the payment made for renewal of software license and hence, the provisions of section 40(a)(ia) should not be applied.
19. This argument of the ld. AR, though sounds attractive at first flush, but, loses its shine on an in-depth analysis. There are two reasons for our not concurring with the same. First, the earlier judgment in Samsung Electronics Co. Ltd. (supra) relates to the assessment years 1999-200 and 2001-02 and obviously the assessment year under consideration, namely, 2009-10 is posterior to the years considered by the Hon'ble jurisdictional High Court. In the absence of any change in the legal position favouring the assessee during the interregnum, the same would have to be applied. Further, what is relevant in this context is the position of law relating to a specific assessment year and not the date of judgment. The second reason is that the Courts declare the law and do not legislate it. Any judgment of the Hon'ble Supreme/High Courts is considered as the position of law applicable from the inception of the provision unless it is specifically stated to have prospective effect. The Hon'ble Supreme Court in M.A. Murthy vs. State of 17 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
Karnataka & Ors. (2003) 264 ITR 1 (SC) has held that : `Normally, the decision of this Court enunciating a principle of law is applicable to all cases irrespective of its stage of pendency because it is assumed that what is enunciated by the Supreme Court is, in fact, the law from inception.' We are, ergo, unable to accord our imprimatur to the contention put forth on behalf of the assessee that the position of law at the point of payment of royalty was any different vis-à-vis the position later clarified in the case of Samsung Electronics (supra). The argument of the assessee that it could not have contemplated liability to deduct tax at source at the material time would have been correct, if it had been a case of retrospective amendment to some substantive provision making certain income chargeable to tax from an earlier date. Per contra, we are confronted with a situation of declaration of law by the Hon'ble jurisdictional High Court succeeded by an amendment of declaratory nature clarifying 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. 18 ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
20. In the above backdrop of the facts and the legal position, we uphold the view canvassed by the authorities below on this issue. The ground raised by the assessee in this regard is dismissed.
21. The next issue urged in the assessee's appeal is against the ld. CIT(A) not directing the AO to allow foreign tax credit of Rs.1,91,52,577/- for the taxes paid by foreign branches as claimed in the return of income filed. The second part of this ground is against the confirmation of the action of the AO in allowing foreign tax credit only to the extent of the basic MAT rate of 10% of profits of the foreign branches without adding surcharge and cess of 1.33%.
22. Succinctly, the facts of this issue are that the assessee claimed tax credit of Rs.1,91,52,577/- in the computation of income towards taxes paid by its overseas branches situated in five countries, namely, Netherland, France, US, UK and Belgium. On being called upon to explain the reasons for claiming such tax credit, the assessee submitted that its foreign branches constituted Permanent Establishments (PEs) and suffered tax on such incomes in accordance with the domestic tax laws of the respective countries. The income earned by the above foreign branches, in addition to suffering tax in respective foreign jurisdictions, again came to be 19 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
included in the total income for the purposes of taxation in India. Since profits of the foreign branches got doubly taxed, the assessee made out a case for claim of credit for such taxes paid abroad against the amount of tax payable in India. The AO required the assessee to reconcile the amount of income included in its total income under the Act and the amount of income which was offered in foreign tax jurisdictions for which it was claiming tax credit against the tax liability under the Act. The assessee submitted a reconciliation determining revenue of Rs.10,13,61,402/- suffering double taxation in India and abroad. The AO observed that the tax rates in these countries varied between 10% to 40%. Considering the fact that the assessee offered these incomes in India for taxation only at 10% under the minimum alternate tax as per section 115JB of the Act, he allowed foreign tax credit of Rs.1,01,36,140/- (10% of Rs.10.13 crore income, which suffered double taxation in India and abroad). The assessee's alternate contention that the foreign tax credit should be allowed at 11.33%, including surcharge etc. of 1.33%, did not find favour with the AO, who held that the assessee was entitled to the foreign tax credit only for the basic rate of 10% under the MAT. The ld. CIT(A) accorded his seal of approval to 20 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
the view taken by the AO, against which the assessee has approached the Tribunal.
23. We have heard both the sides and gone through the relevant material on record. The crux of the above factual position is that the assessee's foreign branches in five countries constituted its PEs, who suffered income tax in such jurisdictions. The assessee paid total tax of Rs.1.91 crore in foreign countries. Because of the assessee being a resident of India and liable to pay tax in India on its global income including that earned by its foreign branches, such income earned by the PEs came to be included in the total income under the Act. The amount of profit earned by the PEs, which has entered into the computation of the assessee's total income, is Rs.10.13 crore. As against the assessee's claim that it should be allowed tax credit for the full amount of taxes paid abroad amounting to Rs.1.91 crore, the Revenue has held that only the amount of tax relatable to the doubly taxed income could be allowed credit against the total tax liability of the assessee under the Act. There is a further controversy in the computation of tax u/s 115JB as to whether the tax credit should be allowed at the rate of 10% of the doubly taxed income, which is the basic rate of tax u/s 21 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
115JB or such rate should also include surcharge at 1.33%. Thus we need to determine the following two issues in this regard:-
i. Whether the assessee is entitled to the full foreign tax paid or tax only on the doubly taxed income?; and ii. If entitled only to tax on doubly taxed income, then the extent of foreign tax credit to be allowed?
24. We can better appreciate the position in the light of the relevant provisions contained in Chapter IX of the Act with the caption `Double taxation relief'. Section 90, being, the first section of this Chapter, to the extent it is relevant for our purpose, runs as under: -
`90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,--
(a) for the granting of relief in respect of--
(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or.....'
25. A circumspection of the above provision deciphers that in so far as sub-clause (i) is concerned, the same talks of granting relief in respect of 'income' on which tax is paid both in India and the 22 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
other country; and sub-clause (ii) talks of granting relief in respect of 'income-tax' chargeable under the Act and the concerned foreign country. Mechanism for granting relief is contained in the respective Double Taxation Avoidance Agreements.
26. The first issue before us is whether the assessee is entitled to credit for the full tax paid abroad or the tax paid only on the doubly taxed income? The ld. AR candidly admitted that his case is covered u/s.90(1)(a)(i) and not under (ii) of section 90(1)(a) of the Act. We will, therefore, focus only on sub-clause (i) of section 90(1)(a) of the Act as per which the Central Government may enter into an agreement with the Government of any country outside India 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 specified territory, as the case may be." This sub-clause, therefore, pre-supposes that 'income' which is sought to be reduced from the total income of the assessee under the Act must have also been included in the total income of the assessee in the other country. We find that even if the assessee is chargeable to tax under the Act on its global income, it may still be possible that some income is chargeable in the foreign tax jurisdictions but not chargeable under 23 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
the Act due to exemption available (which is different from income chargeable but deductible under the relevant provisions). If a particular income is included only in the total income under the Act but not under the total income of other country, or vice-versa, the same cannot qualify for the benefit under the provision. It is thus evident that only the doubly taxed income qualifies for relief u/s 90(1)(a)(i) of the Act.
27. We have noted above that the machinery for providing relief under section 90 is contained in the respective DTAAs. A major chunk of the assessee's income is from the USA. The relevant provision for granting relief of foreign tax in the DTAA between India and USA is contained in Article 25. Para 2 of the Article 25 dealing with granting relief to a resident of India, is as under : -
`2. (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the United States, whether directly or by deduction. 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 may be taxed in the United States.' 24 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
28. The above para fairly indicates that where a resident of India derives income which may be taxed in the United States also, then India shall allow a deduction from the tax on the income of that resident of an amount equal to the income tax paid in the United States. However, a cap has been provided to the extent of allowing such credit in the immediately next line by stating that: `Such deduction shall not, however, exceed that part of the income tax ... which is attributable to the income which may be taxed in the United States.'
29. It has been noticed above that the AO determined the tax liability of the assessee under section 115JB of the Act. This section contains a special provision for payment of tax by certain companies with reference to 'Book profits', which expression has been defined in its Explanation 1 to mean the profit as shown in the statement of profit and loss of the relevant previous year as increased by certain items given in clauses (a) to (k) and then reduced by certain items given in clause (i) to (viii). Though a part of the income of the assessee qualified for deduction u/s.10A in the regular computation, but such deduction is not available in the computation of income u/s.115JB in view of the amended clause (f) 25 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
and clause (ii) of the Explanation 1 to section 115JB at the material time. Thus, it is evident that in so far as computation of the assessee's book-profit u/s.115JB is concerned, the same includes within its ambit the amount of income which is otherwise eligible for deduction u/s.10A and, as such, the assessee also suo motu included such income in the computation u/s 115JB. It is seen as an admitted position that the assessee filed its return in India considering not only the income earned from Indian operations but also from its foreign branches. The AO determined tax on income under the normal provisions of the Act at Rs.12.75 crore and under section 115JB at Rs.17.25 crore. Eventual assessment has been made by considering the income u/s 115JB.
30. Again coming back to section 90(1)(a)(i), the position is that relief is to be allowed in respect of income on which tax has been paid in India and the other country. The assessee admitted before the AO that the income which suffered double taxation both in foreign countries and India is Rs.10.13 crore. In that view of the matter, it becomes clear that the relief under section 90(1)(a)(i) of the Act has to be granted only to the extent of such doubly taxed income and not beyond that. The assessee paid total taxes in 26 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
foreign countries to the tune of Rs.1,91,52,577/-. The amount of doubly taxed income is Rs.10.13 crore. As the income of the assessee has been finally computed u/s 115JB and it is not the case of the AO that such income of Rs.10.13 crore is not fully part of the book profits computed u/s 115JB, it is this amount of income which would require exclusion from the amount of income computed u/s 115JB.
31. Going with the above position and converting the exclusion of doubly taxed income of Rs.10.13 crore from the total income in terms of tax credit, the assessee will get tax relief of Rs.1,01,36,140 (going by the AO giving benefit of tax at the basic rate under MAT at 10%) or Rs.1,14,84,247/- (going by the basic rate tax of tax under MAT at 10% plus surcharge at 1.33%). Thus, the maximum amount of tax relief which can possibly be given to the assessee, subject to our determination of the second aspect of this issue, is Rs.1,14,84,247/-, meaning thereby that the tax paid in foreign countries to the tune of Rs.76,68,330/- (Rs.1,91,52,577/- minus Rs.1,14,84,247/-) cannot qualify for credit against the tax liability arising under the Act.
27ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
32. The ld. AR relied on the judgment in Wipro Ltd. vs. DCIT (2016) 382 ITR 179 (Karn) to contend that credit for the full amount of foreign tax at Rs.1,91,52,577/- should be allowed. In our considered this judgment does not advance the case of the assessee. In that case, the assessee claimed that it was entitled to relief of income taxes paid in foreign jurisdictions. The AO did not accept the claim, which was allowed by the CIT(A). However, the Tribunal restored the matter to file of the CIT(A) by holding that when the assessee was not liable to pay tax in view of exemption u/s. 10-A, it was not entitled to tax relief in respect of taxes paid in contracting country as per section 90. The Hon'ble High Court observed that income u/s. 10A was chargeable to tax u/s. 4 and was includible in total income u/s. 5, but no tax was charged because of exemption given u/s. 10A only for a period of 10 years. It held that merely because exemption has been granted in respect of taxability of source of income, it could not be postulated that assessee was not liable to tax. It is palpable from the above judgment that the issue raised before it was quite different. It was on the point that whether tax on income paid abroad, which income otherwise qualifies for the benefit u/s 10A of the Act, should be granted relief? On the other hand, admittedly income which has been deducted u/s 10A in 28 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
the normal computation is chargeable under the computation u/s 115JB and it is not the case of the AO that foreign tax relatable to such deductible income under the normal provisions should not be allowed credit. The Hon'ble High Court in Wipro Ltd. (supra) has further laid down in para 59 that: `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.' We, therefore, hold that the assessee is entitled to credit for the tax paid in foreign countries only to the extent of the doubly taxed income and not the remaining amount, whose corresponding income is not a part of the computation of income u/s 115JB under the Act.
33. Now we turn to the second aspect of the issue about the extent of foreign tax credit to be allowed in respect of the doubly taxed income. Whereas the AO has restricted the tax credit to the extent of 10% of the doubly taxed income, being, the basic rate at which income is chargeable to tax u/s 115JB, the assessee seeks, notwithstanding its claim for full credit for foreign taxes, credit for 29 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
the foreign tax at the effective rate of tax and surcharge etc. u/s 115JB, that is, 11.33%.
34. We have noted the language of section 90(1)(a)(i) which talks of granting relief in respect of doubly taxed 'income'. Similarly, we have noted Article 25(2) of the DTAA between Indian and the USA providing for deduction from the tax on the income of an amount equal to the income tax paid in the USA. On a conjoint reading of the above provisions, following two things emerge. First is that it is the amount of doubly taxed income which has to be excluded from the income chargeable to tax in India. Once we exclude such doubly taxed income from the income computed under the Act, then whatever is the amount of tax and surcharge thereon will get automatically excluded from the total tax liability computed under the Act. Second is that the deduction from the income tax liability under the Act has to be restricted to the amount of income tax paid in the USA on such doubly taxed income. The above two propositions, when applied to the factual panorama of the extant case, leads us to the inevitable conclusion that once the doubly taxed income is to be excluded, it would mean that the foreign tax credit will have to be allowed on it at the rate at which such income 30 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
attracted taxation under the Act, which is 11.33% under section 115JB of the Act. If however, the amount of tax paid in the other country is less than 11.33%, then the deduction should be limited to the amount of tax paid on such doubly taxed income in the other country. The AO has noted in the assessment order that the assessee paid foreign tax at the rates ranging from 10% to 40%. Thus if the doubly taxed income was subjected to tax in the other country at the rate of 10%, then tax credit should be restricted to 10% and in case it was subjected to foreign tax in the other country at a rate higher than 11.33% (say, 15% or 20% or 40%), then the amount of foreign tax credit should be restricted to 11.33% of the concerned doubly taxed income. The AO is directed to verify the respective tax rates in Netherland, France, US, UK and Belgium for the year under consideration on which the assessee paid taxes and then allow the benefit accordingly after granting reasonable opportunity of hearing to the assessee.
35. Ground No.2 of the assessee's appeal is against the confirmation of disallowance u/s.14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (hereinafter also called `the Rules') at Rs.80,93,070/-.
31ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
36. Briefly stated, the facts of the case are that the assessee claimed dividend income amounting to Rs.8,74,13,850/- earned on mutual funds as exempt from tax. The Assessing Officer (AO) observed that no disallowance was offered by the assessee u/s.14A of the Act. On being called upon to explain the reasons for not offering the disallowance, the assessee submitted that a suo motu disallowance of Rs.3,13,492/- was offered. The AO, not satisfied, computed the disallowance u/s.14A r.w. Rule 8D at Rs.80,93,070/-. The ld. CIT(A) echoed the assessment order on this point.
37. We have heard both the sides and gone through the relevant material on record. The assessment year under consideration is 2008-09. Unlike earlier years, Rule 8D is applicable for the purpose of making disallowance u/s.14A. The disallowance made by the AO is in two parts, viz., Rs.5,49,818/- under Rule 8D(2)(ii) and Rs.75,43,252/- under Rule 8D(2)(iii). In so far as the disallowance of Rs.5,49,8198/- is concerned, it is seen from the assessee's Balance sheet, whose copy has been placed in the paper book, that as against Investments of Rs.176.57 crore, the assessee's Shareholders' fund stands at Rs.509.29 crore. Thus, it is evident that the Shareholders' fund is far in excess of the amount of 32 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
investments. The Hon'ble Karnataka High Court in CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from a common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. This view has been taken by following the judgment of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), upholding the view of the lower authorities that when interest free funds in the form of share capital and reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) to the tune of Rs.5,49,818/-.
38. Now we come to the disallowance made under Rule 8D(2)(iii) amounting to Rs.75,43,252/-. It is seen that the same has been worked out by the AO at 0.50% of average amount of investments. This computation is strictly in accordance with the mandate of Rule 33 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
8D(2)(iii). Since Rule 8D is applicable from the assessment year under consideration, the disallowance has to be made and sustained in accordance with the prescription of such rule only.
39. Here we would like to clarify that the Hon'ble Delhi High Court in ACB India Ltd. vs. CIT (2015) 374 ITR 108 (Del) has held that the average value of investments, for the purposes of Rule 8D(2)(iii), should be confined to those securities in respect of which exempt income is earned and not the total investments. Similar view has been taken by the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments (P) Ltd. (2017) 165 ITD 27 (Del) (SB) holding that only those investments should be considered for computing average value of investments which yield exempt income during the year. In view of the afore referred precedents, we set aside the impugned order to this extent and remit the matter to the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments in calculating the average value of investments, which have yielded exempt income during the year. The assessee will be allowed hearing opportunity in the fresh proceedings. 34 ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
40. The ld. AR further contended that a suo motu disallowance of Rs.3,13,492/- was offered by the assessee under section 14A. The AO is directed to verify this claim and then accordingly compute the amount disallowable u/s.14A r.w. Rule 8D(2)(iii).
41. Ground No.4 of the assessee's appeal is against the confirmation of addition of Rs.5,84,000/-, being, the value of lapsed ESPOs in the income computed under the normal provisions of the Act as well as the profits computed u/s.115JB.
42. We have heard both the sides and gone through the relevant material on record. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of the immediately preceding two assessment years, appeals of which have been decided by the Tribunal on 05-08-2019. In the appeal for the A.Y. 2008-09, the Tribunal in IT(TP)A.No.287/Bang/2013 has held that the amount of ESOPs was rightly credited by the assessee to the General reserve on lapse of option and hence cannot be included in the computation of book profits u/s.115JB of the Act. It has further been directed that such an amount of lapsed ESOPs should be considered as income chargeable to tax u/s.41(1) for the year in 35 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
which cessation or remission took place and not the years in which deduction was claimed. We hold accordingly.
43. Ground No.5 of the assessee's appeal is against reducing telecommunication charges and internet usage charges totalling Rs.9,82,28,337/- from only the 'Export turnover' in computing deduction u/s.10A. Ground No.1 of the Revenue's appeal is against the direction of the ld. CIT(A) that link charges and internet usage charges be reduced from 'Export turnover' and also from 'Total turnover'.
44. This issue also came up for consideration before the Tribunal in relation to the A.Y. 2007-08. Vide its order dated 05-08-2019 in IT(TP)A. No.286/Bang/2013, the Tribunal has held that any amount reduced from 'Export turnover' should also be reduced from the amount of 'Total turnover' in the computation of deduction u/s.10A of the Act. Following the same, we allow the assessee's ground and dismiss that of the Revenue.
45. Ground No.6 of the assessee's appeal is against excluding Foreign currency expenses amounting to Rs.1,07,63,08,980/- from the 'Export turnover' in the process of computation of deduction u/s.10A. The ld. AR fairly agreed that the full amount of foreign 36 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
currency expenses has been rightly held to be excludible from the amount of 'Export turnover'. It was, however, prayed that the same amount may also be excluded from the amount of 'Total turnover'. Following similar view taken by us in relation to Ground No.5 of the assessee's appeal and Ground No.1 of the Revenue's appeal above, we hold that the amount of Foreign currency expenses to the tune of Rs.107.63 crore be excluded from the 'Export turnover' as well as 'Total turnover'.
46. Ground No.7 of the assessee's appeal is against reduction in the amount of deduction u/s.10A by a sum of Rs.2,41,23,133/- on the premise that the assessee is in the business of Deputation of Technical Manpower (DTM) and/or rendering of technical services outside India and hence income from providing onsite development of computer software is not eligible for deduction u/s.10A.
47. Similar issue has been determined by the Tribunal in the assessee's own case for the A.Y. 2007-08 holding that the amount relatable to DTM and onsite software services should be considered as eligible for deduction u/s.10A of the Act. Since facts and circumstances are admittedly similar, following the view taken for the A.Y. 2007-08, we determine this issue in favour of assessee. 37 ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
48. Ground No.8 of the assessee's appeal is against the ld. CIT(A) in not directing the AO to allow set off of brought forward losses and unabsorbed depreciation of earlier years against the business income, short term capital gain and income from other sources in computing total income in accordance with the provisions of Chapter VI. Ground No.2 of the Revenue's appeal is against the direction of the ld. CIT(A) in holding that if the unit of the assessee is independent then its loss could not be adjusted against the profits of other units for the purposes of computing deduction u/s.10A.
49. We have heard both the sides and gone through the relevant material on record. The Tribunal in its order for the A.Y. 2007-08 has discussed this issue threadbare and following the judgment of Hon'ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd. (2017) 291 CTR 1 (SC) has held that the deduction should be allowed qua the eligible undertaking standing on its own without reference to the other eligible or non-eligible unit or undertakings. To put it simply, the profits of the eligible units should be considered on standalone basis. Following the view, we determine the issue accordingly.
38ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
50. Ground No.9 of the assessee's appeal about the deduction of interest u/s.80G was not pressed by the ld. AR, which hereby stands dismissed.
51. Ground No.11 of the assessee's appeal is against the ld. CIT(A) in not directing the AO to determine the amount of MAT credit to be carried forward is stated to be consequential to Ground No.10 relating to foreign tax credit, which we have decided supra.
52. Ground No.12 is against the levy of interest u/ss. 234B and 234C. The ld. AR submitted that pursuant to amendment carried out in section 115JB by substitution of clause (i) of Explanation 1, the amount or amount set-aside as provision for diminution in the value of any asset came to be added to the amount of profit as shown in the statement of profit and loss. The ld. AR submitted that this amendment came into force after the close of the relevant financial year and hence, the assessee could not have anticipated its liability to pay advance tax on the same at the material time. It was, therefore, prayed that interest u/ss.234B and 234C should be directed to be suitably reduced.
53. We have heard both the sides and gone through the relevant material on record. The assessee's computation of income 39 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
u/s.115JB has been placed at page 58 of the paper book. It can be seen that in such computation, the assessee added Rs.6,99,33,296/- towards `the amount or amounts set-aside for diminution in the value of any asset'. The amendment to section 115JB through clause (i) has been brought out by the Finance (No.2) Act, 2009 with retrospective effect from 01-04-2001. The Finance (No.2) Bill 2009 was introduced in the Lok Sabha on 06-07-2009, whereas the financial year of the assessee closed on 31-03-2009. It is pursuant to the retrospective amendment coming into force after the close of the financial year but before the filing of the return that the assessee computed its income u/s.115JB accordingly. In so far as the question of charging interest u/s.234B and 234C is concerned, it is found that the Hon'ble jurisdictional Karnataka High Court in CIT Vs. Kirloskar Systems Ltd. (2013) 40 taxmann.com 124 (Kar.) has held that interest u/s.234B and 234C cannot be levied for default in payment of advance tax in case wherein section 115JB is invoked pursuant to such amendment. We, therefore, hold that interest u/ss.234B and 234C should not be charged to the extent of retrospective amendment to section 115JB affecting the computation of book profits accordingly.
40ITA No.342/PUN/2014
and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.
54. Ground No.13 of the assessee's appeal was not pressed by the ld. AR, which is hereby dismissed.
55. The third and the fourth grounds of the Revenue's appeal are against the direction by the ld CIT(A) to the TPO for computing Arm's Length Price of the international transaction of `Interest received' at Rs.5,86,903/- from its Associated Enterprise adopting the average EURIBOR rate as applicable to the A.Y. 2009-10.
56. Here again, both the sides are in agreement that the facts and circumstances of these grounds are similar to those for the preceding years wherein the Tribunal has held that EURIBOR +2% should be considered as benchmark for determining the ALP of the international transaction of interest received. We follow the same and order accordingly.
57. In the result, both the appeals are partly allowed.
Order pronounced in the Open Court on 26th August, 2019.
Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दनांक Dated : 26th August, 2019 सतीश 41 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd. आदेश क ितिलिप अ िे षत/Copy षत of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. यथ / The Respondent; 3. The CIT(A)-IV, Bangalore 4. The CCIT-II, Bangalore 5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे "सी" / DR 'C', ITAT, Pune; 6. गाड फाईल / Guard file. आदेशानुसार/ ार BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date 1. Draft dictated on 20-08-2019 Sr.PS 2. Draft placed before author 23-08-2019 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *