Income Tax Appellate Tribunal - Mumbai
Dcit 3(4), Mumbai vs Tata Consultancy Services Ltd., Mumbai on 18 December, 2023
P a g e |1 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 IN THE INCOME TAX APPELLATE TRIBUNAL "H" BENCH, MUMBAI BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER & SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA No. 2413/Mum/2021 (A.Y. 2015-16) Tata Consultancy Services Vs. DCIT LTU-1 Limited, 9 t h Floor, Nirmal 29 t h Floor, Centre One, Building, Nariman Point, World Trade Centre Mumbai - 400021 Cuffe Road, Mumbai - 400005 स्थायी ले खा सं . /जीआइआर सं . / PAN/GIR No: AAACR4849R Appellant .. Respondent ITA No.2477/Mum/2021 (A.Y.2015-16) DCIT-3(4) Vs. Tata Consultancy 29 t h Floor, Centre-1 Services Limited World Trade Centre, 9 t h Floor, Nirmal Building Cuffe Parade, Nariman Point, Mumbai - 400005 Mumbai - 400021 स्थायी ले खा सं . /जीआइआर सं . / PAN/GIR No:AAACR4849R Appellant .. Respondent Appellant by : Porus Kaka Sr. Adv. a/w Manish Kanth Respondent by : Heera Ram Choudhary Date of Hearing 07.11.2023 Date of Pronouncement 18.12.2023 P a g e |2 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 आदे श / O R D E R Per Amarjit Singh (AM):
Both these cross appeals are filed by the assessee and revenue for assessment year 2015-16 directed against the common order of CIT(A). Since, common issue on identical facts are involved in these appeals filed by the assessee and revenue, therefore, for the sake of convenience all these appeals are adjudicated together by taking ITA No. 2413/Mum/2021 as lead case.ITA No. 2413/Mum/2021 (Assessee's Appeal)
2. Fact in brief is that return of income declaring total income of Rs.130,40,22,86,880/- was filed on 20.11.2015. The case was subject to scrutiny assessment and notice u/s 142(2) of the Act was issued on 27.04.2016. The assessee company engaged in the business of export of computer software, providing e-solutions, BPO activities and other management consultancy activity. Further fact of the case are discussed while adjudicating the ground of appeal the assesse and the revenue.
Ground No.1: Disallowance u/s 40(a)(ia) year end provision made:
3. During the course assessment the assessing officer noticed that assesse has made year end provisions for F.Y. 2014-15 to the amount of Rs.141,55,62,737/-. The assessing officer asked the assesse to justify why no tax was deducted on the aforesaid provision and why the same should not be disallowed u/s 40(a)(ia) of the Act. The assessee explained that assessee company's account were finalized in 2nd week of April every year. In order to reflect its expenses in the books of account as per the applicable accounting standard and accounting policy, the company was required who merely provide for the expenses because the bills from the vendors were not received. It was also explained that these P a g e |3 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 provisions were made on reasonable estimate basis and were debited to expense account and credited the provision account. It was also explained that no account of any vendor was credited for such provision, therefore, no tax was deducted. However, the AO has not agreed with the submission of the assessee and stated that as per Sec.
40(a)(ia) of the Act any expense on which tax is deductible at source under the relevant provision of the Act and such tax has not been deducted or after deduction has not been paid, no deduction can be allowed for such expenses while computing the income chargeable under the head profit and gains of business or provision. Since, the assessee has not deducted tax on the provisions of expenses and therefore the AO held that the case of the assessee is squarely covered by the provisions of Sec. 40(1)(ia) of the Act. Therefore, the amount of Rs.141,55,62,737/- was disallowed u/s 40(1)(ia) of the Act.
4. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has upheld the disallowance made by the assessing officer u/s 40(1)(ia) of the Act.
5. During the course of appellate proceedings before us at the outset the ld. Counsel submitted that identical issue on similar fact has been adjudicated by the ITAT, Mumbai in the case of the assessee for assessment year 2013-14 and 2014-15 vide ITA No. 1769/Mum/2018 and ITA No. 5904/Mum/2019 Mumbai ITAT.
6. Heard both the sides and perused the material on record. With the assistance ld. Representatives we have perused the decision of ITAT for assessment year 2013-14 as referred by the ld. Counsel wherein the identical issue on similar fact has been adjudicated in favour of the assessee. The relevant operating part of the decision is reproduced as under:
P a g e |4 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 "18.1. We have heard rival submissions and perused the materials available on record. We find that assessee had made certain provisions for expenses at the end of the year for which deduction of tax at source has not been made. The ld.
AO disallowed the same for non-deduction of tax at source invoking the provisions of Section 40(a)(ia) of the Act both under normal provisions of the Act as well as under the computation of book profits u/s.115JB of the Act. We find that the ld. CIT(A) had deleted the said disallowance by observing as under:-
"This is a matter arising for the first time in the case of assessee and has three parts, I, II and III. The Assessing Officer deals with the same in para 14 of assessment order. The genesis of the disallowance under section 40(a)(ia)1 is remark in Audit Report under section 44AB which is as under:
In the opinion of the company, year-end provisions of expenses which are reversed in the subsequent year are not liable for deduction of tax at source as such provisions are made only for the purpose of preparation of annual financial statements in accordance with applicable accounting principles/standards
16. I first take up the part I on the matter of disallowance u/s 40(a)(ia).
The Assessing Officer called for explanation of the assessee who stated inter alia that a. Entry concerned is made as per accounting standards and policy b. The person concerned to whom sum is payable is not identifiable from the entry c. Tax deduction at source is effected when the person to whom sum payable is identified and thereafter Form 16A is issued.
d. Certain case decision is cited.
The Assessing Officer overruled the assessee and reasons recorded by him included the following:
A. Even when sum is credited to suspense account tax deduction at source is to be made B. Bangalore ITAT in case of IBM India Pvt Ltd [TS-305-ITAT-2015(Bang] has stated that even when sum is credited to suspense account tax deduction at source is to be effected and this included provision
17. The matter is examined. The primary requirement to effect disallowance under section 40(a)(ia) is by identifying a default in complying with provision relating to TDS. The explanation before Assessing officer is that provision is created in books in accordance with accounting principle and reversed next year. This is a consistent method of accounting followed by the assessee. Here a provision created by book entry is disallowed by invoking section 40(a)(ia). If at all Assessing Officer had to make a disallowance under section 40(a)(ia) the entry(ies) must be split up by identifying (a) to whom payable (b) whether the sum credited is one where tax is deductible at source (c) under which section tax is deductible at source and (d) whether same exceeds threshold limits specified In section. Identification of violation in respect of specific entry or a set of entries in tax deduction at source was a fundamental exercise P a g e |5 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 keeping in view provisions of XVll-B was the first step before invoking section 40(a)(ia). This exercise is not carried out. As no default in deduction of tax at source is recorded, the question of disallowance does not arise. Hence on this count assessee succeeds on part I of the ground.
18. Part II is the disallowance of whole of the sum created as provisions.
The Assessing Officer disallowed the same after recording reasons that",... Even then assessee cannot be a/lowed the deduction of provisions u/s 37 as in such situation provision is nothing but an ac/hoc provision, liability for which has ether not accured or cannot be ascertained ant thus the provision cannot be said to have been laid out or expended wholly and exclusively for the purposes of business". The written submission does not contain a specific comment on this part. In course of hearing, the appellant stated that this is a consistent method where income and expenses are accounted for following the principle of accrual and that this consistent method is disturbed without adequate recording of reasons or analysing facts.
19. I find from the assessment order that the views of appellant is not considered. The decision is taken without examining relevant facts. Verification of annual reports of the company reveal no significant change in accounting policy. The Assessing Officer has made a disallowance merely because provision is created. The disallowance without examining the nature of provision by itself renders it wrong. There are admissible and inadmissible provisions. The disallowance made sans valid reasons has no locus stand/. The heading of the disallowance and the computation statement mentions the same as disallowance under section 40(a)(i)2 which leaves doubt as to whether there is an unambiguous finding regarding eligibility under section 37. As an emphatic finding which is reason based is not; present in the assessment order, the alternate disallowance under section 37 is also held not in order,
20. Part III of the ground is against adding the same in computation of Book Profit under section 115JB. I had deleted the substantive addition on both counts. Keeping in view this decision, the Assessing Officer is directed to recompute book profit under section 115JB.
21. In view of discussion above, he Assessing Officer is directed to delete the addition of Rs.2,6551677,983.Parts I, II and III of the ground is disposed of accordingly."
18.2. We find that provision has been made in the books by the assessee as per the standard accounting practices followed by it and that since the accounts of the company are closed within short period after the end of the year, before which the data or invoice from the concerned vendor was not available with the assessee whereas the services had already been provided by the vendor to the assessee. In respect of these items, the assessee had made provision for expenses in its books as per the applicable accounting standard and as per the generally accepted accounting principles on accrual basis. Since the concerned vendor account is not credited by the assessee they are not identifiable for want of bills, the assessee has credited provision for expenses and had not deducted tax at source for the same, as according to the assessee, only when the party P a g e |6 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 name is identifiable, the provisions of 40(a)(ia) of the Act would come into operation. Accordingly, it pleaded that no liability of TDS could be fastened on the assessee when the payee is not identifiable. We further find that the very same issue has been the subject matter of adjudication of this Tribunal in the case of Mahindra and Mahindra Ltd., vs DCIT in ITA No.8597/Mum/2010 for A.Y.2006-07 dated 2006-07 dated 06/06/2012 wherein this ground has been adjudicated as under:-
"19.Next ground of appeal is about addition made under section 40a(ia) in respect of year-end provision of Rs.4,25,52,623/-.AO on pages 104 (para23) has discussed the issue as under-
"It has been stated by auditors in note for clause 17(f) and auntie 7 (b) of form 3 CD audit report, that company is not detecting the TDS on year end provision as they are of the view that the liability of deducting TDS arises in subsequent year when Bill of the party is booked."
19.1.After considering the submissions made by the appellant AO held that same was not acceptable because expenses under consideration was liable to TDS and were squarely covered by the provisions of chapter XVIIB of the Act. He was of the view that once the assessee was debating the P&L account, it automatically was crediting the party account based on matching principle.
19.2.Before us ,AR submitted that amount in question was year-end accounting provision to book, expenditure incurred, but in respect of which there was no obligation to either pay or to deduct tax at source is because no income had accrued to the payee, that no order had been passed under section 201 of the act holding, the appellant to be an assessee in default. Therefore, no disallowance could be made under section 40a(ia). He referred to page number 265 of the paper-book that gives details of provision on which TDS was not paid. As per the AR bills for the said expenditure were not received during the year under consideration.
As per the AR, the appellant company would make year-end provisions based on services rendered by various lenders/professionals. These provisions represented cost of various activities carried out by the company during the relevant financial period. Since, the company was following the Mercantile system of accounting it was required to account for such expenses, even though the concerned parties had not submitted their bills or such bills were pending for approval based on the internal system. At that point of time, since bills from the contractors had not been raised though that was owed by the company in favour of any specific party. Such a debt would be owed only on receipt of the bills and after it had been passed following the procedure. Only at that point of time relationship of debtor and creditor was established and was also an obligation to pay that would amount within the agreed period of time. The obligation, to deduct tax at source from the account of a specific party arose only at the time the bill was passed not before that. Citing the example of audit fees the AR submitted that obligation to pay the fees to the statutory auditors arises only after they complete the statutory audit.
P a g e |7 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 He relied upon the decisions of GE India Technology Centre Private Ltd.(327 ITR 456) and Industrial Development Bank of India(107 ITD45) in this regard. DR submitted that work was already carried out for the assessee, that appellant should have deducted tax source. He further submitted that once the amount was debited to profit and loss account provisions of section 40(a)(ia) were applicable.
19.3.We find that the AO has not examined the issue about year-end payments. There is a difference between the payments that are made during the year and the payments made at the fag-end of the year. In our humble opinion in 2nd category of payments tax has been detected in the subsequent year when Bills are booked. In this regard we have also considered the amendment made to Sec.40(a)(ia) by the finance act,2008, with retrospective effect from 1.4.2005.We have also perused the case laws relied upon by the AR. Principles discussed in the said judgement is also support our view that provisions of tax deducted at source were not applicable in case consideration Ground number 19 is decided in favour of the assessee."
18.3. Respectfully following the same, we find no infirmity in the order of the ld. CIT(A) granting relief to the assessee. Accordingly, the ground No.8 raised by the Revenue is dismissed."
Following the decision of ITAT as referred supra we allow this ground of appeal of the assessee for the reason mentioned in the finding of the ITAT order. Therefore, this ground of appeal of the assessee is allowed.
Ground No. 2: Claim of deduction u/s 10AA in respect of interest income:
7. During the course of assessment the assessing officer noticed that assessee has earned total interest income of Rs.1554.93 crores out of which amount of Rs.958.82 crores was attributable to SEZ units which has been allocated on the basis of turnover. The assessee has claimed deduction u/s 10AA in respect of interest of Rs.958.82 crores included in the SEZ profits. However, the assessing officer was of the view that the aforesaid claim of deduction was not a part of the return of income and assessee had raised this claim during the course of assessment.
Therefore, AO has referred the decision of Hon'ble Supreme Court in the case of Goetze (I) Ltd. (284 ITR 323) and disallowed the claim of deduction u/s 10AA on the interest income.
P a g e |8 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1
8. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.
9. During the course of appellate proceedings before us the ld. Counsel submitted that on similar fact and identical issue the ITAT, Mumbai in the case of the assessee for assessment year 2014-15 vide ITA No. 5904/Mum/2019 has decided the issue in favour of the assessee.
10. Heard both the sides and perused the material on record. We have perused the decision of ITAT in the above referred case wherein identical issue on similar fact the issue has been decided in favour of the assessee. The relevant operating part of the decision is reproduced as under:
"19. We heard the parties and perused the material on record. The lower authorities have denied the benefit of deduction under section 10AA on the interest income earned by the assessee for the reason that the claim is not made through filing the revised return. In Goetze (India) Ltd.(supra) the Hon'ble Supreme Court held that the assessee can make a claim for deduction, which has not been claimed in the return, only by filing a revised return within the time allowed. In assessee's case, we notice that the assessee, in the computation of income has claimed the deduction under section 10AA without including the interest income to the profits of the business and has only revised the amount of deduction before the lower authorities by including the interest income. Therefore, we see merit in the contention of the Ld.AR that this is not a fresh claim, but a re-computation of the deduction already claimed while filing the return of income. Be that as may, the powers of the Tribunal are not impinged in entertaining claim not made in return of income or revised return of income.
20. Before proceeding on merits, we will look at the relevant provisions of section 10AA, which reads as below:-
"10AA. **** (7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the undertaking: Provided that the provisions of this sub-section as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009) shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years."
P a g e |9 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 (emphasis supplied)
21. Plain reading of the computation mechanism as provided in subsection (7) of section 10AA leads to the conclusion that for the purpose of deduction under section 10AA, it is the profits of the business that needs to be considered. In assessee's case we notice that the Assessing Officer had not disputed the fact that the interest on deposits being part of profits from business of the assessee and therefore there is merit in the contention that while computing the deduction as per subsection (7) of section 10AA, the same is to included as part of the profits of the business.
22. We in this regard notice that in the Full Bench decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Hewlett Packard Global Soft Ltd (87 Taxmann.com 182) considered similar issue in the context of deduction under section 10A/10B of the Act where it is held that -
"35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the „Gross Total Income of the Undertaking‟, which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10- B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before „Gross Total Income‟ as defined under Section 80-B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10- B of the Act. The words „derived by an Undertaking‟ in Section 10-A or 10-B are different from „derived from‟ employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction.
36. We have to take a purposive interpretation of the Scheme of the Act for the exemption under Section 10-A/ 10-B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play-in-the-joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive P a g e | 10 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 interpretation, was also propounded by Hon'ble Supreme Court in the following cases:-
I] In Bajaj Tempo Ltd., Bombay Vs. Commissioner of Income Tax, Bombay, [(1992) 3 SCC 78], the Hon‟ble Supreme Court held that:-
"5. ... ..Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analyzed then it appears that literal construction would not be proper. ..."
II] In R.K. Garg v. Union of India, [(1981) 4 SCC 675] = [1982 SCC (Tax) 30 p.690], the Hon‟ble Apex Court has held as under:-
"8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events ³ self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court P a g e | 11 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on meager and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid."
37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as „Income from other Sources‟ under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be delinked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act.
38. We therefore affirm and agree with the view expressed by the first Division Bench of this Court in the case of M/s. Motorola India Electronics (P) Ltd.(supra) and we do not agree with the view taken by the subsequent Division Bench on 10/04/2014 in the present case.
23. We further notice that a similar view is expressed by the Jurisdictional High Court in the case of Symantee Software India P Ltd (supra) while considering the deduction under section 10A of the Act. It is relevant to mention here that the manner of computing deduction under section 10A as per the provisions of subsection (4) of the said section is similar to subsection (7) of section 10AA and therefore the ratio of the above decisions rendered in the context of deduction under section 10A would equally be applicable to deduction claimed under section 10AA. Accordingly respectfully following the above decision of the jurisdictional High Court and also the Full Bench of the Hon‟ble Karnataka High Court, we hold that interest income is also to be considered for the purpose of arriving at the profits eligible for deduction under section 10AA. The Assessing Officer is directed to re-compute the deduction under section 10AA accordingly. The ground no.4 of the appeal is thus allowed."
P a g e | 12 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 Following the decision of ITAT as referred supra we allow this ground of appeal of the assessee on the reason mentioned in the above order of the ITAT, therefore, this ground of appeal of the assessee is allowed.
Ground No. 3: Disallowance of expenses incurred on payment of subscription fees u/s 40(ai) Rs.974,46,988/-:
11. During the course of assessment the AO has noticed that during the year under consideration the assessee has made payment towards subscription services amounting to Rs.974,46,988/- to various non-
resident without deducting withholding taxes. The payment towards subscription were mainly made for the following purposes:
"(i) Online access to database/periodical/research subscription journal
(ii) Subscription towards software license
(iii) Webinar access"
In support of its claim of non-deduction of withholding tax on the subscription services the assessee explained that these were publication and was not an information or advice given individually. The information was available on subscription to anyone willing to pay. It was a copyright information and cannot be passed to anyone else. The information was accessable by any subscriber on payment of requisite price with regular internet access. It was also explained that it was for use of copyright article and not for transfer of right in the copyright in the article. The assessee has not received any knowledge as to how database were maintained etc. However, the AO has not agreed with the submission of the assessee. He was of the view that information obtained by the assessee was of technical in nature and the information/knowledge available to the assessee was made through license, therefore same was covered under the definition of royalty under Sec. 9(1)(iv) and (vi) of the Income P a g e | 13 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 Tax Act as well as Article 13(2)/(3) of the treaty. Therefore, the aforesaid amount was disallowed and added to the total income of the assessee.
12. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has upheld the action of the assessing officer.
13. During the course of appellate proceedings before us the ld. Counsel submitted that subscription was made towards publication and same was not any information or advice given individually. He also submitted that information was accessable by any subscriber on payment of requisite price with regular internet access for which no particular software or hardware is required. He also stated that the fees was payable even if no services was utilised. He also referred the decision of Hon'ble Bombay High Court in the case of DIT (IT) Vs. Dun & Bradstreet Information Services India (P) Ltd. (2012) 20 taxman.com 695 (Bombay).
On the other hand, the ld. D.R supported the order of lower authorities.
14. Heard both the sides and perused the material on record. We have perused the decision of Hon'ble Bombay High Court in the case of Dun & Bradstreet Information Services India Pvt. Ltd. as referred supra by the ld. Counsel wherein held that payment to non-resident for import of business information reports from an American company were not liable to deduction of tax at source u/s 195 of the Act.
15. We have also perused the decision of ITAT in the case of American Chemical Society Vs. DCIT (IT) wherein held that subscription fees received by assessee, a corporation based in USA from providing access to its online chemistry database and online authorise the independent customers would not qualify as royalty in terms of Sec. 9(1)(vi) and Article 12(3) of India USA DTAA. We have also considered the P a g e | 14 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 submission of the assessee that subscription was paid for the services pertaining to publication and same were not an information or advice given individually. The subscription services were not of the nature of transfer of right in the copyright in the article etc. The AO has not contrary disproved the material fact that subscription was made for use of a copyrighted article and not for transfer of right in the copyright in the article and assessee had not received any licence for commercial exploitation of the copyright. In view of the facts and findings as discussed we consider the ld. CIT(A) is not justified in sustaining such disallowance, therefore, this ground of appeal of the assessee is allowed.
Ground No.4: Disallowance of foreign tax credit in respect of income pertaining to Sec. 10A/10AA eligible units in India:
16. During the year under consideration the assessee claimed tax credit of Rs.527,99,93,028/- u/s 90 of the Act on the ground that even the income in respect of which deduction u/s 10AA was claimed was eligible for relief u/s 90 of the Act. However, the AO has not allowed the claim of tax credit u/s 90 in respect of income eligible for deduction u/s 10A of the Act.
17. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee directing the AO to allow foreign tax credit only with respect to DTAA country, where the income was taxed both in India and abroad. It was also directed that assessee would be entitled to relief only to the extent of tax paid overseas on the income which has been offered to tax abroad and also in India. The ld. CIT(A) also stated that relief of tax should not exceed the rate of tax payable in India. The ld. CIT(A) after following the decision of ITAT in the case of the assessee for assessment year 2008-09 to 2010-11 vide ITA No. 5713/Mum/2016 for 2009-10 also stated that AO is directed to break up foreign tax credit in 3 points taxes paid in US, tax paid in other P a g e | 15 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 DTAA countries and taxes paid in non DTAA countries. The ld. CIT(A) also stated that in other DTAA countries, tax credit will not be available in respect of income which is claimed exempt u/s 10A/10B and respect of non DTAA countries tax credit will not be available.
18. During the course of appellate proceedings before us the ld. Counsel referred the decision of ITAT in the case of assessee itself for assessment year 2007-08 to 2013-14. He also submitted that foreign tax credit should be provided for taxes paid in overseas jurisdiction in respect of Sec. 10A(10AA) eligible income in India, as per the tax credit provisions of respective DTAA. He also submitted that even under MAT computation the assessee should be allowed full credit for tax paid overseas in respect of 10A/10AA income.
19. Heard both the sides and perused the material on record. We have perused the decision of ITAT for the assessment year 2009-10 vide ITA No. 5823/Mum/2016. The relevant operating part of the decision is reproduced as under:
"31. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As could be seen, while the Assessing Officer has disallowed assessee's claim of foreign tax credit in respect of income exempt under section 10A/10AA of the Act on the reasoning that only such income which is subjected to tax in both the countries would qualify for tax credit, learned Commissioner (Appeals) has restricted the relief of foreign tax credit only in respect of tax paid in USA even in respect of income which is exempt under section 10A/10AA of the Act. The learned Commissioner (Appeals) has come to such conclusion by following the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra). The reasoning of the learned Commissioner (Appeals) on the issue is, as per the decision of Hon'ble Karnataka High Court in Wipro Ltd. (supra), the foreign tax credit benefit under section 90(1)(a)(ii) of the Act would only be applicable under Indo-US DTAA and would not be applicable to other DTAA countries and non-DTAA countries. On a careful reading of the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra), it is noted, while dealing with identical issue the Hon'ble Court held that in the cases covered under section 90(1)(a)(ii) of the Act, it is not the case of income being subjected to tax or the assessee has paid tax on the income. The provision applies to a case where the income of the assessee is eligible to tax under the Act as well as in the corresponding law in force in the other country. The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on P a g e | 16 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit under the Indo-US convention or under the provision of the Act must pay tax in India on such income. The Court observed, as per the embargo placed in the DTAA, the assessee is entitled to such tax credit only in respect of that income which is taxed in USA. In similar context, the Court also referred to the tax treaty with Canada where the provisions does not allow credit for tax paid in Canada if the income is not subjected to tax in India. With regard to country's with which India does not have any agreement for avoidance of double taxation, the Court observed that as per section 91 of the Act, the assessee would be eligible to avail tax credit. Thus, on a careful reading of the aforesaid judgment of the Hon'ble Karnataka High Court, it becomes clear that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo- Saudi Arabia, Indo-Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly."
Following the decision of ITAT as referred above we direct the assessing officer to allow foreign tax credit subject to the terms and conditions as directed in the above referred order of the ITAT therefore, this ground of appeal of the assessee is allowed for statistical purposes.
Ground No. 5: Addition of "Provision for Diminution in value of Investment" for computing profit under section 115JB Rs.2,50,00,000/-:
20. During the course of assessment the AO noticed that assesse had debited diminution in value of investment of Rs.2,50,00,000/- in the profit and loss account following the mandatory accounting standard. The assessee had also reduced the said amount from the investment in the assets side of the balance sheet. However, the assessee has not added the same while computing book profit u/s 115JB of the Act on the ground that diminution in the value of investment was in the nature of write off loss due to diminution in the value of investment and not P a g e | 17 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 the amount retained/ provision set aside for diminution in the value of investment. However, the assessing officer hat not agreed with the submission of the assessee and stated that as per clause (i) of explanation 1 of Sec. 115JB only the amount set aside as provisions for diminution in value of any asset is required to be added to book profit. Therefore, AO has added the amount of Rs.2,50,00,000/- as diminution in value of investment to the book profit of the assessee for the purpose of computation u/s 115JB of the Act.
21. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has upheld the action of the assessing officer.
22. During the course of appellate proceedings before us the ld. Counsel contended that diminution in the value of investment charged to profit and loss account was in the nature of write off loss due to diminution in the value of investment and not the amount retained/provision set aside for diminution in value of investment. The ld. Counsel also placed reliance on the following judicial pronouncements:
"i. ACIT Vs. Reliance Welfare Association Circle (ITA No. 5976/Mum/2012) ITAT Mumbai ii. CIT Vs. Vodafone Essar Gujarat Limited (ITA No. 749 of 2012 ( HC Gujarat) iii. PCIT Vs. Torrent Pvt. Ltd. (ITA No. 1225 of 2018 )(HC Gujarat)"
23. Heard both the sides and perused the decision of ld. CIT(A). We have perused the decision of ITAT Mumbai in the case of ACIT Vs. Reliance Welfare Association as referred above. The relevant extract of the decision is reproduced as under:
"7. We have heard the rival contention of both the parties. Looking to the facts and circumstances of the case, we find that CIT(A) has observed that a debit of Rs.46,94,62,365/- appearing in Profit & Loss Account is not a provision set aside for diminution in value of current investment but the actual charge to Profit & Loss Account which has been written off in value of current assets. We find P a g e | 18 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 that on perusal of section 115JB of the Act is very clear that appellant company require to added back the book profit set aside as provision for diminution in value of investment under the circumstances what is required to be decided whether the amount of Rs.46,94,62,365/- debited to Profit & Loss account set aside a provision or has been write off as a loss against the value of assets. The assessee has made investment in mutual fund in March 2008. The intention of the assessee was to hold a short period and accordingly classified the said investment as current investment in balance sheet of the assessee company as on 31.03.2008. The assessee company sold this unit in April, 2008 i.e. within a period of one month. The assessee company required to draw its accounts in accordance with Part II of Schedule VI of the Companies Act as provided in section 211 of the Companies Act, 1956. As per accounting standard the standard for accounting of investment is mandatory in nature classifies different treatment of accounting of current investment and long term investment. The current investment is required to be stated in accounts at lower of cost or fair value as on balance sheet date. Whereas when there is fall in the value of investment, provision is required to be made in accounts. As per amended provisions of Section 115JB requires provision for diminution in value of investment to be added back to determine Minimum Alternate Tax. Fair value of units of mutual funds was lower than its cost by Rs.46,94,62,365/- and the same being current investment, the appellant following mandatory Accounting standard - 13, charged Rs.46,94,62,365/- to Profit & Loss Account and prepared its accounts in accordance with Schedule VII provided in Section 211 of the Companies Act 1956. The assessee had credited the difference between the sale price and fair value as on 31.03.2008 to Profit & Loss Account and not the difference between sale price and its cost. Such accounting treatment is impossible where the provision is made instead of write off. 8. We find that considering the above facts a debit of Rs.46,94,62,365/- appearing in Profit & Loss Account is not a provisions set aside for diminution in value of investment but a actual charge to the Profit & Loss account which has been written off against the value of the current asset. Therefore, we are of the considered view that debit of Rs.46,94,62,365/- appearing in Profit & Loss Account is not a provision of set aside for diminution in value of investment but the actual charged for the loss in the diminution in value of investment. Therefore, we are of the view that for the book profit purpose of section 115JB is not required to be increased by Rs.46,94,62,365/- as the same is not in the nature of provision.
Following the decision of ITAT, Mumbai as referred supra this ground of appeal of the assessee is allowed.
Ground No. 6: Rate of Dividend Distribution Tax on dividend paid to overseas shareholders ought to be restricted to Rate as per respective DTAA:
24. This ground of appeal is not pressed therefore, the same stand dismissed.
P a g e | 19 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 Ground No.7: Deduction u/s 10AA on commercial profits instead of income from business and profession:
25. During the appellate proceedings before us the ld. Counsel submitted that identical issue on similar fact has been adjudicated in the case of the assesse itself for assessment year 2012-13 & 2014-15 vide ITAT Mumbai vide ITA No. 5199/Mum/2019 for 2014-15.
26. We have perused the decision of ITAT Mumbai in the case of assessee for assessment year 2014-15 vide ITA No. 599/Mum/2019. The relevant operating part of the decision is reproduced as under:
"32. We heard the parties and perused the materials on record. We notice that the co-ordinate bench has considered similar issue in assessee‟s own case for A.Y. 2012-13 (supra) wherein it is held that -
"6.3. In respect of claim of deduction u/s.10AA of the Act on commercial profit, the ld. AR before us placed reliance on the provisions of Section 80HH of the Act and also argued that the language of Section 80HH and Section 10AA are pari materia in as much as both the sections provide that in computing the total income of the assessee, deduction shall be allowed at certain percentage of profits and gains derived from business. The expression "profits and gains" derived was subject matter of adjudication by the Hon‟ble Supreme Court in the case of Vijay Industries Ltd., reported in 103 taxmann.com 454 wherein the Hon‟ble Apex Court observed that the profits and gains referred to commercial profits without deducting depreciation and investment allowance as per the Act. Since this aspect was not raised by the assessee before the lower authorities, accordingly, the lower authorities did not have an occasion to give their finding on the same. Hence, in the interest of justice and fair play, we deem it fit and appropriate to remand this issue raised in the additional ground to the file of the ld. AO for denovo adjudication in the light of the decision of the Hon‟ble Apex Court in Vijay Industries Ltd., referred to supra and decide the controversy in accordance with law. Accordingly, the additional ground raised by the assessee in respect of claim of deduction u/s.10A of commercial profits is allowed for statistical purposes".
33. Respectfully following the decision of the co-ordinate bench, we remand the issue to the file of the Assessing Officer for de novo consideration of the issue keeping in mind the decision of the Hon‟ble Supreme Court in the case of Vijay Industries Ltd (supra). This ground is allowed for statistical purpose."
Following the decision of ITAT as referred supra this issue is remanded to the file of the assessing officer for deciding de novo as directed by the P a g e | 20 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 ITAT in the referred decision. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.
27. The appeal of the assessee is partly allowed.
ITA No. 2477/Mum/2021 (Revenue's Appeal)Ground No. 1: Disallowance of taxes paid in overseas countries Rs.947,89,832/-:
28. During the year under consideration the assesse has paid the state taxes amounting to Rs.947,89,832/- in the USA on its USA sourced income. The same was claimed as a deductible expenses in the return of income. However, the assessing officer held that such claim was not allowable as deduction either u/s 37(1) or Sec. 40(a)(ii) of the Act.
29. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee after following the decision of ITAT in the case of the assessee itself for assessment year 2007-08 to 2010-11. The ld. CIT(A) has also referred the decision of ITAT for assessment year 2009-10 vide ITA No. 5713/Mum/2016 for assessment year 2009-10 in his finding which is reproduced as under:
"6. We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term "tax", as defined under section 2(43) of the Act would only include taxes chargeable under the Indian Income Tax Act. It is the further case of the assessee that since in respect of the State taxes paid overseas, the assessee is not eligible to claim relief under section 90 or 91 of the Act, it will not be covered under section 40(a)(ii) of the Act. On a perusal of provisions of sub-section (43) of section 2 of the Act, it becomes clear that the term "tax" has been defined to mean any tax paid under the provisions of the Act. Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of the Act would not be allowable as deduction under section 40(a)(ii) of the Act. It is the say of the assessee that the tax eligible for relief under section 90 of the Act are only those taxes which are levied by Federal / Central Government and not by any local authority of State, City or County. Thus, it is ineligible for any relief under section 90 of the Act. The aforesaid submissions P a g e | 21 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 of leaned Sr. Counsel for the assessee, prima facie, is acceptable if one has to strictly go by the meaning of "tax", defined under section 2(43) of the Act, as it only refers to tax paid under the provisions of the Act. It is also worth mentioning, the State taxes paid by the assessee in DTAA countries are not eligible for relief under section 90 of the Act. Therefore, the issue which arises is, whether it can be allowed as deduction under section 37 of the Act. No doubt, in assessee's own case in assessment year 2005-06, the Tribunal in the order referred to above following its own decision in DCIT v/s Tata Sons Ltd., [2011] 43 SOT 27 (Mum.), has held that the State taxes paid overseas cannot be allowed as deduction in view of the provisions of section 40(a)(ii) of the Act. However, the aforesaid legal position has substantially changed after the decision of the Hon'ble Jurisdictional High Court in Reliance Infrastructure Ltd. (supra). While interpreting the provisions of section 2(43) of the Act, vis-a- vis section 40(a)(ii) of the Act, the Hon'ble Court held that the tax which has been paid abroad would not be covered within the meaning of section 40(a)(ii) of the Act, since, the meaning of the word "tax" as defined under section 2(43) of the Act would mean only the tax chargeable under the Act. Thus, as per the aforesaid decision of the Hon'ble Jurisdictional High Court, taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act. Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression 'income tax'. In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required."
Following the decision of ITAT as referred in the order of the ld. CIT(A) as above, we don't find any reason to interfere in the decision of ld. CIT(A) therefore, this ground of appeal of the revenue is dismissed.
Ground No.2: Disallowance of expenditure on imported software on account of non-deduction of TDS:
30. During the course of assessment the assessee has claimed software expenses to the amount of Rs.104,72,46,907/- the break-up of the same is given below as under:
"(i) software for internal use: Rs.40,17,05,471/-
(ii) Software for trading purpose: Rs.64,55,41,436/-
P a g e | 22 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 The assessing officer has treated the software utilized for internal use as being in the nature of capital expenditure and accordingly the amount of Rs.40,17,05,471/- was disallowed u/s 40(a)(i) of the Act. Regarding imported software from third party sale, the assessing officer concluded that these licenses were in the nature of royalty and since no TDS has been deducted by the assessee u/s 195 of the Act, therefore, same was disallowed u/s 40(a)(i) of the Act.
31. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the claim of the assesse after following the decision of ITAT in the case of assessee itself for assessment year 2005-06 vide ITA No. 7513/Mum/2010 dated 23.03.2017.
32. During the course of appellate proceedings before us the ld. Counsel contended that identical issue on similar facts has been decided in favour of the assessee by the various decision of ITAT for assessment year 2012-13 to 2014-15.
33. Heard both the sides and perused the material on record. We have perused the decision of ITAT for assessment year 2012-13 vide ITA No. 797/Mum/2018. The relevant operating part of the decision is reproduced as under:
"7.1. We have heard rival submissions and perused the materials available on record. We find that the very same issue was subject matter of adjudication by this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.5713/Mum/2016 dated 30/10/2019. The facts recorded in the order passed by this Tribunal for A.Y.2009-10 and the adjudication of the same by the lower authorities is reproduced below as the same facts are prevailing in this year also except with variance in figures and yet another exception is that agreement copies were duly filed by the assessee during the year under consideration before the lower authorities.
"8. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed expenditure incurred in respect of purchase of software called upon the assessee to furnish the necessary details. On verifying the details furnished by the assessee, he found that the assessee had purchased software for its internal use amounting to ₹ 47,36,54,498, and for trading purpose amounting to ₹ 31,03,03,823. After perusing the details, the Assessing Officer was of P a g e | 23 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 the view that the amount paid towards acquiring software brought along with support service is in the nature of royalty as per section 9(i)(vi) of the Act. In this context, he referred to Explanation-3 to section 9(1)(vi) of the Act as well as CBDT Circular no.621 dated 9th December 2019. Having held so, the Assessing Officer observed that since the assessee had not deducted tax at source while making payment for purchases of software both for internal use as well as for trading purpose, the amount paid is liable for disallowance under section 40(a)(i) of the Act. Accordingly, he disallowed the entire amount of ₹ 78,39,58,321. The assessee challenged the aforesaid disallowance before the first appellate authority.
9. Learned Commissioner (Appeals) following the order passed by the Tribunal in assessee's own case for the assessment year 2005-06, held that the expenditure incurred on software products acquired for internal use is a capital expenditure, hence, the assessee is entitled to depreciation thereon. However, in respect of payment made towards software products acquired for re-sale / trading purpose, learned Commissioner (Appeals) agreed with the Assessing Officer that it is in the nature of royalty, hence, the assessee was required to deduct tax at source."
7.2. We find that the ld. AR argued that the amendment brought out by the Finance Act, 2012 will not have any retrospective effect based on the principle of "impossibility of performance", since assessee cannot be expected to deduct tax at source in respect of transactions effected in earlier years. This argument has to be dismissed as the year under consideration is A.Y.2012-13 where amendment has been brought.
7.3. The ld. AR further argued that even under the applicable DTAA, the payment for purchase of software cannot be regarded as „royalty‟, since the definition of „royalty‟ under DTAA is narrower than the definition in the Act. The ld. AR without prejudice, in respect of purchase of software for trading purpose, argued that assessee does not obtain any license from the seller and only earns margin on trading or re-selling of such software. Accordingly, he submitted that the same cannot be treated as „royalty‟ and no disallowance u/s.40(a)(i) of the Act could be made on the same. He also drew attention of the Bench to certain clauses in the resetting agreement entered into between assessee and Microsoft Regional Sales Corporation and submitted that assessee is only a re-seller of the software product and assessee was not entitled to make any alterations to the software in order to make copies thereon. Finally, the ld. AR also submitted on without prejudice basis that in any case, provisions of Section 40(a)(i) of the Act would not be made applicable to allowance of depreciation on imported software if the same is treated as capital in nature.
7.4. Per contra, the ld. DR vehemently relied on the orders of the lower authorities.
7.5. We find ultimately that this issue has been restored to the file of the ld. AO by this Tribunal in A.Y.2009-10 by making certain observations. We find that while rendering this decision and also for the decision of A.Y.2010-11 in ITA No.974/Mum/2018 dated 18/08/2020, the decision of the Hon‟ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd., vs. CIT P a g e | 24 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 reported in 432 ITR 471 was not rendered. Now, we find that the issue in dispute before us has been fully settled by the aforesaid decision of the Hon‟ble Apex Court in favour of the assessee by holding as under:-
"By virtue of section 90 of the Income-tax Act, 1961, once a Double Taxation Avoidance Agreement applies, the provisions of the Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by Explanation 4 to section 90, Parliament has clarified that where any term is defined in a DTAA, the definition contained in the DTAA is to be looke4 at. It is only where there is no such definition that the definition in the Ad can then be applied.
UNION OF INDLA V. AZADI BACHAO ANDOLAN [7003] 763 1TR 706 (SC) relied on.
The expression "copyright" has not been defined separately in the definitions section of the Copyright Act, 1957, yet, section 14 makes it clear that "copyright means the "exclusive right", subject to the provisions of the Act, to do or authorise the doing of certain acts "in respect of a work". In the case of computer programmes, section 14(b) specifically speaks of two sets of acts: the seven ads enumerated in clause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. All the seven acts set out in clause (a) delineate how the exclusive right with the owner of the copyright may be parted with. In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the pub tic, perform the work in public or make translations or adaptations of the work. The definition of an "in fringing copy" contained in section 2(m) of the 1957 Act, in relation to a computer programme, i. e., a literary work, means reproduction of the work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of safe, transfer, licence, etc., is at the heart of the exclusive right. Section 14(b)(ii) of the 1957 Act was amended twice, first in 1994 and then again in 1999, with effect from January 15, 2000. What is conspicuous in the provision after the amendment is the absence of the phrase "regardless of whether such copy has been sold or given on hire on earlier occasions". This is a statutory recognition of the doctrine of first sale or principle of exhaustion.
Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied.
Importantly, by virtue of section 16 of the 1957 Act no copyright exists in India outside the provisions of the 1957 Act or any other special law for the time being in force.
The making of copies or adaptation of a computer programme in order to utilise the programme for the purpose for which it was supplied, or to make backup copies as a temporary protection against kiss, destruction P a g e | 25 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement copyright under section 52(1)(aa) of the 1957 Act. Section 52(l)(ad) is independent of section 52(1)(aa) of the 1957 Act, and states that the making of copies of a computer programme from a personally legally obtained copy of non-commercial personal use would not amount to an infringement of copyright. Section 52(1)(ad) of the 1957 Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the 1957 Act.
There is an important difference between the right to reproduce and the right to use computer software. Whereas the former would amount to parting with a copyright by the owner thereof, the latter would not. When, under a non-exclusive licence, an end -user gets the right to use computer software in the form of a compact disk, the end-user only receives a right to use the software and nothing mare. The end-user does not get any of the rights that the owner continues to retain under section 14(b) of the 1957 Act read with sub-clauses (i) to (vii) of clause (a) thereof Thus. the conclusion that when computer software is licensed for use under an end-user licence agreement, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect. The licence for the use of a product under an end-user licence agreement cannot be construed as the licence spoken of in section 30 of the 1957 Act, as such end-user licence agreement only imposes restrictive conditions upon the end-user and does not part with any interest relatable to any rights mentioned in section 14(a) and (b) of the 1957 Act. \ The ownership of copyright in a work is different from the ownership of the Physical material in which the copyrighted work may happen to be embedded. Any ruling on the more expansive language contained in the Explanations to section 9(vi) of the Income-tax Act, 1961 would have to be ignored if it is wider and less beneficial to the assessee than the definition cont wined in the DTAA, in terms of section 90(2) of the Act read with Explanation 4 there-to.. and article 3(2) of the DTAA Further, the expression copyright" has to be understood in the context of the statute which deals with it, it being acc4Tted that municipal laws which apply in the contracting States must be applie4 unless there is any repugnancy to the terms of the DTAA. By no stretch of imagination, can the payment for such computer software amount to royalty within the meaning of article 12 of the DTA A or section 9(i)(vi) of the Act.
DASSAULT SYSTEMS K. K., In re [70101 32 ITR 175 (AAR), GEOQUEST SSTEMS B. V., In re 120101 327 ITR 1 (AAR), DIT v. ERICSSON A. B. 120121 343 ITR 470 (Delhi), DIT v. Nokia NETWORKS OY [2013] 358 ITR 259 (Delhi), D1T V. INFRASOFT LTD. [2014] 3 ITR-OL 333 (Delhi) and CIT v. Z'I'E CORPORATION [2017] 392 ITR 80 (Delhi) approved.
STATE BANK OF INDIA V. COLLECTOR OF CUSTOMS (2000) 1 SCC 727 relied on.
Royalty, under section 90)(vi) of the Act, means the transfer of all or any rights, including the g-ranting of a licence, in respect of any copyright in P a g e | 26 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 a literary work. Under article 3(2) of the Double Taxation Avoidance Agreement between India and Singapore, the definition of the term "royalties", shall have the meaning assigned to it by the DTAA, meaning thereby that the expression "royalty, when occurring in section 9 of the Act, has to be construed with reference to article 12 of the DTAA. This position is also clarified by CBDT Circular No. 333 dated April 2, 19822 . Thus, by virtue of article 12(3) of the DTAA, royalties are payments of any kind received as consideration for "the use of; or the right to use, any copyright" of a literary work, which includes a computer programme or software.
When article 12 of the DTAA defines the term "royalties" in paragraph (3) thereof, it does so stating that such definition is exhaustive : it uses the expression "means". Secondly, the term "royalties" refer to payments of any kind that are received as a considerate ion for the use of or the right to use any copyright in a literary work. The definition contained in Explanation 2 to section 90(1)(vi) of the Act, is wider in at least three respects it speaks of "consideration", but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head "capital gains"; when it speaks of the transfer of "all or any rights", it expressly includes the granting of a licence in respect thereof; and it states that such transfer must be "in respect of"
any copyright of any literary work. However, even where such transfer is 'in respect of" copyright, the transfer of all or any rights in relation to copyright is a sine qua non under Explanation2 to section 9(1)(vi) of the Act. in short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the 1957 Act.
Indian tax laws use the expression "in respect of" as synonymous with the expression "on" the expression "in respect of", when used in a taxation statute, is only synonymous with the words "on" or "attributable to". This accords with the meaning to be given to the expression "in respect of" contained in Explanation 2(v) to section 9(1)(vi) of the income- tax Act, 1961 and would not in any manner make the expression otiose.
STATE OF MADRAS V. SWASTIX TOBACCO FACTORY [1966] AIR 1966 SC 1000; [1966] 3 SCR 79 relied on.
While Explanation 2(v) to section 90Xvi) of the Ad, when it speaks of "all of any rights...in respect of copyright" is more expansive than the DTAA provision, which speaks of the "use of or the right to use" any copyright, when it comes Jo the expression "use of, or the right to use", the same position would obtain under Explanation 2(v) to section 9(1)(vi)of the Ad, inasmuch as, there must, under the licence granted or sale made; be a transfer of any of the rights contained in section 14(a) or (b) of the 1957 Act, for Explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of royalties" in the DTAAs and the definition of "royalty in Explanation 2(v) to section 90(vi) of the Act.
Even if the ambit of " royalty " were considered only under the Act, the definition of royalty in Explanation 2(v) to section 9 (1)(vi) of the Act would P a g e | 27 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 make it clear that there has to be a transfer of "all or any rights" which includes the grant of a licence in respect of any copyright in a literary work. The expression 'including the granting of' a licence" in clause (v) of Explanation 2(v) to section 9(i)(vi) of the Act, would necessarily mean a licence in which transfer is made of an interest in rights "in respect of' copyright, namely, that there is a parting with an interest in any of the rights mentioned in section 14(b) read with section 14(a) of the 1957 Act. To this extent, there will be no difference between the position, under the DTAA and Explanation 2 to section 9(i)(vi)of the Act.
Explanation 4 to section 9(1)(vi) of the Act was inserted retrospectively to expand the scope of Explanation 2(v). In any case, Explanation 2(v) contains the expression, "the transfer of all or any rights" which is an expression that would subsume "any right, property or information" and is wider than the expression "any right, property or information".
CBDT Circular No. 152 dated November 27, 19741 cannot apply to explain a position that existed even before section 9(1)(vi) was actually inserted in the Act by the Finance Act, 1976. In so far as section 9(1)(vi) of the Act relates to computer software Explanation 3 thereto refers to computer software for the first time with effect from April 1, 1991, when it was introduced, which was then amended by the Finance Act, 2000. Quite clearly, Explanation 4 cannot apply to any right for the use of or the right to use computer software before the term "computer software"
was inserted in the statute. Likewise, even qua section 2(o) of the 1957 Act, the term "computer software' was introduced for the first time in the definition literary work, and defined under section 2(ffc) only in 1994. It is equally Ludicrous for the amendment which also inserted Explanation 6 to section 9(i)(vi) of the Act, to apply with effect from June 1, 1976, when technology relating to transmission by a satellite, optic fibre or other similar technology was only regulated by Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, much after 1976. For all these reasons, it is clear that Explanation 4 to section 9(1)(vi) of the Act is no clarificatory of the position as of June 1, 1976, but in fact, expands that posit ion to include what is stated therein, by the Finance Act, 2012. Notification No, 21 of 2C'12 dated June 13, 2012 being issued after Explanation 4 was inserted could not be invoked to assert that Explanation 4 clarifies the legal position as it always stood. It is only when the non-resident is liable to pay income-tax in India on income deemed to arise in India and no deduction of tax at Source is made under section 195(1) of the Income-tax Act, 1961 or such person has, after applying section 195(2) of the Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in section 201 of the Act, follow by virtue of which the resident-payee is deemed an "assessee in default", and thus, is made liable to pay tax, interest and penalty thereon. Section 194E of the Act belongs to a set of various provisions which deal with tax deduction at source, without any reference to chargeability to tax under the Act of the non-resident assessee. This section is similar to sections 193 and 194 of the Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Act. On the other hand, at the heart of section 195 of the Act is the fact that deductions can only be made if the non-resident P a g e | 28 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 assessee is liable to pay tax under the provisions of the Act in the first place.
GE INDIA TECHNOLOGY CENTRE (P.) LTD. V. CIT 120101 327 ITR 456 (SC) explained.
PILOM v. CIT 120201425 ITR 312 (SC) explained and distinguished.
The "person" spoken Of in section 195(1) of the Art is liable to make the necessary deductions only if the non-resident is liable to pay tax as an asses-see under the Act, and not otherwise. The tax deductor must take into consideration the effect of the DTAA provisions. Thus the charging and machinery provisions contained in sections 9 and 195 of the Act are interlinked. The person liable to deduct tax is only liable to deduct tax first and foremost if the nonresident person is liable to pay tax, and second, if he is so liable, he is liable to deduct tax depending on the rate mentioned in the DTAA.
GE INDIA TECHNOLOGY CENTRE (R) LTD. v. CIT [20101 327 ITR 456 (SC) and VODAFONE INTERNATIONAL HOLDINGS B. V. V. UNION OF LNDJA [20121 341 ITR 1 (SC) relied on.
The argument based on article 30 of the Double Taxation Avoidance Agreement between India and the United States of America that the DTAA's provisions in these cases would not apply at all, inasmuch as the provisions relatable to deduction of tax at source under section 195 of the Act do not refer to tax at all, but are deductions that are to be made before assessments to tax are made, would Lead to absurd consequences. Article 30 cannot be read out of context. The logic behind article 30 of the DTA.4 is for reasons connected with the municipal taxation laws of the United States of America and has nothing to do with Indian municipal law governing the liability of persons to deduct tax at source under section 195 of the Income-tax Act. This is reinforced by the fact that the OECD Commentary on articles 30 and 31 acknowledges the fact that the "entry into force" provisions, unlike the rest of the provisions in the OECD Mode! Tax Convention on Income and on Capital, depend on the domestic laws of contracting States.
Persons are not obligated to do the impossible, i.e., to apply a provision of a statute when it was not actually and factually on the statute book. Thus the "person" mentioned in section. 195 of the Act cannot be expected to do the impossible, namely, to apply the expanded definition of "royalty" inserted by Explanation 4 to section 9(1 Xvi) of the Act, Or the assessment years. at a time when such Explanation was not actually and factually in the statute.
CIT v. NGC NETWORKS (INDIA) Pvt Ltd, 120211432 ITR 326 (Born) approved.
After the 1999 amendment of section 141))(ii) of the 1957 Act, what is conspicuous by its absence is the phrase "regardless of whether such copy has been sold or given on hint on earlier occasions ". This is a statutory recognition of the doctrine of first sale or principle of exhaustion.
P a g e | 29 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 The doctrine of first sale or principle of exhaustion is dependent, in the first place, upon legislation which either recognises or refuses to recognise the doctrine (thereby continuing to vest distribution rights in the copyright owner, even beyond the first sale of the copyrighted work). The language of section 14(b) of the 1957 Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental any copy of the computer programme". Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the provision. The safe or commercial rental spoken of in section 14(b)(ii) of the 1957 Act is of "any copy of a computer programme", making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction thereof for sale or commercial rental, The object of section 14(b)(ii) in. the context of a computer programme, is to interdict reproduction of the computer programme and consequent transfer of the reproduced computer programme to subsequent acquirers or end-users. Thus, any sale by the author of a computer software to a distributor for onward sale to an end- user, cannot possibly be hit by the provision. Further, the distributor cannot use the computer software at all and has to pass on the software, as shrink-wrapped by the owner, to the end-user for a consideration., the distributor's profit margin being that of an intermediary, who merely resells the same product to the end-user.
WARNER BROS. ENTERTAINMENT INC. V. SANTOSH V. G. [20091 SCC OnLine Del 835 approved.
Double Taxation Avoidance Agreements entered into by India with other contracting States have to be interpreted liberally with a view to implement the true intention of the parties. The Agreements have, as their starting point, either the OECD Model Tax Convention on Income and Capital or the United Nations Model Double Taxation Convention between Developed and Developing Countries in so far as the taxation of royalty for parting with copyright is concerned. The OECD Model Tax Convention speaks of the importance of the OECD Commentary. The term "royalties" is defined in all the DTAAS in a manner either identical with or similar to the definition con tamed in article 12 of the OECD Model Tax Convention. The OECD Commentary on royalty payments under article 12 states that in a transaction where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transact ion for tax purposes. Payments in these types of transactions would be dealt with as business profits.
From the positions taken by India (in the capacity of an OECD non- member) with regard to article 12 of the OECD Model Tax Convention and the OECD Commentary, which use the language "reserves the right to"
and "is of the view that some of the payments referred to may constitute royalties", it is not at all clear what exactly the nature of these positions is. This is in contrast with the categorical language used by India in its positions taken with respect to other aspects ("India does not agree to"). Mere positions taken with respect to the OECD Commentary do not alter P a g e | 30 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 the DTAA 's provisions, unless the latter are actually amended by way of bilateral renegotiation. The OECD Commentary on article 12 of the OECD Model Tax Convention incorporated in the DTAM will continue to have persuasive value as to the interpretation of the term "royalties"
contained therein, DIT v. NEW SKIES SATELLITE BV 120161382 ITR 114 (Delhi) approved.
Persons who deduct tax at source and assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the provisions that govern them. Such persons and assessees can place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifyiing them, or in the event of conflicting municipal decisions. From this point of view also, the OECD Commentary is significant, as the contracting States to which the persons deducting tax and the assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for parting with copyright, or income derived from licence agreements which is then taxed as business profits depending on the existence of a permanent establishment in the contracting State.
The HPC Report 2003 and the E-Commerce Report 2016 submitted to the Government of India are recommendatory reports expressing the views of the committee members, which the Government of India may accept or reject. When it comes to DTAA provisions, even if the position put forth in these reports were to be accepted, a DTAA would have to be bilaterally amended before any such recommendation can become law in force for the purposes of the Act.
On appeals arising in four categories of cases (a) cases in which computer software was purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer; (b) cases where resident Indian companies were distributors or resellers, purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling it to resident Indian end- users (c) cases where the distributor was a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resold it to resident Indian distributors or end-users; and d) cases where the computer software was affixed onto hard ware and sold as an integrated unit or equipment by foreign, nonresident suppliers to resident Indian distributors or end-users, on the question. whether amounts paid in/ the persons resident in India to nonresident, foreign-n software suppliers, amounted to royalty, and whether it constituted taxable income deemed to accrue in India under section 9(I)(vi) of the Income-tax Act, 1961 thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source under section. 195 of the Act;
Held, (i) that in all these cases, the licence" that was granted under the enduser licence agreement, was not a licence in terms of section 30 of the 1957 Act, which transferred an interest in all or an of the rights P a g e | 31 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 contained in sections 14(a) and 14(b) of the 1957 Act, but a licence" which imposed restrictions or conditions for the use of computer software. Thus, none of the end user licence agreements was referable to section 30 of the 1957 Act, inasmuch as section 30 'that Act spoke of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of that Act. The end-user licence agreements did not grant any such right or interest, least of all a right or interest to reproduce the computer software, In fact, such reproduction was expressly interdicted, and it was also expressly stated that no vestige of copyright was at all transferred, either to the distributor or to the end-user. What was "licensed" by the foreign, non-resident supplier to the distributor and resold to the resident end- user, or directly supplied to the resident enduser, was in fact the sale of a physical object which contained an embedded computer programme, and was therefore, a sale of goods The distributors resold shrink- wrapped copies of the computer programmes already put in circulation &y foreign, non-resident suppliers and manufacturers, since they had been sold and imported into India via distribution agreements and they were thus not hit by section 14(a)(ii) of the 1957 Act, The end-user licence agreements conveyed title to the material object embedded with a copy of the computer software to the distributors or end-users. The distribution of copyrighted computer software, on the facts, would not constitute the grant of an interest in cop, right under section 14(b)(i0 of the 1957 Act, thus necessitating the deduction of tax at source under section 195 of the Income-tax Act, 1961.
TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH [2004] 271 ITR 401 (SC); [2004] 137 SIC 620 (SC) relied on.
(ii) That given the definition of "royalties' contained in article 12 of the DTAAs there was no obligation on the persons mentioned in section 195 of the Act to deduct tax at source, as the distribution agreements and end-user licence agreements did not create any interest or right in such distributors or end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Act which deal with royalty, not being more beneficial to the assessees, had no application in the facts of these cases. The amounts paid by resident Indian end-users or distributors to non-resident computer software manufacturers or suppliers, as consideration for the resale or use of the computer software through end-user licence agreements or distribution agreements, was not royalty for the use of copyright in the computer software, and did not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Act were not liable to' deduct any tax at source under section 195 of the Act.
Decision of the Delhi High Court in CIT v. ALCATEL LUCENT CANADA [2015] 372 ITR 476 (1.)(Delhi) affirmed.
Decisions of the Karnataka High Court in CIT v. SAMSUNG ELECTRONICS Co. Ltd. 12012J 345 ITR 494 (Karn) and CIT v. SUNRAY COMPUTERS P. LTD. [2012] 348 ITR 196 (Karn) and ruling of the Authority for Advance Rulings in CITRIX SYSTEMS ASIA PACIFIC Pry. LTD., In re (2012] 343 ITR 1 (AAR) reversed.
P a g e | 32 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 The real nature of the transaction must be looked at upon reading the agreement as a whole.
7.6. In view of the above, the ground No.1 raised by the Revenue is hereby dismissed."
Respectfully following the decision of the ITAT in the case of the assessee itself on the similar issue and facts as referred above we don't find any reason to interfere in the decision of ld. CIT(A), therefore, the ground of appeal of the revenue stand dismissed.
Ground No. 3: Disallowance u/s 14A of the Act:
34. During the course of assessment the AO noticed that assessee has earned dividend income of Rs.244,83,29,696/- which was claimed as exempt income u/s 10(34) of the Act. The assessing officer has computed the disallowance in accordance with Sec. 14A r.w.Rule 8D(ii) to the amount of Rs.280,58,643/-.
35. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has deleted the addition holding that AO has mechanically applied Rule 8D and made disallowance without giving any reason.
36. During the course of appellate proceeding before us the ld.
Counsel submitted on similar issue and identical fact from assessment year 2010-11 to 2014-15 the ITAT has adjudicated in favour of the assessee.
37. Heard both the sides and perused the material on record. We have perused the decision of ITAT in the case of the assessee itself for assessment year 2014-15 vide ITA No. 5904/Mum/2019. The relevant part of the decision is reproduced as under:
50. For the year under consideration, we notice that the assessee has made a very detailed submission before the Assessing Officer with regard to the suo motu disallowance (refer para 6.2 on pages 41 to 44 of assessment order). The Assessing Officer, in his finding, has simply stated that he is not satisfied with the correctness of the claim of expenditure since the amount disallowed by the assessee is very meager. It is the settled position that the Assessing Officer cannot invoke the provisions of disallowance under section 14A read with rule P a g e | 33 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 8D without recording any cogent reasons as to why he is not satisfied with the correctness of the claim of the assessee. Mere recording that the amounts being meager compared to the exempt income earned, cannot be construed as recording of satisfaction. Therefore, respectfully following the ratio laid down by the coordinate bench in assessee‟s own case, we hold that the CIT(A) has correctly deleted the addition made by the Assessing Officer for want of recording of objective satisfaction with cogent reasons. This ground of the revenue is dismissed."
Following the decision of ITAT, Mumbai on similar issue and facts in the case of the assessee as referred above we don't find any infirmity in the decision of ld. CIT(A), therefore, this ground of appeal of the revenue stand dismissed.
Ground No.4: disallowance of advertisement expenses (Brand building expenses) of Rs. 148,06,18,804/-:
38. During the course of assessment the AO noticed that assessee claimed expenses to the amount of Rs.149,43,14,207/- towards advertisement. Out of aforesaid total expenses, the assessing officer treated expenditure of Rs.148,06,18,804/- as brand building expenses incurred on sponsorship, exhibition, event, seminar, conferences and aforesaid of the nature of capital expenses. The assessing officer treated these expenses as capital in nature and allowed depreciation @ 25% on such expenses.
39. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) after following the decision of ITAT in the case of the assessee itself for assessment year 2009-10 has allowed the appeal of the assessee.
40. During the course of appellate proceeding before us the ld. Counsel submitted that similar issue on identical facts has been adjudicated in the case of the assessee itself by the ITAT for assessment year 2009-10 to 2014-15.
41. Heard both the sides and perused the material on record. We have perused the decision of ITAT in the case of the assessee itself for P a g e | 34 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 assessment year 2011-12 vide ITA No. 1650/Mum/2016. The relevant operating part of the decision is reproduced as under:
"34. We have considered the rival submissions and perused the material available on record. As it is evident from the details of expenditure mentioned in the aforesaid paragraphs, the expenditures were incurred by the assessee for the purpose of advertisement in newspaper, magazine, events, seminar, conferences, exhibition, advertisement at Airport, etc. We find that on identical issue, the Co-ordinate Bench of the Tribunal vide order dated 30.10.2019, passed in assessee's own case in Tata Consultancy Services Ltd. v/s ACIT, ITA no.5713/Mum/2016, for the assessment year 2009-10, vide Para-23 at Page- 22, observed as under:-
23. We have considered rival submissions and perused the material on record. We have also carefully examined the case laws cited before us.
On a detailed analysis of facts on record, we have noted that the reasoning of the Assessing Officer that the expenditure was incurred for brand building is without any basis. It is to be noted, before the Departmental Authorities the assessee had demonstrated that in no way it is connected with development of Tata brand. The details of expenditure incurred clearly demonstrate that they were basically for the purpose of advertising assessee's products in print media or through seminar, conferences, etc. As rightly observed by learned Commissioner (Appeals), the Assessing Officer has brought no material on record to establish that the expenditure is for brand building. As observed earlier, the expenditure relates to advertisement in newspaper, magazine, events, seminars, conferences, exhibitions, etc. Thus, the nature of expenditure incurred by the assessee clearly indicates that it was for promoting its own business. Further, considering the turnover of the assessee, the expenditure incurred on advertisement does not appear to be unusually high. That being the case, the expenditure incurred on advertisement cannot be treated to be in the nature of capital expenditure and amortized over a period of five years. To that extent, we agree with the decision of learned Commissioner (Appeals) on the issue. However, as regards experience certainty expenditure amounting to Rs.5.28 crore, it appears that learned Commissioner (Appeals) has held it to be of capital nature on the basis that the assessee itself admitted so. However, before us, leaned Sr. Counsel for the assessee has vehemently argued that no such admission was made by the assessee before learned Commissioner (Appeals) and under a misconception, learned Commissioner (Appeals) has come to such conclusion. The leaned Sr. Counsel submitted, the experience certainty campaign was also for the purpose of advertisement only and in this context, he has furnished before us the details of such expenditure through additional evidences. Since, the additional evidences furnished by the assessee will have a crucial bearing in determining the nature of expenditure, we are inclined to admit the additional evidences. However, considering the fact that these evidences were not furnished before the Departmental Authorities, to afford a fair opportunity to the Department to verify the authenticity of assessee's claim vis-a-vis the additional evidences furnished before us, we restore the issue to the Assessing Officer for de novo adjudication after providing reasonable opportunity of being heard to the assessee.
P a g e | 35 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 We make it clear, our aforesaid direction is only with regard to the experience certainty expenditure of Rs. 5.28 crore. The decision of learned Commissioner (Appeals) on this issue is modified to this extent only.
35. The learned D.R. could not show us any reason to deviate from the aforesaid order and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the decision of the Co- ordinate Bench rendered in assessee‟s own case cited supra, ground no.5, raised in assessee‟s appeal is allowed with similar directions. This ground is allowed for statistical purpose."
Respectfully following the decision of the coordinate bench of the ITAT Mumbai in the case of the assessee itself on similar issue and identical facts as referred above we don't find any merit in the appeal of the revenue, therefore, the same stand dismissed.
Ground No.5: Disallowance of payment towards Tata Brand Equity subscription of Rs.75 crores:
42. During the course of assessment the assessing officer noticed that assessee has paid Rs.75 lacs to Tata Sons towards subscription fees and claimed the same as revenue expenditure. The AO treated these expenditure as capital in nature and allowed depreciation on the same.
43. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee.
44. During the course of appellate proceedings before us the ld.
Counsel submitted that identical issue on similar fact has been adjudicated by the ITAT in the case of the assessee for assessment year 2011-12 to 2014-15.
45. Heard both the sides and perused the material on record. We have perused the decision of ITAT for AY. 2011-12. The relevant operating part of the decision is reproduced as under:
"39. We have considered the rival submissions and perused the material available on record. As per the „Tata Brand Equity and Business Promotion Agreement‟, the assessee was under contractual obligation to make annual P a g e | 36 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 payment towards the subscription fees. According to assessee, in consideration of this subscription fees, Tata Sons Limited was, inter-alia, responsible for organising corporate identity and brand promotional activities and campaigns, engage professional consultants, make available a pool of sharable resources of the Tata Group to the assessee and provide assistance in accessing the network of domestic and international business contacts and also permit the assessee to use the business name. All the activities were predominantly the activities carried out or to be carried out by Tata Sons Limited to enhance the value of TATA Brand, which is owned by Tata Sons Limited and for same expenses were incurred by Tata Sons Limited and accounted in its books of account.
40. In the case of sister concern of assessee, the Co-ordinate Bench of Tribunal in ACIT v/s M/s Rallis India Ltd.: ITA No. 5701/Mum/2008 vide order dated 30.08.2011 dismissed the appeal filed by the Revenue against the allowance of similar contribution to Tata Sons Limited under the Brand Equity and Business Promotion Scheme. In another sister concern‟s case, the Co-ordinate Bench of Tribunal in M/s Tata Autocomp Systems Ltd. v/s ACIT: ITA No. 7596/Mum/2012 vide order dated 12.06.2013, following the earlier decision in Rallis India Ltd. (supra), deleted the disallowance on account of similar subscription paid to Tata Sons Ltd. towards brand equity and promotion scheme. The Co-ordinate Bench also noted that department has accepted the decision in Rallis India Ltd. (supra) and no appeal has been filed by the department against the same. Further, in the present case, nothing has been brought on record to suggest that the subscription fee paid by the assessee to Tata Sons Limited under the „Tata Brand Equity and Business Promotion Agreement‟ is different in nature from the one considered in aforesaid decisions. Thus, respectfully following the judicial precedence in case of sister concerns, we direct the Assessing Officer to delete the disallowance on account of subscription fees paid by the assessee to Tata Sons Limited. Accordingly, ground no. 6 raised in assessee‟s appeal is allowed."
Respectfully following the decision of ITAT on similar issue and identical facts in the case of the assessee itself as referred supra we don't find any merit in the ground of appeal of the Revenue therefore, this ground of appeal of the revenue is dismissed.
Ground No.6: Disallowance of expenditure of commission to non- resident is allowable as deduction (disallowance u/s 40(a)(i) on account of non-deduction of TDS) Rs.397,41,017/-)
46. During the year under consideration the assesse has paid commission of Rs.3,97,41.017/- to foreign agents during the relevant assessment year in respect of overseas business. The assessing officer disallowed the claim of deduction on the ground that commission P a g e | 37 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 payment were made to foreign agents without deducting tax u/s 195 of the Act, therefore, the claim of deduction was disallowed u/s 40(a)(i) of the Act.
47. The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) held that the non-resident agent, were operating outside India and no part of their income arisen in India, therefore, same was not subject to withholding tax u/s 195 of the Act. The ld. CIT(A) has allowed the ground of appeal of the assessee after following the decision of ITAT on the similar issue and identical fact for assessment year 2008-09 & 2010-11.
48. During the course of appellate proceedings before us the ld. Counsel submitted that similar issue on identical facts has been deciding in favour of the assessee by the ITAT for assessment year 2008- 09 to 2014-15.
49. Heard both the sides and perused the material on record. We have perused the decision of ITAT for assessment year 2009-10 in the case of the assessee itself vide ITA No.5823/Mum/2016. The relevant part of the decision is reproduced as under:
5. We have considered rival submissions and perused the material on record.
The facts on record clearly reveal that commission has been paid to non- resident agents located in their respective countries towards services rendered by them in those countries in relation to obtaining export contracts for the assessee. No material has been brought on record by the Assessing Officer to demonstrate that the non-resident agents either have any business connection in India or have PE in India so as to bring the commission payment within the tax net. The factual finding recorded by learned Commissioner (Appeals) that the non-resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non-resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. Accordingly, we uphold the decision of learned Commissioner (Appeals) on this issue.
P a g e | 38 ITA No. 2413 & 2477/Mum/2021 TCS Ltd. Vs. DCIT LTU-1 Respectfully following the decision of the ITAT on the similar issue and identical facts as referred above we do not find any merit in the appeal of the Revenue. Therefore, this ground of appeal is dismissed.
Ground No.7: Foreign tax credit in respect of income pertaining to Sec. 10A/10AA eligible units in India:
50. We have adjudicated the similar issue on identical facts while adjudicating the ground no. 4 of the appeal of the assessee vide ITA No. 2413/Mum/2021 as supra in favour of the assessee following the various decision of the ITAT as referred in that findings. Therefore, applying the findings of ground of appeal no. 4 in the appeal of the assessee mutatis mutandis this ground of appeal revenue stand dismissed.
Ground No.8:
51. This ground of appeal is not pressed therefore the same stand dismissed.
52. In the result, the appeal of the assesse is partly allowed and the appeal of the revenue is dismissed.
Order pronounced in the open court on 18.12.2023
Sd/- Sd/-
(Aby T Varkey) (Amarjit Singh)
Judicial Member Accountant Member
Place: Mumbai
Date 18.12.2023
PS. Rohit
P a g e | 39
ITA No. 2413 & 2477/Mum/2021
TCS Ltd. Vs. DCIT LTU-1
आदे श की प्रतितिति अग्रेतिि/Copy of the Order forwarded to :
1. अपीलाथी / The Appellant
2. प्रत्यथी / The Respondent.
3. आयकर आयुक्त / CIT
4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai
5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //True Copy// आदे शानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीिीय अतिकरण/ ITAT, Bench, Mumbai.