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2019 (8) TMI 1325 - AT - Income TaxTDS u/s 195/ 194J - disallowance u/s.40(a)(ia) - whether the payment made to resident towards annual license fee paid for the renewal of Microsoft software is in the nature of royalty? - HELD THAT:- Having regard to the fact that the assessee is subject to the jurisdiction of the Hon’ble Karnataka High Court, it will be governed by the law laid down by its jurisdictional High Court as per Article 226 of the Constitution of India notwithstanding a contrary favourable view of the Hon’ble Delhi High Court, which even this Bench of the Pune Tribunal has followed in some cases not falling within the jurisdiction of the Hon’ble Karnataka High Court. Ex consequenti, the assessee will have to be subjected to the view canvassed by the Hon’ble Karnataka jurisdictional High Court, as per which consideration for the purchase of off-the-shelf software under software licence agreement results in only a transfer of right to use copy of the software, constituting royalty under the provisions of section 9(1)(vi). As the instant case is that of a resident paying royalty to another resident, there is no need to examine any DTAA from the angle of taxability or otherwise of royalty in the hands of the recipient as the same stands established under the Act. Section 194J(1) deals with deduction of tax at source, inter alia, from royalty as per clause (c) and provides that the payer of royalty, not being an individual or a Hindu undivided family, shall, deduct tax at source at the rate of 10%. Clause (ba) to the Explanation to section 194J further provides that "royalty" for the purpose of this section shall have the same meaning as given in section 9(1)(vi). Thus, it is clear that where income in the nature of royalty is payable to a resident-payee, then the payer is liable to deduct tax at source u/s 194J. Failure to deduct and pay such tax in the Government exchequer entails, inter alia, disallowance u/s 40(a)(ia), as has been made by the authorities below in the instant case. - Decided against assessee. Disallowance of foreign tax credit - taxes paid by foreign branches as claimed in the return of income filed - assessee’s foreign branches in five countries constituted its PEs, who suffered income tax in such jurisdictions - AO allowed foreign tax credit only to the extent of the basic MAT rate of 10% of profits of the foreign branches without adding surcharge and cess of 1.33% - HELD THAT:- We find that even if the assessee is chargeable to tax under the Act on its global income, it may still be possible that some income is chargeable in the foreign tax jurisdictions but not chargeable under the Act due to exemption available (which is different from income chargeable but deductible under the relevant provisions). If a particular income is included only in the total income under the Act but not under the total income of other country, or vice-versa, the same cannot qualify for the benefit under the provision. It is thus evident that only the doubly taxed income qualifies for relief u/s 90(1)(a)(i) which fairly indicates that where a resident of India derives income which may be taxed in the United States also, then India shall allow a deduction from the tax on the income of that resident of an amount equal to the income tax paid in the United States. Where a resident of India derives income which may be taxed in the United States also, then India shall allow a deduction from the tax on the income of that resident of an amount equal to the income tax paid in the United States. If the doubly taxed income was subjected to tax in the other country at the rate of 10%, then tax credit should be restricted to 10% and in case it was subjected to foreign tax in the other country at a rate higher than 11.33% (say, 15% or 20% or 40%), then the amount of foreign tax credit should be restricted to 11.33% of the concerned doubly taxed income. The AO is directed to verify the respective tax rates in Netherland, France, US, UK and Belgium for the year under consideration on which the assessee paid taxes and then allow the benefit accordingly after granting reasonable opportunity of hearing to the assessee. Disallowance u/s.14A r.w. Rule 8D - HELD THAT:- This issue is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT [2017 (5) TMI 403 - SUPREME COURT] upholding the view of the lower authorities that when interest free funds in the form of share capital and reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) to the tune of ₹ 5,49,818/-. Disallowance made u/s 8D(2)(iii) - as seen that the same has been worked out by the AO at 0.50% of average amount of investments - HELD THAT:- We set aside the impugned order to this extent and remit the matter to the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments in calculating the average value of investments, which have yielded exempt income during the year. The assessee will be allowed hearing opportunity in the fresh proceedings. AR further contended that a suo motu disallowance was offered by the assessee u/s 14A. The AO is directed to verify this claim and then accordingly compute the amount disallowable u/s.14A r.w. Rule 8D(2)(iii). Addition being, the value of lapsed ESPOs in the income computed under the normal provisions of the Act as well as the profits computed u/s 115JB - HELD THAT:- As decided in own case the amount of ESOPs was rightly credited by the assessee to the General reserve on lapse of option and hence cannot be included in the computation of book profits u/s.115JB. It has further been directed that such an amount of lapsed ESOPs should be considered as income chargeable to tax u/s.41(1) for the year in which cessation or remission took place and not the years in which deduction was claimed. We hold accordingly. Deduction u/s 10A - Reducing from ‘Export turnover’ as well as ‘Total turnover’ - telecommunication charges and internet - Foreign currency expenses - HELD THAT:- Considering earlier decisions any amount reduced from ‘Export turnover’ should also be reduced from the amount of ‘Total turnover’ in the computation of deduction u/s.10A. Deduction u/s 10A - Considering earlier decisions amount relatable to DTM and onsite software services should be considered as eligible for deduction u/s.10A Set off of brought forward losses and unabsorbed depreciation - against the business income, short term capital gain and income from other sources in computing total income in accordance with the provisions of Chapter VI - HELD THAT:- The Tribunal in its order for the A.Y. 2007-08 has discussed this issue threadbare and following the judgment of Hon’ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] has held that the deduction should be allowed qua the eligible undertaking standing on its own without reference to the other eligible or non-eligible unit or undertakings. To put it simply, the profits of the eligible units should be considered on standalone basis. Following the view, we determine the issue accordingly. Interest u/s.234B and 234C - Default in payment of advance tax where tax was paid u/s 115JB - amendment to section 115JB - HELD THAT:- The amendment to section 115JB through clause (i) has been brought out by the Finance (No.2) Act, 2009 with retrospective effect from 01-04-2001. The Finance (No.2) Bill 2009 was introduced in the Lok Sabha on 06-07-2009, whereas the financial year of the assessee closed on 31-03-2009. It is pursuant to the retrospective amendment coming into force after the close of the financial year but before the filing of the return that the assessee computed its income u/s.115JB accordingly. In so far as the question of charging interest u/s.234B and 234C is concerned, it is found in CIT Vs. Kirloskar Systems Ltd. [2013 (12) TMI 9 - KARNATAKA HIGH COURT] has held that interest u/s.234B and 234C cannot be levied for default in payment of advance tax in case wherein section 115JB is invoked pursuant to such amendment. We, therefore, hold that interest u/ss.234B and 234C should not be charged to the extent of retrospective amendment to section 115JB affecting the computation of book profits accordingly.
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