2017 (12) TMI 1703 - AT - Income Tax

Deduction u/s 10AA - denial of deduction as the assessee-company had not provided any services and the assessee-company had not complied with the condition stipulated under sub-section (4) of section 10AA - CIT-A deleted addition - HELD THAT - Any undertaking established in a SEZ is entitled to claim a relief from its profits provided it is engaged in the manufacture or production of articles or things or provision of any service. From the above BRL being in unit has correctly claimed relief under section 10AA of the Act on income derived from export of research services. The appellant is entitled to Section 10AA relief. It is undisputed fact that the M/s. Biocon Ltd. also enjoys the SEZ status. Therefore by selling platform technology to the assessee-company the motive of tax evasion cannot be attributed to M/s. Biocon Ltd. Furthermore M/s. Mylan Ltd. also said to be unrelated party. Therefore it cannot be even imagined that without any value addition by the assessee-company M/s. Mylan would have paid so much of consideration. This factor should clinch the issue in favour of the assessee-company. Thus viewed from any angle the assessee-company cannot be denied the benefit of deduction u/s. 10AA though the reasoning adopted by the CIT(A) is cryptic. No reason to interfere with the order of the CIT(A) this issue. - Decided against revenue TDS liability on reimbursement of actual cost incurred - addition u/s 40(a)(ia) - HELD THAT - There was no dispute with regard to the contention of the assessee-company that subject payments are merely reimbursement of the cost incurred and no profit element was present. Further there was no dispute that the payees had shown receipts as income in their respective hands and discharged the tax liability. In the light of these facts we hold that the assessee-company is not under obligation to deduct tax at source on the payments which are not liable to tax in the hands of the payee. Further we find no reason to differ with the reasoning of the CIT(A) that when the second proviso to section 40(a)(ia) is applicable to the facts of the present case there is no obligation to deduct tax at source and consequent disallowance u/s. 40(a)(ia). See M/S. TE CONNECTIVITY INDIA PVT. LTD. VERSUS INCOME-TAX OFFICER (LTU) (TDS) BANGALORE 2016 (5) TMI 1222 - ITAT BANGALORE . Thus we do not find any reason to interfere with the order of the CIT(A). - Decided against revenue TDS u/s 195 - services rendered by non-resident parties - HELD THAT - The assessee-company is only entitled to use the annual report given by those parties which does not mean that technology is made available to it. The co-ordinate bench of Tribunal (Delhi) in the case of ITO vs. Nokia India Pvt. Ltd. 2015 (7) TMI 476 - ITAT DELHI ) has considered an identical issue The assessee-company is not under obligation to deduct tax at source on the payments made to non-resident parties and therefore the question of consequent disallowance u/s. 40(a)(ia) does not arise. Thus the grounds of appeal are allowed. disallowance u/s. 14A - HELD THAT - In the present case there is no dispute that surplus fund far exceeds investments made. Therefore it should be presumed that investments are made out of surplus funds of the assessee and the question of disallowance on account of interest does not arise. As regards disallowance of indirect expenditure in the absence of recording satisfaction as to how claim of the assessee is incorrect no disallowance can be made. The assessee-company placed reliance on the decision of the co-ordinate bench cited supra and the ratio of the decision is squarely applicable to the facts of the present case. Thus this ground of appeal is allowed.

Summary

Issues Involved:
1. Eligibility for deduction under section 10AA of the Income-tax Act.
2. Disallowance under section 40(a)(ia) for non-deduction of tax at source on payments to domestic and non-resident parties.
3. Disallowance under section 14A for expenses related to exempt income.

Detailed Analysis:

1. Eligibility for Deduction Under Section 10AA:
The primary issue was whether the assessee-company was entitled to a deduction under section 10AA of the Income-tax Act. The Assessing Officer (AO) denied the deduction, arguing that the assessee did not provide any services or produce any articles or things, and that the consideration received was for existing technology developed by Biocon Ltd., not for any new services provided by the assessee. The AO also contended that the assessee failed to meet the conditions under section 10AA(4), particularly regarding the formation of the unit by splitting up or reconstructing an existing business and the transfer of used plant and machinery.

The Commissioner of Income-tax (Appeals) [CIT(A)] overturned the AO's decision, stating that the assessee was entitled to the deduction as it was established in a Special Economic Zone (SEZ) and had provided research and development services. The CIT(A) emphasized that the SEZ Act's provisions override those of the Income-tax Act, and the approval from the SEZ authorities was sufficient to grant the deduction.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had indeed provided research and development services to Mylan and had incurred significant costs for these activities. The Tribunal also highlighted that the SEZ status granted to the assessee was conclusive proof of compliance with the conditions under section 10AA(4).

2. Disallowance Under Section 40(a)(ia):
The AO disallowed payments made to domestic companies (Biocon Ltd. and Biocon Pharmaceuticals Pvt. Ltd.) and non-resident parties under section 40(a)(ia) for non-deduction of tax at source. The CIT(A) accepted the assessee's contention that payments to domestic companies were reimbursements of costs and thus not subject to TDS. However, the CIT(A) upheld the disallowance for payments to non-resident parties, arguing that these payments constituted fees for included services under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

The Tribunal reversed the CIT(A)'s decision regarding non-resident payments, stating that the services provided by the non-resident parties did not "make available" any technical knowledge, experience, skill, or process to the assessee, as required under the DTAA. Therefore, the payments were not liable for TDS, and the disallowance under section 40(a)(ia) was not applicable.

3. Disallowance Under Section 14A:
The AO made a disallowance under section 14A for expenses related to earning exempt income. The assessee argued that no expenses were incurred specifically for earning the exempt income, as investments were made from surplus funds. The CIT(A) upheld the AO's decision, but the Tribunal sided with the assessee, stating that in the absence of any nexus between the expenses and the exempt income, the disallowance under section 14A was not justified.

Conclusion:
The Tribunal concluded that the assessee was entitled to the deduction under section 10AA, as it had provided research and development services and complied with the SEZ Act's provisions. The disallowance under section 40(a)(ia) was not applicable for payments to non-resident parties, as the services did not "make available" technical knowledge. Finally, the disallowance under section 14A was not justified due to the lack of a direct nexus between the expenses and the exempt income. The appeals filed by the revenue were dismissed, and those filed by the assessee were allowed.