TMI Blog2005 (7) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... software is eligible for deduction under s. 10A of the Act. The profit arises not at the time of manufacture but at the time when it is ultimately sold. Since the product was sold through the STP unit, the same is eligible for deduction as profit of eligible STP unit as provided u/s. 10A of the Act. We accordingly do not find any reason to arrive at a view other than that arrived by learned CIT(A).'' In the result, the appeal of assessee is partly allowed. The appeal of Revenue and the cross-objection by assessee are dismissed. - GOPAL CHOWDHURY, JUDICIAL MEMBER AND DEEPAK R. SHAH, ACCOUNTANT MEMBER For the Appellant : Padam Chand Kincha For the Respondent : Ajit Korde ORDER Deepak R. Shah, AM.: These cross-appeals by assessee as well as by Revenue and the cross-objection by assessee in an appeal by Revenue are directed against the order of the learned CIT(A)-I, Bangalore, dt. 29th Dec, 2000. 2. We first take up the appeal of assessee. In the first ground, the assessee challenges the computation of deduction under s. 80HHE. 2.1 Learned counsel for assessee submitted that the learned CIT(A)-I has erred in confirming the reduction from export turnover and total turnover, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA) between India and Canada. 3.1 The assessee received certain income by way of royalty in respect of software from Canada. The receipt by way of royalty was subjected to tax in Canada and tax was deducted at source by the payee. The same income received also formed part of total turnover of assessee. Thus, the income arising from such royalty receipt is also chargeable to tax in India. The assessee claimed relief in respect of tax doubly charged in India as well as in Canada on such income. The assessee contended that the claim for rebate in respect of double taxation is to be granted as per art. 23 of the DTAA between India and Canada. The assessee contended that the entire royalty income taxed in Canada is to be treated as taxed in India also and accordingly, whatever tax is paid in Canada is to be given as rebate while computing tax payable by assessee in India. The AO did not agree with the above view. He held that since the receipts, which are also forming part of turnover of assessee, are eligible for deduction under s. 80HHE of the Act. Accordingly, the entire receipts by way of royalty from Canada have not been subjected to tax in India and accordingly, only proportionate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of units eligible for exemption under s 10A are excluded 2. Double taxation relief is to be calculated with reference to income which is double taxed 3. Though in Canada, the gross income may be taxed, the expenditure incurred in connection with such income is deductible while computing total income in India Therefore, the calculations should proceed by determining the net profits on the relevant turnover 1. Turnover of all units to be taken, including of those units enjoying exemption under s 10A 2. By proceeding stepwise, it is possible to track the turnover and the relevant profit from its origin to the destination i.e. total income and tax payable thereon ( 3 ) Actual Computation As done by the appellant As done by the AO As done by the CIT ( A ) As per Annex. 'A' As per Annex. 'B' As per Annex. 'C Annexure A ' ' Amount ( Rs. ) ( i ) 3,06,81,657 * 3,47,47,530/8,08,08,210 1,31,93,112 ( ii ) Actual tax paid in Canada 46,02,248 Credit being lower of the above 46,02,248 Annexure 'B' Amount ( i ) Tax paid in Canada : 4,602,248 ( a ) Canadian Turnover 30,681,657 ( b ) Total turnover of 80HHE units 536,240,937 ( c ) Total taxable income (80HHE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subjected to tax in Canada. The terms subject to tax and income chargeable to tax in art. 23 of the Treaty refer to the gross amounts and not the net amount on which tax has ultimately been paid. Once gross income is regarded as the income having suffered tax in Canada and hence is adopted as the numerator in applying the formula for giving relief from double taxation, it should be a complete figure that should, on a parity of reasoning, be adopted as the denominator while applying the formula for giving credit from double taxation. When comparable figures are adopted in a formula, the same would factor in all the variable involved in the components of the formula. The learned CIT(A) has thus erred in going about the mechanism of giving credit from double taxation in a complex and long-drawn manner. In case of any ambiguity or a duality of opinion, the interpretation in favour of the assessee is to be adopted, more particularly so, in case where unlike other countries no detailed rules exist, in the domestic statute to deal with foreign taxes credits. 3.3 Learned Departmental Representative, on the other hand, submitted that the AO has not given credit on tax paid on doubly taxed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments and has claimed full credit of the taxes deducted in Canada. He also relied upon the decision of Hon'ble Supreme Court in the case of Kalyankumar Ray v. CIT [1992] 102 CTR (SC) 188 : [1991] 191 ITR 634 (SC), wherein it was held thus : Though, largely, the tax calculations are only matters of detail and arithmetic, there do arise sometimes difficult questions of interpretation of the provisions relating to tax rates, additional tax, interest and so on, and the assessee should, in all fairness, have full details regarding the computation to enable him to take further steps in the matter . As the assessee has not discharged its onus of establishing nature of receipt, i.e. whether it is royalty or business profit, in theses circumstances, correct component of income cannot be taken for giving DTAA relief. The AO did not determine the quantum of relief according to the provisions of art. 23 of the DTAA with Canada. 3.4 Shri Korde thereafter referred to the commentary on model DTAA, particularly commentary on arts. 23A and 23B concerning the methods for eliminating of double taxation. As per the DTAA between India and Canada, the method for computing relief under DTAA is or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material placed before us and also the orders of authorities below. We have also considered the decisions cited. Avoidance of double taxable is achieved by either-(a) exemption method or (b) credit method. Under the exemption method, the country of residence exempts the income which has been taxed in the source country. The exemption method may be classified as-(i) Full exemption method, (ii) Exemption with progression. Under the credit method, the country of residence gives credit for the tax paid in the source country. Credit method achieves sharing of tax. Credit method may be classified as-(i ) Full credit method (ii) Ordinary credit method. Sec. 90 of the IT Act deals with and provides for both the above methods-Sec. 90(l)( b) deals with avoidance of tax (exemption method). The treaty with Canada provides for relief from double taxation. The methodology prescribed under both the treaties is the ordinary credit mechanism. The commentary to the model conventions (both the OECD and the UN model conventions) acknowledges that there may be a lot of difficulties in the application of the article on relief double taxation . It therefore recommends that the domestic legislation shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the nature of income taxed in Canada as under: The Canadian tax is the tax withheld on the gross receipts from our client, the withholding tax being the final tax. The billings for the Canadian client have been made up from STP unit located at Reddy Building, Koramangala, but no exemption has been claimed under s. 10A of the Indian IT Act in respect of this income. The company has claimed the deduction under s. 80HHE on the export income from this unit, which was set up before the asst. yr. 1994-95 and not eligible for s. 10A exemptions : From the above, it is clear that the Canadian tax is levied on the gross receipts, which is also part of gross receipts of undertaking eligible for deduction under s. 80HHE of the Act only and in respect of which exemption under s. 10A was neither claimed nor allowed. However, the fact remains that the royalty income in Canada is forming part of total turnover of units eligible for deduction under s. 80HHE. It is also an admitted fact that the total turnover or gross receipts of eligible units cannot be considered as income, which has been subjected to tax in India. The expenses for earning such income have been allowed as deduction. On the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to modification of the respective figures adopted therein when the effect is given to the order of this Tribunal. 3.9 Learned Departmental Representative has submitted that the AO has not determined the nature of income i.e. whether royalty or business profit. In our opinion, such exercise is not required as the assessee is resident in India and its global income is taxable as business profit. Thus, the nomenclatures of such receipts does not determine either the component of taxable income or the tax payable thereon. 4. The next ground of appeal is as under: The learned CIT(A)-I has failed in appreciating that surcharge is to be calculated after giving credit for rebates and relief under Chapter VIII, Chapter VIII-B and Chapter DC which would therefore also include relief from double taxation. 4.1 It is the contention of the assessee that the tax payable is to be reduced by the credit for double taxation and only thereafter surcharge is to be added. Credit for double taxation under art. 23 of DTAA is given pursuant to provisions of s. 90(1)(a). Sec. 90 is part of Chapter IX of the IT Act. As per Finance Act for the relevant year, income-tax shall be charged at the rates specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be accepted and the profit and gains from sale of the software are to be treated as exempted as it form part of the profits and gains of the STP unit and the assessee has opted for seeking exemption under s. 10A in respect of profits and gains of this unit for this asst. yr. 1997-98. In view of the finding that the profit from sale of the software is part of income exempt under s. 10A, the alternate contention of the assessee that it is entitled to deduction under s. 80HHE in respect of the income is rendered only of academic importance. However, I endorse the finding of the AO that the assessee has not fulfilled the condition in sub-s. [2] of s. 80HHE stipulating that the deduction is available only if the consideration is brought to India or received in foreign exchange, and it is not entitled to deduction under s. 80HHE in respect of the income, if any, from sale of the software . 6.1 Learned Departmental Representative, Shri Ajit Korde, submitted that the income from sale of Eagle Software is not exempted under s. 10A because the assessee started working on the development of said software even before the STP unit came into existence and the expenditure on development of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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