TMI Blog2017 (11) TMI 1675X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 (10) TMI 195 - KARNATAKA HIGH COURT)and CIT Vs. Synopsys International Old Ltd. [2013 (2) TMI 448 - KARNATAKA HIGH COURT] we uphold the disallowance made by the authorities below, of software expenses paid to overseas entities under Section 40(a)(i) of the Act for not deducting tax at source under Section 195 of the Act thereon TDS liability on software expenses paid to Indian entities - Held that:- We find that in the F.Y. 2005-06 relevant to A.Y. 2006-07, the year under consideration, there was no liability to deduct tax at source under Section 194J of the Act in respect of software expenses paid to Indian entities as the term ‘royalty’ in Sec. 194J of the Act was introduced by the Taxation Laws Amendment Act, 2006 w.e.f. 13.7.2006. Therefore, in our view, the disallowance under Section 40(a)(ia) of the Act, in respect of software expenses paid to Indian entities amounting to ₹ 55,90,949 is bad in law and therefore deleted. Disallowance under Section 40(a)(i) should not be made in respect of payments actually made during the year under consideration - Held that:- This issue is no longer res integra as the Hon'ble Apex Court in the case of Palam Gas Service Vs. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the learned CIT (Appeals) and consequently dismiss ground No.2 raised by Revenue. TDS liability on commission paid to non residents - Held that:- Respectfully following the decision of the Hon'ble High Court of Delhi in the case of CIT Vs. Angelique International Limited (2013 (10) TMI 17 - DELHI HIGH COURT), we uphold the finding of the learned CIT (Appeals) that in the year under consideration the commission paid to non-residents was not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) of the Act. Deduction under Section 10A - Held that:- As find from a perusal of the orders of the authorities below that the Assessing Officer has only relied on certain extracts from the Annual Report in support of contentions; rather than examining the agreements, contracts, invoices and other relevant evidences in the matter. In view of the above, we set aside the issue of reductionof expenditure incurred in foreign currency from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination based on factual evidence as stipulate that expenditure incurred in foreign currency for rendering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned CIT (Appeals) disposed off the appeal vide order dt.31.03.2015, allowing the assessee partial relief. 3. Aggrieved by the order of CIT (Appeals) for Assessment Year 2006-07 dt.31.3.2015, both the assessee and revenue have preferred appeals in respect of findings rendered against them in the impugned order. We now proceed to dispose off these cross appeals in seriatum hereunder : Assessee's appeal in IT(TP)A No.799/Bang/2015 for A.Y. 2006-07. 4. In the assessee's appeal, the grounds raised are as under : 1.1 The order passed by the learned Commissioner of Income Tax (Appeals) 3, Bangalore, to the extent prejudicial to the appellant is bad in law and liable to be quashed. Disallowance of subscription charges paid to M/s Gartner, Forester Research and Meta 2.1 The learned Commissioner of Income tax (Appeals) 3, Bangalore has erred in confirming the disallowance of subscription charges paid to M/s Gartner, Forester Research and Meta totally amounting to ₹ 8,42,00,399/- under section 40(a)(ia) of the Act. 2.2 On facts and circumstances of the case and law applicable, the impugned payments were not chargeable to tax in India, not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly paid during the relevant previous year cannot be disallowed under section 40(a)(ia) of the Act. Disallowance of brand building expenses 5.1 The learned Commissioner of Income tax (Appeals) 3, Bangalore has erred in confirming the disallowance of brand building expenses amounting to ₹ 30,36,80,000/- for the impugned reason that the same constitutes deferred revenue expenditure . 5.2 On facts and in the circumstances of the case and law applicable, brand building expenses of ₹ 30,36,80,000/- is to be fully allowed as deduction as claimed by the appellant. Deduction under section 10A in respect of rental income 6.1 The learned Commissioner of Income tax (Appeals) 3, Bangalore has erred in not allowing deduction under section 10A in respect of rental income of ₹ 10,05,84,495/- On facts and circumstances of the case and law applicable, rental income of ₹ 10,05,84,495/- constituted profits of business of STPI units and consequently the said income is eligible for deduction under section 10A. 5. Ground No.1.1 being general in nature, no adjudication is called for thereon. 6. Ground Nos.2.1 to 2.4 - Disallowance of Subscription charges. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 7.2.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hon'ble High Court of Karnataka in the case of CIT Vs. Synopsys International Old Ltd. (2012) 28 taxmann.com 162 (Kar) and CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 dt.15.10.2011 has elaborately discussed this issue and held that payments made for import of software constitute Royalty and hence liable for TDS under Section 195 of the Act; thereby overruling the decisions of the co-ordinate benches of ITAT, Bangalore that software payments are not liable for TDS under Section 195 of the Act. Respectfully, following the aforesaid decisions in the cases of CIT Vs. Synopsys International Old Ltd. (supra) and CIT Vs. Samsung Electronics Co. Ltd. (supra), we uphold the disallowance made by the authorities below, of software expenses of ₹ 10,21,856 paid to overseas entities under Section 40(a)(i) of the Act for not deducting tax at source under Section 195 of the Act thereon. Consequently, Grounds 3.1 to 3.4 raised by the assessee are dismissed. 8. Ground Nos.4.1 to 4.3 In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , publishing charges, marketing fees, consulting fees, global meets, trade show fees, exhibition stall space, etc. In our view, this expenditure incurred is in the course of and for the purpose of assessee's business and it cannot be said that the said expenditure has resulted in the acquisition of any asset ; which finding is not borne out by the facts on record. 10.2.2 On a perusal of the orders of the authorities below, it appears to us that the Assessing Officer and learned CIT (Appeals) in coming to their views have merely gone by the nomenclature brand building expenditure without actually examining the nature of each expenditure under the above head. In view of the above, we restore this issue of brand building expenditure back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head brand building and decide the issue of allowability of brand building expenditure as revenue expenditure in the light of our observations and after affording the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be duly considered. Consequently, grounds 5.1 and 5.2 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (4) of Section 10 of the Act is deemed to be business of the undertaking for the purpose of extending the benefit of deduction under Section 10A of the Act. At paras 8 9 thereof, the Hon'ble Court, explaining the interplay of section 10A(1) and 10A(4) of the Act, has held as under : 11.2.2 Similarly, the Hon'ble High Court of Karnataka in the case of Wipro Ltd. Vs. DCIT in its order reported in (2016) 382 ITR 179 before whom the substantial question of law No.16 for consideration was in respect of income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation, held that these items were eligible for deduction under Section 10A of the Act. At para 166 thereof; the Hon'ble Court followed its own earlier order in the case of Wipro Ltd. in ITA No.507 / 2002 dt.25.8.2010, in respect of income from sale of scrap, export incentive and rent received to hold as under : 166. This Court had occasion to consider the substantial questionof law in assessee's case itself in ITA 507 . 2002 decided on 25.8.2010 while dealing with the income from sale of scrap, export incentive and rent received, answered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, we, in the interest of justice and equity, admit the aforesaid additional grounds raised by the assessee for consideration in this appeal. 14. Additional Ground No.1. We have heard the rival contentions on this issue and perused the material on record. In respect of this additional ground, we deem it appropriate to remand the same to the file of the Assessing Officer for verification of details and documents in respect of the issue of whether allowability of foreign tax credit in respect of income eligible for deduction under Section 10A of the Act is also allowable under Section 90 of the Act in the light of the decision of the Hon'ble Karnataka High Court in the case of Wipro Ltd. Vs. DCIT (supra) and adjudication thereon after affording the assessee adequate opportunity of being heard and to file details and submissions in this regard that shall be duly considered. The Assessing Officer is accordingly directed. Consequently, additional ground No.1 is treated as allowed for statistical purposes. 15. Additional Ground No.2. 15.1 This additional ground raises the issue of the allowability of state taxes paid outside India either as a deduction in computing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -07. 17. The Grounds raised in Revenue s appeal are as under : 1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 18. Grounds at S.Nos.1, 7 8. 18.1 Grounds at S.Nos.1, 7 8 (supra) being general in nature, no adjudication is called for thereon. 19. Ground No.2 Disallowance u/s. 14A of the Act. 19.1 In this ground (supra), Revenue assails the action of the learned CIT (Appeals) in directing the Assessing Officer to disallow expenditure incurred for earning of exempt income under Section 14A of the Act as per the estimation proposed by the Assessing Officer rather than in following the procedure laid down under Rule 8D of the IT Rules, 1962. 19.2 We have heard the rival contentions, perused and carefully considered the material on record. In the course of assessment proceedings, the assessee offered an amount of ₹ 33,43,422 as disallowance under Section 14A of the Act which comprised 50% of the salary of an employee and 50% of the salary of the Sr. Vice President. The Assessing Officer, however, did not accept the assessee's submissions and computed the disallowance under Section 14A r.w. Rule 8D at ₹ 4,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t commission paid to non-residents were not liable for TDS under Section 195 of the Act and consequently not liable for disallowance under Section 40(a)(i) of the Act. 20.3.1 We have heard the rival contentions, perused and carefully considered the material on record. There is no dispute that the services rendered by the non-resident commission agents outside India was to procure new business and to strengthen existing business of the assessee from overseas clients. CBDT Circular No.23 dt.23.7.1969 (copy placed at pages 835 to 838 of compilation of decisions) held that a foreign agent of Indian exporter operates in his own country and no part of his income arises in India. ; Circular No.786 dt.2.7.2000 (copy placed at page 839 compilation of decisions) further stated that the relevant sections 5(2) and 9 of the Act had not undergone any change in this regard and therefore the clarification in Circular No.23 still holds good. These circulars were in force when the commission expenditure was incurred during the F.Y. 2005-06 relevant to A.Y. 2006-07; the year under consideration. Subsequently, Circular No.7 of 2009 dt.22.10.2009 (copy placed at pages 841 842 of compilation of dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erfere with the order passed by the tribunal deleting the addition made by the Assessing Officer under Section 40(a)(i) of the Act. The appeal, being devoid of merit, is dismissed. 20.3.2 Respectfully following the decision of the Hon'ble High Court of Delhi in the case of CIT Vs. Angelique International Limited (supra), we uphold the finding of the learned CIT (Appeals) that in the year under consideration the commission paid to non-residents was not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) of the Act. Consequently, Ground No.3 of Revenue s appeal is dismissed. 21. Ground No.4 - Computation of deduction u/s. 10A of the Act. 21.1 In this ground, Revenue contends that the learned CIT (Appeals) erred in directing the Assessing Officer not to exclude expenses incurred in foreign currency related to technical services rendered abroad from export turnover for computation of deduction under Section 10A of the Act without appreciating the reasons cited by the Assessing Officer in the order of assessment. 21.2 On a perusal of the record before us, it is seen that in the course of assessment proceedings, the Assessing Officer reduced 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee's Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 10A of the Act, following its decision in the case of Motor Industries Co. Ltd. (supra) has held that the expenditure incurred in foreign exchange for rendering of technical services for development and export of computer software services outside India cannot be excluded from export turnover. At paras 12 to 14 thereof the Hon'ble High Court has held as under : 12. On substantial question No. 1, the Assessing Authority has extensively considered whether the activity carried on by the assessee is software development or technical service. It is an admitted fact, as per the assessment order, the role of the assessee is of developer of software and not a consultant to any project. It is also categorically held by the assessing authority that the purpose of business of the assessee is to develop the software and in such process, expenditure is incurred in foreign currency to provide technical services outside India. Having held so, the assessing authority proceeded to conclude that the nature of expenditure and the nature of business are two different and distinct concepts and as per the statute, what is to be excluded is the expenses in foreign exchange for rendering te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxmann.com 377 (Kar.) and this court has held that though the services rendered in deputing the software engineers abroad who among other things have to do testing, installation and monitoring of software supplied to the client, appears to be technical in nature, it does not fall within the clause of providing technical service outside India in connection with the development or production of computer software and accordingly such expenditure cannot be excluded in computing export turnover. To decide the question on hand, the Tribunal has placed reliance on the Judgment passed by the Tribunal in the case of Mphasis Ltd. (supra). The very same Judgment was subjected to judicial scrutiny before this court in ITA No. 1075/2008 connected with ITA No. 196/2009, wherein this court, following the Judgment of Motor Industries Co. Ltd.(supra), answered the substantial question of law in favour of the assessee and against the revenue. This court has held that the expenditure incurred in the development or production of computer software though is in the nature of technical services, is not so, for the purposes of the Act and the said expenditure cannot be excluded in computing export turno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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