TMI Blog2019 (8) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA. No.342/PUN/2014, IT(TP) A. No.10/BANG/2014 - - - Dated:- 26-8-2019 - Shri R.S. Syal, Vice President And Shri Partha Sarathi Chaudhury, Judicial Member For the Assessee : Shri Padamchand Khincha For the Revenue : Shri Neeraj Bansal, CIT ORDER PER R.S.SYAL, VP : These two cross appeals one by the assessee and the other by the Revenue are directed against the order passed by the CIT (A)- IV, Bangalore on 08-11-2013 in relation to the assessment year 2009-10. 2. Briefly stated, the facts of the case are that the assessee, an Indian company, is a subsidiary of iGate Incorporated, USA. It acts as a single source broad range of information technology applications, solutions and services that include c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done as such payments, in the opinion of the assessee, made to the foreign companies could not be treated as royalty as per the provision of section 9(1)(vi) read with the respective Double Taxation Avoidance Agreements. The contention of the assessee was not accepted by the ITO (TDS), who held that the assessee was a defaulter for not deducting tax at source from the remittances made for purchase of the software as the provisions of section 9(1)(vi) of the Act were attracted and the payment made by the assessee was in the nature of royalty on which tax ought to have been deducted. The AO placed reliance on the definition of the term `royalty as mentioned in the DTAA and accordingly held that the assessee was a defaulter within the meaning of section 201(1) of the Act. The first appeal failed but the Tribunal granted relief by holding that payment was not in the nature of royalty for the reason that it did not partake of the character of royalty in terms of the DTAA. When the matter came up before the Hon ble High Court, it held that a resident payer who had not filed an application u/s. 195(2) of the Act cannot later on contend that no part of the payment resulted in any taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes 'royalty', inter alia, as per the provisions of s. 9(1)(vi). Failure to deduct tax at source has been held to attract the legal consequences flowing therefrom. 7. Au contraire , the Hon ble Delhi High Court in DIT vs. Ericsson A.B. (2012) 343 ITR 0470 (Del) has held that in order to qualify as royalty payment within the meaning of section 9(1)(vi) and particularly cl. (v) of Expln. 2 thereto, it is necessary to establish that the cellular operator, by making such payment, obtained all or any of the copyright rights of such literary work. It held that a distinction was required to be made between the acquisition of a copyright right and a copyrighted article . Software supplied by the assessee, being, an integral part of the GSM mobile telephone system, incapable of independent use and there being nothing to establish that the cellular operator had obtained any copyright of such software, it held that no part of the payment received by the assessee under the supply agreement could be classified as royalty within the meaning of section 9(1)(vi) of the Act or under the relevant clause of the DTAA. 8. In DIT Vs. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. first appellate authority, who decided the appeal of the assessee, is CIT(A)-IV, Bangalore. The assessee preferred second appeal before the Bangalore Benches of the Tribunal. Subsequently, a prayer was made for transfer of appeals from Bangalore to Pune, which request was accepted and the appeals were transferred to Pune. Under these circumstances, a question arises as to which Hon ble High Court exercises jurisdiction over the assessee for the year under consideration. 11. There is hardly any need to accentuate that the jurisdiction is decided by the office of the Assessing Officer as has been held by Hon ble Delhi High Court in Suresh Desai Associates Vs. CIT (1998) 230 ITR 912 (Delhi) . In that case, the assessment was made at Bombay, the appeal against which was also decided by the CIT(A), Bombay. Both the parties preferred appeals to Tribunal, Delhi, which were disposed of by the Delhi Tribunal. Rejecting the contention of the assessee for hearing by it, the Hon ble Delhi High Court held that jurisdiction under s. 256 vested in High Court of Bombay and not the High Court of Delhi. It further observed that transfer of assessment cases of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bangalore. The contrary contention of the ld. AR in this regard is, therefore, repelled. 14. We have noticed above that there is a difference of opinion between the Hon ble Karnataka High Court por una parte and the Hon ble Delhi High Court por otra parte on the point in controversy before us. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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) of the Act. 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) of the Act, as has been made by the authorities below in the instant case. 18. The ld. AR added another dimension to the issue by contending that the first judgment in the case of CIT Vs. Samsung Electronics Co. Ltd. Ors (supra) was delivered on 24-09-2009 and the transaction of payment of software charges by the assessee got concluded during the year ending on 31-03-2009. It was, therefore, urged that the assessee could not have foreseen its liability of deduction of tax at source on the payment made for renewal of software license and hence, the provisions of section 40(a)(ia) should not be applied. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w canvassed by the authorities below on this issue. The ground raised by the assessee in this regard is dismissed. 21. The next issue urged in the assessee s appeal is against the ld. CIT(A) not directing the AO to allow foreign tax credit of ₹ 1,91,52,577/- for the taxes paid by foreign branches as claimed in the return of income filed. The second part of this ground is against the confirmation of the action of the AO in allowing 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%. 22. Succinctly, the facts of this issue are that the assessee claimed tax credit of ₹ 1,91,52,577/- in the computation of income towards taxes paid by its overseas branches situated in five countries, namely, Netherland, France, US, UK and Belgium. On being called upon to explain the reasons for claiming such tax credit, the assessee submitted that its foreign branches constituted Permanent Establishments (PEs) and suffered tax on such incomes in accordance with the domestic tax laws of the respective countries. The income earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue has held that only the amount of tax relatable to the doubly taxed income could be allowed credit against the total tax liability of the assessee under the Act. There is a further controversy in the computation of tax u/s 115JB as to whether the tax credit should be allowed at the rate of 10% of the doubly taxed income, which is the basic rate of tax u/s 115JB or such rate should also include surcharge at 1.33%. Thus we need to determine the following two issues in this regard:- i. Whether the assessee is entitled to the full foreign tax paid or tax only on the doubly taxed income?; and ii. If entitled only to tax on doubly taxed income, then the extent of foreign tax credit to be allowed? 24. We can better appreciate the position in the light of the relevant provisions contained in Chapter IX of the Act with the caption `Double taxation relief . Section 90, being, the first section of this Chapter, to the extent it is relevant for our purpose, runs as under: - ₹ 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ualifies for relief u/s 90(1)(a)(i) of the Act. 27. We have noted above that the machinery for providing relief under section 90 is contained in the respective DTAAs. A major chunk of the assessee s income is from the USA. The relevant provision for granting relief of foreign tax in the DTAA between India and USA is contained in Article 25. Para 2 of the Article 25 dealing with granting relief to a resident of India, is as under : - ₹ 2. (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States. 28. The above para 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in foreign countries to the tune of ₹ 1,91,52,577/-. The amount of doubly taxed income is ₹ 10.13 crore. As the income of the assessee has been finally computed u/s 115JB and it is not the case of the AO that such income of ₹ 10.13 crore is not fully part of the book profits computed u/s 115JB, it is this amount of income which would require exclusion from the amount of income computed u/s 115JB. 31. Going with the above position and converting the exclusion of doubly taxed income of ₹ 10.13 crore from the total income in terms of tax credit, the assessee will get tax relief of ₹ 1,01,36,140 (going by the AO giving benefit of tax at the basic rate under MAT at 10%) or ₹ 1,14,84,247/- (going by the basic rate tax of tax under MAT at 10% plus surcharge at 1.33%). Thus, the maximum amount of tax relief which can possibly be given to the assessee, subject to our determination of the second aspect of this issue, is ₹ 1,14,84,247/-, meaning thereby that the tax paid in foreign countries to the tune of ₹ 76,68,330/- (₹ 1,91,52,577/- minus ₹ 1,14,84,247/-) cannot qualify for credit against the tax liability arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e doubly taxed income. Whereas the AO has restricted the tax credit to the extent of 10% of the doubly taxed income, being, the basic rate at which income is chargeable to tax u/s 115JB, the assessee seeks, notwithstanding its claim for full credit for foreign taxes, credit for the foreign tax at the effective rate of tax and surcharge etc. u/s 115JB, that is, 11.33%. 34. We have noted the language of section 90(1)(a)(i) which talks of granting relief in respect of doubly taxed income . Similarly, we have noted Article 25(2) of the DTAA between Indian and the USA providing for deduction from the tax on the income of an amount equal to the income tax paid in the USA. On a conjoint reading of the above provisions, following two things emerge. First is that it is the amount of doubly taxed income which has to be excluded from the income chargeable to tax in India. Once we exclude such doubly taxed income from the income computed under the Act, then whatever is the amount of tax and surcharge thereon will get automatically excluded from the total tax liability computed under the Act. Second is that the deduction from the income tax liability under the Act has to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-09. Unlike earlier years, Rule 8D is applicable for the purpose of making disallowance u/s.14A. The disallowance made by the AO is in two parts, viz., ₹ 5,49,818/- under Rule 8D(2)(ii) and ₹ 75,43,252/- under Rule 8D(2)(iii). In so far as the disallowance of ₹ 5,49,8198/- is concerned, it is seen from the assessee s Balance sheet, whose copy has been placed in the paper book, that as against Investments of ₹ 176.57 crore, the assessee s Shareholders fund stands at ₹ 509.29 crore. Thus, it is evident that the Shareholders fund is far in excess of the amount of investments. The Hon'ble Karnataka High Court in CIT Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from a common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. This view has been taken by following the judgment of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal provisions of the Act as well as the profits computed u/s.115JB. 42. We have heard both the sides and gone through the relevant material on record. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of the immediately preceding two assessment years, appeals of which have been decided by the Tribunal on 05-08-2019. In the appeal for the A.Y. 2008-09, the Tribunal in IT(TP)A.No.287/Bang/2013 has held that 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 of the Act. 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. 43. Ground No.5 of the assessee s appeal is against reducing telecommunication charges and internet usage charges totalling ₹ 9,82,28,337/- from only the Export turnover in computing deduction u/s.10A. Ground No.1 of the Revenue s appeal is against the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term capital gain and income from other sources in computing total income in accordance with the provisions of Chapter VI. Ground No.2 of the Revenue s appeal is against the direction of the ld. CIT(A) in holding that if the unit of the assessee is independent then its loss could not be adjusted against the profits of other units for the purposes of computing deduction u/s.10A. 49. We have heard both the sides and gone through the relevant material on record. 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. (2017) 291 CTR 1 (SC) 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. 50. Ground No.9 of the assessee s appeal about the deduction of interest u/s.80G was not pressed by the ld. AR, which hereby stands dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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