TMI Blog2021 (10) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... I 596 - ITAT AHMEDABAD] that an AE could not be adopted as a tested party since lacking uncontrolled comparable transactions. As in CIT Vs B R Constructions [ 1992 (6) TMI 13 - ANDHRA PRADESH HIGH COURT] holds that a co-ordinate bench decision not taking into consideration the relevant law and facts; as the case may be, is not a binding precedent. We therefore accept the assessee s instant ground for this precise reason alone and delete the impugned ALP adjustment. Management and consultancy fee involving ALP adjustments - HELD THAT:- We are of the view that the learned TPO needs to re-examine the entire issue in light of the assessee s foregoing submissions accordingly pin-pointing; prima-facie, a cost to cost reimbursement arrangement between itself, its AE and the ultimate payee M/s.KPMG qua the services in issue. We further wish to quote here the foregoing judicial procedents decision that the benefit test also not to be applied whilst determining NIL Arm s Length Price on the ground that the taxpayer had not in fact derived any benefit from the international transactions in issue. The assessee shall also be at liberty to file its additional evidence; if any, in conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 021 framed in furtherance to the Dispute Resolution Panel ( DRP )-1, Bengaluru s directions dt.09-02-2021 in F.No.55/DRP-1/BNG/2019-20, involving proceedings u/s.143(3) r.w.s.144C(13) r.w.s.143(3A) 143(3B) of the Income Tax Act, 1961 [in short, the Act ]. Heard both the parties. Case file perused. 2. The assessee has raised the following substantive grounds in the instant case: TRANSFER PRICING (TP) GROUNDS General 1. On the facts and in the circumstances of the case and in law, the Ld. Transfer Pricing Officer i.e. the Deputy Commissioner of Incometax - Transfer Pricing Officer - 2, Hyderabad (hereinafter referred to as 'the Ld.TPO') and the Ld.AO under the directions issued by Hon'ble DRP, erred in making an addition to the Appellant's total income of INR 26,07,96,022 (based on the provisions of Chapter X of the Income-tax Act, ('the Act') and the said additions [i.e Rs. 13,18,72,422 being the adjustment qua the software development service, Rs 3,89,08,530 being the adjustment qua the ITES Segment, Rs. 40,487,821 being additions in respect of Interest on AE receivables and Rs. 3,95,25,970 Rs. 1,00,0 1,279 being additions in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies Limited x) Sankhya Infotech Limited (Seg) xi) DCM LTD xii) E-Zest solution Ltd xiii) Harbinger Systems Limited ITES SEGMENT 5. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in incorrectly selecting the following companies as comparables while benchmarking the ITES Services (ITeS) of the Appellant, without appreciating that the said companies were not comparable/ functionally dissimilar to the Appellant, which ought to have been excluded from the final set of com parables: i) Infosys BPO ii) Eclerx Services Limited iii) Cross Domain iv) Tech Mahindra v) SPI Technologies India Private Limited vi) MPS Limited 6. On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in incorrectly rejecting the following companies while benchmarking the ITES Services (ITeS) of the Appellant which ought to have been included as a com parables as they were engaged in the ITE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Considering the receivables from Associated Enterprise (AE) as a separate international transaction. (ii) Making an adjustment with respect to interest on the receivables from AE. 12. On the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld TPO in making an adjustment with respect to interest on the receivables from AE without appreciating that the said adjustment is unwarranted and unjustified in view of the following grounds which are independent of and without prejudice to one and another viz (i) the appellant is a debt free company (ii) the international transactions (i.e. AE sales) resulting in the said outstandings is at ALP. 13. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld TPO in (i) considering the credit period of 30 days as against the credit period mutually agreed between the Appellant and its AE's (ii) considering the State Bank of India's ('SBI') short term de 0 it rates as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;TDS ') amounting to Rs. 3,01,408 attributable to Infor (Bangalore) Private Limited and Rs. 3,49,350 attributable to Approva Systems Private Limited ('transferor companies') which were amalgamated with Appellant with effect from 01 April 2015. 18. On the facts and in the circumstances of the case and in law, the Ld AO erred in not granting credit of advance tax of Rs. 27,04,000 paid by Infor(Bangalore) Private Limited and Rs. 36,42,600 paid by Approva Systems Private Limited ('transferor companies') which were amalgamated with Appellant w.e.f April 2015. 19. On the facts and in the circumstances of the case and in law, the Ld AO erred in computing higher books profits under Section 115JB of the Act by Rs. 86,95,802(net) consequent to double disallowance of deferred tax amounting to INR 89,50,830 and non-consideration of interest on delayed payment of TDS/Advance tax amounting to INR 2,55,028. 20. On the facts and in the circumstances of the case and in law, the Ld AO erred in erroneously levying interest of Rs.19,60,250 under Section 234A of the Act on the alleged delay in filing of Income tax return without appreciating that the Appellant had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore, the said impugned orders, being bad in law are liable to be quashed or alternatively set aside The Appellant craves leave to add, alter, vary, omit, substitute and or amend the above grounds of appeal (which are without prejudice to one another) at any time before or at the time of hearing of the appeal so as to enable the Honorable Members to decide this appeal according to law . 3. Learned counsel states at the outset that the assessee s 1st, 2nd, 24th and 25th substantive grounds are general/consequential in nature. Rejected accordingly. 4. We come to the assessee s 3rd substantive ground alleging that the learned lower authorities have erred in law and on facts whilst selecting No.(i) to (xii) companies as comparables in software development services (SDS) segment. Coming to the assessee s ground Nos.3(i) to 3(vi), we note that this tribunal s co-ordinate bench s order(s) in its cases for AYs.2014-15 and 2016-17; as the case may be, have already decided the issue(s) whilst directing exclusion of M/s.Infosys Limited, M/s.Larsen Toubro Infotech Limited on the ground that they had been having huge turnovers. The factual position is stated to be no dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispute that the tribunal s foregoing bench has already held it to be a comparable entity. So far as the assessee s objection that M/s.R.S.Software (India) Limited also provides different services, we direct the TPO to verify the same in principle and if it is found that the relevant segmental details pertaining to software development services are available, the corresponding PLI of the very filed only would be taken in necessary computation. This ground No.3(x) is partly accepted for statistical purposes. 4.7. Next entity before us is, M/s.Infobeans Technologies Limited which already stands included in tribunal s order for AY.2014-15. The assessee s plea before is that this entity is engaged in diversified activities. We follow our reasoning in the preceding paragraph to remit the instant issue back to the TPO for his afresh adjudication in very terms. 4.8. The assessee s next substantive grievance seeks to exclude M/s.Cigniti Technologies Limited from the array of comparables on the ground that this entity is engaged in software testing segment. Learned departmental representative strongly opposes assessee s stand on the ground that it had itself included the instant comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Learned lower authorities have directed exclusion thereof in view of the fact that it failed to satisfy 75% export criteria. Mr.Lala vehemently submitted before us that the instant entity has missed the foreign export filter by a whisker only since the same comes to 74.2% as against 75% adopted by the lower authorities. We find no merit in the assessee s arguments since Chapter-X is a Special Provision wherein there is no scope for any kind of grace marketing and more particularly when other segmental companies are already there. We further quote hon'ble apex court s decision in Commissioner of Customs Vs. Dilip Kumar (2018) 9 SCC 1 (FB)(SC) that provisions of the Act have to be strictly interpreted only. The assessee fails in its instant ground No.4(v). This ground No.4 (with all sub-grounds) is partly accepted in foregoing terms. 6. We now advert to the assessee s 5th substantive ground involving sub-ground Nos.(i) to (vi) seeking to exclude the allegedly improperly selected comparables in the lower proceedings. It transpires during the course of hearing that this tribunal s earlier orders; right from AYs.2011-12 to 2015- 16, have excluded M/s.Infosys BPO, Eclerx Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in comparable entities corresponding financials re-examination/verification back to the TPO for his necessary verification. Ordered accordingly. 8.2. The assessee s sub-ground Nos.6(iii), (iv), (v), (xi) and (xii) seeking to include M/s.Jindal Intellicom Limited, M/s.Allsec Technologies Ltd, M/s.Tata Business Support Services Limited, M/s.Cosmic Global Limited and M/s.BNR Udyog Limited; respectively on the ground that the corresponding export filter limit of 75% ought not to be applied to reject functionally comparable companies in light of a catena of case law, are found to be carrying no substance as per stricter interpretation (supra) in preceding paragraphs. These subgrounds are rejected therefore. 8.3. Learned counsel does not press for the assessee s subground No.6(vi) during the course of hearing. 8.4. Coming to the assessee s sub-ground Nos.6(vii), (ix) and (x) alleging cherry picking at the lower authorities behest qua M/s.Suprawin Technologies Limited, M/s.Tata Consulting Engineers Limited and M/s.Tata Elxsi Limited, learned counsel first of all submitted that the corresponding data is very much available now. We therefore restore all these sub-grounds back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case may be, is not a binding precedent. We therefore accept the assessee s instant 13th substantive ground for this precise reason alone and delete the impugned ALP adjustment of Rs.2,80,004/-. 11. Next comes assessee s identical substantive grounds No.14th and 15th seeking to allow management and consultancy fee involving ALP adjustments of Rs.3,95,25,970/- and Rs.1,00,01,279/-; respectively. Learned counsel vehement contended before us that the lower authorities have erred in law and on facts in making both the impugned adjustments thereby taking NIL price as their market rate(s) in issue. And also that they have wrongly applied benefit test as well which is not sustainable in light of CIT Vs. Cushman Wakefield (India) Pvt. Ltd., [269 CTR 16] (Del) and CIT Vs. EKL Appliances Ltd. (2012) [345 ITR 241] (Del) that it is not within the TPO s domain to ascertain or apply the benefit test since the same has to be ascertained from the point of view of an assessee than questioning its wisdom by departmental authorities. His next argument is that it is the assessee s AE had in fact made the impugned payments to M/s.KPMG on cost to cost basis only without involving any pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow its foreign tax payment as a deduction. Mr.Lala vehemently contended that the instant issue allowability of foreign tax paid as a deduction in the nature of an expenditure incurred wholly and exclusively for the purpose of the business is no more res integra in light of hon'ble Bombay high court s decision in Reliance Infrastructure Ltd. Vs. CIT (2017) 390 ITR 271 (Bom) wherein their lordships hold in very clear terms that Section 40(a)(ii) does not cover the same. We find in this factual backdrop that this tribunal s coordinate bench decision in DCIT Vs. Elitecore Technologies Private Ltd. (2017) 165 ITD 153 (Ahd) has distinguished the foregoing judicial precedent to conclude that the same is not a binding precedent since coming from the hon'ble nonjurisdictional high court as under: 27. In ground no. 3, the assessee has raised the following grievance 3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in not allowing entire foreign tax credit amounting to Rs.55,61,306. 3.2 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, in assessee's own case for the 2009-10, and confirmed the quantification of eligible tax credit at Rs 3,10,799. As for the balance amount of Rs 52,50,507 (i.e. tax withheld abroad at Rs 55,61,306 minus tax credit allowed of Rs 3,10,799), the CIT(A) held that it should be allowed as deduction under section 37(1)- a claim which was negatived, or rather simply brushed aside, by the Assessing Officer without any discussion at all. Aggrieved by learned CIT(A) upholding the eligible tax credit at Rs 3,10,799, the assessee is in appeal before us. In the meantime, however, the order so followed by the CIT(A) also came up for examination before us. Vide order dated 3rd January 2017 on assessee's appeal for the assessment year 2009-10, the stand of the CIT(A) on quantification of tax credit was reversed, claim of the assessee on quantification, to a very large extent, was upheld, and, in the process, some observations on principles governing the quantification of such tax credit were made. Learned counsel for the assessee suggests that matter deserves to be remitted to the file of the CIT(A) for fresh adjudication, on quantification aspect, in the light of the order so passed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, these earnings are, so far as the present year is concerned, are passive earnings, and no part of the costs incurred in India can be allocated to earnings from Singapore and Indonesia. As regards earnings from maintenance contract, the assessee has allocated the costs on a proportionate basis and no defects are pointed out in the allocation so made by the assessee. However, there seems to be no logic in allocating a share, in proportion of turnover, of all the costs borne by the assessee to these earnings- as has been done by the Assessing Officer. When the income in respect of such foreign operations is not separately computed, it is to be done on a reasonable basis, and what would constitute reasonable basis will be the basis which is based on sound reasoning. The concept of averaging on the basis of overall revenues and profits of the assessee, or on the basis of some other ratio analysis, can only come into play when the income element cannot be worked out on some other reasonable basis on the facts of a particular case So far as the facts of the present case are concerned, we have also noted that the assessee has, during the course of the assessment proceedings, given th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly marginal or incremental costs incurred in respect of foreign income should be taken into account and the overheads cannot be allocated thereto. As we have noted earlier, the allocation of proportional deductions can be justified in some situations, such as when business operations are somewhat evenly or even in a significant manner, spread over the residence and source jurisdiction, but that's not the case here. Right now, we are dealing with a situation in which a major portion of income, by release of retention money as also by addition of an additional user by the customer, is a somewhat passive income, even though in the nature of business receipt, and as such, to that extent, allocation of all the expenses incurred by the assessee, in respect of such earnings, will not be justified. As regards the income from maintenance contracts, the relates costs have already been allocated and the Assessing Officer has not pointed out any infirmity in the same. In this view of the matter, quantification of income for the purpose of computing admissible tax credit, as done by the assessee and as reproduced earlier, is accepted. 10. We have noted that the tax credit for both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, and that is with respect to deductibility of taxes so paid abroad, except to the extent of tax credit being granted in respect of the same under section 90 or 91, under section 37(1). Aggrieved by deduction being granted by the CIT(A) in respect of the balance amount of income tax paid abroad ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 (i.e. income tax withheld abroad minus the tax credit held admissible in such respect of such income tax paid abroad), the Assessing Officer is in appeal before us. 31. So far as this aspect of the matter is concerned, the stand of the assessee, at the assessment stage, has been that in case any part of the amount of income tax withheld abroad is not allowed as tax credit against the Indian tax liability, a deduction under section 37(1) be allowed in respect of the same. It was pointed that though there is a bar, under section 40(a)(ii), on deduction in respect of 'tax' on the profits and gains of the business, such a bar does not apply on the taxes paid outside India, as, in terms of definition of tax under section 2(43), income-tax chargeable under the provisions of this Act, and in relation to any other as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical argument contrary to the scheme of the statutory provision. He, however, left the matter to us. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. If we are to uphold the contentions of the assessee and the impugned order of the CIT(A). the scheme of benefit available to the assessee in respect of taxes paid or withheld outside India, by way of an example, is as follows: Assuming that the assessee earned an income of Rs 100 from outside India, and the taxes withheld abroad are Rs 60 and the admissible tax credit available to the assessee under section 90 and/or 91, in respect of these taxes withheld, is Rs 40 as the effective tax rate in India in respect of the said income is 40%, the benefit available to the assessee should be as follows: Tax credit to be adjusted against tax liability under the Income Tax Act, 1961 Rs 40 Deduction under section 37(1) in respect of taxes paid or withheld outside India Rs 20 In effect thus, the assessee gets a tax benefit of Rs 48 (i.e. Rs 40 plus 40% of Rs 20 which is allowed as deduction) as against a related tax liability of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a tax levied under the Indian Income Tax Act, 1961. Hon'ble Bombay High Court had, rejecting this plea in no uncertain terms though in the context of surtax, observed as follows: ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 With respect, this argument does not appeal to us. It is significant to note that the word tax'; is used in conjunction with the words any rate or tax , The word any goes both with the rate and tax. The expression is further qualified as a rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. If the word tax is to be given the meaning assigned to it by s. 2(43) of the Act, the word any used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word tax as defined in s. 2(43) of the Act is subject to unless the context otherwise requires . In view of the discussion above, we hold that the words any tax herein refers to any kind of tax levied or leviable on the profits or gains of any business or profession or assessed at a proportion of, or otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the aforesaid decisions. We agree with the view taken by the High Courts of Calcutta [Molins (India) Ltd. vs. CIT (1983) 144 ITR 317 (Cal) and Brooke Bond (India) Ltd. vs. CIT (1992) 193 ITR 390 (Cal) : TC 15R.590], Bombay (in) Lubrizol (India) Ltd. vs. CIT (1991) 187 ITR 25 (Bom) followed in several other decisions of that Court], Karnataka [CIT ITA No.197 and 508/Ahd/2016 Assessment Year: 2012- 13 vs. International Instruments Pvt. Ltd. (1983) 144 ITR 936 (Kar), Madras [Sundaram Industries Ltd. vs. CIT (1986) 159 ITR 646 (Mad), Andhra Pradesh [Vazir Sultan Tobacco Co. Ltd. vs. CIT (1988) 169 ITR 35 (AP)], Rajasthan [Associated Stone Industries Co. Ltd. vs. CIT (1988) 170 ITR 653 (Raj)], Gujarat [S.L.M. Maneklal Industries Ltd. vs. CIT (1988) 172 ITR 176 (Guj) followed in several cases thereafter], Allahabad [Himalayan Drug Co. Pvt. Ltd. vs. CIT (1996) 218 ITR 346 (All)] and Punjab Haryana High Court [Highway Cycle Industries Ltd. vs. CIT (1989) 178 ITR 601 (P H) : TC 17R.807]. 35. A coordinate bench of this Tribunal, while dealing with the same question of deductibility of income tax paid abroad and in the case of DCIT Vs Tata Sons Ltd [(1991) 9 ITR (Trib) 154 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empted in the country of residence. If the exemption is unconditional and the exempted income does not affect in any way the taxation of other income, then in substance the result is the same as a purely territorial system. Most exemption systems are not of this kind and so are to be distinguished from territorial systems. Most countries using an exemption system adopt exemption with progression, under which the total tax on all income of a resident is calculated, and then the average rate of tax is applied to the income that does not enjoy the exemption. Exemption systems are also increasingly subject to various conditions to ensure satisfaction of the assumption underlying the system (that the income has been taxed in the ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 source country at its ordinary rates).These conditions can consist of subject- to-tax tests (including the specification of tax rates) or selective application of exemption to foreign countries under domestic law or tax treaties. In particular, the exemption is usually not given where the source tax has been reduced or eliminated by a tax treaty. The result is that there are no countries asserting jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olitically because of entrenched interests). Given that tax treaties are premised on an item-by-item foreign tax credit limit, rather than on a worldwide limit aggregating all foreign income of the taxpayer, the itemby- item limit is probably easiest to use in domestic law. Whichever double tax relief system is adopted, some method of apportioning deductions between domestic and foreign income will be necessary. Where deductions allocated to foreign income exceed that income, the loss should not be available for use against domestic income. 8. There are thus four methods in which relief can be granted to a taxpayer in the residence country in respect of income-tax paid abroad. It is also important to bear in mind the fact that these four methods are mutually exclusive methods in the sense ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 that each one of these methods, on standalone basis, is meant to grant requisite relief from double taxation of an income. Application of more than one of these methods, in a particular situation can thus only result in granting relief greater than the double taxation itself. To sum up even at the cost of an element of repetition, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BLE TAXATION RELIEF 90. Agreement with foreign countries or specified territories.--(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,-- (a) for the granting of relief in respect of-- (i) income on which taxes have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income under this Act and under the corresponding law in force in that specified territory outside India, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that specified territory outside India, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India. (2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-s. (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (3) Any term used but not defined in this Act or in the agreement referred to in sub-s. (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him-- (a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or (b) of a sum calculated on that income at the Indian rate of tax; whichever is less. (3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under s. 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident Indian partnership firm, which includes income earned outside India, except income deemed to accrue or arise in India, which has suffered tax in such source jurisdiction. Sec. 90 and s. 90A provide that when India has entered into a DTAA with a foreign country, or a specified association outside India, the provisions of such agreements will override the provisions of the Indian IT Act-- except to the extent the provisions of the Indian IT Act are beneficial to the assessee. Under the tax credit scheme envisaged in the schemes of tax treaties, once again each income sourced in the treaty partner country is practically treated as a separate basket of income and the double taxation relief, in respect of taxes paid in that treaty partner country, is restricted to the taxes actually levied in the home country in respect of the said income. It thus follows that the least relief available in respect of income-tax paid abroad is if at all an assessee is also taxed in India in respect of the income-taxed abroad, it is only to the extent the tax rate abroad falls short of Indian tax rate. There is no dispute that the assessee has claimed double taxation relief under the scheme of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit in respect of taxes paid in USA as there is no Indian tax liability in respect of the said income taxed in USA. That has at least restricted some intended double benefit to the assessee, but even in a situation in which tax relief is confined to a situation in which the same has been actually taxed in India, the relief will be available against tax liability in respect of other incomes to the extent of applicable tax rate on taxes actually paid abroad. The net effect is that even when there is admittedly no double taxation of an income, the assessee is able to reduce his Indian income-tax liability, in respect of other incomes, by being allowed deduction in respect of taxes paid abroad. Such a claim being accepted will lead to quite an incongruous result by any standard. 12. It is in the backdrop of the above claim for deduction that one has to take a look at s. 40(a)(ii) and s. 2(43) which are reproduced below for ready reference : Sec. 40(a)(ii)--Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession ,-- (ii) any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;tax' under s. 2(43), covers only income-tax chargeable under the provisions of this Act (i.e. IT Act, 1961) , and, as a corollary thereto, this limitation on deduction of tax does not extend its scope to taxes paid other than under IT Act, 1961. 14. The above claim of deduction has been approved by the Co-ordinate Benches, for the first time in the asst. yr. 1976-77, and which has also been followed by another Co-ordinate Bench, vide order dt. 23rd Oct., 1984--a copy of which was also filed before us. This decision has been followed by the Coordinate Benches since then. It has been noted in this order that there is no finding that local taxes (abroad) were assessed on a proportion of the profits i.e. consultancy fees received . When CIT sought a reference under s. 256(1), for esteemed views of Hon'ble Bombay High Court and against this order on the question of deductibility of local taxes paid abroad, the Tribunal declined the reference and, inter alia, observed that the question is one of the facts , that the tax deducted is a local tax and not a tax on profits and that foreign tax is not covered by the provisions of s. 40(a)(ii) . Hon'ble High Court also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of K.P. Varghese vs. ITO Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC), has held that the task of interpretation is not a mechanical task and, quoted with approval, Justice Hand's observation that it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning . Their Lordships further observed that, we must not adopt a strictly literal interpretation of ... but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs and that we cannot ignore the context and the collection of the provisions in which ......, appears, because, as pointed out by Judge Learned Hand in the most felicitous language : interpret '. . .the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In Lubrizol's case (supra), Hon'ble Bombay High Court took note of the wording of s. 40(a)(ii) and disagreed with the assessee's contention that the expression 'tax' is restricted to 'income-tax' as defined under s. 2(43). While doing so, their Lordships, inter alia, observed as follows : It is significant to note that the word 'tax' is used in conjunction with the words 'any rate or tax'. The word 'any' goes both with the rate and tax. The expression is further qualified as a rate of tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. If the word 'tax' is to be given the meaning assigned to it by s. 2(43), the word 'any' used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word 'tax' as defined in s. 2(43) of the Act is subject to unless the context otherwise requires . In view of the discussion above we hold that the word 'any' tax herein refers to any kind of tax levied or leviable on the profits or gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Even in a situation in which tax relief is confined to a situation in which the same has been actually taxed in India, the relief will be available against tax liability in respect of other incomes to the extent of 38.5 per cent of taxes paid abroad. The scheme of the Act does not visualize this kind of an undue relief to the assessee which provides much greater relief than the hardship caused to the assessee. The hardship is of double taxation of an income in more than one tax jurisdiction, and the relief must not go beyond mitigating this hardship; it cannot be turned into an undue advantage, or source of income, to the assessee. Sec. 91 restricts the double taxation relief only to such amount as may have been paid by the assessee in excess of his income-tax obligations in India. Similarly, in terms of the provisions of tax treaties which are entered into under s. 90, tax credits, in respect of taxes paid abroad, are restricted to assessee's domestic tax liability in respect of the subject income as was held by this Tribunal in the case of Jt. CIT vs. Digital Equipments India Ltd. (2005) 93 TTJ (Mumbai) 478 : (2005) 94 ITD 340 (Mumbai). If we are to hold that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordance with the provisions of this Convention, may be taxed in the United States, India shall allow a deduction from the income of that resident an amount equal to incometax paid in the Unites States, whether directly or by way of deduction. Such deduction shall however not exceed that part of income-tax (as compute before the deduction is given) which is attributable to the income which is taxed in the United States.' A plain reading of the above provision makes it clear that the deduction on account of income-tax paid in the US, from income-tax payable in India, cannot exceed Indian income-tax liability in respect of such an income. This restriction on the deduction is unambiguous and beyond any controversy, as evident particularly from the last sentence in art. 25(2)(a) which is italicized as above the supply the emphasis on the same. As a matter of fact, we are unable to appreciate any basis whatsoever for the CIT(A)'s conclusion that the taxes paid in the US, in the instant case, are to be credited to the assessee's account and are to be refunded to the appellant, in case he has no income-tax liability in respect of that income in India. As for the CIT(A)'s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the foreign tax credit, the innovative theory of crediting the entire tax paid in the US to the assessee and grant of refund to him in case there is no tax liability in India in respect of that income, as enunciated and adopted by the CIT(A), is wholly unsustainable in law. Where is the question of refund of taxes paid abroad when FTD (i.e., foreign tax credit), in view of specific provisions to that effect in the DTAAs, cannot even exceed the Indian income-tax liability ? It is not the tax payment abroad which is the material figure for the purpose of computing Indian income-tax liability, but it is the admissible foreign tax credit in respect of the same which affects such an Indian income-tax liability. The FTD in respect of income-tax paid in the US cannot exceed the Indian incometax liability in respect of the income on which income-tax is paid in US. 19. In view of the aforesaid judicial precedent, and being in considered agreement with the same, we reject this alternate claim of the assessee. 20. Learned counsel has also contended that in any event, we must allow deduction in respect of State income-taxes paid in USA and Canada as relief is not admissible i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable in India, the admissible double taxation relief under s. 91 will be higher than relief under the tax treaty. It will be so for the reason that State income-tax will also be added to income-tax abroad, and the aggregate of taxes so paid will be eligible for tax relief--of course subject to tax rate on which such income is actually taxed in India. The tax relief under s. 91 thus works out to at least 38 per cent, as against tax credit of only 35 per cent admissible under the tax treaty. In such a situation, the assessee will be entitled to relief under s. 91 in respect of Federal as well as State taxes, and that relief being more beneficial to the assessee vis- -vis tax credit under the applicable tax treaty, the provisions of s. 91 will apply to State income-taxes as well. The State incometax is also, therefore, covered by Expln. 1 to s. 40(a)(ii), and deduction cannot be allowed in respect of the same. Finally, in view of Hon'ble Bombay High Court's judgment in Gill's case (supra), income-tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between Federal and State taxes either. Interestingly, State incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese decisions. It was thus, in ignorance about these significant developments, the coordinate bench, in Mastek's case (supra), has observed as follows: 39. Due consideration of the provisions of sec.37 and sec.40(a)(ii) of the Act as well, it emerges that u/s 37, all taxes and rates are allowable irrespective of the place where they are lived i.e., whether on Indian soil or offshore, whereas u/s 40(a)(ii) of the Act, income-tax which is a tax leviable on the profits and gains chargeable under the Act is deductible. On the other hand, all other taxes levied in foreign countries whether on profits or gains or otherwise are deductible under the provisions of sec. 37 of the Act and payment of such taxes does not amount to application of income. 40. Let us now have a glimpse at the judicial views on a similar issue. (i) South East Asia Shipping Co. ITA No.123 of 1976 - Mumbai Tribunal: The issue, in brief, was that the tax authorities of the respective country had collected income-tax at source, according to them, a part of such earnings accrued and arose in their countries which were liable to income-tax under its taxing laws. Such foreign tax claimed as a deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular assessee, at least in that case litigation cannot be allowed to perpetuate for an indefinite period. In the instant case, the issue is not only settled in favour of the assessee in its own case by the Tribunal in ITA Nos. 5708/Mum/82 and 5790/Mum/83 dated 23.10.82, but even after rejection of Revenue's Application under section 256(1) in RA Nos.305 AND 306/Bom/85 dated 14.1.86, its application under section 256(2) on the issue has been rejected by the High court by its order dated 29/3/93 in ITA No.89 of 1989. thus, the issue has reached finality in the assessee's own case and it cannot be dragged into further litigation. 41. Taking into account all these facts and circumstances of the issue and in consonance with the findings of the Hon'ble Benches of Mumbai Tribunal (supra), we are of the firm view that the learned CIT (A) was justified in his stand which requires no interference of this Bench at this juncture. It is ordered accordingly. 37. The views so taken by the coordinate bench, however, are not only diametrically opposed to an earlier decision of another coordinate bench in the case of Tata Sons (supra), as reproduced earlier, and of Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so taken by Hon'ble Bombay High Court in Reliance Infrastructure's case (supra). Clearly, therefore, the coordinate bench, in Mastek Ltd's case (supra), was swayed by judicial precedents which, as held by Hon'ble Bombay High Court in the aforesaid case, are not really binding judicial precedents on the issue. There are direct decisions of Hon'ble Bombay High Court itself, in the case of Inder Singh (supra) and Lubrizol (supra), which, for the detailed reasons set out above by Hon'ble Bombay High Court, must be preferred over these decisions declining to admit reference applications under section 256(2), as it then existed. 39. Having said that, we may also point out that earlier decision of Hon'ble Bombay High Court in Lubrizol's case (supra) and the fact that it stands specifically approved by Hon'ble Supreme Court in the case of Smithkline and French India (supra) was not brought to the notice of Hon'ble Bombay High Court either. It was in this backdrop that Their Lordships further made the following observations in the case of Reliance Infrastructure (supra): It therefore, follows that the tax which has been paid abroad would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the impact of Hon'ble Supreme Court's decision in Smithkline and French (supra). 41. Learned counsel for the assessee submits that the decision of Hon'ble Bombay High Court in the case of Reliance Infrastructure (supra) is directly on the issue of foreign tax credit while Lubrizol's decision (supra) and Smithkline and French India decision (supra) are in the context of surtax. These decisions, according to the learned counsel, have nothing to do with the question of deductibility of taxes paid abroad. The only direct decision on the issue is from Hon'ble Bombay High Court in the case of Reliance Infrastructure (supra) and that is in favour of the assessee. It is his argument that since there is no decision by the jurisdictional High Court to the contrary of what has been stated by Hon'ble Bombay High Court, Reliance Infrastructure (supra) decision is a binding precedent for us and we must follow the same. Any other approach, he very politely tells us, would be violate fundamental principles of judicial discipline and cannot, therefore, meet approval of Hon'ble Courts above. He reminds us that the Tribunal decision in the case of Tata Sons (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vassed are that (a) the connotations of expression 'tax' appearing in the above provisions are controlled by definition under section 2(43) of the Act; (b) the connotations of the expression 'tax' appearing in the above provision extend to any tax, whether under the Income Tax Act, 1961 or not, as long as the tax is levied on the profits and gains of business, or assessed at a proportion of, or otherwise on the basis of, any such profits and gains. This controversy is evident from the following extracts from the various decisions, including the decision cited by the learned counsel of the assessee, as also from orders impugned in appeal before us: (i) Mastek Ltd's decision by the coordinate bench, relied upon by the learned counsel: 39. Due consideration of the provisions of sec.37 and sec.40(a)(ii) of the Act as well, it emerges that u/s 37, all taxes and rates are allowable irrespective of the place where they are lived i.e., whether on Indian soil or offshore, whereas u/s 40(a)(ii) of the Act, income-tax which is a tax leviable on the profits and gains chargeable under the Act is deductible. On the other hand, all other taxes levied in foreign cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. The tax levied by different countries is not a tax on profits but a necessary condition precedent to the earning of profits. So the AAC was absolutely justified in allowing the appeal of the assessee and we see no reason to differ from the finding. Reference application of the Revenue was rejected by the Tribunal which has been ratified by the Hon'ble Bombay High Court in ITA NO.123 OF 1976. ....................... (ii) Reliance Infrastructure (supra) by Hon'ble Bombay High Court We would have answered the question posed for our consideration by following the decision of this Court in Inder Singh Gill (supra). However, we notice that the decision of this Court in Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit and/or gain of business. The Indian Income Tax Act, 1922 Act also contains a similar provision in Section 10(4) thereof. However, the Indian Income Tax Act, 1922 contains no definition of tax as provided in Section 2(43) of the Act. Consequently, the tax paid on income / profits and gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains ,; Tax has been defined U/s.2(43) as fax in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA. It is submitted that tax only includes taxes levied under Indian Income Tax Act, 1961 and foreign tax is out of the definition of 'tax hence foreign tax paid will not be disallowed by virtue of Sec.40 (a)(ii). Reliance is placed on following decided cases where it has been held that taxes paid in foreign country is an allowable expenditure U/s.37(1) CIT vs. Tata Sons Ltd (ITA No. 89 of 1989) - Bombay high court rejected reference in 1993 for this matter hence its approved stand of high court that fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. If the word tax is to be given the meaning assigned to it by s. 2(43) of the Act, the word any used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Furthermore, the word tax as defined in s. 2(43) of the Act is subject to unless the context otherwise requires . In view of the discussion above, we hold that the words any tax herein refers to any kind of tax levied or leviable on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. [Emphasis, by underlining, supplied by us now] (ii) Hon'ble Supreme Court in Smithkline and French's case (supra) specifically approving the Lubrizol judgment ...........Firstly, it may be mentioned, s. 10(4) of the 1922 Act or s. 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the IT Act. All they say is that it must be a rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hkline French (supra), that s. 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the IT Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession . We, therefore, do not think we have the liberty of taking the view that learned counsel is urging us to take. 45. In any case, Hon'ble Bombay High Court's judgment in the case of Reliance Infrastructure (supra) proceeds on peculiar facts and a sort of concession by the revenue inasmuch as it was not the case of the revenue that context in which the expression 'tax' is used in section 40(a)(ii) requires a meaning different from the meaning assigned by Section 2(43). This is evident from the observations made by Their Lordships to the effect that We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word In this Act, unless the context otherwise requires the meaning of the word 'tax' as found in Section 2 (43) of the Act would apply wherev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Corpn. Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682; (1990) 77 FJR 17 (SC) Hon'ble Supreme Court explained the expression 'per incuriam' thus (at p. 36 of 77 FJR) : 'The Latin expression 'per incuriam' means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court.' A fortiori, a decision of the Tribunal unmindful of its earlier decision(s) on the same issue is also a per incuriam decision. Of course, if the subsequent decision had considered the earlier decision and yet differed from the conclusion, the situation would have been materially different. The only reason we have preferred Tata Sons decision (supra) over Mastek decision (supra), both of which are decisions from benches of equal strength, is that the latter was delivered in ignorance of earlier decisions in the cases of Tata Sons (supra) and Lubrizol India (supra). 48. A per incuriam decision, as noted by several binding judicial precedents, including, for example, in the case of CIT Vs B R C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d if these taxes are covered by Section 40(a)(ii), the theory that meaning of 'tax' under section 40(a)(ii) must remain confined to the taxes levied under Income Tax Act, 1961 comes to a naught since the taxes in respect of which credits are available under section 90 or 91 cannot be, under any circumstances, imposed under the Indian Income Tax Act. The argument of the learned counsel, if we have understood it correctly, is devoid of, in our considered view, legally sustainable merits. 50. In view of the above discussions, we are of the considered view that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad as the same will be, for the detailed reasons set out above, hit by the disabling provisions under section 40(a)(ii) of the Act. The relief granted by the CIT(A), by directing the grant of deduction of Rs.52,50,507 in respect of income tax withheld abroad in respect of which no foreign tax credit is admissible, under section 37(1) of the Act must, therefore, stand vacated. We direct so. We further direct that, as a result of our directions earlier in this order, in the event of assessee being allowed only partial tax credit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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