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TMI Blog2021 (10) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respect of Management fees/ Consultancy Fee paid/reimbursed by the Appellant] being wholly unjustified are liable to be deleted. 2. 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 rejecting the transfer pricing analysis/ study prepared by the Appellant and conducting fresh benchmarking, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied. SOFTWARE DEVELOPMENT SERVICES (SDS) SEGMENT 3. On the facts and in the circumstances of the case and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ITES Services (ITeS), without appreciating that the said companies were comparable to the Appellant: i) Informed Technologies Limited ii) Ace BPO Services Limited iii) Jindal Intellicom Limited iv) Allsec Technologies Limited v) Tata Business Support Services Limited vi) Karvy Data Mangement Services vii) Suprawin Technologies Limited viii) Sundaram Business Services Pvt Limited ix) Tata Consulting Engineers Limited x) Tata Elxsi Limited xi) Cosmic Global Limited xii) BNR Udyog Limited 7. Without prejudice to the above grounds on incorrect selection of functionally dissimilar comparable companies while benchmarking the ITES Services (ITeS) segment of the Appellant, on the facts and in the circumstances of the case and in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Comparable Uncontrolled Price (CUP) to benchmark the impugned interest on delay in receipt of outstanding receivables instead of LIBOR rate. Management Fees 14. 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 computing the ALP of the Management Fee of Rs.3,95,25,970 paid by the Appellant to its AE at Nil resulting in addition of Rs. 3,95,25,970 without appreciating the following which are independent and without prejudice to one another: a) That the action of the TPO and the consequent addition of Rs. 3,95,25,970 is without jurisdiction and bad in law and thus liable to quashed/deleted. b) That the management fee payment was at arms' length and consequently the said adjustment/addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 furnished the original ITR on 30 November 2016 and revised ITR on 03 october 2017 for the relevant AY which was within the statutory timelines provided under Section 139(1) and Section 139(5) of the Act respectively. 21. On the facts and in the circumstances of the case and in law, the Appellant prays for consequential relief in the interest levied under Section 234B of the Act basis the relief allowed in the aforesaid grounds of appeal. 22. On the facts and in the circumstances of the case and in law, the Appellant prays that the education cess paid/ payable on the income tax be allowed as a tax-deductible expenditure in view of the favorable judicial precedents and oblige. The Appellant most humbly craves leave to raise the aforesaid additional legal ground & prays to your Honours to kindly admit & allow the aforesaid ground of appeal. 23. On the facts and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 different in the impugned assessment year as well. We therefore adopt judicial consistency in absence of any distinction on facts herein as well. These twin entities - Infosys Limited and Larsen & Toubro Infotech Limited shall stand excluded by the Transfer Pricing Officer (TPO) therefore. 4.1. Coming to M/s.Tata Elxsi Limited, we note that the tribunal's foregoing earlier order(s) have directed exclusion of the instant third entity as well whilst holding that this company is engaged in various activities including product design services and trading wherein no segmental information was available. Learned departmental representative fails to pin point any distinction regarding availability of the corresponding segmental data in the impugned assessment year as well. We therefore direct the TPO to exclude M/s.Tata Elxsi Limited (seg) in very terms. 4.2. The next entity herein is M/s.Persistent Systems L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude 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 company in the list of comparables and therefore it is estopped from contesting M/s.Cignity Technologies Limited's inclusion herein. We find no merit in either parties' submissions in entirety at this stage. This is primarily for the reason that we are dealing with Chapter-X of the Act in the nature of a "Special Provision" so as to determine Arm's Length Price (ALP) of the specified international transaction. Hon'ble apex court's recent decision in (2019) 416 ITR 613, PCIT Vs. Maruti Suzuki Ltd (SC) holds that income tax proceedings are not hit by the 'Principles of Estoppel'. The fact also remains that the instant entity's segmental details deserve to be verified as to whether it is providing software development services or not? We therefore restore this instant ground back to the TPO for his afresh factual verification. The assessee's ground Nos.3(i) to (xii) are partly accepted in foregoing terms. 5. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Services Limited and M/s.Cross Domain Solutions Private Limited inter alia on the ground that the same had been having diversified activities with huge broad value and turnover in former first and KPO services providers, in latter twin entities cases; respectively. These sub-grounds stand accepted therefore. 6.1. The assessee's sub-grounds No.5(iv) to (v) involving M/s.Tech Mahindra Business Services Ltd., M/s.SPI Technologies India Private Limited are found to be deserves acceptance since their respective turnovers of Rs.703.2 crores and Rs.336.21 crores are found to be more than the filter limit of Rs.200 crores taken by the TPO. We therefore adopt our precious stricter interpretation reasoning direct exclusion of these twin entities. 6.2. Coming to M/s.MPS Limited in ground No.5(vi), we note that the tribunal's order in AY.2014-15 (supra) has already directed inclusion thereof. This sub-ground is accordingly rejected. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the TPO regarding these remaining comparables. We also make it clear that the learned counsel had made a submission before us that in case we accept the assessee's ground Nos.(i), (ii), (vii) and (viii), all the remaining eight comparables entities would be rendered academic. We therefore direct the TPO to consider the assessee's instant concession as well in consequential proceedings. This 6th substantive ground is partly accepted in foregoing terms. 9. Learned counsel next stated that the assessee's 8th to 10th substantive grounds are consequential in nature. The same are accordingly disposed in light in foregoing detailed discussion. 10. The assessee's 11th to 13th substantive grounds challenge correctness of the lower authorities' action making ALP adjustment pertaining to interest on receivables amounting to Rs.2,80,004/-. Learned counsel stated in light of the tribunal's earlier orders, and more particularly in AY.2014-15 have directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profit element therein. Learned counsel has quoted a catena of case law that such cost to cost arrangement itself forms a valid market comparable which could not be dis-regarded whilst adding the entire price as ALP adjustment. The Revenue in turn has strongly supported both the impugned adjustment. 11.1. We have given our thoughtful consideration to rival contentions. 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 (supra) 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 action of the learned AO in disregarding the fact that tax credit has been claimed on the income which has been taxed in both the countries, i.e. source country and resident country. 3.3 Alternatively, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the AO in not considering actual profitability of foreign income and tax thereon while computing the tax on doubly taxed income at the time of allowing the tax credit in respect of taxes paid in Indonesia, Malaysia and Rwanda 28. In a connected ground of appeal, i.e. ground no. 3 which we must take up alongwith the above stated interrelated grievance of the assessee, the Assessing Officer has also raised the following grievance in its appeal: 3. The Ld. CIT(A) has erred in law and on facts in restricting the disallowance of foreign tax credit to Rs.3,10,799 and the balance unallowed credit of Rs.52,50,507 allowed u/s.37(1) of the Act, without properly appreciatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Tribunal, and learned Departmental Representative does not oppose this prayer. On the quantification aspect, therefore, we remit the matter the file of the CIT(A) for adjudication de novo in accordance with the law, in the light of the observations made by the Tribunal for the assessment year 2009-10 in assessee's own case, by way of a speaking order and after giving a reasonable opportunity of hearing to the parties. For the sake of completeness, we reproduce these observations as below: 8. So far as the first issue that we have identified for adjudication, i.e. the manner in which the quantum of income eligible which is required to be treated as taxed in both the countries ,is concerned, there is no guidance available in the treaties. All that both the treaties state is that the foreign tax credit shall not exceed the part of the income tax as computed before the deduction is given, "which is attributable as the case may be, to the income which may be taxed in that other State" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis 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 the working on the computation of income- a copy of which is placed at page 79 of the paper-book filed before us.. ....... 9. We see no infirmities in this computation showing the element of income embedded in the receipts which have been taxed abroad as well. These details were duly furnished to the Assessing Officer vide letter dated 20th March 2013, a copy of which was also placed before us at pages 69 onward of the paperbook. On a perusal of these details, we find that as far as release of retention money of Rs 53,23,085, released after validation of software by IBM Singapore, is concerned, we find that it is uncontroverted claim of the assessee that entire related expenses have been incurred in the earlier years as the software supply was completed in financial year 2006-07. There cannot obviously be any incremental cost at the point of time when retention money of 15% of total contract value is released. The same is the position in respect of receipt of Rs 31,61,369 from PT Tech Mahindr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation 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 jurisdictions is to be computed separately but in a similar manner, as is provided in the respective treaties. So far as the tax credit in respect of Indonesian receipts is concerned, as noted above and in view of article 23(1) of the applicable tax treaty, it cannot "exceed the part of the income tax as computed before the deduction is given, which is attributable as the case may be, to the income which may be taxed in that other State". The income tax is, therefore, required to be computed on proportionate basis. What is, therefore, to be computed next is the tax attributable to the income which is so taxed in both the tax jurisdictions. The tax has been paid, in this case, on book profits. To the best of our understanding, and particularly in the absence of any other method having been pointed out to us, only way in which be so done is by apportioning the actual tax paid under MAT provisions (i.e. Rs 54,13,417), in the same ratio as double taxed profit to the overall profits i.e. 35,86,178:4,77, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply 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 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". Reliance was placed on a coordinate bench decision in the case of DCIT Vs Mastek Limited [(2013) 36 taxmann.com 384 (Ahmedabad - Trib.)] as also some other judicial precedents which have been noted and relied upon in this coordinate bench decision. While the Assessing Officer did not deal with these arguments at all and simply brushed aside the claim of the assessee, learned CIT(A) upheld this claim and directed the Assessing Officer to allow deduction under section 37(1) in respect of amount of difference between the income tax withheld abroad and the foreign tax credit granted to the assessee in respect of the same. Aggrieved, the Assessing Officer is in appeal before us. 32. Learned counsel for the assessee had stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 40 33. The stand of the revenue authorities, on the other hand, is that in the above example, no amount of tax paid or withheld outside India can be allowed as deduction under section 37(1). It is undisputed position that but for the restriction placed under section 40(a)(ii) income tax paid by an assessee would be deductible expense, and, therefore, the controversy requiring our adjudication is confined to the question as to whether or not this restriction comes into play in respect of the income tax paid abroad. The case of the assessee is that taxes paid abroad are paid for the purposes of business, and as such deductible under s. 37(1) which provides that, "any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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] 34. The views so expressed by Hon'ble Bombay High Court, in Lubrizol's case (supra), were approved by Hon'ble Supreme Court in the case of Smithkline & French India Ltd Vs CIT [(1996) 219 ITR 581 (SC)]. We are unable to see as to how these observations help the assessees herein. 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 or tax levied on the profits and gains of business or profession. The observations relied upon must be read in the said context and not literally or as the provisions in a statute. But so far as the issue herein is concerned, even this literal reading of the said observations does not help the assessee. As we have pointed out hereinabove the surtax is essen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (Bom)] and speaking through one of us, elaborately set out the broad principles governing the issue and observed as follows: 7. Let us deal with some fundamentals first. The payment of income-tax in overseas tax jurisdictions, in addition to taxability in the home jurisdiction, is an inevitable corollary of inherent conflict between the source rule and residence rule. This conflict develops when a person resident in one of the tax jurisdictions earns income which is sourced from another tax jurisdiction. As per the residence rule, irrespective of the geographical location of a place where a person earns income, the income is taxable in the tax jurisdiction in which a person is resident. The source rule, however, lays down that an income earned in a tax jurisdiction, irrespective of the residential status of the person earning the said income, is liable to be taxed in the tax jurisdiction where the income is earned. Therefore, a tax object, i.e., the income which is to be taxed, as a rule attracts taxability in the source jurisdiction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven where the source tax has been reduced or eliminated by a tax treaty. The result is that there are no countries asserting jurisdiction to tax worldwide income that give an exemption for all kinds of foreign income; where a country is referred to as an exemption country, this generally means that it provides some form of exemption to business income, dividends received from direct investments in foreign companies, and often employment income, with a credit being used in other cases. The third system is the foreign tax credit system under which a credit against total tax on worldwide income is given for foreign taxes paid on foreign income by a resident upto the amount of domestic tax on that income. This limit is designed to ensure that foreign taxes do not reduce the tax on the domestic income of residents and is calculated by applying the average rate of tax on the worldwide income before the credit to the foreign-source income. In its simplest form, this limit is applied to foreign income in its entirety, without distinguishing the type of income and the country where it is sourced. The fourth system is to give a deduction for foreign income-taxes in the calculation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esult in granting relief greater than the double taxation itself. To sum up even at the cost of an element of repetition, these methods are as follows : * In the first method, residence country follows pure territorial method of taxation and brings to tax only such incomes as are sourced in the residence jurisdiction itself. There is then no conflict between the source rule and the residence rule in as much as the residence rule is not strictly followed. Globally, however, there are not many takers for this system, and quite reasonably so, because, as Prof. Vann rightly puts it, it simply invites shifting of income offshore to evade taxes completely. * The second method is to grant tax exemption to the income taxed abroad. The exemption method is usually conditional in the sense it provides progressive relief, on average rate basis, and is contingent upon the related income not being exempted from tax, or subjected to tax at a less than ordinary tax rate, under a tax treaty arrangement. Effectively thus it is not a simpliciter exemption of income taxed abroad, but an exemption of income subject to several riders. In that sense, it is distinct from the pure territorial method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestigation 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 country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-s. (1) 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, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1 : For the removal of doubts, it is hereby declared that the charge of tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1 : For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company. Explanation 2 : For the purposes of this section, the expressions-- (a) 'specified association' means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of this section; (b) 'specified territory' means any area outside India which may be notified as such by the Central Government for the purposes of this section. *This section was not in force in the relevant assessment year as it was also introduced w.e.f. 1st April, 2006 vide Finance Act, 2006, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. Explanation : In this section,-- (i) the expression 'Indian income-tax' means income-tax charged in accordance with the provisions of this Act; (ii) the expression 'Indian rate of tax' means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this chapter, by the total income; (iii) the expression 'rate of tax of the said country' means income-tax and supertax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; ITA No.197 and 508/Ahd/2016 Assessment Year: 2012-13 (iv) the expression 'income-tax' in relation to any country includes any excess profits tax or business profits tax charged on the profits by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out in s. 90 and s. 91 of the Act. 11. The assessee, however, was not satisfied with the relief so granted by the AO. He also claimed deduction, in computation of income from 'profits and gains from business and profession', in respect of taxes paid abroad. It is the case of the assessee that the taxes so paid abroad constituted expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, and, therefore, deductible under s. 37(1) of the Act. It is this deduction which is now subject-matter of core dispute before us. Interestingly, while the assessee has claimed deduction of overseas income-taxes under s. 37(1), the assessee has also claimed tax credits, in respect of taxes so paid abroad, under s. 90 or under s. 91--as applicable. The same amount has been treated as a charge on income, by claiming the same as deduction as expenditure incurred to earn an income, as also an application of income, by claiming the same as appropriation of income being tax levied on profits and claiming income-tax credit in respect thereof. There is no meeting ground between these two diametrically opposed approaches, and, in our humble understa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of any 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. **Explanation 1 : For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate of tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under s. 90 or, as the case may be, deduction from the Indian income-tax payable under s. 91. **Explanation 2 : For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate of tax levied includes any sum eligible for relief of tax under s. 90A. **Inserted w.e.f. 1st April, 2006, vide Finance Act, 2006 Sec. 2(43)--In this Act, unless the context otherwise requires-- "tax" 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 incometax and super-tax chargeable under the provisions of this Act prior to the aforesaid date;" 13. Let us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce under s. 256(2) and the order of the Tribunal thus received finality. This decision has been consistently followed over the decades. However, in the lead decision cited before us, there is a categorical observation to the effect that "the tax deducted is a local tax and not a tax on profits", whereas in the present case it is an undisputed position that the tax levied abroad, being income-tax, is a tax on profits of the assessee--whether on presumptive basis or on the basis of actual profits earned by the assessee. Obviously, therefore, a decision in the context of 'local tax' not in the nature of tax on profits will have no application on these facts. It is also important to take note of amendment in law by inserting Expln. 1 to s. 40(a)(ii) which provides that, "for the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under s. 90 or, as the case may be, deduction from the Indian income-tax payable under s. 91". It cannot, therefore, be said that a foreign tax, in respect of which relief is eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he things which is clearly discernible from the above observations of their Lordships is that while interpreting the statutes, one has to essentially bear in mind the context and underlying scheme of the legislation in which the words are set out. Keeping these discussions in mind, let us see the context in which expression 'tax' is used in s. 40(a)(ii) which provides that "any sum paid on account of any 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" cannot be allowed as a deduction in computation of income from business or profession. The underlying principle in this provision is that a tax which is levied on the income of the assessee is an appropriation of income, representing State's share in the income of the assessee, and not a charge on income. In the case of Lubrizol India Ltd. vs. CIT (1991) 93 CTR (Bom) 237 : (1991) 187 ITR 25 (Bom), Hon'ble Bombay High Court has observed that, "As held in a number of decisions income-tax is a Crown's or Central Government's share in the profits of a company". In other words thus, income-tax represents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a proportion of, or otherwise on the basis of, any such profits or gains." 16. Hon'ble Bombay High Court's judgment in Lubrizol India Ltd. (supra) which holds that the meaning of expression 'tax' cannot be restricted to the definition of 'tax' was delivered on 11th July, 1990, and, to that extent, Tribunal's decision dt. 23rd Oct., 1984, in assessee's own case for the asst. yr. 1976-77 and which has been followed in all other assessment years, is no longer good law. None of the subsequent decisions of the Tribunal, which merely followed the said order, had an occasion to deal with the law so laid down by their Lordships. It needs hardly be stated that mere rejection of reference by the Hon'ble High Court does not amount to approval of the views of the Tribunal. As against this rejection of reference, which is sought to be construed as implied approval of Tribunal's analysis, there is a direct decision by the Hon'ble High Court holding that definition of tax under s. 2(43) is not relevant for the purpose of s. 40(a)(ii). With respect, instead of following the Co-ordinate Bench in such circumstances, we have to yield to the higher wisdom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to admissibility of tax relief under s. 90 or s. 91, it will result in a situation that on one hand double taxation of an income will be eliminated by ensuring that the assessee's total income-tax liability does not exceed income-tax liability in India or income-tax liability abroad--whichever is greater, and, on the other hand, the assessee's domestic tax liability will also be reduced by tax liability in respect of income decreased due to deduction of taxes. Such a benefit to the assessee is not only contrary to the scheme of the Act and contrary to the fundamental principles of international taxation, it also ends up making double taxation relief a mechanism to reduce domestic tax liability in India--something which is most incongruous. In our considered view, an interpretation which leads to such glaring absurdities cannot be adopted. 18. Learned counsel has also submitted that in the event of our declining the deduction, we should at least direct that tax credit in terms of the provisions of s. 90 be granted in respect of the entire amount. Learned counsel submits that this approach is justified in as much as we must take into account right to tax, rather ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted States on an income and returning a loss in respect of that income in India, to the effect that "this is an absurd situation and was not visualized by the treaty", it cannot but stem from his inability to take note of the fact that certain incomes (e.g., royalties, fees for technical or included services, interest, dividends etc.), are taxed on gross basis in the source country but are only be taxed on net basis, as is the inherent scheme of income-tax legislation normally, in the country of which the assessee is resident. In such situations, it is quite possible that while an assessee pays tax in the source country which is on gross basis, he actually ends up incurring loss when all the admissible deductions, in respect of that earning, are taken into account. There is nothing absurd about it. The underlying philosophy of the source rule on gross basis, which prescribes taxation of certain incomes on gross basis in the source country, is that irrespective of actual overall profits and losses in earning those incomes, the assessee must pay a certain amount of tax, at a negotiated lower rate though, in the country in which the income in question is earned. It is also noteworthy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken through India USA tax treaty to point out that tax credits are admissible only in respect of income- tax levied by the Federal Government and not by the State Governments. It is contended that since no relief is admissible in respect of State taxes under s. 90 or s. 91, these taxes will continue to be tax deductible, and to that extent, decisions of the Co-ordinate Benches will hold good. We are unable to see legally sustainable merits in this submission either. Apart from the fact that such a claim of deduction is clearly contrary to the law laid down by Hon'ble jurisdictional High Court in Lubrizol's case (supra), there is another independent reason to reject this claim as well. The reason is this. It is only elementary that tax treaties override the provisions of the IT Act, 1961, only to the extent the provisions of the tax treaties are beneficial to the assessee. In other words, a person cannot be worse off vis-a-vis the provisions of the IT Act, even when a tax treaty applies in his case. Sec. 90(2) States that even in relation to the assessee to whom a tax treaty applies "the provisions of this Act shall apply to the extent they are more beneficial to that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deductible in computation of income for the purposes of computing Federal tax liability in USA, but that factor cannot influence deductibility of these taxes, particularly in the light of the provisions of Expln. 1 to s. 40(a)(ii) and in the light of Hon'ble Bombay High Court's judgment in Gill's case (supra), in computation of business income under Indian IT Act. For all these reasons, we are unable to uphold the plea of the assessee seeking deduction of at least State income-tax paid in USA. 21. In view of the above discussions and for the detailed reasons set out above, we uphold the grievance of the AO. The CIT(A) was indeed not justified in deleting the disallowance of Rs. 67,89,30,514 in respect of income-tax paid abroad. We vacate the relief granted by the CIT(A) and restore this disallowance. 36. Oblivious of the judicial precedents discussed above, another bench of this Tribunal, in the case of Mastek Ltd (supra), however, touched a different chord. This bench was of the view that deduction in respect of taxes paid abroad can be allowed as a deduction under section 37(1). In coming to this conclusion, bench did not take note of the Lubrizol decision (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AAC with a reasoning that the 'payment of foreign income-tax formed part of the expenditure like other usual business expenses incurred in the course of business and as such, the assessee was entitled to claim deduction of the same u/s 37 of the Act for being incurred wholly and exclusively for the purpose of business.' On a further appeal, the Tribunal had, after due consideration of the provisions of both the sections - 37 which allows a business expenditure and 40(a)(ii) which contained prohibition - as under: '40(a)(ii) - any sum paid on account of any 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' The Tribunal observed that the term 'tax' is defined in relation to the AY commencing on the 1st day of April, 1965 and in subsequent assessment years as meaning tax chargeable under the provisions of the Act and that this amendment was effected by the Finance Act 1965. taking cognizance of it, the Hon'ble Tribunal had held that 'any sum paid on account of any rate or income tax and super-tax chargeable under the provisions of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trary to certain observations a later judgment of Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd vs CIT [TS 676 HC 2016 (BOM)] wherein Their Lordships have, inter alia, observed as follows: We have considered the rival submissions. So far as the question relating to the Tribunal not following its order in the case of the applicant itself for A.Y. 1979- 80, we find that there is a justification for the same. This is so as the decision of this Court in Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following its order for A.Y. 1979-80. In fact, the decisions of this Court in South East Asia Shipping Co.(supra) and Tata Sons Ltd. (supra), which are being relied upon in preference to Inder Singh Gill (supra) cannot be accepted as both the orders being relied upon by the applicant was rendered not at the final hearing but on applications under Section 256(2) of the Act and at the stage of admission under Section 260A of the Act. This unlike the judgment rendered in a Reference by this Court in Inder Singh Gill (supra). Moreover, the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. 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 wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act. [Emphasis, by underlining, supplied by us] 40. Ironically, there is no meeting ground between the observations so made by Hon'ble Bombay High Court and its earlier observations, in Lubrizol's case (supra), to the effect that "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", which stand specifically approved by Hon'ble Supreme Court in the case of Smithkline French India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o attached to our labour of love that the cause of justice is sacrificed. We are thus urged to follow the Mastek decision (supra) Reliance Infrastructure decision (supra) in letter and in spirit. Learned counsel has then pointed out that the Explanations to Section 40(a)(ii) refer only such taxes paid outside India in respect of which relief under section 90 and 91 are available, and it cannot be open to extend the scope of what is covered by Explanations to Section 40(a)(ii). 42. Learned counsel's remarks are indeed thought provoking. We have to take a conscious call on the points made by him. As we do so, we must make it clear, though at the cost of stating the obvious, that whatever we say is, and shall always remain, what Hon'ble Courts above hold on this issue. In a way, therefore, we are writing on the sand fully aware that whatever we write, no matter how painstakingly we write, on this sand, will be washed away by a wave of judicial thought from Hon'ble Courts above. We are also alive to the fact that considering how significant this issue is it is only a matter of time that Hon'ble Courts above may have to take a call on it. Its ironically in this comfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deduction by the assessee was turned down by the AO. This was reversed by the AAC with a reasoning that the 'payment of foreign income-tax formed part of the expenditure like other usual business expenses incurred in the course of business and as such, the assessee was entitled to claim deduction of the same u/s 37 of the Act for being incurred wholly and exclusively for the purpose of business.' On a further appeal, the Tribunal had, after due consideration of the provisions of both the sections - 37 which allows a business expenditure and 40(a)(ii) which contained prohibition - as under: '40(a)(ii) - any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of the Indian Tax Act, 1922. Therefore, on the state of the statutory provisions as found in the Indian Income Tax Act, 1922 the decision of this Court in Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act defines "tax" as income tax chargeable under the provisions of this Act. Thus, by definition, the tax which is payable under the Act alone on the profits and gains of business are not allowed to be deducted notwithstanding Sections 30 to 38 of the Act. It therefore, follows that the tax which has been paid abroad would not be covered with in the meaning of Section 40(a) (ii) of the Act in view of the definition of the word 'tax' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well. ¬ DCIT Vs. Mastek Limited (Ahmedabad Tribunal) - Jurisdictional tribunal decision delivered on 16m may 2012 which relied on above decision of Bombay High Court. The above contention of ETPL has been accepted by the learned Commissioner of Income-tax (Appeals) in ETPL's case for AY 2009-10. Copy of the said order is attached as Annexure 1A [Emphasis, by underlining, supplied by us now]. 43. In the light of the above observations in judicial precedents relied upon by the learned counsel for the assessee, and in the light of extracts from the impugned orders, the core issue, in our considered view, is whether or not the meaning of expression 'tax' appearing in section 40(a)(ii) must remain confined to a tax levied under the Indian Income Tax Act, 1961. As a matter of fact, Hon'ble Bombay High Court, in the case of Reliance Infrastructure (supra), Their Lordships have gone to the extent of saying that but for definition of tax under section 2(43) "We (Their Lordships) would have answered the question posed for our consideration by following the decision of this Court in Inder Singh Gill (supra)" which was rendered in the context of the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. But so far as the issue herein is concerned, even this literal reading of the said observations does not help the assessee. As we have pointed out hereinabove the surtax is essentially levied on the business profits of the company computed in accordance with the provisions of the IT Act. Merely because certain further deductions [adjustments] are provided by the Surtax Act from the said profits, it cannot be said that the surtax is not levied upon the profits determined or computed in accordance with the provisions of the IT Act. Sec. 4 of the Surtax Act read with the definition of "chargeable profits" and the First Schedule make the position abundantly clear. ..................................... 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 vs. International Instruments Pvt. Ltd. (1983) 144 ITR 936 (Kar), Madras [Sundaram Industries Ltd. vs. CIT (1986) 159 ITR 646 (Mad), Andhra Pradesh [Vazir Sulta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid under the Act". That was not the situation before us. The very thrust of stand of the revenue was that the connotations of expression 'tax' in section 40(a)(ii) must be taken in its contextual meaning which extends to any tax ascertainable with reference to the profits of the assessee as evident from the wordings of section which refer to "any 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", and that its connotations cannot be treated as restricted to tax under the Income Tax Act. This argument, in the context of deduction in respect of tax outside Income Tax Act, 1961, has already met the approval of Hon'ble Supreme Court. The law laid down by Hon'ble Supreme Court binds all of us under Article 141 of the Constitution of India. Once we are aware about a particular position that Hon'ble Supreme Court has taken, it is not open to us to reach a conclusion which is, or can be perceived as, in defiance to the position taken by Hon'ble Supreme Court. Maybe, if the views expressed were by our jurisdictional High Court, or by any of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to be a binding precedent-- (i) if it is reversed or overruled by a higher Court, (ii) when it is affirmed or reversed on a different ground, (iii) when it is inconsistent with the earlier decisions of the same rank, (iv) when it is sub silentio, and (v) when it is rendered per incuriam". Nothing, therefore, turns on Mastek decision by the coordinate bench. Learned counsel has then invited our attention to the fact that the said decision in Mastek's case (supra) is now pending for consideration before Hon'ble jurisdictional High Court, as Their Lordships have, vide order dated 14th March 2013 in TA No. 826 of 2012, have admitted the appeal, inter alia, on the question "whether the Appellate Tribunal has substantially erred in deleting the disallowance under section 40(a)(ii) in respect of Rs 42,57,297 paid as Belgium Tax claimed as deduction under section 37(1) of the Act". In our considered view, nothing turns on this argument either, since the pendency of matter before Hon'ble jurisdictional High Court acts as a bar only on the constitution of a special bench of this Tribunal, as was held in the case of General Motors India Pvt Ltd Vs ACIT [TS-640 -ITAT-2016-Ahd-TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to observe here that Section 91 of the Act is a specific provision dealing with foreign tax credit to be granted in case of taxes paid in the specified countries i.e. except Pakistan which comes under the latter sub-section 2 thereof. If we go by the assessee's analogy that foreign tax credit to the specified extent u/s.91(1) "of a sum calculated on such doubly taxed income at the Indian rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal" is allowable for the purpose of granting credit and the remaining component is to be granted deduction under Chapter-IV of the Act, the same would render the former specific provision itself as otiose going contrary to "generalia specialism non derogant" which means that a specific provision prevails over the general one. We thus adopt stricter interpretation (supra) and conclude whatever is the assessee's unallowable foreign tax credit claim u/s.91(1) since exceeding the specified limit, would not be entitled for business expenditure u/s.37 of the Act. We further quote B.R.Constructions (supra) to treat hon'ble Bombay high court's judgement as not a binding precedent in light of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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