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TMI Blog2023 (12) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, 1961 ("the Act"). 2. The learned AO/ learned TPO/ Hon'ble CIT(A) has erred in law and in facts by ignoring the submissions filed by the Appellant in relation to the business model of the Appellant. 3. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in holding that the payments made for availing business development services are not at arm's length. 4. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the fact that the appellant, being an entrepreneurial entity, undertakes all strategic decisions for rendering the services and therefore, the related cost has to be borne by the same. 5. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the facts that services were rendered by Onmobile USA LLC to the customers of the Appellant on behalf of the Appellant, and therefore are not received by the subsidiaries in Latin American countries, and therefore in the absence of any service being availed by the subsidiaries in Latin American countries, no portion of the cost can be apportioned to the said entities. 6. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er depreciation and the same are to be treated only as "plant & machinery"? 2. Whether the Honourable CIT(A) was correct in allowing deduction of tax paid outside India by holding that tax paid outside India would be outside the scope of Section 40(a)(ii) of the Income tax Act? 3. Whether the Hon'ble CIT(A) has erred in not following the binding decision of the Hon'ble Karnataka High Court in the case of Kirloskar Electric Co. Ltd., vs CIT [1997] 228 ITR 676, in which it was held that tax paid outside India on profits and gains of any business cannot be deducted in view of provisions of Section 40(a)(ii) of the Income tax Act?" Brief facts of the case are as under: 2. Assessee is a telecommunication operator in India and abroad that provides mobile value added services. The Ld.AO has noted that the services include ring back tones (RBT). A. The Assessee provides mobile value added services ("MVAS") to telecommunication operators in India and abroad. The services include ring back tones ("RBT"), contests, joke and cricket alerts, etc., which enable subscribers to personalize their mobile phones and thereby enhance user experience. The Assessee enters into contracts wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely to the customers of the Assessee in LATAM countries. The company is compensated by the Assessee at a cost plus mark-up of 6%. E. The Assessee selected Onmobile USA as the tested party and adopted TNMM method as the most appropriate method. Upon applying appropriate filters, the Assessee selected a set of comparable companies. The mean of the net cost plus mark up charged by the comparables stood at 11.77%. Accordingly, the mark up of 6% on costs paid by the Assessee was treated to be at arm's length. Re services received from LATAM affiliates: F. The Assessee selected the LATAM affiliates as the tested party, and adopted TNMM method as the most appropriate method. Upon applying appropriate filters, the Assessee selected a set of comparable companies. The mean of the net cost plus mark up charged by the comparables stood at 8.03%. Accordingly, the mark up of 5-7% on costs paid by the Assessee was treated to be at arm's length. G. ANALYSIS DONE BY THE TPO The TPO held that the services of Onmobile USA are availed not just by the Assessee, but also by the other affiliates, and therefore, the costs incurred in that regard are to be shared by the 4 entities. Accordingly, the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R that, the object behind inserting the transfer pricing provisions is to avoid shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. It is thus submitted by the Ld.AR that the assumption of the authorities below runs contrary to the intent and purpose of the transfer pricing provisions. 4.2 It is submitted that the subsidiaries of the assessee work on a cost plus model, and assuming that the costs incurred by the assessee towards receipt of services from Onmobile USA, which in itself bears a mark-up, is apportioned to the LATAM affiliates, the LATAM affiliates would recover the said costs from the assessee, with a further mark up of 5-7%. This would lead to reduction in the income of the assessee in India, and shifting of the same to foreign country, which is contrary to the transfer pricing provisions. In fact, Section 92(3) of the Act, specifically prohibits determination of TP adjustment which has the effect of reducing the income chargeable to tax in India. By virtue of the adjustment, the Ld.TPO has in effect acted contrary to Section 92(3) of the Act. The Ld.AR submitted that the adjustments mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. It is submitted that in terms of Section 92C of the Act, the arm's length price of an international transaction shall be determined by any of the method prescribed thereunder. The Ld.TPO in the present case has determined the adjustment in an adhoc manner, without adhering to the statutory provisions. It is submitted that the adjustment determined in an adhoc manner is without jurisdiction and therefore ought to be set aside. 4.6 Reliance in this regard is placed on the following decisions: - CIT v. Johnson & Johnson Ltd. reported in [2017] 80 taxmann.com 337 (Bombay); - Merck Ltd. (supra); and - CIT v. Kodak India (P.) Ltd. reported in [2017] 79 taxmann.com 362 (Bombay). 4.7 The Ld.DR on the contrary relied on the orders passed by authorities below. He submitted that all these details that have been argued by the Ld.AR has not been considered by the Ld.TPO and therefore it needs verification. We have perused the submissions advanced by both sides in the light of records placed before us. 4.8 We note that the Ld.TPO has not considered the agreements between the assessee and its AE and the nature of the transaction entered into, the services rendered by the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arnataka vide order dated 18.01.2021 in ITA No. 340.2021. The Ld.DR thus supported the order of Ld.CIT(A) in granting relief to the assessee. We have perused the submissions advanced by both sides in the light of records placed before us. 5.2 We note that identical issue has been considered by Coordinate Bench of this Tribunal for A.Y. 2015-16 (supra) by observing as under: "24. During the year under consideration, the assessee has claimed depreciation @ 60% towards the addition made to the block of assets "Computers". These additions included items like NMS CG/TX cards, switches, etc. The AO following the earlier years orders, allowed depreciation only @ 15% treating the additions as part of telecom equipment as they relate to functioning of mobile phones. The DRP confirmed the disallowance. 25. The ld. AR submitted that the issue is covered by the decision of coordinate Bench of the Tribunal in assessee's own case for the AY 2008-09 to 2011-12 and the Hon'ble High Court of Karnataka has affirmed the decision of the Tribunal for AY 2008-09. 26. We have considered the rival submissions and perused the material on record. The coordinate Benches of the Tribunal have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aft India Ltd. (supra) wherein the Special Bench of the Mumbai Tribunal of this order held as under : '31. Now we have to consider whether a 'router' can be considered as "computer hardware" or a "computer component". Computer hardware refers to the physical parts of a computer and related devices. Internal hardware devices include motherboards, hard drives, and RAM. External hardware devices include monitors, keyboards, mouse, printers, and scanners. The internal hardware parts of a computer are often referred to as 'components', while external hardware devices are usually called 'peripherals'. Together, they all fall under the category of computer hardware. 'Software', on the other hand, consist of the programs and applications that run on computers. Because software runs on computer hardware, software programs often have 'system requirements', that list the minimum hardware required for the software to run. 31.1 In short, "Router" is a hardware device that routes data (hence the name) from a local area network (LAN) to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e will take up this case for discussion, in which the question was whether printer and scanner could be allowed a higher rate of depreciation as applicable to computers. The Bench noticed that the printer and scanner cannot be used without computer. It was on this appreciation of the factual position that the printer and scanners were held to be part of computer qualifying for depreciation at the rate applicable to computer. In the opposition the orders taking view in favour of the Revenue are led by the case of router mania Technologies (supra). In this case it was observed that the router is a device which links or connects the computers for the exchange of relevant data. In reaching the conclusion that router is not eligible for depreciation at the rate applicable to computer, the Bench noticed that the router at its own does not perform any logical, arithmetical or memory functions by manipulations of electronic, magnetic or optical impulses. 33. We prefer the view taken in the case of Samiran Majumdar (supra) over that in the case of Router mania Technologies (supra) ; With utmost respect, the Mumbai Bench had taken a narrow view on this issue, by holding that only a device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... integrated with 'computer.' Such devices used as part of the computer in its functions and, thus, it can be termed as 'computer' only, therefore, eligible for depreciation @ 60%. Therefore, also we find no infirmity in the claim of the assessee of depreciation @ 60% of ITG networking equipments." 10.6-4 A similar view was adopted by a co-ordinate bench of this Tribunal in the case of NCR Corpn. (P.) Ltd. (supra) wherein at para 10 thereof it was held as under : "10. Having heard both the parties and having gone through the material on record, we find that this issue is more or less covered by the decision of the Special Bench in the case of Datacraft India Ltd. (cited supra) wherein it has been held that as long as the functions of the computer are performed along with other functions and the other functions are dependent upon the functions of the computer it is a computer entitled to the higher rate of depreciation. The Special Bench has also stated that all the input and output devices of the computer such as key board, mouse, monitor, etc are to form part of the block of computers. In the case before us also the ATM machine is doing both the logical, arithmet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia in respect of which no foreign tax credit is eligible in India by holding that the same would be outside the scope of Section 40(a)(ii) of the Act. It is submitted that during the year under consideration, the Assessee had discharged taxes in foreign countries to the extent of Rs. 7,74,61,101/-, and claimed foreign tax credit of Rs. 3,97,38,075/-. 6.1 At the outset, the Ld.AR submitted that as regards the foreign taxes paid to the extent of Rs. 3,77,23,026/- (7,74,61,101 less 3,97,38,075), no deduction was claimed by the Assessee. It is submitted that to the extent no credit is available to the Assessee under Sections 90, 90A, 91 of the Act read with Rule 128 of the Income Tax Rules, 1962, deduction of the unclaimed foreign tax paid, ought to be allowed. It is submitted that taxes paid outside India in respect of which no credit is claimed in India does not constitute taxes on income as defined under explanation 2 to Section 40(a)(ii) of the Act. Accordingly, the Assessee is rightly entitled to the claim of deduction, as allowed by the CIT(A). Reliance in this regard is placed on the following decisions: - Reliance Infrastructure Ltd. v. CIT: reported in (2016) 76 taxmann.c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rastructure Ltd (supra) has considered a similar issue and held that - (h) Before dealing with the rival contentions, it would be useful to reproduce the statutory provision arising for our consideration to decide this issue. "Definitions 2. In this Act, unless the context otherwise requires, - (1) to (42)** ** ** 43. "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 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] "Amounts not deductible 40. Notwithstanding anything to the contrary in Section 30 to the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". (a) In the case of any assessee - (i), (ia), (ib), (ic)** ** ** (ii) Any sum paid on account of any rate or tax levied on the profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not noticed the decision of this Court in S. Inder Singh Gill (supra) on a Reference. Therefore, it is rendered per incuriam. (j) This Court in S. Inder Singh Gill (supra) was required to answer the question whether for the purpose of computing total world income of the assessee as defined in Section 2(15) of the I. T. Act, the income accruing in Uganda has to be reduced by the tax paid to the Uganda Government in respect of such income? The Court while answering the question in the negative observed that it is not aware of any commercial principle/practice which lays down that the tax paid by one on one's income is allowed as a deduction in determining the income for the purposes of taxation. (k) It is axiomatic that income tax is a charge on the profits/ income. The payment of income tax is not a payment made/incurred to earn profits and gains of business. Therefore, it cannot be allowed an as expenditure to determine the profits of the business. Taxes such as Excise Duty, Customs Duty, Octroi etc., are incurred for the purpose of doing business and earning profits and/or gains from business or profession. Therefore, such expenditure is allowable as a deduction to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (n) However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides/clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the tax paid abroad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii) of the Act. (q) The Explanation to Section 40(a)(ii) of the Act was inserted into the Act by Finance Act, 2006. However, the use of the words "for removal of doubts" it is hereby declared "...." in the Explanation inserted in Section 40(a)(ii) of the Act, makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by the Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of the Supreme Court in CIT v. Vatika Township (P) Ltd. [2014] 367 ITR 466/227 Taxman 121/49 taxmann.com 249 and CIT v. Gold Coin Health Foods (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC). (r) In the above facts and circumstances, question (iii)(a) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Question (iii)(b) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. 49. The Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) has laid down the ratio that to the extent tax paid in foreign c ..... 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