CGI INFORMATION SYSTEMS AND MANAGEMENT V. THE INCOME TAX OFFICER

ITA/610/2016

AI Insights

The case involves CGI Information Systems and Management Consultants Private Limited, which appealed against the orders of the Income Tax Officer, Commissioner of Income Tax, and the Income Tax Appellate Tribunal regarding various disallowances and interpretations related to deductions and tax credits for the assessment year 2003-2004. The primary issues revolved around the interpretation and application of Section 10A and Section 80HHE of the Income Tax Act, 1961, concerning the deductibility of certain expenses and the entitlement to tax credits for taxes withheld abroad. The High Court of Karnataka examined precedents and the specific circumstances of the case, ultimately deciding in favor of the assessee on most counts.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 753783 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 23-01-2023
• Assessment Year: misc
• Other Referred Cases: CIT Vs. Toyota Kirloskar Motor Private Limited, Jt.CIT Vs. Digital Equipments India Ltd., Wipro Ltd Vs. DCIT
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: E I SANMATHI
• Assessee Lawyers: K SURYANARAYANA
• Keywords: Capital expenditure; Contingent Liability; Deduction under Section 10A; Double Taxation Avoidance Agreement; Income tax appeal; Tax credit
• Section: 10A; 80HHE

Judgement Text

" - 1 - ITA No. 610 of 2016 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23RD DAY OF JANUARY, 2023 PRESENT THE HON'BLE MR JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR JUSTICE G BASAVARAJA INCOME TAX APPEAL NO. 610 OF 2016 BETWEEN: CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PRIVATE LIMITED ELECTRONIC CITY TOWER II, NO.95/1 AND 95/2, ELECTRONIC CITY PHASE I (WEST) BANGALORE-560 100 REPRESENTED HEREIN BY ITS DIRECTOR MS.BABALUSHA ESTHER ALEXANDER …APPELLANT (BY SRI. K.SURAYANARAYA, SR. ADV. FOR SMT. TANMAYEE RAJKUMAR, ADV.) AND: 1. THE INCOME TAX OFFICER WARD-8(1)(2), MUMBAI (TRANSFERRED TO BENGALURU) DEPUTY COMMISSIONER OF INCOME TAX - CIRCLE 11(2) (PRESENTLY ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU - 560 095.560095 Digitally signed by RAMYA D Location: High Court of Karnataka - 2 - ITA No. 610 of 2016 2. COMMISSIONER OF INCOME TAX BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BANGALORE-560 095. …RESPONDENTS (BY SRI. E.I.SANMATHI, SR. STANDING COUNSEL) THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED30/06/2016 PASSED IN ITA NO.415/BANG/2011, FOR THE ASSESSMENT YEAR 2003-2004. PRAYING TO (A) FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE AND ETC. THIS APPEAL, COMING ON FOR HEARING, THIS DAY, P.S.DINESH KUMAR J., DELIVERED THE FOLLOWING: JUDGMENT This appeal by the assessee challenging the order dated June 30, 2016 in ITA No.415 (Mum)/2011 for the A.Y.1 2003-04, has been admitted to consider following questions of law: 1. Whether on the facts and in the circumstances of the case, the deduction claimed by the appellant-assessee under Section 10A of the Act having been allowed for the Assessment year 1997-1998, which was the initial year of claiming deduction; and having also been allowed for the Assessment Years 1999-2000 and 2000-2001, the Income Tax Appellate Tribunal was justified in upholding disallowance made by the Assessing Officer for the 1 Assessment Year - 3 - ITA No. 610 of 2016 Assessment Year 2003-2004, despite the indisputable fact that the appellant has satisfied all the conditions for claiming the deduction in question under Section 10A of the Act? 2. Whether on the facts and in the circumstances of the case, the income Tax Appellate Tribunal was right in upholding the disallowance made by the Assessing Officer under Section 10A of the Act merely on the basis that the appellant did not challenge the CIT's order for the Assessment year 1998-1999? 3. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the expenses incurred towards subscription of Microsoft licenses was capital in nature on the basis that the said software was an operating system software? 4. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in upholding the disallowance of the provisions for expenses to the extent of Rs.50,08,053/- on the basis that they were contingent in nature and the details as to the manner of creation of the provisions were not furnished? 5. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has been in eror in not adjudicating on the alternative contention that in computing the deduction under Section 80HHE of the Act of 1961, if foreign exchange fluctuation loss is to be reduced from the 'export turnover', the same ought to be reduced from the 'total turnover' too? 6. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in - 4 - ITA No. 610 of 2016 holding that the appellant was not entitled to credit of taxes withheld in USA and Canada? 2. Heard Shri. T. Suryanarayana, learned Senior Advocate for the Assessee and Shri. E. I. Sanmathi, learned Standing Counsel for Revenue. 3. At the outset, Shri. Suryanarayana submitted that questions No. 1 and 2 are covered by decision in CGI Information Systems & Management Consultants Pvt. Ltd., in assessee's own case in ITA No.608/2016 decided on October 31, 2022. Question No. 5 does not arise for consideration in this appeal. Hence, remaining questions for consideration are 3, 4 and 6. 4. Question No.3 is with regard to annual subscription license fee in respect of Microsoft Software license. The AO2 has held that the said expenditure is a capital expenditure. The said view has been confirmed by CIT(A)3 and ITAT4. 2 Assessing Officer 3 Commissioner of Income Tax (Appeals) - 5 - ITA No. 610 of 2016 5. Shri. Suryanarayana placing reliance on CIT Vs. Toyota Kirloskar Motor Private Limited5 submitted that subscription fee is on yearly basis and therefore same cannot be capitalized. 6. Sri. Sanmathi, for the Revenue submitted that software is a part of desktop computer and the same has been capitalized when it was purchased. Therefore, expenditure must be treated as capital expenditure. 7. We have perused para 25 of ITAT’s order wherein the assessee’s contention has been recorded. The specific case of assessee is that contract between assessee and the Microsoft states that an annual charge of 260 CDN$ per license is required to be paid. However, due to bulk subscription, discounted rate of 215.1 CDN$ was given. 8. It is not disputed that software license fee is paid annually. Revenue's contention that software is 4 Income Tax Appellate Tribunal 5 (2013) 13 Taxmann.com 294(3) - 6 - ITA No. 610 of 2016 embedded into personal computer and the computer has been treated as a capital expenditure, on the face of it, is untenable because there is no dispute with regard to expenditure which is an annual subscription charge. Once the payment is for a fixed period, it is obvious that said software cannot be used after expiry of that year. In the case of Toyota Kirloskar Motors, this Court has held that: “3. …when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh license fee id to be paid. Therefore, without renewing the license or without paying the fee on such renewal, it is not possible to use those software in those circumstances the findings recorded by the authorities that the fee paid for obtaining the software and the license and for renewing the same is to be construed as only revenue expenditure…” (Emphasis supplied) 9. We are in respectful agreement with the authority in Toyota Kirloskar Motors. Hence, this question needs to be answered in favour of the assessee. - 7 - ITA No. 610 of 2016 10. Question No. 4 is disallowance of provision made for Rs.50,08,053/- by the CIT(A) and the ITAT. Shri. Suryanarayana submitted that the provision is in respect of payment to be made to the employees. Based on employee's performance, they have been paid 80% of the performance pay as incentives and remaining 20% is paid based on the financial performance of the company. He argued that the financial performance of the company is a liability which the company would know at the time of closure of books of account i.e., on 31st March of the relevant financial year. Therefore, the disallowance of provision is incorrect. 11. Shri. Sanmathi's argument is there could be cases where incentives are not paid to the employees if the employees leave the employment before assessment of their performance. Therefore, it is a contingent liability and not determined. His next argument is that there is no - 8 - ITA No. 610 of 2016 evidence with regard to determined expenditure which is likely to ensue in the following financial year. 12. In reply, Shri. Suryanarayana, made available a copy of the explanation produced before the CIT(A). Adverting to para 5 of the explanation, he pointed out that the provisions are made in respect of each head and the amount have been quantified. We have perused the same. The assessee has given details of seven items: Particulars Amount (Rs) Performance pay (Bangalore) 435,601 Performance pay (Mumbai) 488,150 Provision for L.T.A 574,080 A/P Project bonus 300,000 Provision for per diem 1,876,318 India Satcom Payment 400,000 Per diem another expense 1,533,904 Total 5,608,053 13. Thus, the CIT(A) had the benefit of these figures which were reflecting in the books of account. Assessee had made provision in respect of the above - 9 - ITA No. 610 of 2016 expenditure. We have also noticed that in addition to above seven heads, provisions were made for three more heads and the same have been allowed. As submitted by Shri. Suryanarayana, disallowance made by AO has been set aside by CIT(A), resultantly, the provision has been allowed. 14. The contention urged on behalf of Revenue that the determined amounts were not made available before Revenue is factually incorrect and therefore untenable. Now, the point that remains to be considered and answered is whether the above seven expenditures could be allowed or not. 15. The specific contention of assessee is that these expenditures are ascertained liabilities as on the date of closure of books of accounts. The objection raised by the Revenue that there are possibilities of employees leaving the company and not getting paid is also untenable because the percentage of the employees leaving their - 10 - ITA No. 610 of 2016 employment will be minimal and in such an event, assessee is duty bound to reverse the entry in the following year. Since, the provisions made are ascertained figures, the disallowance made by the AO and confirmed by the two authorities is perverse and unsustainable. 16. The last question is whether ITAT was correct in holding that appellant was not entitled to tax credit withheld in the US and Canada. 17. The AO has disallowed the tax credit by recording thus in para 9.3 and 9.4: \"It is seen that the assessee has opted not to avail deduction u/s 10A in respect of SEEPZ, Mumbai Unit only for the A.Y.2003-04. The assessee has claimed deduction u/s.10A in respect of this unit for the A.Ys.2004-05 and 2005-06. For the A.Y.2003-04, the assessee company has incurred loss on SEEPZ, Mumbai unit. Therefore, they have opted cut not to claim deduction u/s.10A only for this particular year and reentered the scheme in any way such a exit and re- entry is not allowable. Just because the assessee undertaking has no profit during the year and therefore the assessee cannot claim refund on the withholding taxes deducted in USA & Canada. - 11 - ITA No. 610 of 2016 The claim of the assessee has been examined. It was seen that only in this particular year the assessee has made the claim of refund of taxes deducted in USA and Canada. In this matter reliance is placed in the judgment of Hon'ble ITAT, Mumbai bench case of Jt.CIT Vs. Digital Equipments India Ltd. reported in 277 ITR (AT) 15 (Mum).2005. The Hon'ble Tribunal has discussed the issue in under consideration in detail. The facts of the case of the assessee and of the Digital Equipment (Supra) is identical. In the case of Digital Equipments the assessee company paid taxes in the source country but actually incurred loss when all the admissible deduction in respect of that earning were taken into account. In this case also the assessee company paid withholding taxes in the source country (USA & Canada) and is having losses in India. To quote from the Hon'ble Tribunal's decision, \"in the case before us the assesses company had paid taxes in respect of that earning only in one country i.e., United States and claim losses, on taking into account the admissible deduction there from, in the other country, i.e., India. This is surely not, by any stretch of logic of a case of double taxation of income.\" The ratio of the judgment of the Hon'ble Tribunal is that if any income is not taxable in India, the refund of withholding taxes cannot be granted to the assessee in India. As can be seen from the facts of the case enumerated above that the assessee company is claiming exemption u/s 10A in respect of profits of Mumbai unit. Only during this year the assessee had loss and therefore, the assessee claiming refund of taxes deducted in USA & Canada.\" - 12 - ITA No. 610 of 2016 18. We have carefully perused the Assessment Order. The AO has assessed the income of assessee as Rs. 11,32,90,110/-. For the reasons stated in para 9.3 and 9.4 the tax credit has been denied and the said view has been approved by the CIT(A) and the ITAT. 19. Shri. Suryanarayana contended that assessee has two units, one in Mumbai and another in Bangalore. Mumbai unit has incurred loss and Bangalore unit is making profit. The assessment order covers both units. The AO has assessed income and therefore, assessee is liable to pay tax. Assessee has also paid tax both in the USA and Canada, therefore under DTAA6, the assessee is entitled for tax credit. 20. Shri. Sanmathi’s argument is that assessee has availed deduction under Section 10A. Therefore, assessee is not entitled for benefit under DTAA. It is to be noticed that the AO has assessed income of the assessee as 6 Double Taxation Avoidance Agreement - 13 - ITA No. 610 of 2016 Rs.11.32 Crores. Assessee is liable to pay tax on said income. If the argument of Shri. Sanmathi that assessee has availed deduction under Section 10A is to be accepted, assessee’s income will have to be re-computed and after giving deduction under Section 10A, if assessee becomes liable to pay tax, he must be entitled to tax credit. It was brought to the notice of this Court that Section 10A deduction has been allowed by this Court in ITA No.608/2016 and connected cases decided on 31.10.2022. In view of our findings, notwithstanding Section 10A deduction, assessee shall be entitled for tax credit (See: Wipro Ltd Vs. DCIT7). Accordingly, this question is answered in favour of the assessee. 21. In the light of above discussion, the following: 7 (2015) 62 taxmann.com 26 (Kar). - 14 - ITA No. 610 of 2016 ORDER (a) Appeal is allowed. (b) Order passed by the AO, confirmed by the CIT(A) and the ITAT in order dated June 30, 2016 in ITA No.415 (Mum)/2011 is set aside. (c) Questions No. 1 to 4 and 6 are answered in favour of the assessee and against the Revenue. (d) Question No.5 does not arise for consideration. No Costs. Sd/- JUDGE Sd/- JUDGE BH "