Appeal details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 77345 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 8 month(s) 8 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-06-2014
Appeal Filed By
Department
Bench Allotted
C
Next Hearing Date
08-04-2014
Assessment Year
2003-2004
Appeal Filed On
01-10-2009
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHE NNAI . . . , ! , ' # $ BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER . I.T.A. NO. ASSESSMENT YEAR !% APPELLANT &'!% RESPONDENT 1535/MDS/2009 2002-03 INCOME TAX OFFICER (TDS), LARGE TAXPAYER UNIT, CHENNAI-600 101 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 38, WHITES ROAD, II FLOOR, CHENNAI-600 014 [PAN: AAACD 3312 M] 1536/MDS/2009 2003-04 INCOME TAX OFFICER (TDS), LARGE TAXPAYER UNIT, CHENNAI-600 101 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 38, WHITES ROAD, II FLOOR, CHENNAI-600 014 [PAN: AAACD 3312 M] 460/MDS/2010 2002-03 DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 30, WHITES ROAD, CHENNAI-600 014 [PAN: AAACD 3312 M] C.O.NO.27/MDS/ 2010 2002-03 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 3O, WHITES ROAD, CHENNAI-600 014 [PAN: AAACD 3312 M] ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I, CHENNAI 751/MDS/2010 2006-07 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 38, WHITES ROAD, 3 RD FLOOR, CHENNAI-600 014 [PAN: AAACD 3312 M] ASSISTANT COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI 864/MDS/2010 2006-07 DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 30, WHITES ROAD, CHENNAI-600 014 [PAN: AAACD 3312 M] 1922/MDS/2010 2006-07 DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101 M/S.COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LIMITED, 30, WHITES ROAD, CHENNAI-600 014 [PAN: AAACD 3312 M] ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 2 -: REVENUE BY ASSESSEE BY : : SHRI T.N.BETGERI, JCIT SHRI SAROJ KUMAR, ADVOCATE / DATE OF HEARING : 08-04-2014 /DATE OF PRONOUNCEMENT : 09-06-2014 #( / O R D E R PER VIKAS AWASTHY, J.M: THESE ARE SIX APPEALS. TWO APPEALS IN ITA NO.1535/MDS/2009 FOR THE ASSESSMENT YEAR (AY) 2002- 03 AND ITA NO.1536/MDS/2009 FOR THE AY.2003-04 HAVE BEEN F ILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF IN COME TAX(APPEALS)-XI, CHENNAI, DATED 06-07-2009 PASSED U/S.201(1) AND 201(1A) OF THE INCOME TAX ACT, 1961 (HEREIN AFT ER REFERRED TO AS THE ACT). THE CIT(APPEALS) HAS PASSED COMMON ORDER FOR BOTH THE AYS. ITA NO.460/MDS/2010 RELEVANT TO THE AY.2002-03 HAS BEEN FILED BY THE REVENUE ASSAILING THE ORDER OF CIT(APP EALS), LTU, CHENNAI DT.29-01-2010. THE ASSESSEE HAS FILED CROS S-OBJECTIONS IN THE SAID APPEAL. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 3 -: ITA NO.751/MDS/2010 RELEVANT TO THE AY.2006-07 HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(APPE ALS), LTU, CHENNAI DT.12-03-2010. THE REVENUE HAS FILED CROSS APPEAL IN ITA NO.864/MDS/2010 AGAINST THE SAME ORDER OF CIT(A PPEALS). ITA NO.1922/MDS/2010 RELEVANT TO THE AY.2006-07 HAS BEEN FILED BY THE REVENUE ASSAILING THE ORDER OF CI T(APPEALS), LTU, CHENNAI DT.31-08-2010 PASSED U/S.154 OF THE AC T. 2. FIRST WE WILL TAKE UP THE APPEALS OF THE REVENUE IN ITA NO.1535 & 1536/MDS/2009 FOR THE AYS.2002-03 & 2003- 04 RESPECTIVELY ASSAILING THE ORDER OF CIT(APPEALS) PA SSED U/S.201(1) AND 201(1A). THE BRIEF FACTS OF THE CAS E ARE: THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF SOFT WARE DEVELOPMENT AND EXPORT. DURING THE PERIOD RELEVANT TO THE AYS UNDER CONSIDERATION, THE ASSESSEE MADE REMITTANCES TO M/S.SPRINT USA FOR HIRING INTERNATIONAL PRIVATE LEA SED CIRCUITS [IPLC]. THE AFORESAID REMITTANCES MADE TO NON-RESI DENT COMPANY WERE WITHOUT DEDUCTION OF TAX AT SOURCE. M/S.SPRIN T USA IS PROVIDING IPLC BANDWIDTH SERVICE TO THE ASSESSEE FO R INTERNET ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 4 -: ACCESS, BUSINESS, DATA EXCHANGE, VIDEO CONFERENCING AND OTHER TELECOMMUNICATION FACILITIES TO ENABLE DEDICATED HI GH SPEED CONNECTIVITY. THE DETAILS OF THE SERVICES PROVIDED BY M/S.SPRINT USA TO THE ASSESSEE ARE AS UNDER: (A) INTERNATIONAL PRIVATE LEASED CIRCUIT (IPLC) AN IPLC IS A POINT TO POINT PRIVATE LINE USED BY AN ORGANIZATION TO COMMUNICATE BETWEEN OFFICES THAT ARE GEOGRAPHICALLY DISPERSED THROUGHOUT THE WORLD. AN IPLC IS USED FOR INTERNET ACCESS, BUSINESS DATA EXCHANGE, VIDEO CONFERENCING AND ANY OTHER FORM OF TELECOMMUNICATION. THIS SERVICE ENTITLES THE CU STOMER TO HIGH SPEED CONNECTIVITY ANYWHERE IN THE WORLD VIA SUBMA RINE CABLE. IT IS STATED THAT IPLC SERVICES ARE PROVIDED BY TWO IN TERNATIONAL CAREER COMPANIES. SPRINT IS PROVIDING A US HALF CH ANNEL AND VSNL IS PROVIDING INDIA HALF CHANNEL. CONGNIZANT I S USING IPLC SERVICES FOR THEIR BACKBONE CONNECTIVITY AND INTERN ATIONAL CUSTOMER CONNECTIVITY. (B) PRIVATE LEASED CIRCUIT (PLC) A PRIVATE LEASED CIRCUIT IS A DIRECT OR DEDICATED LINE THAT CONNECTS CUSTOMER SPECIFIED LOCATIONS, SUCH AS BETW EEN THE HEAD ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 5 -: OFFICE AND A BRANCH OFFICE, OR A GROUP COMPANY AND A FACTORY. SPRINT PROVIDED PRIVATE LEASED CIRCUITS IN US AND U K FOR CONNECTING COGNIZANT CUSTOMERS TO COGNIZANT US BACK BONE. (C) FRAME RELAY CIRCUIT (FRC) IT IS A COST EFFECTIVE DATA NETWORKING SERVICE THAT ALLOWS ENTERPRISES TO CONNECT TO REMOTE OFFICES IN A SECUR E, PRIVATE WAN ENVIRONMENT. IT IS STATED THAT THE STANDARD COMPON ENTS INCLUDE (I) PORTS THE CUSTOMERS PHYSICAL ENTRY INTO THE FRAM E RELAY NETWORK FROM A PARTICULAR SITE (II) PERMANENT VIRTUAL CIRCU IT (PVCS) PVCS PROVIDE POINT TO POINT CONNECTIVITY BETWEEN TWO SID ES LIKE A PRIVATE LINE (III) LOCAL ACCESS/LOCAL LOOPS PROVIDING CON NECTIVITY TO THE FRAME RELAY NETWORK. THIS IS A DEDICATED ACCESS LI NE FROM THE END USERS SITE TO THE NEAREST FRAME RELAY SWITCH. (D) ROUTER MANAGEMENT SPRINT IS RESPONSIBLE FOR INSTALLING/CONF IGURING THE ROUTERS AT COGNIZANTS CUSTOMERS SITE IN US AND EUROPE AND BA CKBONE SITES IN US AND UK. IT IS STATED THAT SPRINT PROVIDES EQUIPMENT CSU/DSU (CUSTOMER SERVICE EQUIPMENT/DIGITAL SERVICE EQUIPME NT) FOR ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 6 -: TERMINATING THE CIRCUITS IN COGNIZANT US BACKBONE A ND CUSTOMER LOCATIONS IN US AND EUROPE. THE PAYMENT TO SPRINT INCLUDES ROUTER RENTAL CHARGE S, ROUTER MANAGEMENT CHARGES, ROUTER MAINTENANCE CHARGES, SOF TWARE INITIALIZATION CHARGES, ROUTER INSTALLATION CHARGES . AFTER ANALYZING THE NATURE OF SERVICES PROVIDED BY SPRINT USA TO THE ASSESSEE, CUSTOMER SERVICE AGREEMENT AND SERVICES LEVEL AGREEMENT, THE ITO (INTERNATIONAL TAXATION-II ) VIDE HIS ORDER U/S.201(1) AND 201(1A) HELD THAT THE PAYMENTS MADE TO THE NON- RESIDENTS COMPANY CONSTITUTES ROYALTY FOR USE OF TELECOMMUNICATION EQUIPMENT AND OTHER SERVICES UNDE R THE PROVISIONS OF INCOME TAX ACT. ON THE CONTRARY, THE STAND OF THE ASSESSEE IS THAT THE REMITTANCES MADE BY THE ASSESS EE CONSTITUTE PAYMENTS FOR USAGE CHARGES, RECURRING CHARGES INSTA LLATION CHARGES AND ALSO NON USAGE CHARGES WHICH INCLUDE SE RVICE FEE, ACCESS FEE AND EQUIPMENT. THE LD.COUNSEL FOR THE A SSESSEE IN ORDER TO SUPPORT HIS CONTENTIONS FURNISHED CUSTOMER SERVICE AGREEMENT WITH M/S.SPRINT USA, COPIES OF INVOICE RA ISED BY ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 7 -: M/S.SPRINT USA AND COPY OF M/S.VIDESH SANCHAR NIGAM LIMITED [VSNL]. 2.1 AGGRIEVED AGAINST THE SAID ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(APPEALS). THE CIT(APPEALS) H ELD THAT THE PAYMENTS MADE BY THE ASSESSEE WERE FOR INTERNATIONA L TELECOMMUNICATION SERVICES WHICH IS A STANDARD FACI LITY OR SERVICE PROVIDING TO ALL THOSE WILLING TO PAY. THE ASSESSE E DOES NOT GET ANY RIGHT TO USE ANY GOODS/EQUIPMENT PROVIDED IN SU CH TRANSMISSION. THEREFORE, THE PAYMENTS MADE TO THE OVERSEAS COMPANY IS NOT IN THE NATURE OF ROYALTY FOR THE U SE OF EQUIPMENT. THE CIT(APPEALS) FURTHER HELD THAT M/S.SPRINT USA D OES NOT HAVE ANY PERMANENT ESTABLISHMENT [PE] IN INDIA. THE INC OME OF THE SPRINT IS IN THE NATURE OF BUSINESS INCOME AS IT PR OVIDES ONLY SERVICE TO THE ASSESSEE AS THE ASSESSEE HAS NOT T AKEN ANY EQUIPMENT ON LEASE. IN THE ABSENCE OF PE FOR THE S ERVICES RENDERED BY SPRINT, THERE IS NO NECESSITY TO PAY TA XES IN INDIA AND AS SUCH THE ASSESSEE IS UNDER NO OBLIGATION TO DEDU CT TAX U/S.195 OF THE ACT WHILE MAKING PAYMENTS. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 8 -: 2.2 AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REV ENUE HAS COME IN APPEAL BEFORE THE TRIBUNAL. THE LD.DR VEHE MENTLY SUPPORTING THE ORDER OF ITO (INTERNATIONAL TAXATION ) SUBMITTED THAT THE PAYMENTS MADE TO M/S.SPRINT USA ARE IN THE NATU RE OF ROYALTY. IN ORDER TO SUPPORT HIS CONTENTIONS, TH E LD.DR RELIED ON THE RECENT JUDGMENT OF THE HONBLE MADRAS HIGH COUR T IN THE CASE OF M/S.VERIZON COMMUNICATIONS SINGAPORE PTE LTD., VS. ITO (INTERNATIONAL TAXATION) REPORTED AS 261 ITR 575 (MAD). 2.3 ON THE OTHER HAND, SHRI SAROJ KUMAR, ADVOCATE A PPEARING ON BEHALF OF THE ASSESSEE STRONGLY SUPPORTED THE OR DER OF CIT(APPEALS) AND PRAYED FOR DISMISSAL OF THE APPEAL OF THE REVENUE. 2.4 WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO EXAMINED THE J UDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F M/S.VERIZON COMMUNICATIONS SINGAPORE PTE LTD., VS. ITO (INTERNA TIONAL TAXATION) (SUPRA). WE FIND THAT THE ISSUE IN DISPUTE IS IDEN TICAL TO ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 9 -: THE ONE ADJUDICATED BY THE HONBLE HIGH COURT IN TH E AFORESAID CASE. SIMILAR ISSUE, WHETHER THE SERVICES PROVIDE D BY THE OVERSEAS COMPANY CONSTITUTES ROYALTY OR NOT? CAM E UP BEFORE THE HONBLE HIGH COURT. IN THE SAID CASE, THE NON- RESIDENT COMPANY WAS ENGAGED IN THE BUSINESS OF PROVIDING IN TERNATIONAL CONNECTIVITY SERVICES (BANDWIDTH SERVICES/TELECOM S ERVICES) IN THE ASIA PACIFIC REGION INCLUDING INDIA FOR TRANSMISSIO N OF DATA AND VOICE. THE INTERNATIONAL LEG OF TELECOMMUNICATION SERVICES OUTSIDE INDIA WAS PROVIDED BY THE NON-RESIDENT COMP ANY. IN INDIAN TERRITORY, THE CONNECTING SERVICES WERE PROV IDED BY VSNL. VSNL TRANSMITTED THE TRAFFIC OF THE CUSTOMER IN IND IA FROM THE CUSTOMERS OFFICE IN INDIA TO A VIRTUAL POINT OUTSID E INDIA AND THE NON-RESIDENT COMPANY TRANSMITTED IT UP TO THE CUSTO MER LOCATION OUTSIDE INDIA. THE NON-RESIDENT COMPANY USED ITS TE LECOM SERVICE EQUIPMENT SITUATED OUTSIDE INDIA IN PROVIDING INTER NATIONAL HALF CIRCUIT. THE GATEWAY/LANDING STATION IN INDIA USED IN TRANSMITTING THE TRAFFIC WITHIN INDIA BELONG TO VSNL AND WAS USE D BY VSNL FOR PROVIDING INDIAN END SERVICES IN ACCORDANCE WITH TH E CONTRACT WITH ITS CUSTOMERS. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 10 - : THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT T HE PAYMENT RECEIVED BY THE NON-RESIDENT COMPANY IN PRO VIDING INTERNATIONAL PRIVATE LEASED CIRCUIT WAS TAXABLE AS A ROYALTY FOR USE OR RIGHT TO USE COMMERCIAL AND SCIENTIFIC EQUIP MENT U/S.9(1)(VI) OF THE ACT READ WITH EXPLANATION-2 AND ARTICLE 12(3) OF THE DOUBT TAXATION AVOIDANCE AGREEMENT BETWEEN INDI A AND SINGAPORE. IN FIRST APPEAL, THE ORDER OF THE ASSES SEE WAS UPHELD BY THE CIT(APPEALS). ON FURTHER APPEAL, THE TRIBUN AL HELD THAT EVEN IF THE PAYMENTS WERE TREATED AS NON-RELATING T O THE USE OF EQUIPMENT, THEY SHOULD BE CONSIDERED AS PAYMENT FOR THE USE OF THE PROCESS PROVIDED BY THE ASSESSEE, WHEREBY THROU GH THE ASSURED BANDWIDTH, THE CUSTOMER IS GUARANTEED THE T RANSMISSION OF DATA AND THE VOICE. THE FACT THAT THE BANDWIDTH IS SHARED WITH OTHERS, HOWEVER, HAS TO BE SEEN IN THE LIGHT OF THE TECHNOLOGY GOVERNING THE OPERATION OF THE PROCESS AND THIS BY ITSELF DOES NOT TAKE THE ASSESSEE OUT OF THE SCOPE OF ROYALTY. THU S, THE CONSIDERATION BEING FOR THE USE AND RIGHT TO USE OF THE PROCESS, IT IS ROYALTY, WITHIN THE MEANING OF CLAUSE-(III) OF EXPLANATION-2 TO SECTION 9(1)(VI) OF THE ACT. THE HONBLE HIGH COUR T AFFIRMED THE FINDINGS OF THE TRIBUNAL ON THE ISSUE. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 11 - : 2.5 THE FACTS IN THE PRESENT CASE ARE IDENTICAL TO THE ONE ADJUDICATED BY THE HONBLE HIGH COURT. THUS, IN VI EW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE LAW LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT, WE FIND MERIT IN THE APPEALS OF THE REVENUE. ACCORDINGLY, BOTH THE APPEALS OF THE REVENUE ARE ALLOWED. 3. ITA NO.460/MDS/2010 (AY.2002-03) & C.O.NO.27/MDS/2010 : THE REVENUE HAS RAISED AS MANY AS SIX GROUNDS IN IT S APPEAL. GROUND NOS. 1 & 6 ARE GENERAL IN NATURE AND AS SUCH THEY ARE NOT TAKEN UP FOR ADJUDICATION. 3.1 THE GROUND NO.2 RELATES TO EXCLUSION OF FOREIGN CURRENCY EXPENDITURE FROM EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. THE LD.COU NSEL FOR THE ASSESSEE SUBMITTED AT THE OUTSET THAT THE GROUND RA ISED IN APPEAL BY THE REVENUE HAS ALREADY BEEN ADJUDICATED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN ITA NO.114/MDS/2011 (AY.2005-06) DECIDED ON 23-01-2013. THE LD.AR PLACED ON RECORD THE COPY OF THE ORDER OF THE TRIBUNAL IN THE ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 12 - : AFORESAID APPEAL. THE CO-ORDINATE BENCH OF THE TRI BUNAL FOLLOWING THE DECISION OF HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF PATNI TELECOM P. LTD., VS. ITO REPORTED AS 308 ITR (AT) 414 (HYDERABAD) WHEREIN IT WAS HELD THAT EXPENSES INCURRED IN FORE IGN EXCHANGE, AS PART OF THE EXPORT CARRIED OUT BY THE ASSESSEE, CANNOT BE EXCLUDED FROM THE EXPORT TURNOVER. THE C HENNAI BENCH HELD THAT THE FACTS OF THE ASSESSEES CASE AR E EXACTLY SIMILAR TO THE FACTS IN THE CASE OF PATNI TELECOM P. LTD., VS. ITO (SUPRA) AND DIRECTED THE ASSESSING OFFICER TO INCLU DE FOREIGN CURRENCY EXPENDITURE TO FORM PART OF EXPORT TURNOVE R OF THE ASSESSEE IN COMPUTING DEDUCTION U/S.10A OF THE ACT. WE FIND THAT IN THE AY UNDER CONSIDERATION, THERE IS NO CHANGE I N THE FACTS AND THUS THE SAME RATIO CAN BE APPLIED IN AY.2002-03 AS WELL. ACCORDINGLY, THIS GROUND OF APPEAL OF THE REVENUE I S DISMISSED. 3.2 THE GROUND NO.3 RAISED IN APPEAL BY THE REVENUE IS EXCLUSION OF TELECOMMUNICATION EXPENSES FROM EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.10 A. FOLLOWING THE SAME PRINCIPLE AS LAID DOWN BY THE HYDERABAD BE NCH OF THE ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 13 - : TRIBUNAL IN THE CASE OF PATNI TELECOM P. LTD., VS. ITO (SUPRA), WE DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 3.3 IN GROUND NO.4, THE REVENUE HAS ASSAILED THE FI NDINGS OF CIT(APPEALS) FOR DELETING THE DIS-ALLOWANCE U/S.40( A)(I) IN RESPECT OF PAYMENTS MADE TO M/S.SPRINT USA TOWARDS LEASE LI NE CHARGES. THE CIT(APPEALS) DELETED THE DIS-ALLOWANCE U/S.40A( IA) FOR NON- DEDUCTION OF TAX AT SOURCE ON PAYMENTS MADE TO M/S. SPRINT USA FOR THE REASONS THAT, THE CIT(APPEALS)-XI, CHENNAI VIDE ORDER DT.06-07-2009 PASSED U/S.201(1) AND 201(1A) FOR THE RELEVANT AY HAS HELD THAT THE ASSESSEE WAS UNDER NO OBLIGATION TO DEDUCT TAX U/S.195 WHILE MAKING SUCH PAYMENTS AS M/S.SPRINT US A HAD NO PE IN INDIA. SINCE, THE SAID ORDER OF THE CIT(APPE ALS)-XI, CHENNAI HAS BEEN SET ASIDE BY US, IN THE APPEAL OF THE REVENUE IN ITA NO.1535/MDS/2009, THIS GROUND OF APPEAL OF T HE REVENUE HAS TO BE ALLOWED. 3.4 GROUND NO.5 RAISED IN APPEAL BY THE REVENUE IS WITH REGARD TO LEVY OF INTEREST U/S.234D. THE LD.COUNSEL FOR T HE ASSESSEE HAS SUBMITTED THAT THE PROVISIONS REGARDING THE LEVY OF INTEREST ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 14 - : U/S.234D WERE INSERTED BY THE FINANCE ACT, 2003 W.E .F. 01-06- 2003, THEREFORE THEY CANNOT BE APPLIED IN THE AY.20 02-03. IT IS AN UNDISPUTED FACT THAT THE PROVISIONS OF SE CTION 234D WERE INSERTED BY THE FINANCE ACT, 2003 W.E.F.01-06- 2003, THEREFORE, THEY HAVE NO RETROSPECTIVE APPLICABILITY . MOREOVER, THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. EKTA PROMOTERS P. LTD., REPORTED AS 113 ITD 719 HAS HELD THAT THE INTEREST U/S.234D IS CHARGEABLE FROM AY.2004-05 ONW ARDS. ACCORDINGLY, THIS GROUND OF APPEAL OF THE REVENUE I S DISMISSED. 3.5 IN CROSS-OBJECTIONS, THE ASSESSEE HAS PRIMARILY RAISED TWO ISSUES. ISSUE NO.1 RELATES TO EXCLUSION OF FOREIGN CURRENCY EXPENDITURE FROM EXPORT TURNOVER AND TOTAL TURNOVER FOR COMPUTING DEDUCTION U/S.10A AND 10B. THIS ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN REVENUES APPEAL. THE REFORE, THE FIRST CROSS-OBJECTION HAS BECOME INFRUCTUOUS AND IS DISMISSED AS SUCH. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 15 - : 3.6 THE SECOND ISSUE IS RAISED IN CROSS-OBJECTION N O.2 TO 4. THE ASSESSEE HAS SUPPORTED THE ORDER OF CIT(APPEALS ) WITH REGARD TO THE DIS-ALLOWANCE U/S.40(A)(I) IN RESPECT OF PAYMENTS MADE TO M/S.SPRINT USA TOWARDS LEASE LINE CHARGES. SINCE THIS ISSUE HAS BEEN ADJUDICATED IN FAVOUR OF THE REVENUE IN ITA NO.1535/MDS/2009, THE ASSESSEE WAS LIABLE TO DEDUCT TAX U/S.195 OF THE ACT ON REMITTANCES MADE TO M/S.SPRINT USA. THE ASSESSING OFFICER HAS RIGHTLY MADE DIS-ALLOWANCE U/ S.40(A)(I) ON SUCH PAYMENTS. ACCORDINGLY, CROSS-OBJECTIONS 2 TO 4 ARE DISMISSED. 3.7 IN RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED AND THE CROSS-OBJECTIONS OF THE ASSESSEE ARE DISMISSED. 4. ITA NO.751/MDS/2010 (AY.2006-07) BY ASSESSEE AND ITA NO.864/MDS/2010 (AY.2006-07) BY REVENUE: BOTH THE APPEALS ARE DIRECTED AGAINST THE ORDER OF CIT(APPEALS), LTU DT.12-03-2010. THE ASSESSEE IN ITS APPEAL HAS RAISED AS MANY AS 19 GROUNDS. GROUND NOS.1 AND 19 ARE GENERA L IN NATURE AND ARE THUS NOT TAKEN UP FOR ADJUDICATION. GROUND NO.2 & 3 RELATE TO EXCLUSION OF EXPENDITURE INCURRED IN FORE IGN CURRENCY ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 16 - : FROM EXPORT TURNOVER AND GROUND NO.4 TO 7 RELATE TO EXCLUSION OF TELECOMMUNICATION EXPENDITURE FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.10A. THE ISSUES RAISED BY THE ASSESSEE IN ABOVE GROUNDS OF APPEAL HAVE ALREAD Y BEEN ADJUDICATED IN FAVOUR OF THE ASSESSEE IN THE APPEAL OF THE REVENUE I.E., ITA NO.460/MDS/2010. RELIANCE HAS BE EN PLACED ON THE DECISION OF HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF PATNI TELECOM P. LTD., VS. ITO (SUPRA) FOR DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE. BOTH THE ISSUES IN THE PRE SENT APPEAL ARE THUS ALLOWED. THE ASSESSING OFFICER IS DIRECTED TO INCLUDE FOREIGN CURRENCY EXPENDITURE AS WELL AS TELECOMMUNICATION E XPENDITURE AS PART OF THE EXPORT TURNOVER. 4.1 IN GROUND NOS. 8 TO 13, THE ASSESSEE HAS ASSAIL ED THE FINDINGS OF CIT(APPEALS) WITH RESPECT TO SET OFF OF CURRENT YEARS LOSSES OF ELIGIBLE UNITS AGAINST THE PROFITS OF OTH ER UNITS ELIGIBLE FOR DEDUCTION U/S.10A. THE LD.COUNSEL FOR THE ASSESSEE IN SUPPORT OF HIS SUBMISSIONS RELIED ON THE JUDGMENT OF THE HONB LE KARNATAKA HIGH COURT IN THE CASE OF CIT & ANR. VS. YOKOGAWA INDIA LTD. AND OTHERS, REPORTED AS 246 CTR (KAR) 226 AND THE DECISION OF THE ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 17 - : CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.114/MDS/2011 FOR THE AY.2005-06 (SUPRA). THE RE LEVANT EXTRACT OF THE FINDINGS OF THE TRIBUNAL ARE REPRODU CED HERE UNDER: IN THE PRESENT CASE THE ASSESSING OFFICER ADJUSTED THE BROUGHT FORWARD LOSSES OF THE ASSESSMENT YEAR 2004- 05 OF THE ELIGIBLE UNITS AGAINST THE CURRENT YEARS PROFITS O F THE ELIGIBLE UNITS BEFORE COMPUTING THE DEDUCTION UNDER SECTION 10A. THE VERY SAME ISSUE WAS CONSIDERED BY THE INCOME-TAX AP PELLATE TRIBUNAL, B-BENCH, CHENNAI, IN THE CASE OF RR DONNE LLEY INDIA OUTSOURCE PVT. LTD. VS DCIT, IN ITA NOS.1489 & 1490(MDS)/2010. THROUGH THEIR ORDER DATED 26-7-201 2 THE TRIBUNAL, FOLLOWING THE DECISIONS OF THE HONBLE KA RNATAKA HIGH COURT IN THE CASE OF CIT & ANR. VS. YOKOGAWA I NDIA LTD. AND OTHERS, 246 CTR (KAR) 226 AND IN THE CASE OF CI T & ANR. VS. TATA ELXSI LTD. & OTHERS, 247 CTR 334, HAS HELD THAT THE CURRENT YEARS PROFIT OF THE ELIGIBLE UNITS SHOULD NOT BE REDUCED BY SETTING OFF OF THE BROUGHT FORWARD LOSSES OF EAR LIER YEARS EVEN THOUGH RELATING TO ELIGIBLE UNITS. THE ASSESS ING OFFICER HAS TO GIVE DEDUCTION UNDER SECTION 10A ON ELIGIBLE PROFITS OF THE CURRENT ASSESSMENT YEAR. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. WE FIND THAT IN THE AY UNDER CONSIDERATION, THERE H AS BEEN IDENTICAL SET OF FACTS AND THE ISSUE IN APPEAL IS S QUARELY COVERED BY THE FINDINGS OF THE CO-ORDINATE BENCH OF THE TRI BUNAL IN ITA ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 18 - : NO.114/MDS/2011 FOR THE AY.2005-06 (SUPRA). ACCORD INGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 4.2 THE NEXT ISSUE RAISED IN PARA NOS.14 TO 17 IN T HE GROUNDS OF APPEAL BY THE ASSESSEE RELATE TO DIS-ALLOWANCE U/S. 14A OF THE ACT. THE ASSESSING OFFICER HAS MADE DIS-ALLOWANCE U/S.14 A BY APPLYING THE PROVISIONS OF RULE 8D ON TAX FREE INCO ME OF ` 3,80,10,340/-. THE CIT(APPEALS) UPHELD THE FINDING S OF THE ASSESSING OFFICER ON THE ISSUE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD., REPORTED AS 328 ITR 81 (BOM) HAS HELD THAT THE PROVISIONS OF RULE 8D ARE APPLICA BLE W.E.F. AY.2008-09. THE NEWLY INTRODUCED PROVISIONS OF RULE 8D HAVE NO RETROSPECTIVE APPLICABILITY, THE AUTHORITIE S BELOW HAVE ERRED IN APPLYING THE SAME. THE TRIBUNAL IN ASSESS EES OWN CASE FOR THE AY.2005-06 HAS UPHELD THE ACTION OF THE ASS ESSING OFFICER IN MAKING THE DIS-ALLOWANCE @2% OF THE EXEMPT INCOM E. THE TRIBUNAL FURTHER ACCEPTED ALTERNATE CONTENTION OF T HE AASSESSEE THAT THE PROFIT FOR THE PURPOSE OF SECTION 10A WIL L BE ENHANCED TO THE EXTENT OF DIS-ALLOWANCE. THEREFORE, PROPORTIONA TE ENHANCEMENT WILL BE IN THE AMOUNT OF DEDUCTION AVAI LABLE ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 19 - : U/S.10A. RESPECTFULLY FOLLOWING THE SAME, WE DIREC T THE ASSESSING OFFICER TO DIS-ALLOW 2% OF THE EXEMPT INC OME U/S.14A AND FURTHER MAKE PROPORTIONATE ENHANCEMENT IN THE A MOUNT OF DEDUCTION AVAILABLE U/S.10A. THIS GROUND OF APPEAL OF THE ASSESSEE IS PRTLY ALLOWED. 4.3 GROUND NOS.18 IN THE APPEAL OF THE ASSESSEE REL ATE TO DIS- ALLOWANCE U/S.40(A)(I) IN RESPECT OF PROFESSIONAL/T ECHNICAL FEE PAID TO TARAS CONSULTING LLC AND EPICOR SOFTWARE PTY. LT D., BOTH NON- RESIDENT ENTITIES TOWARDS TRAVEL AND OTHER EXPENDIT URE. THE ASSESSEES CONTENTION BEFORE ASSESSING OFFICER FOR NOT DEDUCTING TAX ON SUCH PAYMENT U/S.195 WAS BASED ON CBDT CIRCU LAR NO.786 DT.07-02-2000. HOWEVER, THE SAID CIRCULAR H AS BEEN WITHDRAWN VIDE SUBSEQUENT CIRCULAR NO.7 OF 2009. E VEN BEFORE CIT(APPEALS), THE ASSESSEE WAS UNABLE TO PRODUCE AN Y DETAILS IN SUPPORT OF ITS CLAIM. BEFORE US ALSO, THE LD.COUNS EL FOR THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE CLAI M OF THE ASSESSEE. ACCORDINGLY, THIS GROUND OF APPEAL OF TH E ASSESSEE IS DISMISSED. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 20 - : 4.4 IN VIEW OF OUR ABOVE FINDINGS, THE APPEAL OF TH E ASSESSEE IS PARTLY ALLOWED. 5. ITA NO.864/MDS/2010 (AY.2006-07): THE REVENUE HAS RAISED SIX GROUNDS IN ITS APPEAL. GROUND NOS.1 TO 6 ARE GENERAL IN NATURE AND THEREFORE THEY ARE N OT TAKEN UP FOR ADJUDICATION. GROUND NOS.2 TO 4 RELATE TO EXCLUSIO N OF FOREIGN CURRENCY EXPENDITURE AND TELECOMMUNICATION EXPENDIT URE FROM BOTH EXPORT TURNOVER AND TOTAL TURNOVER FOR THE PUR POSE OF COMPUTING DEDUCTION U/S.10A. BOTH THESE ISSUES ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS. SAKSOFT LIMITED REPORTED AS 313 ITR (AT) (MADRAS) 553. THE SPECIAL BENCH HAS HELD THAT THE EXPENSES ON FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTIC LES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES INCURRE D IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA WHICH ARE REQUIRED TO BE EXCLUDED FROM THE EXPORT TURNOVER SH OULD ALSO BE EXCLUDED FROM TOTAL TURNOVER WHILE COMPUTING DEDUCT ION U/S.10B OF THE ACT. MOREOVER, THESE ISSUE HAVE ALREADY BEEN H ELD IN FAVOUR ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 21 - : OF THE ASSESSEE IN ASSESSEES APPEAL NO.751/MDS/201 0 IN PARA NO.4 HEREIN ABOVE. ACCORDINGLY, BOTH THE GROUNDS I N THE APPEAL OF THE REVENUE ARE DISMISSED. 5.1 IN GROUND NO.5, THE REVENUE HAS ASSAILED THE OR DER OF CIT(APPEALS) WITH RESPECT TO DIS-ALLOWANCE OF PROVI SIONS FOR EXPENSES. THE LD.DR HAS SUBMITTED THAT THE CIT(APP EALS) HAS ERRED IN DELETING THE DIS-ALLOWANCE MADE BY ASSESSI NG OFFICER TO THE TUNE OF ` 6,25,02,220/- TOWARDS VARIOUS EXPENSES ON THE GROUND THAT THE EXPENSES ARE CONTINGENT IN NATURE A ND NOT PERTAINING TO THE AY UNDER CONSIDERATION. ON THE OTHER HAND, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR ISSUE WAS RAISED BY THE REVE NUE IN APPEAL BEFORE THE TRIBUNAL IN ITA NO.90/MDS/2011 FOR THE A Y.2005-06. THE TRIBUNAL VIDE ORDER DT.23-01-2013, DISMISSED TH IS GROUND OF APPEAL OF THE REVENUE BY PLACING RELIANCE ON THE DE CISION OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF BHARAT EARTH MOVERS VS. CIT REPORTED AS 245 ITR 428. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 22 - : WE EXAMINED THE ORDER OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ITA NO.90/MDS/2011 (SUPRA). WE FIND TH AT THE ISSUE IN HAND IS IDENTICAL TO THE ONE ADJUDICATED BY THE TRI BUNAL IN ASSESSEES CASE IN THE APPEAL OF THE REVENUE FOR TH E AY.2005- 06. THE RELEVANT EXTRACT OF THE FINDINGS OF THE TR IBUNAL IN THE SAID APPEAL ARE UNDER: 4.3 THE NEXT GROUND OF THE REVENUE IS THAT THE PRO VISION MADE BY THE ASSESSEE FOR LIABILITIES OF EXPENDITURE WAS IN THE NATURE OF PROVISION AND SHOULD NOT HAVE BEEN ALLOWED BY TH E COMMISSIONER OF INCOME-TAX(APPEALS) AS AN EXPENDITU RE IN COMPUTING THE INCOME. THE ASSESSEE IS PROVIDING PR OVISION FOR EXPENDITURE INCURRED IN THE PREVIOUS YEAR ITSELF. THE AMOUNT WAS NOT PAID BY THE END OF THE YEAR AND IN CERTAIN CASES BILLS WERE NOT RECEIVED BY THE END OF THE YEAR AND IN SUC H CASES THE ASSESSEE IS MAKING A PROVISION FOR SUCH EXPENDITURE ALREADY INCURRED DURING THE RELEVANT PREVIOUS YEAR. IN THE COURSE OF THE NEXT PREVIOUS YEAR THE ASSESSEE IS MAKING THE PAYME NT AND THE DIFFERENTIAL AMOUNT, IF ANY, IS ADJUSTED IN ITS PRO FIT AND LOSS ACCOUNT. THIS IS A CONSISTENT PRACTICE FOLLOWED BY THE ASSESSEE. THE PROVISION FOR UNPAID EXPENSES IS NOT IN THE NAT URE OF CONTINGENT EXPENDITURE. IT IS A PROVISION MADE AGA INST ACTUAL EXPENDITURE. THEREFORE, THE DECISION OF THE HONBL E SUPREME COURT RENDERED IN THE CASE OF BHARAT EARTH MOVERS V S. CIT, 245 ITR 428, SQUARELY APPLIES HERE. THE GROUND OF THE REVENUE IS DISMISSED. ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 23 - : ACCORDINGLY, THIS GROUND OF APPEAL OF THE REVENUE I S DISMISSED FOR SIMILAR REASONS. 5.2 IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. 6. ITA NO.1922/MDS/2010 (AY.2006-07): IN THIS APPEAL, THE REVENUE HAS ASSAILED THE ORDER OF CIT(APPEALS), LTU CHENNAI DT. 31-08-2010 PASSED U/S .154 OF THE ACT. THE ASSESSEE HAD FILED MISCELLANEOUS PETITION FOR RECTIFICATION OF THE ORDER DT.12-03-2010 PASSED BY THE CIT(APPEALS), LTU, CHENNAI IN ITA NO.35/09-10/LTU(A ) FOR THE AY.2006-07. THE CIT(APPEALS) VIDE IMPUGNED ORDER HELD THAT THE ISSUE RAISED IN GROUND NO.13 OF THE APPEAL WAS NOT ADJUDICATED. THE CIT(APPEALS) WHILE DISPOSING OFF M ISCELLANEOUS PETITION OF THE ASSESSEE DECIDED THE SAID GROUND. THE RELEVANT EXTRACT OF THE FINDINGS OF THE CIT(APPEALS) ARE AS UNDER: 5.1 I HAVE CAREFULLY CONSIDERED THE PETITION BY TH E APPELLANT ON THIS ISSUE. I FIND THAT THIS GROUND ( GROUND NO.13) HAS NOT BEEN ADJUDICATED. SINCE SEPARATE EXPENSE H AS NOT BEEN CLAIMED BY THE APPELLANT FOR EARNING OF THE DI VIDEND ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 24 - : INCOME, IT MAY BE ACCEPTED THAT THE SAME WAS INCURR ED FROM THE BUSINESS EXPENSES. WHEN PART OF THE SAME IS DI SALLOWED, BUSINESS INCOME WOULD CORRESPONDINGLY INCREASE. TH E AO IS DIRECTED TO ALLOW ENHANCED DEDUCTION IN RESPECT OF THE ADDITIONAL INCOME DUE TO THE DISALLOWANCE OF THE EX PENSE. HE IS, HOWEVER, DIRECTED TO BIFURCATE THE SAME BETWEEN THE INCOME ELIGIBLE FOR DEDUCTION U/S.10A AND INCOME WH ICH IS NOT ELIGIBLE FOR DEDUCTION U/S.10A. THIS GROUND IS PART LY ALLOWED. 6.1 THE REVENUE HAS COME UP IN APPEAL AGAINST THE A FORESAID FINDINGS OF THE CIT(APPEALS). WE OBSERVE THAT THE ISSUE RAISED IN APPEAL HAS ALREADY BEEN ADJUDICATED BY US IN THE AP PEAL OF THE ASSESSEE IN ITA NO.751/MDS/2010 IN PARA NO. 4.2 HER EIN ABOVE. THEREFORE, FOR THE REASONS MENTIONED THEREIN, THE A PPEAL OF THE REVENUE IS DISMISSED. 7. TO SUM UP, ITA NOS. 1535/MDS/2009 AND 1536/MDS/2 009 OF THE REVENUE ARE ALLOWED. ITA NO.460/MDS/2010 OF TH E REVENUE IS PARTLY ALLOWED AND C.O.NO.27/MDS/2010 OF THE ASS ESSEE IS DISMISSED. THE APPEAL OF THE ASSESSEE IN ITA NO.75 1/MDS/2010 ITA. NOS. 1535, 1536/09 ITA 460 & CO.27/2010 ITA NOS. 751, 864 & 1922/MDS/2010 :- 25 - : IS PARTLY ALLOWED. THE APPEALS OF THE REVENUE IN I TA NOS.864/MDS/2010 AND 1922/MDS/2010 ARE DISMISSED. ORDER PRONOUNCED ON MONDAY, THE 09 TH JUNE, 2014 AT CHENNAI. SD/- SD/- ( . . . ) ( ! ) (DR. O.K. NARAYANAN) (VIKAS AWAS THY) / VICE PRESIDENT !' / JUDICIAL MEMBER #$ /CHENNAI, %! /DATED: 09 TH JUNE, 2014 TNMM !$& ' () *$) /COPY TO: 1. +, /APPELLANT 2. '-+, /RESPONDENT 3. . () /CIT(A) 4. . /CIT 5. )12 ' 3 /DR 6. 24 5 /GF
