M/s TATA SONS LTD., MUMBAI V. ACIT(A) CIR. 2(3), MUMBAI

ITA 4978/MUM/2004

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8383 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 19-08-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 16-06-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: B SENTHIL KUMAR
• Keywords: Business income; Double taxation relief; Cost of acquisition
• Section: 143(3); 195; 90

Judgement Text

ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, MUMBAI [CORAM : N V VASUDEVAN JM, AND PRAMOD KUMAR AM] ITA NO: 4978/MUM/04 ASSESSMENT YEAR: 2000-01 TATA SONS LIMITED .. APPELLANT BOMBAY HOUSE, HOMI MODY STREET, MUMBAI 400 001 VS. DEPUTY COMMISSIONER OF INCOME TAX ... RES PONDENT CIRCLE 2 (3), MUMBAI DINESH VYAS AND B TARAPOREWALA, FOR THE APPELLANT B SENTHILKUMAR, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. THIS APPEAL, FILED BY THE ASSESSEE, IS DIRECTED AGAINST CIT(A)S ORDER DATED 29 TH MARCH 2004 IN THE MATTER OF ASSESSMENT UNDER SECTI ON 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YE AR. 2. WHILE HEARING IN THIS APPEAL WAS CONCLUDED ON 11 TH NOVEMBER 2010, ALONGWITH ASSESSING OFFICERS CROSS APPEAL AGAINST THE SAME CIT(A)S ORDER WHICH HAS SINCE BEEN DISPOSED OF VIDE OUR ORDER D ATED 24 TH NOVEMBER 2010 ( NOW REPORTED AS DCIT VS TATA SONS LIMITED, 43 SOT 27 ) , THE MATTER WAS LISTED FOR CE0072TAIN CLARIFICATIONS, IN RESPE CT OF ASSESSEES CLAIM OF TAX CREDIT IN RESPECT OF STATE INCOME TAXES PAID IN THE USA AND CANADA, ON 4 TH FEBRUARY 2011. AS THIS ISSUE REGARDING TAX CREDIT FOR STATE INCOME ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 2 OF 11 TAXES IS INTRICATELY LINKED TO THE ISSUE REGARDING DEDUCTION OF TAXES PAID ABROAD, WHICH HAS BEEN ELABORATELY DEALT WITH IN OU R ORDER DATED 24 TH NOVEMBER 2010 ON THE CROSS APPEAL, AND FOR THE SAKE OF CONTINUITY, WE WILL TAKE UP THIS ISSUE FIRST. THE RELEVANT GROUND OF A PPEAL, I.E. GROUND NO. 4 IN ASSESSEES APPEAL, IS THAT THE CIT(A) ERRED IN N OT GRANTING DIT RELIEF IN RESPECT OF TAXES PAID IN VARIOUS STATES IN USA AND CANADA. 3. IN THE ORIGINAL HEARING, THE ASSESSEE HAD NOT P RESSED THE GROUND OF APPEAL SEEKING CREDIT IN RESPECT OF STATE INCOME TA X PAID IN UNITED STATES, BUT HAD CLAIMED DEDUCTION IN RESPECT OF THE SAME UN DER SECTION 37(1). THE REASON, FOR NOT PRESSING THIS GROUND OF APPEAL, WAS STATED TO BE THAT THE ASSESSEE WAS CONTENT WITH CIT(A)S HAVING GRANTED T HE DEDUCTION IN RESPECT OF THESE TAXES, AS THE CLAIM FOR TAX CREDIT WAS ANYWAY NOT ADMISSIBLE IN TERMS OF THE INDO US TAX TREATY. THE ASSESSING OFFICER WAS ALSO IN APPEAL BEFORE US IN RESPECT OF THE DEDUCTIO N HAVING BEEN GRANTED BY THE CIT(A). FOR THE DETAILED REASONS SET OUT IN OUR ORDER DATED 24 TH NOVEMBER, 2010, WE UPHELD THE GRIEVANCE OF THE ASSE SSING OFFICER AND HELD THAT DEDUCTIONS IN RESPECT OF ANY INCOME TAX P AID ABROAD, WHETHER STATE OR FEDERAL, WERE NOT ADMISSIBLE. ONE OF THE ARGUMENTS BEFORE US WAS THAT AT LEAST DEDUCTION IN RESPECT OF US AND CANADA STATE INCOME TAXES SHOULD BE ALLOWED, SINCE THE US AND CANADA STATE I NCOME TAX PAYMENTS DID NOT ENTITLE THE ASSESSEE TO ANY TAX CREDIT, AND EIT HER AN INCOME TAX PAYMENT IS TO BE ALLOWED AS DEDUCTION OR IT IS TO B E TAKEN INTO ACCOUNT FOR GIVING TAX CREDIT. WE WERE ALSO TAKEN THROUGH THE P ROVISIONS OF INDIA-USA AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION AND PREV ENTION OF FISCAL EVASION [ 187 ITR (STATUTE) 102 - HEREINAFTER REFE RRED TO AS INDO US TAX TREATY], TO SHOW THAT THE TAX CREDITS UNDER THE IND IA US TAX TREATY ARE RESTRICTED TO CREDITS IN RESPECT OF FEDERAL INCOME TAX PAID IN THE UNITED STATES. IT WAS ALSO SUBMITTED THAT UNDER THE INDIA CANADA D OUBLE TAXATION AVOIDANCE AGREEMENT, TAX CREDITS ARE ADMISSIBLE ONL Y IN RESPECT OF TAX PAID UNDER THE INCOME TAX ACT OF CANADA WHEREAS S TATE INCOME TAXES ARE ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 3 OF 11 LEVIED UNDER SEPARATE PROVINCIAL LEGISLATIONS. IT COULD NOT, ACCORDING TO THE LEARNED COUNSEL, RESULT IN A SITUATION IN WHICH AN INCOME TAX PAYMENT CANNOT HAVE ANY TAX IMPLICATION NEITHER AS A CHAR GE ON INCOME, NOR AS AN ALLOCATION OF INCOME. WHILE REJECTING THESE ARGUMEN TS, AND ALLOWING THE APPEAL OF THE ASSESSING OFFICER ON THIS ISSUE, WE H AD, INTER ALIA , OBSERVED AS FOLLOWS: 20. LEARNED COUNSEL HAS ALSO CONTENDED THAT IN ANY EVENT, WE MUST ALLOW DEDUCTION IN RESPECT OF STATE INCOME-TAXES PAID IN USA AND CANADA AS RELIEF IS NOT ADMISSIBLE IN RESPECT OF THE SAME IN RESPECTIVE TAX TREATIES. WE HAVE BEEN TAKEN THROUGH INDIA USA TAX TREATY TO POINT OUT THA T 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 RE LIEF IS ADMISSIBLE IN RESPECT OF STATE TAXES UNDER SECTION 90 OR SECTION 91, THESE T AXES WILL CONTINUE TO BE TAX DEDUCTIBLE, AND TO THAT EXTENT, DECISIONS OF THE COO RDINATE 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 HONBLE JURISDICTIONAL HIGH COURT IN LU BRIZOL INDIA LTD.S CASE (SUPRA), THERE IS ANOTHER INDEPENDENT REASON TO REJ ECT THIS CLAIM AS WELL. THE REASON IS THIS. IT IS ONLY ELEMENTARY THAT TAX TREA TIES OVERRIDE THE PROVISIONS OF THE INCOME-TAX ACT, 1961, ONLY TO THE EXTENT THE PR OVISIONS OF THE TAX TREATIES ARE BENEFICIAL TO THE ASSESSEE. IN OTHER WORDS, A PE RSON CANNOT BE WORSE OFF VIS- A-VIS THE PROVISIONS OF THE INCOME-TAX ACT, EVEN WH EN A TAX TREATY APPLIES IN HIS CASE. SECTION 90(2) STATES THAT EVEN IN RELATION TO THE ASSESSEE TO WHOM A TAX TREATY APPLIES THE PROVISIONS OF THIS ACT SHALL AP PLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. UNDOUBTEDLY, TITLE OF S ECTION 91 AS ALSO REFERENCE TO THE COUNTRIES WITH WHICH INDIA HAS ENTERED INTO AGR EEMENT, SUGGESTS THAT IT IS APPLICABLE ONLY IN THE CASES WHERE INDIA HAS NOT EN TERED INTO A DOUBLE TAXATION AVOIDANCE AGREEMENT WITH RESPECTIVE JURISDICTION, BU T THE SCHEME OF THE SECTION 91, READ ALONGWITH SECTION 90, DOES NOT REFLECT ANY SUCH LIMITATION, AND SECTION 91 IS THUS REQUIRED TO BE TREATED AS GENERAL IN APP LICATION. THE SCHEME OF THE INCOME-TAX ACT IS TO BE CONSIDERED IN ENTIRETY IN A HOLISTIC MANNER, AND EACH OF THE SECTION CANNOT BE CONSIDERED ON STANDALONE BASIS. IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT SO FAR AS SECTION 91 IS CONCERNE D, IT DOES NOT DISCRIMINATE BETWEEN TAXES LEVIED BY THE FEDERAL GOVERNMENTS AND TAXES LEVIED BY THE STATE GOVERNMENT. THE INCOME-TAX LEVIED BY DIFFERENT STAT ES IN USA USUALLY RANGES FROM 3 PER CENT TO 11 PER CENT, AND THE AGGREGATE I NCOME-TAX PAID BY THE ASSESSEE IN USA WILL RANGE FROM 38 PER CENT TO 46 P ER CENT. THEREFORE, ON THE FACTS OF THE PRESENT CASE AND BEARING IN MIND THE FA CT THAT THE FEDERAL INCOME- TAX IN USA AT THE RELEVANT POINT OF TIME WAS LESSER IN RATE AT 35 PER CENT VIS-A- VIS 38.5 PER CENT INCOME-TAX RATE APPLICABLE IN INDI A, THE ADMISSIBLE DOUBLE TAXATION RELIEF UNDER SECTION 91 WILL BE HIGHER THAN RELIEF UNDER THE TAX TREATY. IT WILL BE SO FOR THE REASON THAT STATE INCOME-TAX WILL ALSO BE ADDED TO INCOME-TAX ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 4 OF 11 ABROAD, AND THE AGGREGATE OF TAXES SO PAID WILL BE EL IGIBLE FOR TAX RELIEF - OF COURSE SUBJECT TO TAX RATE ON WHICH SUCH INCOME IS ACTUALLY TAXED IN INDIA. THE TAX RELIEF UNDER SECTION 91 THUS WORKS OUT TO AT LE AST 38 PER CENT, AS AGAINST TAX CREDIT OF ONLY 35 PER CENT ADMISSIBLE UNDER THE TAX TREATY. IN SUCH A SITUATION, THE ASSESSEE WILL BE ENTITLED TO RELIEF UNDER SECTIO N 91 IN RESPECT OF FEDERAL AS WELL AS STATE TAXES, AND THAT RELIEF BEING MORE BENEF ICIAL TO THE ASSESSEE VIS-A-VIS TAX CREDIT UNDER THE APPLICABLE TAX TREATY, THE PROV ISIONS OF SECTION 91 WILL APPLY TO STATE INCOME-TAXES AS WELL. THE STATE INCOME-TAX IS ALSO, THEREFORE, COVERED BY EXPLANATION 1 TO SECTION 40(A)(II), AND DEDUCTIO N CANNOT BE ALLOWED IN RESPECT OF THE SAME. FINALLY, IN VIEW OF HONBLE BOM BAY HIGH COURTS JUDGMENT IN S. INDER SINGH GILLS CASE (SUPRA), INCOME-TAX A BROAD CANNOT BE ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME AND THIS JUDGMEN T DOES NOT DISCRIMINATE BETWEEN FEDERAL AND STATE TAXES EITHER. INTERESTINGL Y, STATE INCOME-TAXES PAID IN USA, SUBJECT TO CERTAIN LIMITATIONS, ARE DEDUCTIBLE IN COMPUTATION OF INCOME FOR THE PURPOSES OF COMPUTING FEDERAL TAX LIABILITY IN U SA, BUT THAT FACTOR CANNOT INFLUENCE DEDUCTIBILITY OF THESE TAXES, PARTICULARLY IN THE LIGHT OF THE PROVISIONS OF EXPLANATION 1 TO SECTION 40(A)(II) AND IN THE LI GHT OF HONBLE BOMBAY HIGH COURTS JUDGMENT IN S. INDER SINGH GILLS CASE (SUP RA), IN COMPUTATION OF BUSINESS INCOME UNDER INDIAN INCOME-TAX ACT. FOR ALL THESE REASONS, WE ARE UNABLE TO UPHOLD THE PLEA OF THE ASSESSEE SEEKING D EDUCTION OF AT LEAST STATE INCOME-TAX PAID IN USA. 4. HAVING SO HELD THAT DEDUCTION IN RESPECT OF STAT E INCOME TAX PAID IS NOT ADMISSIBLE, WHEN WE TOOK UP THE APPEAL OF THE A SSESSEE AND NOTICED THAT THE ASSESSEE HAS NOT PRESSED GRIEVANCE AGAINST TAX CREDIT IN RESPECT OF STATE INCOME TAX PAID IN USA AND CANADA, FOR THE STATED REASON THAT THE SAME IS NOT ADMISSIBLE IN TERMS OF THE INDO US AND INDO CANADA TAX TREATY PROVISIONS, WE DEEMED IT APPROPRIATE TO ONCE AGAIN HEAR THE PARTIES ON THIS ISSUE. IN OUR CONSIDERED VIEW, IT IS INDEED AN INCONGRUOUS POSITION THAT PAYMENT OF STATE INCOME TAXES IN US AND CANADA ARE NOT ALLOWED DEDUCTION AS THESE ARE TREATED AS IN THE NATURE OF TAXES ON INCOME, IN TERMS OF THE PROVISIONS OF DOMESTIC TAX LAW IN INDI A, AND THESE PAYMENTS ARE ALSO NOT BEING TAKEN INTO ACCOUNT FOR GRANTING CREDIT FOR TAXES PAID ABROAD BY THE ASSESSEE, AS ONLY FEDERAL INCOME TAX IS ELIGIBLE FOR TAX CREDIT IN TERMS OF THE INDO US AND INDO CANADA TAX TREATY. IF THIS APPROACH IS ADOPTED, THE ASSESSEE DOES NOT GET A DEDUCTION FOR STATE TAXES SO PAID ABROAD, NOR DOES HE GET THE TAX CREDIT FOR THE SAME , AND IF THESE TWO PROPOSITIONS ARE CORRECT, THERE IS CLEARLY AN INHER ENT CONTRADICTION IN ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 5 OF 11 THESE PROPOSITIONS ON TAX TREATMENT FOR STATE INCOM E TAXES PAID ABROAD. THERE CANNOT OBVIOUSLY BE A TAX PAYMENT WHICH IS NE ITHER TREATED AS ADMISSIBLE EXPENDITURE, BECAUSE IT IS TREATED AS AN INCOME TAX, NOR IS IT TAKEN INTO ACCOUNT FOR TAX CREDITS, BECAUSE IT IS N OT TO BE TREATED AS INCOME TAX. HOWEVER, AS WE HAVE OBSERVED IN OUR ORDER ON THE CROSS APPEAL, EXTRACTS FROM WHICH ARE REPRODUCED IN THE PRECEDING PARAGRAPH, IT IS INCORRECT TO PROCEED ON THE ASSUMPTION THAT STATE I NCOME TAX PAID IN USA, OR FOR THAT PURPOSE PAID IN CANADA, CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF COMPUTING ADMISSIBLE TAX CREDITS. IT IS SO FOR THE ELEMENTARY REASON THAT THE PROVISIONS OF A TAX TREATY, BASED O N WHICH TAX CREDITS ARE SAID TO BE INADMISSIBLE, CANNOT BE PRESSED INTO SER VICE TO DECLINE A BENEFIT TO THE ASSESSEE WHICH IS OTHERWISE AVAILABLE TO HIM , EVEN IN THE ABSENCE OF SUCH A TAX TREATY, UNDER THE PROVISIONS OF THE INCO ME TAX ACT. 5. EVEN AS WE HAVE HELD THAT, IN PRINCIPLE, STATE INCOME TAXES PAID IN USA ARE ELIGIBLE FOR BEING TAKEN INTO ACCOUNT FOR T HE PURPOSE OF COMPUTING ADMISSIBLE TAX CREDIT UNDER SECTION 91, WE ARE ALIV E TO THE FACT THAT SECTION 91 REFERS TO A SITUATION IN WHICH THE ASSESSEE HAS PAID TAX IN ANY COUNTRY WITH WHICH THERE IS NO AGREEMENT UNDER SECTION 90 FOR THE RELIEF OR AVOIDANCE OF DOUBLE TAXATION AND THAT THERE IS INDEED AN AGREEMENT UNDER SECTION 90 WITH UNITED STATES OF AMERICA, AS ALSO WITH CANADA. IF WE ADOPT A LITERAL INTERPRETATION OF THIS PROVISION , AND BEARING IN MIND THE UNDISPUTED POSITION THAT TAX CREDIT PROVISIONS UNDER SECTION 91 ARE MORE BENEFICIAL TO THE ASSESSEE VIS--VIS THE TAX C REDIT PROVISIONS IN RELATED TAX TREATIES INASMUCH AS WHILE SECTION 91 P ERMITS CREDIT FOR ALL INCOME TAXES PAID ABROAD WHETHER STATE OR FEDERAL , RELEVANT TAX TREATIES PERMIT CREDITS IN RESPECT OF ONLY FEDERAL TAXES, IT WILL RESULT IN A SITUATION THAT AN ASSESSEE WILL BE WORSE OFF AS A R ESULT OF THE PROVISIONS OF TAX TREATIES. THAT CERTAINLY IS NOT PERMISSIBLE UND ER THE SCHEME OF THE INCOME TAX ACT. CIRCULAR 621 DATED 19-12-1991 [(19 92) 195 ITR (STATUTES) 154] ISSUED BY THE CENTRAL BOARD OF DIRE CT TAXES, WHICH IS BINDING ON THE ASSESSING OFFICER UNDER SECTION 119( 2) OF THE ACT, INTER ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 6 OF 11 ALIA , OBSERVES THAT SINCE THE TAX TREATIES ARE INTEND ED TO GRANT RELIEF AND NOT PUT RESIDENTS OF A CONTRACTING STATE AT A DISAD VANTAGE VIS-A-VIS OTHER TAXPAYERS, SECTION 90 OF THE INCOME-TAX ACT HAS BEE N AMENDED TO CLARIFY ANY BENEFICIAL PROVISION IN THE LAW WILL NOT BE DEN IED TO A RESIDENT OF A CONTRACTING COUNTRY MERELY BECAUSE CORRESPONDING PR OVISION IN A TAX TREATY IS LESS BENEFICIAL. IN THE CASE BEFORE US, HOWEVER, TAX CREDIT PROVISIONS IN INDO US TAX TREATY ARE ADMITTEDLY LES S ADVANTAGEOUS TO THE ASSESSEE, BUT JUST BECAUSE THERE IS A TAX TREATY BE TWEEN INDIA AND USA, THE BENEFITS OF THE DOMESTIC LAW PROVISIONS ARE BEI NG DECLINED TO THE ASSESSEE. THAT IS AN INTERPRETATION WHICH LEADS TO ABSURDITY AND CALLS FOR AN INTERPRETATION HARMONIOUS WITH THE SCHEME OF THE INCOME TAX ACT. IN CASE OF ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND THE ACT, THE PROVISIONS OF THE AGREEMENT WOULD PREVAIL OVER THE PROVISIONS OF THE ACT, AS IS ALSO CLEAR FROM THE PROVISIONS OF SECTIO N 90(2) OF THE ACT. SECTION 90(2) MAKES IT CLEAR THAT WHERE THE CENTRA L GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF AN Y COUNTRY OUTSIDE INDIA FOR GRANTING RELIEF OF TAX, OR FOR AVOIDANCE OF DOUBLE TAXATION, THEN IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THE ACT SHALL APPLY TO THE EXTENT THE Y ARE MORE BENEFICIAL TO THAT ASSESSEE MEANING THEREBY THAT THE ACT GETS MO DIFIED IN REGARD TO THE ASSESSEE IN SO FAR AS THE AGREEMENT IS CONCERNE D IF IT FALLS WITHIN THE CATEGORY STATED THEREIN. IT WOULD THUS APPEAR THAT THE TREATY OVERRIDE IS ONLY RESTRICTED TO THE EXTENT IT IS BENEFICIAL TO A TAXPAYER. IN OTHER WORDS, THE FACT THAT A TAXPAYER IS ENTITLED TO MAKE A PART ICULAR CLAIM, IN ACCORDANCE WITH A TAX TREATY PROVISIONS, DOES NOT D ISENTITLE HIM TO MAKE THE CLAIM IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. IN THIS VIEW OF THE MATTER, AND FURTHER TO THE OBSERVATIONS MADE BY US IN OUR ORDER ON THE CROSS APPEAL, IN OUR CONSIDERED VIEW, THE PROVISION S OF SECTION 91 ARE TO BE TREATED AS GENERAL IN APPLICATION AND THESE PROV ISIONS CAN YIELD TO THE TREATY PROVISIONS ONLY TO THE EXTENT THE PROVISIONS OF THE TREATY ARE BENEFICIAL TO THE ASSESSEE; THAT IS NOT THE CASE SO FAR AS QUESTION OF TAX CREDITS IN RESPECT OF STATE INCOME TAXES PAID IN US A ARE CONCERNED. ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 7 OF 11 ACCORDINGLY, EVEN THOUGH THE ASSESSEE IS COVERED BY THE SCOPE OF INDIA US AND INDIA CANADA TAX TREATIES, SO FAR AS TAX CREDIT S IN RESPECT OF TAXES PAID IN THESE COUNTRIES ARE CONCERNED, THE PROVISI ONS OF SECTION 91, BEING BENEFICIAL TO THE ASSESSEE, HOLD THE FIELD. AS SECT ION 91 DOES NOT DISCRIMINATE BETWEEN STATE AND FEDERAL TAXES, AND I N EFFECT PROVIDES FOR BOTH THESE TYPES OF INCOME TAXES TO BE TAKEN INTO A CCOUNT FOR THE PURPOSE OF TAX CREDITS AGAINST INDIAN INCOME TAX LIABILITY, THE ASSESSEE IS, IN PRINCIPLE, ENTITLED TO TAX CREDITS IN RESPECT OF TH E SAME. OF COURSE, AS IS THE SCHEME OF TAX CREDIT ENVISAGED IN SECTION 91, T AX CREDIT IN RESPECT OF FOREIGN INCOME TAX IS RESTRICTED TO ACTUAL INCOME T AX LIABILITY IN INDIA, IN RESPECT OF INCOME ON WHICH TAXES HAVE BEEN SO PAID ABROAD, 6. DURING THE COURSE OF HEARING ON 4 TH FEBRUARY 2011, LEARNED REPRESENTATIVE, APPEARING FOR THE ASSESSEE, FAIRLY ACCEPTS THAT THE TAX CREDIT, FOR STATE INCOME TAXES PAID IN USA AND CANA DA, WILL NOT BE OF ANY USE TO THE ASSESSEE SINCE THE TAX CREDIT AVAILABLE TO THE ASSESSEE, EVEN WITHOUT TAKING INTO ACCOUNT THE STATE INCOME TAXES PAID IN USA AND CANADA, ARE MORE THAN ASSESSEES TAX LIABILITY IN R ESPECT OF SUCH FOREIGN INCOME. IT IS FOR THIS REASON, ACCORDING TO HIM, TH AT THE ASSESSEE DOES NOT WISH TO PURSUE THE CLAIM FOR TAX CREDIT IN RESPECT OF STATE INCOME TAXES PAID IN USA AND CANADA. IN THIS VIEW OF THE MATTE R, THE GRIEVANCE RAISED BY THE ASSESSEE IS WHOLLY ACADEMIC AND INFRUCTUOUS ON THE FACTS OF THIS CASE, AND IS DISMISSED AS SUCH. 7. GROUND NO. 4 IS THUS DISMISSED. 8. COMING BACK TO GROUND NO. 1, I.E. REGARDING ALLO CATION OF INTEREST EXPENSES TO DIVIDEND INCOME AND REGARDING NOT PERMI TTING CAPITALIZATION OF SUCH EXPENSES TO ENHANCE COST OF ACQUISITION OF SHARES, THESE GROUNDS OF APPEAL WERE NOT PRESSED BY THE ASSESSEE. THE SAM E ARE ACCORDINGLY DISMISSED FOR WANT OF PROSECUTION. ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 8 OF 11 9. GROUND NO. 1 IS ALSO DISMISSED. 10. IN GROUND NO. 2, THE ASSESSEE HAS RAISED A GRIE VANCE AGAINST CIT(A)S NOT ACCEPTING THE ASSESSEES CONTENTION TO THE EFFECT THAT FOREIGN DIVIDENDS ARE LIABLE TO BE TAXED, ON NET BASIS, AFT ER DEDUCTING FOREIGN TAXES WITHHELD ABROAD. 11. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE I SSUE IS COVERED IN FAVOUR OF THE ASSESSEE, BY HONBLE BOMBAY HIGH COUR TS JUDGMENT IN THE CASE OF CIT VS AMBALAL KILACHAND (210 ITR 844). IN THE SAID JUDGMENT, THEIR LORDSHIPS HAVE, INTER ALIA, OBSERVED AS FOLLO WS: .WHAT, THEREFORE, ACCRUES TO AN ASSESSEE IN RESPE CT OF SHARES HELD BY HIM IN THE UNITED KINGDOM IS THE DIVIDEND A S ACTUALLY DISTRIBUTED TO HIM. THE AMOUNT INITIALLY AVAILABLE FOR DISTRIBUTION BY THE U.K. COMPANY CANNOT BE CONSIDER ED AS INCOME ACCRUING TO THE ASSESSEE, BECAUSE THE ASSESS EE DOES NOT HAVE ANY RIGHT TO RECEIVE THE AMOUNT SO INITIALLY D ECLARED. HE DOES NOT HAVE ANY RIGHT TO CLAIM ANY CREDIT FOR THE TAX WHICH IS DEDUCTED ON THAT AMOUNT. THEREFORE, UNDER NO CIRCUM STANCES CAN HE CLAIM THAT THE GROSS AMOUNT AVAILABLE FOR DI STRIBUTION HAS ACCRUED TO HIM. THE COMPANY IN THE UNITED KINGD OM IS LIABLE TO PAY CERTAIN TAX ON THAT AMOUNT BEFORE THE MONEY GOES TO THE HANDS OF ITS SHAREHOLDERS. A SHAREHOLDER OUT SIDE THE UNITED KINGDOM CANNOT CLAIM ANY CREDIT FOR THE TAX PAID BY THE COMPANY. THEREFORE, THE ONLY ENTITLEMENT OF A SHARE HOLDER OUTSIDE THE UNITED KINGDOM IS TO RECEIVE DIVIDEND A S REDUCED BY THE DEDUCTION OF THE CORPORATION TAX .. 12. RESPECTFULLY FOLLOWING THE ESTEEMED VIEWS OF HO NBLE JURISDICTIONAL HIGH COURT, WE UPHOLD THE GRIEVANCE OF THE ASSESSE E IN PRINCIPLE AND DIRECT THE ASSESSING OFFICER TO GRANT RELIEF IN ACC ORDANCE WITH THE PRINCIPLES LAID DOWN IN AMBALAL KILACHANDS CASE (S UPRA). 13. GROUND NO. 2 IS ALLOWED IN THE TERMS INDICATED ABOVE. ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 9 OF 11 14. IN GROUND NO. 3, THE ASSESSEE IS AGGRIEVED THAT THE CIT(A) ERRED IN CONFIRMING THE EXCLUSION ON ACCOUNT OF MAINTENANCE OF SOFTWARE AND TECHNICAL SUPPORT, FROM THE EXPORT TURNOVER, TO ARR IVE AT THE DEDUCTION UNDER SECTION 80 HHE. 15. THE SHORT REASON FOR WHICH RECEIPTS IN RESPECT OF SOFTWARE MAINTENANCE AND TECHNICAL SUPPORT HAVE BEEN NOT BEE N TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTIO N 80 HHE WAS THAT DEDUCTION UNDER SECTION 80 HHE IS RESTRICTED TO REC EIPTS IN RESPECT OF DEVELOPMENT AND PRODUCTION OF SOFTWARE. THE CIT(A ) HAS APPROVED THE STAND SO TAKEN BY THE ASSESSING OFFICER. THE ASSESS EE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 16. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 17. WE FIND THAT THE CONNOTATIONS OF SOFTWARE MAI NTENANCE ARE QUITE DISTINCT AND SEPARATE IN SCOPE THAN MAINTENANCE PER SE . IT IS IN VIEW OF THIS DISTINCTION THAT THE COORDINATE BENCH, IN THE CASE OF DIRECTION SOFTWARE SOLUTIONS VS ITO (28 SOT 35 URO), HAS OBSE RVED AS FOLLOWS : 7.2 IN THE SOFTWARE DEVELOPMENT LIFE CYCLE, MAINTEN ANCE IS KNOWN AS LAST PHASE OF DEVELOPMENT AND, THEREFORE, IT IS INHERENT PART OF SUCH DEVELOPMENT. IT IS NECESSARY TO DISTINGUISH SOFTWARE MAINTENANCE FROM MAINTENANC E AS UNDERSTOOD IN COMMON PARLANCE, I.E. MAINTENANCE OF A TANGIBLE ASSET LIKE PLANT AND MACHINERY. ICAI IN ITS PUBLICA TION INFORMATION SYSTEM AUDIT REFERENCE BOOK MODULES 4 TO 7 WHICH DESCRIBE THE RECOMMENDED STEPS FOR SYSTEMS DEVELOPMENT METHODOLOGY, DEFINES, SYSTEM MAINTENAN CE, AS THE LAST PART OF THE SYSTEM DEVELOPMENT LIFE CYCLE, WHICH IS PRECEDED BY FEASIBILITY STUDY, REQUIREMENT DEFINITI ON, SOFTWARE ACQUISITION, PROGRAMMING, TESTING AND IMPLEMENTATIO N. IT IS CLEARLY STATED HEREIN THAT MAINTENANCE IS NOTHING BUT ONGOING DEVELOPMENT WHICH CONTINUES TILL THE SYSTEM IS REPL ACED OR ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 10 OF 11 DISCONTINUED. WHILE THE TERM MAINTENANCE IN RELAT ION TO A TANGIBLE ASSET WOULD MEAN THOSE ACTIVITIES WHICH AR E REQUIRED TO KEEP IT USEFUL, MAINTENANCE OF A SOFTWARE IS A PART OF ITS DEVELOPMENT FOR ENHANCING ITS CAPABILITIES AND CORR ECTING ERRORS. IN CHAPTER XXII OF THE SAME REFERENCE BOOK, WHICH DISCUSSES ALTERNATIVE SYSTEMS DEVELOPMENT METHODOLO GIES LIKE DATA ORIENTED SYSTEM DEVELOPMENT, OBJECT ORIENTED S YSTEM DEVELOPMENT, PROTOTYPING, RAPID APPLICATION DEVELOP MENT, RE- ENGINEERING, REVERSE ENGINEERING AND STRUCTURED ANA LYSIS, IT IS STATED THAT A SYSTEM IS NEVER STATIC AND SYSTEM MAI NTENANCE IS A PART OF ONGOING DEVELOPMENT. INFORMATION SYSTEMS AUDIT AND CONTROL ASSOCIATION OF USA, WHICH IS CONSIDERED THE TOPMOST PROFESSIONALLY RECOGNIZED BODY, PRESCRIBING STANDAR DS FOR SYSTEMS AUDIT AND AUDIT OF BUSINESS APPLICATION SOF TWARE DEVELOPMENT, HAS IN ITS 2004 CISA REVIEW MANUAL, IN CHARTER 6 UNDER THE HEADING SYSTEM CHANGE PROCEDURE AND PROG RAM MIGRATION PROCESS GIVEN AS FOLLOWS : FOLLOWING TH E IMPLEMENTATION AND STABILIZATION OF A SYSTEM, IT EN TERS INTO THE ONGOING DEVELOPMENT OR MAINTENANCE STAGE. THUS ONG OING DEVELOPMENT OF A SOFTWARE SYSTEM IS NOTHING BUT ITS MAINTENANCE. OR IN OTHER WORDS, IN THE WORLD OF C OMPUTER SYSTEMS AND SOFTWARE, MAINTENANCE IS A PART OF ONGO ING DEVELOPMENT. MAINTENANCE OF SOFTWARE, ESPECIALLY WH EN IT INVOLVES ERP MODULES, OR BOUGHT OUT SOFTWARES WOUL D REQUIRE ROUTINES AND SUB-PROGRAMS FOR INTERFACING IT WITH O THER LEGACY SYSTEMS AND ALSO FOR MIGRATION FROM OTHER LEGACY SY STEMS TO NEW SYSTEM AND BUILDING IN NEW FUNCTIONALITIES, WHI CH COULD VARY FROM USER TO ANOTHER USER. 7.3 THUS, EVERY MAINTENANCE OR MODIFICATION OR BUG REPAIRING WOULD REQUIRE INDEPENDENT CODE AND EACH SUCH INDEPE NDENT CODE/PROCEDURE INCLUDING CODES WRITTEN OF INTERFACI NG AND SPECIFIC PROBLEM SOLVING RELATING TO LEGACY PROGRAM ME WOULD STILL BE SOFTWARES AND NOTHING ELSE. THIS BEING TH E CASE AND TAKING THE TOTALITY OF THE SERVICES RENDERED BY THE ASSESSEE, AS CAN BE MADE OUT FROM THE DESCRIPTION OF WORK GIVEN IN THE AGREEMENT, WHICH INTER ALIA MENTIONED CORRECTIONS OF BUGS IN OVISS, CUSTOMIZING PROGRAMMES DEVELOPED, CODE CHANG E IN OVISS WOULD ALL BE NOTHING BUT MANUFACTURE/PRODUCTI ON OF COMPUTER SOFTWARE. THIS BEING THE CASE, WE ARE OF T HE OPINION, THAT FOR THE EXPORT THEREOF, ASSESSEE WOULD BE VERY MUCH ELIGIBLE FOR DEDUCTION UNDER SECTION 10A. 18. IN THIS VIEW OF THE MATTER, AND HAVING NOTED TH AT THERE IS NO DIRECT DECISION TO THE CONTRARY, WE DIRECT THE ASSESSING O FFICER TO TAKE RECEIPTS, IN ITA NO . 4978 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 11 OF 11 RESPECT OF SOFTWARE MAINTENANCE, INTO ACCOUNT FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80 HHE. TO THIS E XTENT, GRIEVANCE OF THE ASSESSEE IS UPHELD. 19. HOWEVER, AS FAR AS RECEIPTS FOR TECHNICAL SUPPO RT SERVICES ARE CONCERNED, WE UPHOLD THE ACTION OF THE AUTHORITIES BELOW, BUT, IN VIEW OF THE SPECIAL BENCH DECISION IN THE CASE OF ITO VS SA K SOFT LTD (121 TTJ 865), DIRECT THE ASSESSING OFFICER TO EXCLUDE THESE RECEIPTS, BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR, RESPECTIVELY, IN THE FORMULA. THE ASSESSEE WILL GET THE RELIEF ACCORDINGLY. 20. GROUND NO. 3 IS THUS PARTLY ALLOWED IN THE TERM S INDICATED ABOVE. 21. IN THE RESULT, APPEAL IS PARTLY ALLOWED. PRONOU NCED IN THE OPEN COURT TODAY ON 23 RD DAY OF FEBRUARY, 2011 SD/- SD/- (N V VASUDEVAN) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTAN T MEMBER MUMBAI; 23RD _ DAY OF FEBRUARY, 2011. COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER - CITY-II , MUMBAI 4. COMMISSIONER (APPEALS) - XXXIII , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, D BENCH, MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC . ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI