DEPUTY COMMSSIONER OF INCOME-TAX,, PUNE vs. IGATE GLOBAL SOLUTIONS LTD.,, PUNE

आदेश / ORDER PER R.S.SYAL, VP :

These two cross appeals – one by the assessee and the other by

the Revenue – are directed against the order passed by the CIT (A)-

IV, Bangalore on 08-11-2013 in relation to the assessment year

2009-10.

Indian company, is a subsidiary of iGate Incorporated, USA. It acts

as a single source broad range of information technology

applications, solutions and services that include client/server

position and development. The assessment was completed by the

AO applying the provisions of section 115JB since the amount of

tax payable under such provision was more than the amount of tax

computed under the normal provisions.

which is against the confirmation of disallowance of Rs.90,59,117/-

made u/s.40(a)(ia) of the Income-tax Act, 1961 (hereinafter also

called `the Act’) for failure to deduct tax at source from payment of

software expenses.

3 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

deduction of Rs.90,59,117/- towards software expenses. No

deduction of tax at source was made on payment made to a resident

payee. Relying on the judgment in the case of CIT Vs. Samsung

Electronics Co. Ltd. & Ors., the AO made the disallowance u/s

40(a)(ia) of the Act, which came to be countenanced in the first

appeal. The assessee is aggrieved by the sustenance of such

disallowance.

material on record. The assessee paid Rs.90.59 lakh to an Indian

party towards Annual license fee for renewal of Microsoft software

license, which was claimed as revenue expenditure. The revenue

nature of the expenditure was not disputed by the AO. However, the

authorities below held such payment to be in the nature of Royalty

requiring deduction of tax at source and in the absence of any tax

withholding by the assessee, the disallowance was attracted

u/s.40(a)(ia) of the Act.

assessee, a resident-payer, to a resident-payee towards annual

license fee paid for the renewal of Microsoft software is in the

4 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

nature of royalty? In CIT & Ors Vs. Samsung Electronics Company

Ltd. & Ors (2009) 227 CTR 335 (Kar.) the assessee, a branch of

Samsung Electronics Co. Ltd., Korea, was engaged in the

development, manufacture and export of software for use by its

parent company, i.e., Samsung Electronics Co. Ltd., Korea. In the

assessment year 1999-2000, the assessee imported software

products of Rs.2,28,960/- from Tektronix Inc., USA. Similarly,

during the other two years, the assessee imported software, namely,

Telelogic Tau TTCN Suite, which was readily available in the

market. No deduction of tax at source was done as such payments,

in the opinion of the assessee, made to the foreign companies could

not be treated as royalty as per the provision of section 9(1)(vi) read

with the respective Double Taxation Avoidance Agreements. The

contention of the assessee was not accepted by the ITO (TDS), who

held that the assessee was a defaulter for not deducting tax at source

from the remittances made for purchase of the software as the

provisions of section 9(1)(vi) of the Act were attracted and the

payment made by the assessee was in the nature of royalty on which

tax ought to have been deducted. The AO placed reliance on the

definition of the term `royalty’ as mentioned in the DTAA and

accordingly held that the assessee was a defaulter within the

5 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

meaning of section 201(1) of the Act. The first appeal failed but the

Tribunal granted relief by holding that payment was not in the

nature of royalty for the reason that it did not partake of the

character of royalty in terms of the DTAA. When the matter came

up before the Hon’ble High Court, it held that a resident payer who

had not filed an application u/s. 195(2) of the Act cannot later on

contend that no part of the payment resulted in any taxable income

in the hands of non-resident recipient. In Para 69 of the judgment,

the Hon’ble High Court also held that : “The assessing authority and

the first appellate authority while are correct to the extent of holding

that there was an obligation on the part of the resident payers in

effecting a deduction from out of the payments made by them in

favour of the non-resident recipients even as consideration for

acquiring what is known as 'shrink wrapped software' or what is

sought to be described as 'ready to sell, off the shelf, packaged

software product’….’. The assessee approached the Hon’ble

Supreme Court, which remitted the matter to the Hon’ble High

Court for rendering a fresh decision. After considering all the

aspects, the Hon’ble Karnataka High Court in the second round in

CIT Vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar.)

has held that the assessee having imported shrink wrapped

6 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

software/off-the-shelf software from non-resident companies under

software licence agreement whereby licence is granted to the

assessee for taking copy of the software, store the same in the hard

disk of the designated computer and to take a back up copy while

the ownership of the copyright continues to vest in the supplier,

there is only a transfer of right to use copy of the software for the

internal business as per the terms and conditions of the agreement

and, therefore, the payment made to the suppliers of the software

constitutes 'royalty' within the meaning of Article 12(3) of the Indo-

US DTAA and also as per the provisions of section 9(1)(vi).

Consequently, the assessee was under held to be under obligation to

deduct tax at source under section 195 from the amount paid to the

foreign software suppliers. Similar view has been reiterated by the

Hon’ble Karnataka High Court in CIT (IT) Vs. Sunray Computers

(P) Ltd. (2012) 348 ITR 196 (Karn) by holding that the payment

made for supply of software by L-Technologies, USA was Royalty

and liable to be taxed in India u/s.9(1)(vi) read with the DTAA

between India and USA. In view of the above precedents, it is clear

that the Hon’ble Karnataka High Court has taken a view that the

purchase of off-the-shelf software under software licence agreement

results in only a transfer of right to use copy of the software and,

7 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

hence the payment made to the supplier of the software constitutes

'royalty', inter alia, as per the provisions of s. 9(1)(vi). Failure to

deduct tax at source has been held to attract the legal consequences

flowing therefrom.

Ericsson A.B. (2012) 343 ITR 0470 (Del) has held that in order to

qualify as royalty payment within the meaning of section 9(1)(vi)

and particularly cl. (v) of Expln. 2 thereto, it is necessary to

establish that the cellular operator, by making such payment,

obtained all or any of the copyright rights of such literary work. It

held that a distinction was required to be made between the

acquisition of a "copyright right" and a "copyrighted article".

Software supplied by the assessee, being, an integral part of the

GSM mobile telephone system, incapable of independent use and

there being nothing to establish that the cellular operator had

obtained any copyright of such software, it held that no part of the

payment received by the assessee under the supply agreement could

be classified as royalty within the meaning of section 9(1)(vi) of the

Act or under the relevant clause of the DTAA.

8 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

assessee, an international software marketing and development

company opened a branch office in India and imported package in

the form of CDs customized according to requirements of

customers. The AO treated entire amount received by the assessee

for transfer of software as well as other incidental services in nature

of royalty and further held that since royalty income had

accrued/arisen to assessee company through its PE in the form of

branch office in India, the same was chargeable to tax in India as

per Article 13 of DTAA. The CIT(A) concurred with the AO. The

ITAT held that such income was not liable to be taxed as royalty.

The Hon’ble High Court held that what has been transferred is not

copyright or right to use copyright but a limited right to use

copyrighted material and hence did not give rise to any royalty

income. It noted that the licensee had no right to deal with the

product just as an owner would be in a position to do and further

there was no transfer of any right in respect of copyright by assessee

and it was a case of mere transfer of a copyrighted article. As the

payment was for a copyrighted article and represented purchase

price of an article, it held that the same could not be considered as

9 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

royalty either under the Act or the DTAA. Similar view has been

reiterated in CIT Vs. ZTE Corporation (2017) 392 ITR 890 (Delhi).

preceding paragraphs that there is a cleavage of opinion amongst the

High Courts. Whereas the Hon’ble Karnataka High Court has held

that the purchase of off-the-shelf software under software licence

agreement is a payment in the nature 'royalty' to the supplier, inter

alia, under the provisions of section 9(1)(vi) of the Act, the Hon’ble

Delhi High Court has held it to be in the nature of business income

of the recipient and not royalty. The matter is sub judice before the

Hon’ble Supreme Court waiting finality.

been transferred from Bangalore to Pune, it cannot be subjected to

the jurisdiction of the Hon’ble Karnataka High Court. In this

context, it is noted that the assessee filed its return and the

assessment was completed u/s.143(3) of the Act by the Addl. CIT,

Range-11, Bangalore. The ld. first appellate authority, who decided

the appeal of the assessee, is CIT(A)-IV, Bangalore. The assessee

preferred second appeal before the Bangalore Benches of the

Tribunal. Subsequently, a prayer was made for transfer of appeals

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from Bangalore to Pune, which request was accepted and the

appeals were transferred to Pune. Under these circumstances, a

question arises as to which Hon’ble High Court exercises

jurisdiction over the assessee for the year under consideration.

decided by the office of the Assessing Officer as has been held by

Hon’ble Delhi High Court in Suresh Desai & Associates Vs. CIT

(1998) 230 ITR 912 (Delhi). In that case, the assessment was made

at Bombay, the appeal against which was also decided by the

CIT(A), Bombay. Both the parties preferred appeals to Tribunal,

Delhi, which were disposed of by the Delhi Tribunal. Rejecting the

contention of the assessee for hearing by it, the Hon’ble Delhi High

Court held that jurisdiction under s. 256 vested in High Court of

Bombay and not the High Court of Delhi. It further observed that

transfer of assessment cases of the assessee under section 127(1) for

some years other than the year in question has no relevance or

bearing on territorial jurisdictional competence. In deciding so, it

was also observed that the: `decisions of the High Courts are

binding on the subordinate Courts and authorities or Tribunal under

its superintendence throughout the territory in relation to which it

11 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

exercises jurisdiction. The binding authority does not extend beyond

its territorial jurisdiction .… the questions of law arising for

decision in a reference should be determined by the High Court

which exercises territorial jurisdiction over the situs of the AO. Else

it would result in serious anomalies. An assessee affected by an

assessment order at Bombay may invoke the jurisdiction of the

Delhi High Court to take advantage of the law laid down by it and

suited to him and thus get rid of the law laid down to the contrary

by the High Court of Bombay not suited to the assessee. This cannot

be allowed.’

112 (P&H) was based in Gujarat whose assessment order was

passed by the ITO, Surat. The first appeal was also filed before the

CIT(A), Surat. Further appeal was filed by the assessee before the

Tribunal at Ahmedabad. Thereafter, when the registered office of

the assessee was transferred to Amritsar, the appeal also got

transferred. The assessee preferred appeal against the order passed

by the Tribunal before the Hon’ble Punjab & Haryana High Court.

The Hon’ble High Court held that since initial process of

assessment was started at Surat and final assessment was framed by

12 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

AO at Surat, it lacked territorial jurisdiction to adjudicate the matter.

Similar view has been taken by the Hon’ble Punjab & Haryana

High Court in CIT Vs. Tibetan Childrens Village (2016) 388 ITR

126 (P&H) and the Hon’ble Allahabad High Court in CIT (E) Vs.

Yamuna Expressway Industrial Development Authority (2017) 395

ITR 18 (Allahabad) holding that the jurisdiction of the Bench will

be determined not by the place of business or residence of the

assessee but by the location of the office of the AO.

assessee is subject to the jurisdiction of the Hon’ble Karnataka High

Court as the assessment order was passed by the Addl.CIT, Range-

11, Bangalore. The contrary contention of the ld. AR in this regard

is, therefore, repelled.

between the Hon’ble Karnataka High Court por una parte and the

Hon’ble Delhi High Court por otra parte on the point in

controversy before us. Having regard to the fact that the assessee is

subject to the jurisdiction of the Hon’ble Karnataka High Court, it

will be governed by the law laid down by its jurisdictional High

Court as per Article 226 of the Constitution of India

13 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

notwithstanding a contrary favourable view of the Hon’ble Delhi

High Court, which even this Bench of the Pune Tribunal has

followed in some cases not falling within the jurisdiction of the

Hon’ble Karnataka High Court. Ex consequenti, the assessee will

have to be subjected to the view canvassed by the Hon’ble

Karnataka jurisdictional High Court, as per which consideration for

the purchase of off-the-shelf software under software licence

agreement results in only a transfer of right to use copy of the

software, constituting royalty under the provisions of section

9(1)(vi). As the instant case is that of a resident paying royalty to

another resident, there is no need to examine any DTAA from the

angle of taxability or otherwise of royalty in the hands of the

recipient as the same stands established under the Act.

2012 has carried out an amendment to section 9(1)(vi) dealing with

`income by way of royalty’ through insertion of Expl. 4 w.r.e.f.

1.6.1976, which reads as under : -

Explanation 4.— For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

14 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

Firstly, it is for the removal of doubts and hence clarificatory in

nature. Secondly, it has been inserted retrospectively from

1.6.1976 covering the year under consideration. Next, it clearly

provides that the transfer of any rights in respect of `any right,

property or information’, being the same expression as used in

the clause (b) of section 9(1)(vi) which attracts taxation of

income from royalty payable by a resident, shall include transfer

of all or any right for use or right to use a computer software,

which also covers within its ambit the granting of a licence.

What is further relevant to note next is that it is not only that the

expression `rights in respect of any right, property or

information’ shall `include’ use or right to use a computer

software, but it will `always’ be considered to have been so

included, which gives further strength to the retrospective effect

of the insertion of the Explanation 4. The net effect of the

insertion of the Explanation 4 read with Explanation 2 to section

9(1)(vi) of the Act is that the legislature has made it clear beyond

an iota of doubt that consideration for the use or right to use a

computer software in any form, including a mere granting of

15 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

licence, will be considered under the Act as income from royalty

in the hands of the recipient.

source, inter alia, from royalty as per clause (c) and provides

that the payer of royalty, not being an individual or a Hindu

undivided family, shall, deduct tax at source at the rate of 10%.

Clause (ba) to the Explanation to section 194J further provides

that "royalty" for the purpose of this section shall have the same

meaning as given in section 9(1)(vi) of the Act. Thus, it is clear

that where income in the nature of royalty is payable to a

resident-payee, then the payer is liable to deduct tax at source u/s

194J. Failure to deduct and pay such tax in the Government

exchequer entails, inter alia, disallowance u/s 40(a)(ia) of the

Act, as has been made by the authorities below in the instant

case.

contending that the first judgment in the case of CIT Vs. Samsung

Electronics Co. Ltd. & Ors (supra) was delivered on 24-09-2009

and the transaction of payment of software charges by the assessee

got concluded during the year ending on 31-03-2009. It was,

16 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

therefore, urged that the assessee could not have foreseen its

liability of deduction of tax at source on the payment made for

renewal of software license and hence, the provisions of section

40(a)(ia) should not be applied.

flush, but, loses its shine on an in-depth analysis. There are two

reasons for our not concurring with the same. First, the earlier

judgment in Samsung Electronics Co. Ltd. (supra) relates to the

assessment years 1999-200 and 2001-02 and obviously the

assessment year under consideration, namely, 2009-10 is posterior

to the years considered by the Hon’ble jurisdictional High Court. In

the absence of any change in the legal position favouring the

assessee during the interregnum, the same would have to be applied.

Further, what is relevant in this context is the position of law

relating to a specific assessment year and not the date of judgment.

The second reason is that the Courts declare the law and do not

legislate it. Any judgment of the Hon’ble Supreme/High Courts is

considered as the position of law applicable from the inception of

the provision unless it is specifically stated to have prospective

effect. The Hon’ble Supreme Court in M.A. Murthy vs. State of

17 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

Karnataka & Ors. (2003) 264 ITR 1 (SC) has held that : `Normally,

the decision of this Court enunciating a principle of law is

applicable to all cases irrespective of its stage of pendency because

it is assumed that what is enunciated by the Supreme Court is, in

fact, the law from inception.’ We are, ergo, unable to accord our

imprimatur to the contention put forth on behalf of the assessee that

the position of law at the point of payment of royalty was any

different vis-à-vis the position later clarified in the case of Samsung

Electronics (supra). The argument of the assessee that it could not

have contemplated liability to deduct tax at source at the material

time would have been correct, if it had been a case of retrospective

amendment to some substantive provision making certain income

chargeable to tax from an earlier date. Per contra, we are confronted

with a situation of declaration of law by the Hon’ble jurisdictional

High Court succeeded by an amendment of declaratory nature

clarifying that the transfer of all or any rights in respect of any right,

property or information includes and has always included transfer

of all or any right for use or right to use a computer software.

18 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

uphold the view canvassed by the authorities below on this issue.

The ground raised by the assessee in this regard is dismissed.

CIT(A) not directing the AO to allow foreign tax credit of

Rs.1,91,52,577/- for the taxes paid by foreign branches as claimed

in the return of income filed. The second part of this ground is

against the confirmation of the action of the AO in allowing foreign

tax credit only to the extent of the basic MAT rate of 10% of profits

of the foreign branches without adding surcharge and cess of 1.33%.

tax credit of Rs.1,91,52,577/- in the computation of income towards

taxes paid by its overseas branches situated in five countries,

namely, Netherland, France, US, UK and Belgium. On being called

upon to explain the reasons for claiming such tax credit, the

assessee submitted that its foreign branches constituted Permanent

Establishments (PEs) and suffered tax on such incomes in

accordance with the domestic tax laws of the respective countries.

The income earned by the above foreign branches, in addition to

suffering tax in respective foreign jurisdictions, again came to be

19 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

included in the total income for the purposes of taxation in India.

Since profits of the foreign branches got doubly taxed, the assessee

made out a case for claim of credit for such taxes paid abroad

against the amount of tax payable in India. The AO required the

assessee to reconcile the amount of income included in its total

income under the Act and the amount of income which was offered

in foreign tax jurisdictions for which it was claiming tax credit

against the tax liability under the Act. The assessee submitted a

reconciliation determining revenue of Rs.10,13,61,402/- suffering

double taxation in India and abroad. The AO observed that the tax

rates in these countries varied between 10% to 40%. Considering

the fact that the assessee offered these incomes in India for taxation

only at 10% under the minimum alternate tax as per section 115JB

of the Act, he allowed foreign tax credit of Rs.1,01,36,140/- (10%

of Rs.10.13 crore income, which suffered double taxation in India

and abroad). The assessee’s alternate contention that the foreign tax

credit should be allowed at 11.33%, including surcharge etc. of

1.33%, did not find favour with the AO, who held that the assessee

was entitled to the foreign tax credit only for the basic rate of 10%

under the MAT. The ld. CIT(A) accorded his seal of approval to

20 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

the view taken by the AO, against which the assessee has

approached the Tribunal.

material on record. The crux of the above factual position is that the

assessee’s foreign branches in five countries constituted its PEs,

who suffered income tax in such jurisdictions. The assessee paid

total tax of Rs.1.91 crore in foreign countries. Because of the

assessee being a resident of India and liable to pay tax in India on its

global income including that earned by its foreign branches, such

income earned by the PEs came to be included in the total income

under the Act. The amount of profit earned by the PEs, which has

entered into the computation of the assessee’s total income, is

Rs.10.13 crore. As against the assessee’s claim that it should be

allowed tax credit for the full amount of taxes paid abroad

amounting to Rs.1.91 crore, the Revenue has held that only the

amount of tax relatable to the doubly taxed income could be

allowed credit against the total tax liability of the assessee under the

Act. There is a further controversy in the computation of tax u/s

115JB as to whether the tax credit should be allowed at the rate of

10% of the doubly taxed income, which is the basic rate of tax u/s

21 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

115JB or such rate should also include surcharge at 1.33%. Thus

we need to determine the following two issues in this regard:-

i. Whether the assessee is entitled to the full foreign tax paid

or tax only on the doubly taxed income?; and

ii. If entitled only to tax on doubly taxed income, then the

extent of foreign tax credit to be allowed?

relevant provisions contained in Chapter IX of the Act with the

caption `Double taxation relief’. Section 90, being, the first section

of this Chapter, to the extent it is relevant for our purpose, runs as

under: -

`90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or…..’

far as sub-clause (i) is concerned, the same talks of granting relief

in respect of ‘income’ on which tax is paid both in India and the

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other country; and sub-clause (ii) talks of granting relief in respect

of ‘income-tax’ chargeable under the Act and the concerned foreign

country. Mechanism for granting relief is contained in the respective

Double Taxation Avoidance Agreements.

credit for the full tax paid abroad or the tax paid only on the doubly

taxed income? The ld. AR candidly admitted that his case is covered

u/s.90(1)(a)(i) and not under (ii) of section 90(1)(a) of the Act. We

will, therefore, focus only on sub-clause (i) of section 90(1)(a) of

the Act as per which the Central Government may enter into an

agreement with the Government of any country outside India for the

granting of relief in respect of “income on which have been paid

both income-tax under this Act and income-tax in that country or

specified territory, as the case may be.” This sub-clause, therefore,

pre-supposes that ‘income’ which is sought to be reduced from the

total income of the assessee under the Act must have also been

included in the total income of the assessee in the other country. We

find that even if the assessee is chargeable to tax under the Act on

its global income, it may still be possible that some income is

chargeable in the foreign tax jurisdictions but not chargeable under

23 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

the Act due to exemption available (which is different from income

chargeable but deductible under the relevant provisions). If a

particular income is included only in the total income under the Act

but not under the total income of other country, or vice-versa, the

same cannot qualify for the benefit under the provision. It is thus

evident that only the doubly taxed income qualifies for relief u/s

90(1)(a)(i) of the Act.

under section 90 is contained in the respective DTAAs. A major

chunk of the assessee’s income is from the USA. The relevant

provision for granting relief of foreign tax in the DTAA between

India and USA is contained in Article 25. Para 2 of the Article 25

dealing with granting relief to a resident of India, is as under : -

`2. (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States.’

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India derives income which may be taxed in the United States

also, then India shall allow a deduction from the tax on the

income of that resident of an amount equal to the income tax

paid in the United States. However, a cap has been provided to

the extent of allowing such credit in the immediately next line

by stating that: `Such deduction shall not, however, exceed that

part of the income tax … which is attributable to the income

which may be taxed in the United States.’

liability of the assessee under section 115JB of the Act. This section

contains a special provision for payment of tax by certain

companies with reference to ‘Book profits’, which expression has

been defined in its Explanation 1 to mean the profit as shown in the

statement of profit and loss of the relevant previous year as

increased by certain items given in clauses (a) to (k) and then

reduced by certain items given in clause (i) to (viii). Though a part

of the income of the assessee qualified for deduction u/s.10A in the

regular computation, but such deduction is not available in the

computation of income u/s.115JB in view of the amended clause (f)

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and clause (ii) of the Explanation 1 to section 115JB at the material

time. Thus, it is evident that in so far as computation of the

assessee’s book-profit u/s.115JB is concerned, the same includes

within its ambit the amount of income which is otherwise eligible

for deduction u/s.10A and, as such, the assessee also suo motu

included such income in the computation u/s 115JB. It is seen as an

admitted position that the assessee filed its return in India

considering not only the income earned from Indian operations but

also from its foreign branches. The AO determined tax on income

under the normal provisions of the Act at Rs.12.75 crore and under

section 115JB at Rs.17.25 crore. Eventual assessment has been

made by considering the income u/s 115JB.

relief is to be allowed in respect of income on which tax has been

paid in India and the other country. The assessee admitted before

the AO that the income which suffered double taxation both in

foreign countries and India is Rs.10.13 crore. In that view of the

matter, it becomes clear that the relief under section 90(1)(a)(i) of

the Act has to be granted only to the extent of such doubly taxed

income and not beyond that. The assessee paid total taxes in

26 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

foreign countries to the tune of Rs.1,91,52,577/-. The amount of

doubly taxed income is Rs.10.13 crore. As the income of the

assessee has been finally computed u/s 115JB and it is not the case

of the AO that such income of Rs.10.13 crore is not fully part of the

book profits computed u/s 115JB, it is this amount of income which

would require exclusion from the amount of income computed u/s

115JB.

doubly taxed income of Rs.10.13 crore from the total income in

terms of tax credit, the assessee will get tax relief of Rs.1,01,36,140

(going by the AO giving benefit of tax at the basic rate under MAT

at 10%) or Rs.1,14,84,247/- (going by the basic rate tax of tax under

MAT at 10% plus surcharge at 1.33%). Thus, the maximum amount

of tax relief which can possibly be given to the assessee, subject to

our determination of the second aspect of this issue, is

Rs.1,14,84,247/-, meaning thereby that the tax paid in foreign

countries to the tune of Rs.76,68,330/- (Rs.1,91,52,577/- minus

Rs.1,14,84,247/-) cannot qualify for credit against the tax liability

arising under the Act.

27 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

(2016) 382 ITR 179 (Karn) to contend that credit for the full amount

of foreign tax at Rs.1,91,52,577/- should be allowed. In our

considered this judgment does not advance the case of the assessee.

In that case, the assessee claimed that it was entitled to relief of

income taxes paid in foreign jurisdictions. The AO did not accept

the claim, which was allowed by the CIT(A). However, the

Tribunal restored the matter to file of the CIT(A) by holding that

when the assessee was not liable to pay tax in view of exemption

u/s. 10-A, it was not entitled to tax relief in respect of taxes paid in

contracting country as per section 90. The Hon’ble High Court

observed that income u/s. 10A was chargeable to tax u/s. 4 and was

includible in total income u/s. 5, but no tax was charged because of

exemption given u/s. 10A only for a period of 10 years. It held that

merely because exemption has been granted in respect of taxability

of source of income, it could not be postulated that assessee was not

liable to tax. It is palpable from the above judgment that the issue

raised before it was quite different. It was on the point that whether

tax on income paid abroad, which income otherwise qualifies for

the benefit u/s 10A of the Act, should be granted relief? On the

other hand, admittedly income which has been deducted u/s 10A in

28 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

the normal computation is chargeable under the computation u/s

115JB and it is not the case of the AO that foreign tax relatable to

such deductible income under the normal provisions should not be

allowed credit. The Hon’ble High Court in Wipro Ltd. (supra) has

further laid down in para 59 that: `However, the said provision

makes it clear that such deduction shall not, however, exceed that

part of the income tax (as computed before the deduction is given)

which is attributable to the income which is to be taxed in United

States.’ We, therefore, hold that the assessee is entitled to credit for

the tax paid in foreign countries only to the extent of the doubly

taxed income and not the remaining amount, whose corresponding

income is not a part of the computation of income u/s 115JB under

the Act.

of foreign tax credit to be allowed in respect of the doubly taxed

income. Whereas the AO has restricted the tax credit to the extent of

10% of the doubly taxed income, being, the basic rate at which

income is chargeable to tax u/s 115JB, the assessee seeks,

notwithstanding its claim for full credit for foreign taxes, credit for

29 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

the foreign tax at the effective rate of tax and surcharge etc. u/s

115JB, that is, 11.33%.

of granting relief in respect of doubly taxed ‘income’. Similarly, we

have noted Article 25(2) of the DTAA between Indian and the USA

providing for deduction from the tax on the income of an amount

equal to the income tax paid in the USA. On a conjoint reading of

the above provisions, following two things emerge. First is that it is

the amount of doubly taxed income which has to be excluded from

the income chargeable to tax in India. Once we exclude such doubly

taxed income from the income computed under the Act, then

whatever is the amount of tax and surcharge thereon will get

automatically excluded from the total tax liability computed under

the Act. Second is that the deduction from the income tax liability

under the Act has to be restricted to the amount of income tax paid

in the USA on such doubly taxed income. The above two

propositions, when applied to the factual panorama of the extant

case, leads us to the inevitable conclusion that once the doubly

taxed income is to be excluded, it would mean that the foreign tax

credit will have to be allowed on it at the rate at which such income

30 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

attracted taxation under the Act, which is 11.33% under section

115JB of the Act. If however, the amount of tax paid in the other

country is less than 11.33%, then the deduction should be limited to

the amount of tax paid on such doubly taxed income in the other

country. The AO has noted in the assessment order that the

assessee paid foreign tax at the rates ranging from 10% to 40%.

Thus if the doubly taxed income was subjected to tax in the other

country at the rate of 10%, then tax credit should be restricted to

10% and in case it was subjected to foreign tax in the other country

at a rate higher than 11.33% (say, 15% or 20% or 40%), then the

amount of foreign tax credit should be restricted to 11.33% of the

concerned doubly taxed income. The AO is directed to verify the

respective tax rates in Netherland, France, US, UK and Belgium for

the year under consideration on which the assessee paid taxes and

then allow the benefit accordingly after granting reasonable

opportunity of hearing to the assessee.

confirmation of disallowance u/s.14A of the Act read with Rule 8D

of the Income-tax Rules, 1962 (hereinafter also called `the Rules’)

at Rs.80,93,070/-.

31 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

claimed dividend income amounting to Rs.8,74,13,850/- earned on

mutual funds as exempt from tax. The Assessing Officer (AO)

observed that no disallowance was offered by the assessee u/s.14A

of the Act. On being called upon to explain the reasons for not

offering the disallowance, the assessee submitted that a suo motu

disallowance of Rs.3,13,492/- was offered. The AO, not satisfied,

computed the disallowance u/s.14A r.w. Rule 8D at Rs.80,93,070/-.

The ld. CIT(A) echoed the assessment order on this point.

material on record. The assessment year under consideration is

2008-09. Unlike earlier years, Rule 8D is applicable for the purpose

of making disallowance u/s.14A. The disallowance made by the

AO is in two parts, viz., Rs.5,49,818/- under Rule 8D(2)(ii) and

Rs.75,43,252/- under Rule 8D(2)(iii). In so far as the disallowance

of Rs.5,49,8198/- is concerned, it is seen from the assessee’s

Balance sheet, whose copy has been placed in the paper book, that

as against Investments of Rs.176.57 crore, the assessee’s

Shareholders’ fund stands at Rs.509.29 crore. Thus, it is evident

that the Shareholders’ fund is far in excess of the amount of

32 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

investments. The Hon'ble Karnataka High Court in CIT & Anr vs.

Microlabs (2016) 383 ITR 490 (Kar) has held that when

investments are made from a common pool and non-interest bearing

funds are more than the investment in tax free securities, no

disallowance of interest expenditure u/s 14A can be made. This

view has been taken by following the judgment of the Hon'ble

Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR

515 (Bom). It is further observed that this issue is now no more res

integra in view of the judgment delivered by the Hon'ble Supreme

Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT

(2017) 394 ITR 449 (SC), upholding the view of the lower

authorities that when interest free funds in the form of share capital

and reserves etc. are more than the amount of investment, then no

disallowance of interest can be made u/s 14A. Respectfully

following the precedents, we order to delete the disallowance under

Rule 8D(2)(ii) to the tune of Rs.5,49,818/-.

amounting to Rs.75,43,252/-. It is seen that the same has been

worked out by the AO at 0.50% of average amount of investments.

This computation is strictly in accordance with the mandate of Rule

33 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

8D(2)(iii). Since Rule 8D is applicable from the assessment year

under consideration, the disallowance has to be made and sustained

in accordance with the prescription of such rule only.

Court in ACB India Ltd. vs. CIT (2015) 374 ITR 108 (Del) has held

that the average value of investments, for the purposes of Rule

8D(2)(iii), should be confined to those securities in respect of which

exempt income is earned and not the total investments. Similar

view has been taken by the Special Bench of the Tribunal in the

case of ACIT vs. Vireet Investments (P) Ltd. (2017) 165 ITD 27

(Del) (SB) holding that only those investments should be considered

for computing average value of investments which yield exempt

income during the year. In view of the afore referred precedents,

we set aside the impugned order to this extent and remit the matter

to the file of Assessing Officer for re-computing the disallowance

under Rule 8D(2)(iii) by considering only such investments in

calculating the average value of investments, which have yielded

exempt income during the year. The assessee will be allowed

hearing opportunity in the fresh proceedings.

34 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

Rs.3,13,492/- was offered by the assessee under section 14A. The

AO is directed to verify this claim and then accordingly compute

the amount disallowable u/s.14A r.w. Rule 8D(2)(iii).

confirmation of addition of Rs.5,84,000/-, being, the value of lapsed

ESPOs in the income computed under the normal provisions of the

Act as well as the profits computed u/s.115JB.

material on record. Both the sides are in agreement that the facts

and circumstances of this ground are similar to those of the

immediately preceding two assessment years, appeals of which have

been decided by the Tribunal on 05-08-2019. In the appeal for the

A.Y. 2008-09, the Tribunal in IT(TP)A.No.287/Bang/2013 has held

that the amount of ESOPs was rightly credited by the assessee to the

General reserve on lapse of option and hence cannot be included in

the computation of book profits u/s.115JB of the Act. It has further

been directed that such an amount of lapsed ESOPs should be

considered as income chargeable to tax u/s.41(1) for the year in

35 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

which cessation or remission took place and not the years in which

deduction was claimed. We hold accordingly.

telecommunication charges and internet usage charges totalling

Rs.9,82,28,337/- from only the ‘Export turnover’ in computing

deduction u/s.10A. Ground No.1 of the Revenue’s appeal is against

the direction of the ld. CIT(A) that link charges and internet usage

charges be reduced from ‘Export turnover’ and also from ‘Total

turnover’.

in relation to the A.Y. 2007-08. Vide its order dated 05-08-2019 in

IT(TP)A. No.286/Bang/2013, the Tribunal has held that any amount

reduced from ‘Export turnover’ should also be reduced from the

amount of ‘Total turnover’ in the computation of deduction u/s.10A

of the Act. Following the same, we allow the assessee’s ground and

dismiss that of the Revenue.

Foreign currency expenses amounting to Rs.1,07,63,08,980/- from

the ‘Export turnover’ in the process of computation of deduction

u/s.10A. The ld. AR fairly agreed that the full amount of foreign

36 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

currency expenses has been rightly held to be excludible from the

amount of ‘Export turnover’. It was, however, prayed that the same

amount may also be excluded from the amount of ‘Total turnover’.

Following similar view taken by us in relation to Ground No.5 of

the assessee’s appeal and Ground No.1 of the Revenue’s appeal

above, we hold that the amount of Foreign currency expenses to the

tune of Rs.107.63 crore be excluded from the ‘Export turnover’ as

well as ‘Total turnover’.

the amount of deduction u/s.10A by a sum of Rs.2,41,23,133/- on

the premise that the assessee is in the business of Deputation of

Technical Manpower (DTM) and/or rendering of technical services

outside India and hence income from providing onsite development

of computer software is not eligible for deduction u/s.10A.

assessee’s own case for the A.Y. 2007-08 holding that the amount

relatable to DTM and onsite software services should be considered

as eligible for deduction u/s.10A of the Act. Since facts and

circumstances are admittedly similar, following the view taken for

the A.Y. 2007-08, we determine this issue in favour of assessee.

37 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

in not directing the AO to allow set off of brought forward losses

and unabsorbed depreciation of earlier years against the business

income, short term capital gain and income from other sources in

computing total income in accordance with the provisions of

Chapter VI. Ground No.2 of the Revenue’s appeal is against the

direction of the ld. CIT(A) in holding that if the unit of the assessee

is independent then its loss could not be adjusted against the profits

of other units for the purposes of computing deduction u/s.10A.

material on record. The Tribunal in its order for the A.Y. 2007-08

has discussed this issue threadbare and following the judgment of

Hon’ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd.

(2017) 291 CTR 1 (SC) has held that the deduction should be

allowed qua the eligible undertaking standing on its own without

reference to the other eligible or non-eligible unit or undertakings.

To put it simply, the profits of the eligible units should be

considered on standalone basis. Following the view, we determine

the issue accordingly.

38 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

interest u/s.80G was not pressed by the ld. AR, which hereby stands

dismissed.

CIT(A) in not directing the AO to determine the amount of MAT

credit to be carried forward is stated to be consequential to Ground

No.10 relating to foreign tax credit, which we have decided supra.

234C. The ld. AR submitted that pursuant to amendment carried

out in section 115JB by substitution of clause (i) of Explanation 1,

the amount or amount set-aside as provision for diminution in the

value of any asset came to be added to the amount of profit as

shown in the statement of profit and loss. The ld. AR submitted that

this amendment came into force after the close of the relevant

financial year and hence, the assessee could not have anticipated its

liability to pay advance tax on the same at the material time. It was,

therefore, prayed that interest u/ss.234B and 234C should be

directed to be suitably reduced.

material on record. The assessee’s computation of income

39 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

u/s.115JB has been placed at page 58 of the paper book. It can be

seen that in such computation, the assessee added Rs.6,99,33,296/-

towards `the amount or amounts set-aside for diminution in the

value of any asset’. The amendment to section 115JB through

clause (i) has been brought out by the Finance (No.2) Act, 2009

with retrospective effect from 01-04-2001. The Finance (No.2) Bill

2009 was introduced in the Lok Sabha on 06-07-2009, whereas the

financial year of the assessee closed on 31-03-2009. It is pursuant

to the retrospective amendment coming into force after the close of

the financial year but before the filing of the return that the assessee

computed its income u/s.115JB accordingly. In so far as the

question of charging interest u/s.234B and 234C is concerned, it is

found that the Hon’ble jurisdictional Karnataka High Court in CIT

Vs. Kirloskar Systems Ltd. (2013) 40 taxmann.com 124 (Kar.) has

held that interest u/s.234B and 234C cannot be levied for default in

payment of advance tax in case wherein section 115JB is invoked

pursuant to such amendment. We, therefore, hold that interest

u/ss.234B and 234C should not be charged to the extent of

retrospective amendment to section 115JB affecting the

computation of book profits accordingly.

40 ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

ld. AR, which is hereby dismissed.

against the direction by the ld CIT(A) to the TPO for computing

Arm’s Length Price of the international transaction of `Interest

received’ at Rs.5,86,903/- from its Associated Enterprise adopting

the average EURIBOR rate as applicable to the A.Y. 2009-10.

circumstances of these grounds are similar to those for the

preceding years wherein the Tribunal has held that EURIBOR +2%

should be considered as benchmark for determining the ALP of the

international transaction of interest received. We follow the same

and order accordingly.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT

पुणे Pune; �दनांक Dated : 26th August, 2019 सतीश

ITA No.342/PUN/2014 and IT(TP) A.No.10/Bang/2014 iGate Global Solutions Ltd.

आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-IV, Bangalore 4. The CCIT-II, Bangalore िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 20-08-2019 Sr.PS 2. Draft placed before author 23-08-2019 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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