2020 (10) TMI 605 - ITAT BANGALORE

Setting off of LOSS OF STPI/SEZ UNITS against business income from non-STPI/non-SEZ units - STPI refers to “Software Technology Park” and SEZ refers to “Special Economic Zone” - HELD THAT:- As decided in own case [2015 (10) TMI 826 - KARNATAKA HIGH COURT] Loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Accordingly, this issue is decided in favour of the assessee.

Exclusion of Miscellaneous income while computing deduction u/s 10A/10AA/10B - HELD THAT:- The decision rendered in own case [2015 (10) TMI 826 - KARNATAKA HIGH COURT] would cover the income booked under the head Sale of Scrap/Newspaper, Rental income and interest income. Accordingly, we direct the AO to allow deduction u/s 10A/10AA/10B of the Act in respect of income earned on sale of scrap/newspaper and Rental income.

The remaining item is “Other income” - In AY 2007-08 and 2008-09, this item of miscellaneous income was restored to the file of the AO for examining the nature of receipt and decide the same accordingly - Following the same, we restore the issue relating to “Other income” to the file of the AO with similar directions.

Exclusion of Net interest income for deduction u/s 10A/10AA/10B - HELD THAT:- It is required to be examined first as to whether the AO has assessed interest income under the head “Income from business” or under the head “Income from other sources”. If the AO has assessed interest income as business income, then the assessee is eligible for deduction u/s 10A/10AA/10B on interest income also. However, if the AO has assessed interest income under the head “income from other sources”, then it is required to be examined as to whether there is direct nexus between interest income and income of business undertaking.

With regard to Category (a) above, if the nexus is shown between the loan funds and the deposits, the assessee is eligible for deduction in respect of interest income, following the decision rendered by the Hon'ble Karnataka High Court in the assessee’s own case .

With regard to Category (b) above, it is imperative on the part of the assessee to show that there is nexus between interest income and income of business undertaking. We have noticed earlier that the AO has taken the view that the surplus funds of undertaking located in SEZ are put into common bank account. Accordingly, the AO has observed that the surplus funds relating to SEZ division could not be separately identified, if all the surpluses of all divisions are put together, meaning thereby, it is the case of the AO that there is no nexus between interest income and income of business undertaking. In our view, the assessee may be given an opportunity to show that the nexus between SEZ/STPI divisions and the fixed deposits from which interest income was earned. If the assessee is able to show the nexus to the satisfaction of the AO, then the interest income to that extent should be eligible for deduction u/s 10A/10AA/10B - restore this issue to the file of the AO for examining it afresh in the light of discussions made supra.

Whether Deemed exports are eligible for deduction section 10A/10AA/10B - HELD THAT:- Identical issue has been decided in favour of the assessee in TATA ELXSI LTD. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] - we direct the A.O. to include deemed exports as part of turnover while computing deduction u/s 10A/10AA/10B of the Act.

Eligibility of the assessee to claim deduction u/s 10A of the Act in case of Delayed collections of export proceeds - HELD THAT:- As relying on own case we direct the AO to include sale amount in the export turnover, while computing deduction u/s 10A of the Act, where the applications have been filed by the assessee to RBI seeking permission to receive the export proceeds beyond the prescribed period.

Set off of foreign tax credit/deduction relating to income generated abroad - HELD THAT:- The expressions used in sec. 90(1)(a)(i) and (ii) and in sec.91 would also merit attention in this regard. Section 90(1)(a)(i) uses the expression “income on which have been paid both income tax ”. Section 91(1) uses the expression “If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose during the previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any Country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income tax, by deduction or otherwise - It can be noticed that, “payment of tax” is mentioned both in sec.90(1)(a)(i) and sec. 91.

Section 90(1)(a)(ii) uses the expression “income tax chargeable under this Act and under the Corresponding law in force in that Country…..” Thus, it can be noticed that the provisions of sec.90(1)(a)(i) and sec.91(1) refers to actual payment made in the foreign Country and the provisions of sec.90(1)(a)(ii) refers to “income tax chargeable under this Act and under the corresponding law in force in that Country”, i.e., there is no reference to actual payment of tax.

Accordingly, following the binding decision of High Court in A.Y. 2001-02 to 2004-05 we set aside the order passed by A.O. on this issue and direct him to allow foreign taxes credit claimed by the assessee.

Claim of Depreciation on Software - amount of software capitalized by it, by invoking provisions of section 40(a)(ia) of the Act for non-deduction of tax at source from the payments made for purchase of software - HELD THAT:- Following the decision rendered by the coordinate bench in the Tally Solution [2017 (7) TMI 606 - ITAT BANGALORE] we direct the A.O. to delete the disallowance on depreciation made u/s 40(a)(ia) of the Act. Since we have held that depreciation is not liable to be disallowed u/s 40(a)(ia) of the Act, the alternative claim of the assessee for enhanced deduction shall become infructuous, even though the claim of the assessee is supported by the circular no.37/2016 dated 2.11.2016 issued by CBDT.

Allocation of Corporate overheads to units claiming deduction u/s 10A/10AA/10B - HELD THAT:- The head office does not exist for its own sake. Its existence is relevant for all the activities undertaken by various divisions, units and profit centres. The very existence of the divisions, units and profit centres is dependent upon the policy decisions taken in head-office. We the view that head office expenses which are in the nature of common expenses are required to be allocated to different units or undertakings and more particularly to the undertakings claiming beneficial deductions under the Act. Since deduction is allowed u/s 10A/10AA/10B on the profits derived from the undertakings, all direct or indirect expenses, must be adjusted in order to arrive at the profits derived from the undertaking. In that process, the component of head office expenses also requires allocation. It appears that the same principle has been upheld by Hon’ble Karnataka High Court. However, there appears to be some direction on the manner of allocation of Head office expenses. The AO should have implemented the direction given by Hon’ble High Court in the earlier years. Accordingly, we restore this issue to the file of the assessing officer.

Rejection of claim for deduction u/s 10A of the Act in respect of STPI units located at Bangalore - HELD THAT:- Following the decision rendered by Hon’ble jurisdictional High Court in the assessee’s own case and in the case of Wipro GE Medical Systems Ltd. [2015 (8) TMI 548 - KARNATAKA HIGH COURT]we hold that the new STPI undertakings located in Bangalore, against which deduction has been claimed by the assessee are eligible for said deduction. Accordingly, we direct the A.O. to allow the claim of the assessee.

Whether applicable foreign VAT/GST shall form part of export turnover or not while computing deduction u/s 10A/10AA/10B - HELD THAT:- We direct the A.O. to include foreign VAT/GST in the export turnover, since export profits realized by the assessee is said to include the above said VAT/GST.

Taxability of interest granted to the assessee u/s 244A - HELD THAT:- Restore this issue to the file of the A.O. with the direction to ascertain the interest, if any, withdrawn out of the interest given to the assessee u/s 244A of the Act in the respective years and reduce the same from the interest income and tax the balance amount. We order accordingly.

Deduction claimed by the assessee u/s 80IB - HELD THAT:- As considered an identical issue in this order in the context of allocation of corporate expenses to undertakings claiming deduction u/s 10A/10AA/10B of the Act (Issue no.8). We have restored this issue to the file of the AO for the reasons discussed in issue no.8. Though the issue herein is contested in the context of deduction u/s 80IB of the Act, yet the underlying facts are identical with issue no.8, discussed supra. Accordingly, in order to maintain uniformity, we feel it proper to restore this issue to the file of AO with similar directions.

Eligibility of the assessee to claim deduction u/s 80IB of the Act on the profit derived on sale of monitors - HELD THAT:- Assessee did not claim benefit u/s 80IB of the Act in respect of profit derived from trading activity of monitors, i.e., monitors, which were sold separately and not along with computer hardware. In respect of monitors sold along with the computer hardware, the Hon’ble High Court has expressed the view that those monitors which are used in the computers are in the nature of spare parts in the manufacture of computers. Accordingly, the Hon’ble High Court has expressed the view that when the computer is sold along with monitor, then the monitor forms part of the said computer, and hence the same falls within the first degree and is eligible for deduction u/s 80IB of the Act. Accordingly, following the decision rendered by Hon’ble High Court, we direct the A.O. to allow deduction u/s 80IB of the Act in respect of sale of monitors made along with the computer hardware, as part of computers.

Eligibility of the assessee to claim deduction u/s 80IB of the Act in respect of “other incomes” received by it - HELD THAT:- Coordinate bench has decided this issue against the assessee in assessment year 2008-09. We also notice that the decision rendered by Hon’ble High Court of Karnataka was in the context of section 80HHC of the Act, meaning thereby, the High Court has not decided an identical issue in the context of 80IB of the Act. Under these set of facts, we prefer to follow the decision rendered by the coordinate bench in assessment year 2008-09.

Exclusion of other income while computing deduction u/s 80IC - HELD THAT:- Before us the assessee did not demonstrate that the miscellaneous income would fall under the category of income derived from industrial undertaking. Accordingly, we hold that the miscellaneous income is not eligible for deduction u/s 80IC - The direction of Ld DRP in AY 2011-12 is reversed. The A.O. is directed to compute the deduction u/s 80IC of the Act.

Whether the expenditure incurred in foreign currency is required to be deducted from the export turnover while computing deduction u/s 10A/10AA/10B? - HELD THAT:- What is required to be excluded is the expenses specifically mentioned in the definition of “export turnover”, viz., the expenditure incurred on freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover.

If any amount is excluded from “export turnover”, the same is required to be excluded from “total turnover” also, as held by Hon'ble Karnataka High Court in the case of Tata Elixi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] and CIT vs. HCL Technologies Ltd [2018 (5) TMI 357 - SUPREME COURT]

We set aside the order passed by the A.O. on this issue and direct him to compute the deduction u/s 10A/10AA/10B of the Act by following the discussions made supra.

Whether reimbursements received by the assessee are required to be excluded from the export turnover for the purpose of computing deduction u/s 10A/10AA/10B ? - The assessee has debited the profit & loss account with the cost of purchase of assets and credited the profit & loss account with the amounts reimbursed by the customers - cost so incurred cannot be categorised as direct cost related to the development of software. Since it is an expenditure incurred at the request of customer for which reimbursement was also received, there is no revenue element involved in it. Accordingly, we are of the view that this amount should not be considered as either expenditure or part of export turnover, i.e., the receipt should be netted off against the expenditure.

Nature of payment received by way of incentive awards - this amount has been received as incentive from the customers, meaning thereby, it is in the nature of additional payments received towards export of software. Hence,we are of the view that it shall form part of sales turnover. Since it is only a revenue item, it cannot be categorized as expenditure as contemplated under the definition of the export turnover.Hence the same is not required to be excluded from the export turnover.

Exclusion of profits attributable to overseas development centre for computing deduction u/s 10A/10AA/10B - HELD THAT:- We respectfully following this decision, are of the opinion that for this year also the issue requires to be remitted back to the Assessing Officer and accordingly do so with a direction to the Assessing Officer to follow the decision of Tribunal.

Rejection of claim for deduction of educational cess - HELD THAT:- We notice that the Hon'ble Bombay High Court has also held in the case of Sesa Goa Ltd vs. JCIT [2020 (3) TMI 347 - BOMBAY HIGH COURT] that the education cess is allowable as deduction.

Deduction of employees’ contribution made to ESIC - HELD THAT:- Even though assessee has not put up the claim in the return of income, a fresh claim can be admitted by the Tribunal as per the decision rendered by Hon’ble Supreme Court in the case of Goetz India Pvt. Ltd. [2006 (3) TMI 75 - SUPREME COURT] when all facts are available on record. Accordingly, we restore this issue to the file of the A.O. with the direction to examine the claim of the assessee and decide the same in accordance with the decision rendered by Hon’ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd. [2014 (3) TMI 386 - KARNATAKA HIGH COURT].

Disallowance of loss claimed towards provision of marked to market valuation of outstanding forward contracts - HELD THAT:- We notice that the details of underlying assets in respect of outstanding forward contracts are not available on record. There should not be any doubt that the value of underlying assets (in the form of debtors, creditors and other monetary assets) as on the balance sheet date, against which the outstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. In that case, the loss arising on restatement of forward contract is fully allowable as deduction. Since the AO has not examined this aspect, we are of the view that this issue needs to be restored to the file of the AO for the limited purpose of examining as to whether the value of underlying assets is more than the value of the forward contracts. Since the AO has disallowed the loss in AY 2009-10, 2011-12 and 2012-13, this issue is restored to the file of AO in the above said three years alone. The assessee is directed to furnish relevant details to prove that the value of underlying assets is more than the value of outstanding forward contracts as on the balance sheet date.

Disallowance u/s 14A of the Act made to the net profit while computing book profit u/s 115JB of the Act - HELD THAT:- In the case of Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] has expressed the view that the amount disallowed u/s 14A of the Act cannot be adopted for the purpose of computation of book profit u/s 115JB and the disallowance to be made u/s clause (f) to explanation 1 has to be computed independently without having regard to the provisions of section 14A - We are unable to sustain the addition made by the A.O. Since the addition required to be made under clause (f) to explanation 1 is required to be computed independently, we restore this issue to the file of the A.O. for examining it afresh.

Disallowance of expenditure by invoking provisions of sec. 115 BBD - HELD THAT:- A.O. was not justified in invoking the provisions of sec.115BBD of the Act for making the impugned disallowance. Since the AO has not disallowed the interest expenditure on the reasoning given by Ld DRP, we do not find it necessary to address the same.

Disallowance of part of advertisement, publicity and sales promotion expenditure treating the same as “brand building expenses” - HELD THAT:- AO has not demonstrated with cogent evidence, any special circumstances or reasons to hold that the impugned expenditure was capital in nature. It is also note-worthy that no specific instances have been pointed out by the AO in this regard. The assessing officer has also not mentioned the basis for arriving at the conclusion that 25% of expenditure would be for promotion of brand value. Hence, we are of the view that the AO has made the ad-hoc disallowance only on surmises and conjectures. AO was not justified in disallowing part of advertisement expenses and accordingly direct him to allow the entire advertisement expenses claimed by the assessee.

Disallowance of fees paid to Registrar of companies for increasing the Authorized capital of the assessee company - HELD THAT:- Hon’ble `Supreme Court in the case of Punjab State Industrial Corporation Ltd. [1996 (12) TMI 6 - SUPREME COURT]and Brooke Bond Ltd. [1997 (2) TMI 11 - SUPREME COURT] has expressed the view that the fees paid to Registrar of Companies for increasing the authorized capital is capital in nature. Hence, we do not find any infirmity in the decision of A.O. in disallowing the claim of assessee by holding that the same as capital in nature. The contention of the assessee that the expenditure should be allowed by amortised over a reasonable period of time. However, we notice that there is no provision under the Act to accept the claim of the assessee. Accordingly, we confirm the disallowance made by the A.O.

TDS u/s 195 - HELD THAT:- A.O. was justified in holding that the payment made to M/s. Gartner Group is in the nature of royalty within the meaning of section 9(1)(vi) of the Act and hence the assessee is liable to deduct tax at source from the said payment u/s 195 of the Act. In view of the default on the part of the assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s. Gartner Group by invoking provisions of section 40(a)(i).

Non-granting of TDS credit - HELD THAT:- This issue requires fresh examination at the end of the A.O. by duly considering the TDS certificates furnished by the assessee and also making due enquiries, if required.

Transfer pricing adjustment on the short term advances given to foreign subsidiaries - HELD THAT:- As assessee did not establish that there is parity of facts. We notice that the coordinate bench of ITAT has determined the ALP rate of interest at Libor + 150 basis point. It is also noticed that the revenue has accepted the decision rendered by ITAT and the TPO has also adopted the same in A.Y. 2015-16. Accordingly, it is noticed that a consistent view is being taken on this issue. Accordingly, we direct the A.O./TPO to adopt the ALP rate of interest at Libor + 150 basis point.

Guarantee commission in respect of corporate guarantee provided by the assessee to its Associated Enterprises (AEs) - HELD THAT:- TPO did not examine internal CUP study of the assessee and has proceeded to determine the ALP of international transaction under TNMM method. Since we have held that the internal CUP is the most appropriate method. We have noticed that the assessee has furnished details of fees collected from AEs and Non-AEs, the nature of services provided to both the parties, copies of sample invoices. We have also noticed that the TPO has not examined them at all. Accordingly, we restore this issue to the file of AO/TPO for examining the issue under internal CUP method by considering all the details and information furnished by the assessee.

Transfer pricing adjustment made for Specified Domestic Transaction - transfer pricing adjustment made for Specified Domestic Transactions - HELD THAT:- transactions are entered between two units belonging to the same assessee. Hence both the units are two arms of the same tax entity. We have earlier expressed the view that the ALP value of inter-unit transactions has to be applied in both the transacting units for the purposes of sec. 92 of the Act. Hence the substitution of ALP value (market value) in respect of interunit transactions u/s 92 of the Act is tax neutral exercise. However, the effect will be seen in this regard while computing deduction u/s 10A/10AA/10B of the Act. Accordingly, the “reduction”, if any, in the quantum of deduction under above sections after application of the ALP, in our view, is the Transfer pricing adjustment contemplated in sec.92 - issue requires fresh examination at the end of TPO/AO by duly considering various other contentions of the assessee and also by considering the discussions made supra. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of the AO/TPO

Adjustment in respect of liquidated damages - HELD THAT:- TPO has feel into error in not recognizing the Mutual subcontracting agreement dated 01st April, 2005 entered between the assessee and M/s Wipro Inc., USA, since it is the claim of the assessee that the said agreement has not been terminated. Without examining the said claim of the assessee, it may not be correct on the part of the TPO to observe that the said agreement was not valid in the year relevant to AY 2010-11. We also notice that the TPO has not brought any material on record in support of his observations that, in an uncontrolled transaction, no third party would have paid such kind of liquidated damages in respect of dispute between its subsidiary and a third party. We are of the view that, without examining the Mutual subcontracting agreement, the TPO could not have come to such kind of conclusion. Accordingly, we are of the view that this issue has not been properly examined by TPO - this issue requires fresh examination at the end of AO/TPO.