2022 (11) TMI 1317 - AT - Income Tax

Deduction claimed u/s 10AA in respect of 4 SEZ units - satisfaction of conditions mentioned in clause (ii) to sub-section (4) to Section 10AA - denial of exemption related to assessment year 2007-08 on the ground of splitting up and reconstruction - HELD THAT - We have referred to the observations by the Ld.CIT(A) for assessment years 2007-08 to 2009-10 wherein there is a categorical finding that these units have not been formed by splitting up or restructuring. This observation has not been challenged by the revenue in appeals filed in 2022 (11) TMI 1316 - ITAT BANGALORE and thus this issue has attained finality. For sake of convenience, we reproduce the relevant observation by the L.dCIT(A) has been tabulated by the Ld.AR. We therefore direct the Ld.AO to grant the deduction claimed by the assessee in respect of the Chennai SEZ Unit I, Chandigarh nit, Mangalore Unit I and Pune Unit I. TP Adjsutment Interest receivables from Infosys China and Infosys Brazil - Rate of interest charged by the assessee for both the loans was at 6% p.a. - TPO determined the arm's length interest rate @ 11.17% stating the same as yield from BBB grade corporate bond (investment grade bonds) for a 1 to 2 years period during the FY 2011-12 - HELD THAT - We note that, the assessee admittedly charged 6% interest rate on the loans advanced to Infosys China and Infosys Brazil. The revenue authorities have accepted the rate charged by the assessee in the subsequent as well as preceding assessment years. We therefore do not see any reason to deviate from the same. We also note that 11.17% computed by the Ld.TPO which was subsequently rectified to 8.53%, do not have any basis, as it is based on fixed deposit interest rate by different banks. We note that principles laid down in case of CIT vs. Cotton Naturals India Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT has not been followed by the Ld.TPO, We also note that the LIBOR rate of 12 month USD is much less than the rate computed by the assessee. We therefore uphold the interest rate computed at 6%. Disallowance u/s. 14A r.w.Rule 8D(2)(iii) - dividend income from mutual funds which was exempt - HELD THAT - Admittedly, the assessee suo moto disallowed u/s.14A. We note that the Ld.AO while computing disallowance under Rule 8D(2)(iii), included the investments made in Infosys BPO Ltd., that did not yield any exempt income for year under consideration. Going by the submissions of the Ld.AR, ratio laid down in Vireet Investment 2017 (6) TMI 1124 - ITAT DELHI disallowance then computed would be less that the disallowance voluntarily offered to tax by the assessee which is not the right course to be adopted. We therefore uphold the disallowance voluntarily made by the assessee that has been offered to tax by the assessee. We direct the Ld.AO to compute the disallowance as voluntarily offered by the assessee. Needless to say that proper opportunity of being heard mist be granted to the assessee. Disallowance u/s. 40(a)(i) in respect of subscription fee paid - Disallowance u/s. 40(a)(ia) / 40(a)(i) in respect of software expenses - HELD THAT - We remand these issues back to the Ld.AO/TPO to verify these claims in accordance with the principles laid down by Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT . In the event after verifying the relevant agreements / invoices and applying the ratio laid down by the Hon ble Supreme Court, no TDS is liable to the deducted, the disallowance u/s. 40(a)(i) / 40(a)(ia) deserves to be deleted. The Ld.AO is directed to carry out necessary verifications in accordance with law by granting proper opportunity of being heard to assessee. Disallowance of software expenses as capital expenditure - Alternatively, assessee has prayed for depreciation to be granted at 60% as against 25% - HELD THAT - We note that the Ld.AO has not examined the documentary evidences in respect of this claim. We therefore set aside this issue to the Ld.AO with a direction to consider the claim of the assessee in the light of evidences / documents filed. The Ld.AO shall also verify this issue based on the principles laid down by Hon ble Supreme Court in case of Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT . Nature of expenses - Disallowance of brand building expenditure - Brand building expenses are included and shown under 'Selling and Marketing expenses' in the financial statements and claimed as revenue expenditure - HELD THAT - We note that Coordinate Bench in case of the sister concerns of assessee Infosys BPO Ltd v DCIT 2020 (1) TMI 1011 - ITAT BANGALORE considered identical issue on similar facts. Nothing has been brought on record by the revenue to the expenses incurred by the assessee is towards any capital asset. Respectfully following the same, we direct the disallowance to be deleted. TDS u/s 195 - Disallowance of Commission paid to non residents - non deduction of TDS - Addition u/s 40(a)(ia) - HELD THAT - There is no quarrel that the benefit available to assessee as per DTAA must be granted as per the ratio of Hon ble Supreme Court in case of Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT . The Ld.AO shall verify and consider the claim in accordance with law. Needless to say that proper opportunity of being heard mist be granted to the assessee. Non reduction of communication expenses and expenses incurred in foreign currency from total turnover while computing deduction under section 10AA - HELD THAT - This issue is no longer resintegra. Hon ble Supreme Court in the case of CIT v HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT held that, freight, telecommunication charges, insurance charges and expenses incurred in foreign currency reduced from export turnover should also be reduced from total turnover while computing deduction under section 10A. Ratio of the said decision is squarely applicable for the purposes of section 10AA/10A and both these sections are in pari material with each other. The CBDT vide Circular No. 4 of 2018 dated 14/08/ 2018 cited the decision of the Hon ble Supreme Court in the case of HCL Technologies Ltd.,(supra), and clarified that, all charges/expenses specified in Explanation 2(iv) to section 10A are liable to be excluded from total turnover also for the purpose of computation of deduction under section 10A. We thus hold that the communication expenses and expenses incurred in foreign currency reduced from the export turnover should also be reduced from the total turnover while computing deduction under section 10AA. Computing deduction u/s. 10AA - reduction of following items from profits of SEZ units i.e. interest income from GLES deposit, interest income from loans given to employees, receipts from sale of scrap and incentive receipts from Airlines - HELD THAT - Amount of income that that qualifies for the deduction under section 10AA is the profits that arises out of the business undertaking, and not from any other income earned by the assessee de horse the business of the undertaking. If the income earned by the assessee is held to be falling under the head, Income from other sources, the same will not qualify for the deduction section 10 AA of the Act. From the above sources that have yielded income to the assessee for the year under consideration, except for income from sale of scrap, no other income could be said to have arisen out of the business undertaking. Further in respect of cessation of trading liability, we direct the Ld.AO to verify if the trade receivables were offered to tax by the assessee in any of the preceding assessment years. If the amount has been offered to tax in any of the preceding assessment years, as a sequitur, would obviously for part of the qualifying amount for the purposes of deduction under section 10AA of the Act. In respect of interest income from GLES deposit, interest income from loans given to employees and incentive receipts from Airlines, in our opinion cannot be held to be profits that arises out of the business undertaking and therefore we hold the same not eligible for purposes of deduction under section 10AA of the Act. Reduction of deduction under section 10AA in respect of pure onsite revenue - HELD THAT - We note that the denial of the exemptions claimed is purely due to the reason that the Ld.AO did not verify the details furnished by assessee. There is no doubt expressed by the Ld.AO regarding the nexus or any shortfall of evidence or materials in support of the assessee s claim as argued by the Ld.AR, the disallowance made on adhoc basis, without any justification and the reasoning for such disallowance is absolutely uncalled for. However in the interest of justice, the Ld.AR suggested the issue may be remanded to the Ld.AO for due verification. We direct the Ld.AO to verify the details filed and to consider the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. Deduction under section 80JJAA being disallowed - DRP held that the assessee is not engaged in manufacture or production of article or thing and therefore not eligible for deduction under section 80JJAA. It was held that manufacture or production of article or thing cannot be equated with software development - HELD THAT - As relying on case of SAP Labs India Pvt. Ltd. 2016 (6) TMI 1333 - ITAT BANGALORE wherein held there is no case for the Revenue that assessee had failed to file details of software engineers employed by it. In our opinion software engineers newly employed by it fell within the meaning of the word 'workmen' - we direct the Ld.AO to consider the claim in accordance with the observations and principles laid down by this Tribunal in herein above. Needless to say that proper opportunity of being heard is to be granted to the assessee. TDS u/s 195 - Disallowance of Sub Contracting charges paid to Infosys Technologies China Co Ltd under section 40(a)(i) for not deducting tax at source - HELD THAT - AR though have submitted various arguments, does not have any merit. Accordingly we dismiss this ground raised by the assessee. Deduction under section 10AA in respect of disallowance under section 40(a)(i) and Deduction in the year of payment of TDS demand - HELD THAT - We note that the submissions of assessee deserves to be considered and the claim has to be considered in accordance with law. In our opinion there is no statutory provision to that effect having been made, as a consequence of the disallowance, claim of deduction of such disallowance under section 10A/AA must follow. Needless to say that proper opportunity of being heard is to be granted to the assessee. Allowability of deduction u/s 35(2AB) in respect of scientific research expenditure incurred from 1.4.2011 to 22.11.2011 - HELD THAT - As this claim deserves to be verified by the Ld.AO based on various evidences and documents filed by assessee having regards to the decisions relied upon by assessee hereinabove. Needless to say that proper opportunity of being heard is to be granted to the assessee. TDS credit not allowed - HELD THAT - As AR submitted that TDS credit was not allowed to the extent of Rs.1,06,50,855/- was not allowed by the Ld.AO. He has filed the evidences in support of this claim. In lieu of the above, we direct the Ld.AO to verify the above claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. TDS credit and advance tax relating to ICIL not allowed even though it was allowed in the Draft assessment order - HELD THAT - Action of the Ld.AO in denying the aforesaid TDS credit and advance tax in the final assessment order is contrary to the scheme of section 144C, invalid, bad in law and liable to be quashed. The Ld.AO be therefore directed to allow TDS credit and advance tax relating to Infosys Consulting India Ltd which was merged with the assessee. We direct the Ld.AO to verify the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. Allowability of incremental foreign tax credit which was allowed in the draft assessment order - HELD THAT - As relying on case of Goetz India Ltd. 2006 (3) TMI 75 - SUPREME COURT we direct the Ld.AO to consider the assessee s claim and grant credit of foreign taxes paid for the year under consideration that has been verified during the draft assessment proceedings. Needless to say that proper opportunity of being heard must ne granted to the assessee. Interest on IT Refund granted under section 143(1) but subsequently recovered on completion of assessment proceedings is allowable as deduction - HELD THAT - This issue needs to be verified by the Ld.AO. The Ld.AO is directed to verify based on the necessary evidences filed by assessee. The issue then is to be considered in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee.

Summary

Issues Involved:
1. Denial of deduction claimed under section 10AA for 4 SEZ units.
2. Transfer pricing adjustment in respect of interest receivable from Infosys China and Infosys Brazil.
3. Disallowance under section 14A read with rule 8D(2)(iii).
4. Protective disallowance under section 40(a)(i) for subscription charges paid to M/s Forester Research and M/s Gartner.
5. Disallowance under section 40(a)(ia) / 40(a)(i) for software expenses.
6. Disallowance of software expenses as capital expenditure.
7. Disallowance of brand building expenses.
8. Disallowance of commission paid.
9. Non-reduction of communication and foreign currency expenses from total turnover while computing deduction under section 10AA.
10. Reduction of various incomes from profits of SEZ units while computing deduction under section 10AA.
11. Reduction of deduction under section 10AA in respect of pure onsite revenue.
12. Disallowance of deduction under section 80JJAA.
13. Disallowance of subcontracting charges paid to Infosys Technologies China Co Ltd under section 40(a)(i).
14. Deduction under section 10AA in respect of the above disallowance under section 40(a)(i).
15. Deduction in the year of payment of TDS demand.
16. Allowability of deduction under section 35(2AB) for scientific research expenditure.
17. TDS credit not allowed fully.
18. TDS credit and advance tax relating to ICIL not allowed.
19. Foreign tax credit not allowed.
20. Allowability of state taxes paid outside India.
21. Deduction for interest on IT refund recovered on completion of assessment proceedings.
22. Interest levied under section 234B and 234D.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 10AA for 4 SEZ Units:
The Tribunal allowed the deduction claimed under section 10AA for the SEZ units at Chennai, Chandigarh, Mangalore, and Pune. It was noted that the deduction was allowed in the first year of claim and cannot be disallowed in subsequent years. The Tribunal referred to various judicial precedents and CBDT Circulars to conclude that the conditions of splitting up and reconstruction cannot be examined in subsequent years once satisfied in the initial year.

2. Transfer Pricing Adjustment:
The Tribunal upheld the interest rate of 6% charged by the assessee on loans advanced to Infosys China and Infosys Brazil. It was noted that the revenue authorities had accepted the rate in subsequent and preceding assessment years. The Tribunal found no basis for the interest rate computed by the TPO based on fixed deposit rates and followed the principles laid down by the Delhi Tribunal in CIT vs. Cotton Naturals India Pvt. Ltd.

3. Disallowance under Section 14A:
The Tribunal upheld the disallowance voluntarily made by the assessee under section 14A. It noted that the AO had included investments in Infosys BPO Ltd., which did not yield any exempt income for the year under consideration. Applying the ratio laid down in Vireet Investment, the Tribunal directed the AO to compute the disallowance as voluntarily offered by the assessee.

4. Protective Disallowance under Section 40(a)(i):
The Tribunal remanded the issue back to the AO/TPO to verify the claims in accordance with the principles laid down by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT. The AO was directed to carry out necessary verifications and delete the disallowance if no TDS was liable to be deducted.

5. Disallowance under Section 40(a)(ia) / 40(a)(i):
The Tribunal remanded the issue back to the AO/TPO to verify the claims in accordance with the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT. The AO was directed to carry out necessary verifications and delete the disallowance if no TDS was liable to be deducted.

6. Disallowance of Software Expenses as Capital Expenditure:
The Tribunal set aside the issue to the AO with a direction to verify the nature and purpose of software expenses and decide in light of judicial precedents. The AO was also directed to verify the claim of depreciation at 60% if the expenses were held to be capital in nature.

7. Disallowance of Brand Building Expenses:
The Tribunal allowed the deduction for brand building expenses, noting that similar expenses were allowed in the assessee's own case and the case of its subsidiary. The Tribunal found no evidence that the expenses were towards any capital asset.

8. Disallowance of Commission Paid:
The Tribunal remanded the issue to the AO to verify the submissions regarding the taxability of commission under the DTAA and the provisions of the Act. The AO was directed to consider the claim in accordance with law and grant proper opportunity of being heard to the assessee.

9. Non-reduction of Communication and Foreign Currency Expenses:
The Tribunal held that communication and foreign currency expenses should be reduced from total turnover while computing deduction under section 10AA, following the Supreme Court's decision in CIT v HCL Technologies Ltd.

10. Reduction of Various Incomes from Profits of SEZ Units:
The Tribunal held that income from sale of scrap should be considered for deduction under section 10AA. However, interest income from GLES deposits, loans to employees, and incentive receipts from airlines were not eligible for deduction under section 10AA.

11. Reduction of Deduction under Section 10AA for Pure Onsite Revenue:
The Tribunal remanded the issue to the AO for verification of details filed by the assessee and to consider the claim in accordance with law. The AO was directed to grant proper opportunity of being heard to the assessee.

12. Disallowance of Deduction under Section 80JJAA:
The Tribunal directed the AO to consider the claim in light of the principles laid down by the Tribunal in similar cases, noting that software engineers could be considered as workmen for the purpose of section 80JJAA.

13. Disallowance of Subcontracting Charges under Section 40(a)(i):
The Tribunal dismissed the ground, noting that the issue was already decided against the assessee in earlier proceedings.

14. Deduction under Section 10AA for Disallowance under Section 40(a)(i):
The Tribunal directed the AO to consider the claim of deduction under section 10AA as a consequence of the disallowance under section 40(a)(i), following judicial precedents and CBDT Circulars.

15. Deduction in the Year of Payment of TDS Demand:
The Tribunal noted that the issue need not be adjudicated as the claim for deduction under section 10AA was already directed to be considered.

16. Allowability of Deduction under Section 35(2AB):
The Tribunal remanded the issue to the AO to verify the claim of deduction for scientific research expenditure incurred from 01/04/2011 to 22/11/2011 in light of judicial precedents.

17. TDS Credit Not Allowed Fully:
The Tribunal directed the AO to verify the claim of TDS credit in accordance with law and grant proper opportunity of being heard to the assessee.

18. TDS Credit and Advance Tax Relating to ICIL:
The Tribunal directed the AO to verify the claim of TDS credit and advance tax relating to Infosys Consulting India Ltd. in accordance with law.

19. Foreign Tax Credit Not Allowed:
The Tribunal directed the AO to consider the claim of foreign tax credit verified during the draft assessment proceedings and grant credit for foreign taxes paid.

20. Allowability of State Taxes Paid Outside India:
The Tribunal dismissed the grounds as not pressed by the assessee.

21. Deduction for Interest on IT Refund Recovered:
The Tribunal directed the AO to verify the claim of deduction for interest on IT refund recovered and consider the issue in accordance with law.

22. Interest Levied under Section 234B and 234D:
The Tribunal noted that the ground was consequential in nature and did not require adjudication.

Additional Ground:
The Tribunal dismissed the additional ground for deduction of education cess as it was not pressed by the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed, with several issues remanded back to the AO for verification and reconsideration in accordance with law. The Tribunal directed the AO to grant proper opportunity of being heard to the assessee in all remanded matters.