2022 (5) TMI 1560 - AT - Income Tax

Two different and contradictory computation sheets computing total income - HELD THAT - As any one of them will only survive it is a matter requiring verification, we restore this matter to the file of AO for verifying the claim of the assessee. Since the assessing officer is required to give effect to the order passed by this Tribunal, the grievance of the assessee may get redressed at that stage. Nature of expenses - Capitalisation of Salaries and Wages - assessee herein has developed certain technologies and software platforms based on AI, IOT and Machine learning - AO noticed that the assessee has claimed all expenses incurred in development of these software products as revenue expenditure - HELD THAT - The common practice followed by information technology companies is to expense all the expenses incurred on development of a software mean for sale/license/rent. We noticed earlier that, in the instant case, the applications developed under CTO projects are the products developed by the assessee for sale/license. These products are revenue assets. The development was complete in respect of first four products and the development work was continuing for the remaining two products. We noticed that the business of the assessee itself is development of software products or providing of software services and hence the revenue generated on their sales or providing of services is its income, in which case, the expenditure incurred on development of those applications shall constitute related expenditure. Even if the expenditure does not result in creation of any successful software product/application/tool etc., considering the business nature of the assessee, those expenses shall constitute revenue expenditure in the hands of the assessee, as it is necessary for the assessee to keep updating itself and keep trying new products to be afloat in the competitive market - Thus we hold that the impugned expenses incurred by the assessee are allowable as revenue expenditure and accordingly, the disallowance made by the assessing officer could not be sustained. TP Adjustment - Adjustment for interest on advances given to Overseas subsidiaries - HELD THAT - We direct AO/TPO to adopt ALP rate of interest at Libor rate of relevant outstanding period of loan 150 basis point. In the grounds of appeal, the assessee has pointed out that the TPO has computed annual interest on month end balances. As submitted that the month end balance of a particular month may include opening balance and it has resulted in duplication/multiplication. We have directed AO/TPO to compute interest for the outstanding period of loan only. Accordingly, the assessee is directed to furnish the outstanding period of each advances in order to enable AO/TPO to compute correct amount of interest. TP Adjustment made in respect of corporate guarantee given by the assessee to its Associated Enterprises - HELD THAT - As relying on in the assessee s own case in AY 2011-12 to 2014-15 2020 (10) TMI 605 - ITAT BANGALORE we direct the AO/TPO to adopt the rate of guarantee commission @ 0.50% and accordingly delete the addition made by estimating the commission in excess of 0.50%. TP adjustment - Specified Domestic Transaction (SDT) - HELD THAT - This 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. Disallowance of expenses u/s 14A against exempt income - HELD THAT - This issue has been restored by ITAT in assessment year 2008-09 to the file of the A.O. A perusal of the assessment order passed by A.O. would show that the A.O. has observed that he was not satisfied with the working furnished by the assessee. However, the A.O. has not examined the basis of the allocation and apportionment of expenses towards the exempt income. Hence, the coordinate bench has restored this issue to the file of the A.O. for examining it afresh. Accordingly, following the decision rendered by the coordinate bench, we restore this issue to the file of the A.O. Taxability of Marked to Market income on reinstatement of forward contracts - HELD THAT - An identical issue has been examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2014-15 2020 (10) TMI 605 - ITAT BANGALORE as noticed 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. Setting off the loss arising from SEZ units against income earned by non-tax holiday units - HELD THAT - An identical issue has been examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2014-15 2020 (10) TMI 605 - ITAT BANGALORE held that the 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. Taxability of profits from development centers located outside India - AO took the view that these development centres are independent units and accordingly estimated income from these centres and correspondingly reduced the said profit from the units eligible for deduction u/s 10A/10AA/10B - HELD THAT - Remit this issue to the file of the A.O. for examining it afresh. Exclusion of other income for the purpose of computing deduction u/s 10AA - HELD THAT - We hold that the income generated on sale of scrap/newspaper should be included in the profits of the undertaking eligible for deduction u/s 10AA. In this year also, the break-up details of Other income are not available. Accordingly, we restore this issue to the file of AO with the direction to examine the break-up details of other income and decide the issue accordingly. Deduction u/s 10A/10AA/10B of the Act in respect of interest income earned by the assessee - HELD THAT - 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 of the Act. With these observations, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra. Eligibility of the assessee to claim deduction u/s 10AA of the Act for deemed exports, i.e., sales made to own units located in SEZs - HELD THAT - As in the assessee s own case in AY 2009-10 to 2014-15 we direct the A.O. to include deemed exports as part of turnover while computing deduction u/s 10A/10AA/10B. Reimbursements received to be excluded from the export turnover for the purpose of computing deduction u/s 10A/10AA/10B - HELD THAT - We noticed that during the year, the break-up details of reimbursements are not given in the assessment order. In the above said decision, detailed discussions have been made with regard to this issue. Accordingly, we restore this issue to the file of AO with the direction to obtain break-up details of reimbursements and follow the directions given in AY 2009-10 to 2014-15 for computing deduction u/s 10A/10AA/10B of the Act. Expenditure incurred in foreign currency as deducted from the export turnover while computing deduction u/s 10A/10AA/10B - HELD THAT - As expenditure incurred in development of software and which forms part of direct cost of development of software would not fall under the category of technical services or services rendered outside India, as contemplated in the definition of Export turnover. Hence the same is not required to be excluded from export turnover. Accordingly, 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 in the case of Tata Elixi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT and HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT - we set aside the order passed by AO on this issue and direct him to compute deduction u/s 10A/10AA/10B of the Act following the discussions made supra. Eligibility of the assessee to claim deduction u/s 10A of the Act in case of Delayed collections of export proceeds - HELD THAT - We direct the AO to include sale amount in the Export turnover while computing deduction u/s 10A/10AA/10B of the Act, wherever the applications have been filed by the assessee to RBI through its bankers seeking permission to receive the export proceeds beyond the prescribed period. Foreign tax credit - allowability of quantum of foreign tax credit - HELD THAT - We set aside the order passed by AO on this issue and direct him to allow foreign tax credit claimed by the assessee in terms of the decision rendered by Hon ble High Court of Karnataka 2015 (10) TMI 826 - KARNATAKA HIGH COURT FTC to be allowed as Business expenses - We direct the AO to allow the foreign tax paid by the assessee, to the extent not allowed as tax credit u/s 90 91 of the Act, as deduction from the business income of the assessee. TDS u/s 195 - Disallowance of payment made u/s 40(a)(ia) for non-deduction of tax at source - HELD THAT - We are of the view that this issue requires fresh examination at the end of AO. Accordingly we restore this issue to the file of the AO with the direction to examine this issue afresh applying the principles laid down in the case Engineering Analysis Centre of Excellence P Ltd. 2021 (3) TMI 138 - SUPREME COURT . If the AO comes to the conclusion that the decision rendered by Hon ble Supreme Court supra is applicable to the payments made to Gartner group and there is no requirement to deduct tax at source, then there is no requirement of making any disallowance u/s 40(a)(i) - if the AO comes to the conclusion that the above said decision of Hon ble Supreme Court is not applicable and the assessee is liable to deduct tax at source, then the AO shall grant enhanced deduction u/s 10A/10AA/10B of the Act by increasing the profits of undertaking by the amount of disallowance so made. Disallowance of interest expenditure incurred on investment in Foreign Subsidiary u/s 115BBD - HELD THAT - We direct the AO to delete the disallowance u/s 115BD of the Act, if the assessee has not received any dividend during the year under consideration . Deduction of Education Cess as expenditure - This ground is liable to rejected in view of the amendment brought in by Finance Act 2022 inserting specific provision in the Income tax Act providing for disallowance of Education Cess. Accordingly, we reject this ground. Claim for credit of TDS credit on the basis of additional TDS certificates - AO did not grant TDS credit on the reasoning that the said TDS amount were not reflected in Form 26AS - HELD THAT - The assessee cannot be penalised for the fault of the TDS deductor in not filing statement of TDS. It is also possible that the deductor of TDS would have filed the statement of TDS belatedly. Accordingly, we are of the view that this issue requires verification at the end of AO. Accordingly, we restore this issue to the file of AO with the direction to examine the claim of the assessee and allow TDS credit in accordance with law. Addition of amount disallowed u/s 14A of the Act under clause (f) of Explanation 1 to sec. 115JB of the Act to the net profit for the purpose of computing book profit - HELD THAT - An identical issue was examined by the co-ordinate bench in the assessee s own case in AY 2014-15 2020 (10) TMI 605 - ITAT BANGALORE special bench of ITAT 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 of the Act 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.

Summary

Issues Involved:
1. Contradictory computation sheets by the AO.
2. Demand towards Dividend Distribution Tax.
3. Capitalisation of Salaries and Wages.
4. Transfer pricing adjustments.
5. Disallowance of expenses u/s 14A.
6. Taxability of Marked to Market income.
7. Setting off losses from SEZ units against non-tax holiday units.
8. Taxability of profits from development centers outside India.
9. Exclusion of "other income" for computing deduction u/s 10AA.
10. Deduction u/s 10A/10AA/10B for interest income.
11. Deduction u/s 10AA for deemed exports.
12. Exclusion of reimbursements from export turnover.
13. Exclusion of foreign currency expenditure from export turnover.
14. Deduction u/s 10A for delayed collections of export proceeds.
15. Claim of foreign tax credit.
16. Disallowance of payment to Gartner Group u/s 40(a)(ia).
17. Disallowance of interest expenditure on investment in foreign subsidiary u/s 115BBD.
18. Deduction of Education Cess.
19. Credit of TDS on additional TDS certificates.
20. Addition of disallowed u/s 14A amount to net profit for computing book profit.

Detailed Analysis:

1. Contradictory Computation Sheets by the AO:
The AO issued two contradictory computation sheets for total income. The Tribunal restored the matter to the AO for verification and redressal.

2. Demand Towards Dividend Distribution Tax:
The AO raised a demand for Dividend Distribution Tax without basis. The Tribunal restored the issue to the AO for verification.

3. Capitalisation of Salaries and Wages:
The AO capitalised expenses related to software development as intangible assets. The Tribunal held these expenses as revenue in nature, thus allowing them as revenue expenditure. The Tribunal also directed the AO to recompute the eligible profits of 10AA units and accordingly compute the eligible benefit under section 10AA.

4. Transfer Pricing Adjustments:
Interest on Advances to Overseas Subsidiaries: The Tribunal directed the AO/TPO to adopt ALP rate of interest at Libor + 150 basis points.
Corporate Guarantee Commission: The Tribunal directed the AO/TPO to adopt a guarantee commission rate of 0.50%.
Specified Domestic Transactions: The Tribunal restored the issue to the AO/TPO for fresh examination.

5. Disallowance of Expenses u/s 14A:
The Tribunal restored the issue to the AO for re-examination in light of the previous Tribunal orders and directed the AO to decide the issue in accordance with law.

6. Taxability of Marked to Market Income:
The Tribunal restored the issue to the AO for verification of whether the value of underlying assets is more than the value of forward contracts.

7. Setting Off Losses from SEZ Units Against Non-Tax Holiday Units:
The Tribunal held that losses from SEZ units should not be adjusted against profits from other SEZ units but can be adjusted against non-SEZ units' profits, following the jurisdictional High Court and Supreme Court decisions.

8. Taxability of Profits from Development Centers Outside India:
The Tribunal restored the issue to the AO for fresh examination, following the directions given in earlier Tribunal orders.

9. Exclusion of "Other Income" for Computing Deduction u/s 10AA:
The Tribunal directed the AO to include income from the sale of scrap/newspaper in the profits of the undertaking eligible for deduction u/s 10AA and to examine the break-up details of "Other income."

10. Deduction u/s 10A/10AA/10B for Interest Income:
The Tribunal restored the issue to the AO for fresh examination to determine the nexus between interest income and the income of the business of the undertaking.

11. Deduction u/s 10AA for Deemed Exports:
The Tribunal directed the AO to include deemed exports as part of turnover while computing deduction u/s 10A/10AA/10B, following the jurisdictional High Court decision.

12. Exclusion of Reimbursements from Export Turnover:
The Tribunal restored the issue to the AO for fresh examination, following the directions given in earlier Tribunal orders and considering the break-up details of reimbursements.

13. Exclusion of Foreign Currency Expenditure from Export Turnover:
The Tribunal directed the AO to compute the deduction u/s 10A/10AA/10B by excluding only specific expenses as defined in the sections and including them in both export turnover and total turnover.

14. Deduction u/s 10A for Delayed Collections of Export Proceeds:
The Tribunal directed the AO to include sale amounts in the export turnover where applications were filed to RBI for extension of time for receipt of export proceeds.

15. Claim of Foreign Tax Credit:
The Tribunal directed the AO to allow foreign tax credit as per the jurisdictional High Court decision and to allow foreign tax paid as business expenditure to the extent not allowed as tax credit.

16. Disallowance of Payment to Gartner Group u/s 40(a)(ia):
The Tribunal restored the issue to the AO for fresh examination in light of the Supreme Court decision in Engineering Analysis Centre of Excellence P Ltd and directed the AO to grant enhanced deduction u/s 10A/10AA/10B if disallowance is made.

17. Disallowance of Interest Expenditure on Investment in Foreign Subsidiary u/s 115BBD:
The Tribunal directed the AO to delete the disallowance if the assessee has not received any dividend during the year.

18. Deduction of Education Cess:
The Tribunal rejected the ground in view of the amendment by Finance Act 2022, which provides for disallowance of Education Cess.

19. Credit of TDS on Additional TDS Certificates:
The Tribunal restored the issue to the AO for verification and to allow TDS credit in accordance with law.

20. Addition of Disallowed u/s 14A Amount to Net Profit for Computing Book Profit:
The Tribunal restored the issue to the AO for fresh examination, following the Special Bench decision in Vireet Investments P Ltd.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with several issues restored to the AO for fresh examination and verification.