2023 (1) TMI 1292 - AT - Income Tax

Deduction u/s 10A - interest income has not been derived from exempt industrial undertaking - HELD THAT - We are of the considered view that earning interest from the surplus funds deposited with bank, bonds as well as loans to the employees and subsidiaries are eligible for deduction under section 10A of the Act subject to the quantification and attribution of such interest to 10A units by the AO. The assessee shall furnish evidence to established its claim u/s 10A of the act which as derived from business of Software Technology Park of India (STPI) units. So ground No.1 of the assessee is allowed subject to the verification and quantification by the AO. Disallowance u/s 14A - expenditure incurred on earning exempt income - HELD THAT - Honourable High Court of Bombay in case of CIT vs. Sociedade De Fomento Industrial (P.) Ltd. 2020 (11) TMI 277 - BOMBAY HIGH COURT held that no doubt expenditure u/s 14A includes both direct and indirect expenditure but that expenditure must have a proximate relationship with exempt income and surmises or conjunctures is no answer. So in the instant case when the assessee has purchased UTI bonds in 1998 and earned interest income thereon in A.Y. 2005 06 no proximate relationship in the expenditure disallowed by the AO with the exempt income has been established but mechanically applied rule 8D which is not applicable for the year under consideration. So in these circumstances we are of the considered view that disallowance made under section 14A by the AO and confirmed by the Ld. CIT(A) is not sustainable in the eyes of law. Computation of deduction of deduction 10A - AO is directed to allow the assessee's claim of deduction u/s 10A of the Act by including the same both in the total turnover as well as export turnover. AO has added back the amount of losses of the assessee's Chennai unit and Goregaon units on the ground that section 10A is an exemption section and not a deduction section - HELD THAT - Since the issue is no longer res-integra having been covered by the order passed in Scientific Atlanta India Technology (P) Ltd 2010 (2) TMI 658 - ITAT, CHENNAI and this issue has also been decided in favour of the assessee in case of CIT vs. Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT we find no illegality or perversity in the impugned findings. Hence, ground numbers 2 and 3 are determined against the Revenue. Addition on account of notional interest from overseas subsidiaries on account of outstanding balances lying with them - HELD THAT - As we are of the considered view that when undisputedly AEs are not the end customers and their remittance to the assessee in turn depends upon the remittances by the end customers it cannot be said that the AEs have benefited because of delay in remitting the receivables. These facts have been duly thrashed by the Ld. CIT(A). So we find no illegality or perversity in the impugned findings returned by the Ld. CIT(A). Hence, ground decided against the Revenue. Addition on account of interest charged to the overseas subsidiaries in respect of the loans granted to them as well as deemed guarantee charge - CIT(A) deleted this addition which is under challenge - HELD THAT - CIT(A) has rightly reached the conclusion that when the interest has already been charged by the average LIBOR rate as discussed in the impugned order the adjustment made by the Ld. TPO/AO on account of arms length is not sustainable in the eyes of law and similarly adjustment made by the assessee on account of guarantee fees also not sustainable as AEs have directly taken the loan from the assessee and as such there is no question of making payment of guarantee fee. So we find no ground to interfere into the findings returned by the Ld. CIT (A). Hence determined against the Revenue.

Summary

Issues Involved:
1. Denial of deduction under section 10A on interest income.
2. Unrealized export proceeds.
3. Disallowance under section 14A.
4. Exemption under section 10A on training income.
5. Losses of units eligible for exemption under section 10A.
6. Exclusion of telecommunication expenses from export turnover.
7. Addition on account of share of customization fee retained by overseas subsidiaries.
8. Addition on account of interest receivable on delayed receipt from overseas subsidiaries.
9. Addition on account of interest charged on loan to overseas subsidiaries.

Detailed Analysis:

Issue 1: Denial of Deduction Under Section 10A on Interest Income
The AO held that the interest income of Rs. 10,88,36,054/- was not eligible for deduction under section 10A as it was not derived from the exempt industrial undertaking. The CIT(A) upheld this decision, relying on the Supreme Court decision in Liberty India, which stated that receipts beyond the first degree cannot be considered for deduction. However, the Tribunal referred to the Karnataka High Court decision in Hewlett Packard Global Ltd., which held that interest income from temporary parking of surplus funds is integral to export business activity and eligible for deduction under section 10A. The Tribunal allowed the deduction subject to verification and quantification by the AO.

Issue 2: Unrealized Export Proceeds
This ground was not pressed during the argument by the assessee's representative and was hence dismissed as infructuous.

Issue 3: Disallowance Under Section 14A
The assessee claimed interest income from UTI bonds as exempt without disallowing corresponding expenses under section 14A. The CIT(A) upheld the disallowance made by the AO. The Tribunal noted that Rule 8D is prospective and not applicable for assessment years before 2007. The Tribunal found no proximate relationship between the disallowed expenditure and the exempt income and ordered the deletion of the disallowance.

Issue 4: Exemption Under Section 10A on Training Income
The AO disallowed the exemption on training income of Rs. 3.04 crores, stating it was not from software development. The CIT(A) allowed the exemption, following previous orders in the assessee's favor. The Tribunal upheld this decision, noting that training income is intricately connected to the export of software and should be included in both total turnover and export turnover for computing deduction under section 10A.

Issue 5: Losses of Units Eligible for Exemption Under Section 10A
The AO added back losses of the assessee's Chennai and Goregaon units, treating section 10A as an exemption section. The CIT(A) deleted the addition, following the Chennai Special Bench decision in Scientific Atlanta India Technology (P) Ltd. The Tribunal upheld this decision, referencing the Supreme Court ruling in CIT vs. Yokogawa India Ltd., which treated section 10A as a deduction section.

Issue 6: Exclusion of Telecommunication Expenses from Export Turnover
The AO excluded telecommunication expenses from export turnover while computing the deduction under section 10A. The CIT(A) allowed the inclusion of these expenses, following the Tribunal's decision in Patni Telecom (P) Ltd. The Tribunal upheld this decision, stating that if such expenses are not included in the consideration received in convertible foreign exchange, their deduction does not arise.

Issue 7: Addition on Account of Share of Customization Fee Retained by Overseas Subsidiaries
The AO made an adjustment of Rs. 4.28 crores on account of customization fees retained by overseas subsidiaries. The CIT(A) deleted the adjustment, following previous orders in the assessee's favor. The Tribunal upheld this decision, noting that the subsidiaries' role justified the commission paid, as confirmed by the Bombay High Court.

Issue 8: Addition on Account of Interest Receivable on Delayed Receipt from Overseas Subsidiaries
The AO added Rs. 2.58 crores as notional interest on delayed receipts from overseas subsidiaries. The CIT(A) deleted this addition, noting that the delay was due to the end customers' delayed payments. The Tribunal upheld this decision, referencing its earlier ruling that the delay did not benefit the subsidiaries.

Issue 9: Addition on Account of Interest Charged on Loan to Overseas Subsidiaries
The AO added Rs. 1.18 crores for interest charged on loans to overseas subsidiaries. The CIT(A) deleted this addition, noting that the interest was charged at the average LIBOR rate. The Tribunal upheld this decision, stating that the interest charged was at arm's length and there was no need to charge additional guarantee fees as the loans were directly from the assessee.

Conclusion:
The Tribunal allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue, providing detailed justifications for each issue based on previous rulings and applicable legal principles.