2021 (5) TMI 188 - AT - Income Tax

Foreign Dividend income - CIT(A) directing the Assessing Officer to assess the foreign dividend income received on net basis - HELD THAT - As of now, the issue is squarely covered in assessee s favor by the orders of Tribunal for AY 1995-96 as well as for AY 2000-01. In AY 2000-01, the bench following the decision of Hon ble Bombay High Court in CIT V/s Ambalal Kilachand 1994 (4) TMI 67 - BOMBAY HIGH COURT decided the issue in assessee s favor. Respectfully following the binding judicial precedents, we hold that the directions of Ld. CIT(A) would not require any interference on our part, in any manner. Ground No.1 of revenue s appeal stand dismissed. Assessee received foreign interest income and offered the same net of tax. The Ld. AO did not consider the assessee s submissions. The Ld. CIT(A) directed Ld. AO apply the analogy of foreign dividend income. Aggrieved, the revenue is before us by way of Ground No.2. Since we have dismissed ground no.1, this ground would also stand dismissed since Ld. CIT(A) has followed the analogy of foreign dividend income only, which we have already confirmed. Disallowance of Software expenditure - CIT(A) opined that the software which was purchased for resale was akin to purchases of raw material and therefore the same was an allowable expenditure and the remaining expenditure was held to be a capital expenditure - HELD THAT - Before us, it is undisputed position that software was purchased for-resale and it was akin to purchase of raw material for the business. This being the case, no fault could be found in the adjudication of Ld. CIT(A). Ground No. 3 of revenue s appeal stands dismissed. Deduction u/s 10A and deduction u/s 80HHE against software exports - whether the old units which was earlier claiming deduction u/s 80HHE could claim deduction u/s 10A in this year? - HELD THAT - We find that this issue is covered in assessee s favor by the decision of Hon ble Bombay High Court in group concern titled as CIT V/s Tata Consultancy Services 2019 (4) TMI 1439 - BOMBAY HIGH COURT as relying on DAMCO SOLUTIONS (P.) LTD. 2010 (10) TMI 592 - DELHI HIGH COURT Section 80HHE of the Act pertains to deduction in respect of profits from export of computer software etc. Sub-section (5) of Section 80HHE provides that where deduction under said section is claimed and allowed in respect of the profits of the business referred to in sub-section (1) for any assessment year, no deduction shall be allowed in relation to such profits under any other provision of the Act for the same or any other assessment year. What sub-section (5) of Section 80HHE thus prohibits is the claim deduction allowed under Section 80HHE under any other provision, be it in the same assessment year or in other assessment year. In the present case, it is not even the ground of the revenue that the deduction under section 10A of the act claimed by the assessee in the present year is in relation to the profit for which the assessee was granted deduction under section 80HHE. Sub- section 5 of Section 80HHE of the Act, therefore, in the present case would have no applicability. Similar is the ratio of decision of Hon ble Delhi High Court in Pr.CIT V/s E-fund International India P. Ltd. 2015 (10) TMI 488 - DELHI HIGH COURT wherein Hon ble Court observed that making of claim u/s 80HHE in one year would not preclude an assessee from claiming the benefit u/s 10A in respect of the same unit in succeeding year. The purpose of sub-section (5) of Sec.80HHE was to avoid double benefit but that would not mean that if for a particular assessment year the assessee wants to claim a benefit only under Sec.10A of the act and not u/s 80HHE, then it would be denied to the assessee. We further find that the allegations of Ld.AO that there was extension of existing business or the new units were formed by splitting or reconstruction of existing business is bereft of any positive material on record. Therefore, we do not find any infirmity in the impugned order, on this issue. Resultantly, Ground No.4 of revenue s appeal stand dismissed. Adjustment of uncollected / unrealized debtors from total turnover in denominator - HELD THAT - Upon careful consideration of subsequent decision of Hon ble Madras High Court in Maars Software 2019 (3) TMI 578 - MADRAS HIGH COURT we find that Hon ble Court has distinguished the decision in Galaxy Granites 2012 (9) TMI 68 - MADRAS HIGH COURT by observing that this decision was rendered in the context of Sec.80HHC and the same would not advance the case of the revenue as far as the scheme of Section 10A or 10B was concerned. The Hon ble Court chose to follow the same principle of interpretation as followed by Hon ble Apex Court in HCL Technologies 2018 (5) TMI 357 - SUPREME COURT and held that the export turnover in numerator as well as denominator could not assume two different characteristics for two parts of the same formula. Therefore, if export turnover in numerator has excluded the unrealized foreign exchange, than the same figure has to be adopted in denominator. The other decisions has cited by Ld. AR has also taken the same view. Therefore, going by the ratio of these decisions, we direct Ld. AO to reduce the unrealized debtors from total turnover in denominator while computing deduction u/s 10A / 80HHE. Correct formula to compute deduction u/s 80HHE - revenue is aggrieved by the action of Ld. CIT(A) in directing Ld. AO to consider entire profits of software business as a whole and apply the ratio of export turnover to total turnover including the total turnover of Sec.10A units - HELD THAT - As relying on M/S SASKEN COMMUNICATION TECHNOLOGIES LTD 2014 (1) TMI 1538 - KARNATAKA HIGH COURT AO is directed to deduct the profits of Sec.10A undertakings from the profit of the software business as a whole and applying the ratio of the export turnover (excluding the export turnover of 10A units) as divided by total turnover (excluding the total turnover of 10A units). AO is directed to re-compute deductions u/s 10A as well as u/s 80HHE in terms of our above order including our decision on overseas taxes, software etc. Disallowance of interest expenditure - HELD THAT - We do not concur with the approach of Ld. CIT(A) in invoking the provisions of Sec.14A of the Act. Consequently, the interest expenditure of ₹ 246.88 Crores would be fully deductible u/s 36(1)(iii) of the Act. The various case laws as enumerated in para 10.3 relied upon by Ld. AR supports our conclusion. Accordingly, Ld. AO is directed to rework allowable deduction u/s 80M. Ground No.4 of assessee s appeal stand allowed to that extent.

Summary

Issues Involved:
1. Deduction of Overseas Taxes & DIT Relief
2. Foreign Dividend and Interest Income
3. Disallowance of Software Expenditure
4. Claim under Section 10A and 80HHE
5. Disallowance of Interest Expenditure

Detailed Analysis:

1. Deduction of Overseas Taxes & DIT Relief:
The assessee claimed a deduction for overseas taxes paid, which was denied by the AO based on the amendment to Sec.40(a)(ii). The CIT(A) directed the AO to rework the disallowance based on Explanation-1 to Sec.40(a)(ii) and grant deduction only if the tax was not eligible for tax relief under sections 90 or 91. The assessee's claim for DIT relief was restricted by the AO to the extent of taxes paid overseas at rates applicable on such income, which was upheld by the CIT(A) with directions to verify the computations. The Tribunal found that appropriate relief had already been granted and dismissed the related grounds as 'not pressed' or 'infructuous'.

2. Foreign Dividend and Interest Income:
The AO taxed the foreign dividend on a gross basis, but the CIT(A) directed it to be taxed on a net basis, following Tribunal orders from earlier years and the decision of the Bombay High Court in CIT V/s Ambalal Kilachand. The Tribunal upheld the CIT(A)'s direction, noting that the issue was covered by earlier decisions. Similarly, the foreign interest income was to be taxed on a net basis, following the analogy of foreign dividend income.

3. Disallowance of Software Expenditure:
The AO disallowed the entire software expenditure claimed by the assessee, treating it as capital expenditure, but allowed depreciation on software used internally. The CIT(A) allowed the expenditure related to software purchased for resale as revenue expenditure and upheld the disallowance for software used internally as capital expenditure. The Tribunal agreed with the CIT(A) that software purchased for resale was akin to raw material and thus allowable as revenue expenditure.

4. Claim under Section 10A and 80HHE:
The AO denied the deduction under Section 10A for old units, treating them as formed by splitting or reconstruction of existing business, and computed the deduction under Section 80HHE instead. The CIT(A) allowed the deduction under Section 10A, relying on earlier appellate orders and a CBDT circular. The Tribunal upheld this decision, finding that the issue was covered by the Bombay High Court's decision in CIT V/s Tata Consultancy Services and other judicial precedents. Additionally, the Tribunal directed the AO to exclude unrealized debtors from the total turnover while computing deductions under Sections 10A and 80HHE, following judicial precedents.

5. Disallowance of Interest Expenditure:
The AO disallowed the interest expenditure claimed by the assessee, treating it as capital expenditure and not incurred wholly for business purposes. The CIT(A) directed the AO to apportion the interest expenditure between business income and income from other sources (dividend), allowing the interest related to dividend income under Section 57(iii) and reworking the deduction under Section 80M. The Tribunal, following earlier decisions, held that the entire interest expenditure was allowable under Section 36(1)(iii) as the assessee was in the business of making investments to secure controlling interest. The Tribunal directed the AO to rework the allowable deduction under Section 80M accordingly.

Conclusion:
The appeals by both the assessee and the revenue were partly allowed, with specific directions provided for reworking deductions and computations as per the Tribunal's findings. The Tribunal's decisions were based on judicial precedents and the factual matrix of the case.