2021 (10) TMI 1248 - AT - Income Tax

Computation of deduction u/s 10AA - exclusion of telecommunicating expenses and internet usage charges from the export as well as total turnover while computing deduction - HELD THAT - As relying on M/S. IGATE GLOBAL SOLUTIONS LTD. 2019 (8) TMI 1226 - ITAT BANGALORE DR did not bring on record any contrary view or order against the order of this Tribunal. Therefore, we hold that any amount reduced from export turnover should also be reduced from the amount of total turnover in the computation of deduction u/s. 10AA of the Act. Thus, ground raised by the assessee is allowed. Exclusion of expenditure on account of technical services from the export as well as total turnover while computing deduction u/s. 10AA - HELD THAT - As relying on own case 2019 (8) TMI 1325 - ITAT PUNE hold that any amount of foreign exchange expenses reduced from export turnover should also be reduced from the amount of total turnover in the computation of deduction u/s. 10AA of the Act. Thus, ground raised by the assessee is allowed. Onsite/deputation of technical manpower (DTM) software services not eligible for deduction u/s. 10AA - HELD THAT - We note that, in assessee‟s own case i.e. IGATE Global Solution Ltd. as it was then in A.Y. 2007-08, 2019 (8) TMI 1226 - ITAT BANGALORE on transfer, Pune Benches of ITAT discussed the issue in great detail and turned down the contention of Revenue that the income from onsite/DTM was not derived from export of computer software and is not qualified for deduction u/s. 10A/10AA of the Act. Further, the Co-ordinate Bench held that Explanation 3 is a deeming provision, which specifically brings profits and gains derived from on site development of computer software and services for development of software outside India within the meaning of the profits and gains derived from the export of computer software outside India which means that not only the profits and gains derived by the eligible undertaking from export of computer software are eligible for deduction but also profits and gains derived from onsite development of computer software and services for development of software outside India. The words derived from contained in sub-section (1) of section 10A is not an exhaustive provision and it has been further elaborated in sub-section (4) to mean the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. The Co-ordinate Bench opined when there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. The proposition as enunciated by the Co-ordinate Bench in assessee‟s own case i.e. iGATE Global Solution Ltd, as it was the then, in A.Y. 2007-08 has been followed by this Tribunal in assessee‟s own case in A.Y. 2010-11 2020 (3) TMI 338 - ITAT PUNE therefore, we hold that the income from onsite/DTM rendered abroad is considered to be derived from the export of computer software, is eligible for deduction u/s. 10A/10AA of the Act. Nature of gain - foreign exchange gain falls on capital account or revenue account - HELD THAT - AO opined that the foreign operations are part and parcel of the overall company‟s operations and cannot be regarded as separate or independent operations and accordingly an amount being amount credited in the year under consideration as held as taxable - CIT(A) directed the AO to ascertain the amount of foreign exchange gain on capital account and on the revenue account and to delete the addition on account of furnishing of gain on capital account. It is clear from the impugned order that the ld. CIT(A) sent the mater back to the file of AO for making addition only in respect of foreign exchange gain on revenue account. The claim of the assessee is on the same line as has been directed by the ld. CIT(A) to be done, accordingly, we, therefore, dismiss the ground taken by the assessee. Disallowance of depreciation on goodwill - HELD THAT - As the assessee acquired entity IT T Ltd. and taken overall net worth of its assets, totaling to ₹ 10,57,24,413/- which clearly evidenced in the financials of assessee in the Agreement at Page No. 8 of the paper book. Likewise, the assessee also shown the total consideration as goodwill under acquisition in the Balance sheet, therefore, we find the order of CIT(A) is incorrect in holding that no evidences showing acquisition in the F.Y. 2003-04. In the facts and circumstances of the case as discussed above, we find force in the arguments of the ld. AR that the assessee is entitled to claim depreciation on goodwill. Depreciation on goodwill only on the written down value of the goodwill starting from F.Y. 2003-04 onwards. The assessee placed on record a chartof the assessment order by which the opening written down value of the F.Y. 2003-04 at ₹ 105,724,413/- and after depreciation allowing @ 25% the closing written down value at ₹ 79,293,310/-. In the same way the written down value has been computed in each of the succeeding year and for F.Y. 2009-10 arrived at ₹ 14,112,506/-. Thus, it is well constitutes the opening written down value of goodwill for the F.Y. 2010-11 relevant to A.Y. 2011-12 i.e. the year under consideration. We, therefore, direct the AO to grant depreciation @ 25% on written down value of the goodwill at ₹ 14,112,506/-. Thus, ground No. 5 raised by the assessee is allowed for statistical purpose. Denial of carry forward of long term capital loss - AO observed that the said amount is net of short term capital loss and said short term capital loss is disallowable u/s. 94(7) - HELD THAT - If we accept the interpretation rendered by both the authorities below, definitely, it would frustrate the object contemplated u/s. 80 of the Act. Section 80 of the Act explains that no loss which has not been determined in pursuance of a return filed shall be carried forward in accordance with the provisions of sub-section (3) of section 139 of the Act. Admittedly, there was no return of loss u/s. 139(3) of the Act as the assessee declared positive income u/s. 139(1) of the Act. Even then, in our opinion that when the AO found variation in long term capital loss he should have allowed carry forward of such loss in the assessment proceedings itself, because, When the he taxed the difference in amount under short term capital gain and also disallowed short term capital loss u/s. 94(7) of the Act, definitely, in our opinion, the AO should have allowed carry forward of differential amount under long term capital loss and for denying the same, in our opinion, is not justified. Therefore, we direct the AO to allow carry forward the difference of amount. Addition of foreign tax credit - HELD THAT - We note that the CIT(A) directed the AO to obtain documents as required under Rule 128(8) of the Income Tax Rules and to give benefit of foreign tax credit. It is seen that the several issues came up for consideration in assessee‟s own case for A.Y. 2009-10. Since, the facts and circumstances of the instant ground are similar to those of the earlier years as discussed in the aforesaid order for A.Y. 2009-10 in the said impugned order and remit the matter back to the file of AO for re-deciding this issue in conformity with the relevant discussion given by the Tribunal in the said order. Needless to say the assessee shall be offered reasonable opportunity of hearing. Thus, ground raised by the assessee is allowed for statistical purpose. Deduction paid towards Education Cess under Finance Act while computing the taxable income - HELD THAT- The Hon‟ble High Court of Bombay in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT was pleased to hold that the Education Cess is an allowable expenditure as per the provision of the I.T. Act - we direct the AO to allow deduction in respect of Education Cess paid by the assessee. Accordingly, the additional ground raised by the assessee is allowed. Disallowance u/s. 14A r.w. Rule 8D - Mandation of recording satisfaction - HELD THAT - the contention of the ld. AR is that there was no satisfaction recorded by the AO as confirmed by the CIT(A) regarding the disallowance made by the assessee on its own is incorrect and we find that the AO categorically held that the disallowance made by the assessee is not accepatable, thereby, the submission of ld. AR is rejected. We find in the present case the AO clearly recorded is non-satisfaction regarding the disallowance made by the assessee on its own relating to exempt income and proceeded to invoke the procedure contemplated under Rule 8D of the Rule. Therefore, the contention of ld. AR that the finding of this Tribunal in assessee‟s own case for A.Y. 2011-12 is applicable to the year under consideration is rejected, therefore, we hold the facts in A.Y. 2011-12 in consolidated order of this Tribunal 2019 (3) TMI 1135 - ITAT PUNE are not identical to the fact of the year under consideration. In view of the same, we hold the order of CIT(A) in this regard in holding that the AO did not record any satisfaction relating to the disallowance made by the assessee on its own is not justified. Thus, the order of CIT(A) is set aside in this regard and the order of AO is restored. Accordingly, ground raised by the Revenue is allowed.

Summary

Issues Involved:
1. Exclusion of telecommunication expenses and internet usage charges from export and total turnover for deduction u/s. 10AA.
2. Exclusion of expenditure on technical services from export and total turnover for deduction u/s. 10AA.
3. Eligibility of deduction u/s. 10AA for onsite/deputation of technical manpower (DTM) software services.
4. Classification of foreign exchange gain as capital or revenue account.
5. Disallowance of depreciation on goodwill.
6. Denial of carry forward of long-term capital loss.
7. Allowance of foreign tax credit.
8. Deduction of Education Cess.
9. Disallowance u/s. 14A r.w. Rule 8D.

Detailed Analysis:

1. Exclusion of Telecommunication Expenses and Internet Usage Charges:
The assessee challenged the exclusion of telecommunication and internet usage charges from both export and total turnover while computing deduction u/s. 10AA. The Tribunal noted that the issue was previously decided in favor of the assessee for A.Y. 2010-11, stating that any amount reduced from export turnover should also be reduced from total turnover. The Tribunal upheld this view, allowing the ground raised by the assessee and dismissing the Revenue's ground on this count.

2. Exclusion of Expenditure on Technical Services:
The assessee contested the exclusion of expenses incurred for providing technical services abroad from both export and total turnover for deduction u/s. 10AA. The Tribunal referenced its earlier decisions for A.Y. 2009-10 and 2010-11, which held that such expenses should be excluded from both export and total turnover. As no contrary view was presented, the Tribunal allowed this ground for the assessee.

3. Eligibility of Deduction for Onsite/DTM Software Services:
The Tribunal examined whether profits from onsite/deputation of technical manpower (DTM) software services qualify for deduction u/s. 10AA. Referring to previous rulings, the Tribunal concluded that onsite services integral to the software development project qualify for deduction. It emphasized that Explanation 3 deems profits from onsite development of software as derived from export, thus eligible for deduction. The Tribunal allowed this ground for the assessee.

4. Classification of Foreign Exchange Gain:
The assessee challenged the CIT(A)'s direction to ascertain whether foreign exchange gain falls on capital or revenue account. The Tribunal noted that the CIT(A) had remanded the matter to the AO to ascertain the nature of the gain. The Tribunal upheld this decision, dismissing the assessee's ground.

5. Disallowance of Depreciation on Goodwill:
The assessee claimed depreciation on goodwill based on the Supreme Court's ruling in Smifs Securities Ltd. The Tribunal reviewed the evidence and financial records, concluding that the assessee is entitled to depreciation on goodwill from F.Y. 2003-04 onwards. The Tribunal directed the AO to grant depreciation at 25% on the written-down value of the goodwill, allowing this ground for statistical purposes.

6. Denial of Carry Forward of Long-Term Capital Loss:
The assessee contested the denial of carry forward of long-term capital loss. The Tribunal noted that the AO had found variations in the capital gains and losses during assessment but allowed only the originally claimed amount for carry forward. The Tribunal held that the AO should have allowed the carry forward of the revised amount found during assessment, directing the AO to allow the carry forward of the differential amount. This ground was allowed for statistical purposes.

7. Allowance of Foreign Tax Credit:
The assessee sought credit for foreign taxes paid. The Tribunal remanded the matter back to the AO to re-decide the issue in line with the Tribunal's previous order for A.Y. 2009-10, ensuring the assessee is given a reasonable opportunity of hearing. This ground was allowed for statistical purposes.

8. Deduction of Education Cess:
The assessee raised an additional ground for the deduction of Education Cess. The Tribunal referenced the Bombay High Court's decision in Sesa Goa Ltd., which held that Education Cess is an allowable expenditure. The Tribunal directed the AO to allow this deduction, thus allowing the additional ground.

9. Disallowance u/s. 14A r.w. Rule 8D:
The Revenue challenged the deletion of disallowance made by the AO u/s. 14A. The Tribunal found that the AO had recorded non-satisfaction with the assessee's disallowance before invoking Rule 8D, contrary to the CIT(A)'s finding. The Tribunal set aside the CIT(A)'s order and restored the AO's disallowance, allowing this ground for the Revenue.

Conclusion:
- The assessee's appeal was allowed for statistical purposes on several grounds, including depreciation on goodwill and carry forward of long-term capital loss.
- The Revenue's appeal was partly allowed, specifically on the issue of disallowance u/s. 14A.
- The Tribunal directed the AO to re-examine certain issues, ensuring compliance with legal precedents and providing the assessee a fair opportunity to present their case.